U.S. SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-KSB

 X    Annual report under Section 13 or 15(d) of the Securities Exchange
---   Act of 1934


      For the fiscal year ended December 31, 2001

     Transition report under Section 13 or 15(d) of the Securities Exchange
---  Act of 1934

     For the transition period from                 to
                                    ---------------    --------------

Commission file number: 0-28360

                            IBW Financial Corporation
                 (Name of Small Business Issuer in its Charter)


       District of Columbia                             52-1943477
  (State or other jurisdiction            (I.R.S. Employer Identification No.)
of incorporation or organization)

               4812 Georgia Avenue, NW, Washington, DC    20011
               (Address of Principal Executive Offices) (Zip Code)

Issuer's Telephone Number: (202) 722-2000

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act: Common Stock, par value
                                                      $1.00 per share

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 (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
Yes  X    No
   -----     -----

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 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 Form 10-KSB.   X
                               -----

The issuer's revenues for the fiscal year ended December 31, 2001 were
approximately $24,476,000.

The aggregate market value of the outstanding Common Stock held by nonaffiliates
as of March 5, 2002 was approximately $4,487,266 (based on the most recent trade
known to the Company). See "Market for Common Stock and Dividends").

As of March 5, 2002, the number of outstanding shares of the Common Stock, $1.00
par value, of IBW Financial Corporation was 668,360.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 23, 2002 are incorporated by reference in part
III hereof.

<PAGE>


         Forward-looking statements - This report and the information
incorporated by reference herein, contains forward-looking statements within the
meaning of the Securities Exchange Act of 1934, as amended, including statements
of goals, intentions, and expectations as to future trends, plans, events or
results of Company operations and policies and regarding general economic
conditions. In some cases, forward looking statements can be identified by use
of words such as "may," "will," "anticipates," believes," "expects," "plans,"
"estimates," "potential, "continue," "should" and similar words or phrases.
These statements are based upon current and anticipated economic conditions,
nationally and in the Company's market, interest rates and interest rate policy,
competitive factors, and other conditions which by their nature, are not
susceptible to accurate forecast, and are subject to significant uncertainty.
Because of these uncertainties and the assumptions on which this discussion and
the forward-looking statements are based, actual future operations and results
in the future may differ materially from those indicated herein. Readers are
cautioned against placing undue reliance on any such forward-looking statements.
The Company does not undertake to update any forward-looking statements to
reflect occurrences or events which may not have been anticipated as of the date
of such statements.

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

         IBW Financial Corporation, a District Columbia corporation (the
"Company"), was organized in December 1994 in connection with the reorganization
of Industrial Bank of Washington ("IBW"), a District of Columbia chartered
commercial bank, to act as the one bank holding company for IBW following the
reorganization. On July 1, 1995, the reorganization of IBW was consummated, and
IBW was converted from a District of Columbia chartered bank to a national
banking association, under the name Industrial Bank, National Association (IBW
and Industrial Bank, National Association, generally referred to collectively as
the "Bank"), the main office of the Bank was relocated from the District of
Columbia to Oxon Hill, Maryland, and the Company became the holding company for
the Bank.

         The Bank, all of the shares of which are owned by the Company, is the
sole subsidiary of the Company.

         The Bank was organized in August 1934 as a District of Columbia
chartered commercial bank by a group of African-American businessmen and
educators for the purpose of providing quality financial services, with an
emphasis on home mortgages and automobile financing, to the underserved minority
population of the District of Columbia. Over the past sixty-eight years, the
Company has grown from one office in the District of Columbia and $250,000 in
assets to seven offices in the District of Columbia, three offices in Prince
George's County, Maryland, one office in Charles County, Maryland, and
approximately $295 million in total assets and $23.2 million of shareholders'
equity at December 31, 2001. The Bank is among the largest African-American
commercial banks in the nation, and the largest African-American owned
commercial bank based in the Washington D.C. metropolitan area.

         The Bank provides a broad range of commercial and consumer lending
services, including auto loans, home equity loans, home improvement loans,
credit cards and personal loans. Over two-thirds of the Bank's loan portfolio is
real estate mortgage related, including residential, commercial and investment
properties. In order to expand the ability of the Bank to offer a wide variety
of competitively priced mortgage products to the residents of the District of
Columbia and surrounding areas, the Bank has arranged to sell certain of its
mortgage loans into the secondary market, enabling the Bank to make additional
loans, and loans with wider repayment and interest rate options, available to
the community. Additionally, the Bank offers a wide variety of loans geared to
meet the needs of small businesses in the Bank's market area, including accounts
receivable lines of credit, Small Business Administration loans and equipment
loans.

         The Bank also provides a full range of deposit services to its
customers, including personal checking, low activity student checking, interest
bearing NOW accounts, golden age checking accounts for seniors, statement
savings accounts, money market accounts, student accounts, investment
certificates, IRA's and Christmas club accounts. Other deposit services include
24 hour banking through use of automated teller machines at five convenient
locations. As a part of the Most, Plus and Network Exchange Systems,
accountholders can access ATM's across the United States at any time. Also the
Bank provides a convenient bank by mail service, direct deposit/electronic fund
transfers, cash management services, safe deposit boxes, night depository, tax
deposits, wire transfers and telebanc systems.


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RECENT DEVELOPMENTS

         As discussed in greater detail in Management's Discussion and Analysis
and in the Notes to the Consolidated Financial Statements for the year ended
December 31, 2001 included in this report, in December 2001, management became
aware of a possible error in the reconciliation process for one of the Bank's
correspondent bank accounts. In January 2002, following investigation,
management confirmed the presence of an error in the reconciliation process as a
result of which an inappropriate reconciling item had been perpetuated for
several years. Accordingly, in connection with the filing, on January 31, 2002,
of the Bank's call report for the quarter ended December 31, 2001, the opening
retained earnings balances of the Bank as of January 1, 1999, and of the Company
on a consolidated basis, have been reduced by $2.343 million.

FORMAL AGREEMENT

         On August 25, 1998, the Bank entered into a Formal Agreement (the
"Agreement") with the Office of the Comptroller of the Currency (the "OCC"). The
Agreement requires the Bank to undertake certain actions within designated
timeframes, and to operate in compliance with the provisions thereof during its
term.

         Among the actions required by the Agreement are the following: (i)
Within thirty days, the Bank shall employ an independent management consultant
to perform a study of the Bank's management structure and staffing requirements,
including a report identifying staffing requirements, job descriptions and
evaluations for senior officers, and evaluating organizational structure. The
Board of Directors (the "Board") is required to adopt within thirty days of the
receipt of the report, a plan to eliminate any deficiencies in management,
staffing, or supervision of management; (ii) The Board is required to take steps
to obtain current and satisfactory credit information on loans without such
information, and to insure that proper collateral documentation is maintained.
Management may not grant, renew, alter, restructure or extend a loan without
proper documentation and analysis of credit, purpose and anticipated source of
repayment. In absence of such information, such loans may be made only upon
certification of a majority of the Board why obtaining such information would be
detrimental to the best interests of the Bank; (iii) Within thirty days the
Board shall adopt a written program to eliminate the basis of criticism for
assets rated "doubtful", "substandard" or "other assets especially mentioned;"
(iv) Within thirty days the Board shall establish a loan review system to assure
timely identification and categorization of problem credits and implement a
process to insure the loan review function is independent; (v) Within sixty days
the Board shall review and revise the Bank's loan policy based upon the guidance
on Loan Portfolio Management in the Comptroller's Manual for National Bank
Examiners. Within thirty days thereafter, the Board shall develop a process to
ensure accountability for lending personnel; (vi) The Board shall notify the
Assistant Deputy Comptroller before all loan sales; (vii) Within sixty days, the
Board shall develop a written program to improve and strengthen collection
efforts; (viii) Within ninety days the Board shall develop a profit plan to
improve and sustain the Bank's earnings; (ix) Within 120 days, the Board shall
adopt and implement a strategic plan for the Bank covering at least three years,
including objectives for earnings performance, balance sheet mix, off-balance
sheet activities, liability structure, capital adequacy, reduction in the volume
of nonperforming assets, product line development and market segments intended
to be developed, together with strategies to achieve those objectives; (x) The
Board shall take all steps necessary to correct any violation of law, rule or
regulation cited in any report of examination; (xi) Within thirty days the Bank
shall submit a revised written project plan with respect to Year 2000 compliance
of the Bank's information and environmental systems, including a testing plan
and, within sixty days, a remediation contingency plan in the event any system
is not compliant by the date set forth in the plan.

         Compliance with the Agreement is to be monitored by a committee (the
"Committee") of at least three directors, none of whom is an employee of the
Bank or a family member of an employee. The Committee, presently composed of Mr.
King (Chairman), Mrs. Fleming, and Mr. Chapman, is required to submit written
progress reports on a monthly basis. The Agreement requires the Bank to make
periodic reports and filings with the OCC.

         The Agreement does not contain any capital directive or other
requirement that the Bank increase its capital, or maintain a minimum level of
capital in excess of generally applicable capital requirements.

         As of January 22, 2002, the Bank has submitted to the OCC all of the
written plans, policies, and other information required by the Agreement, and
all revisions requested by the OCC, although certain submissions were made
outside of the time limits required by the Agreement. There can be no assurance
that its regulators will deem the Bank to be compliant under the Agreement, or
that they will not require additional compliance efforts. Failure


                                       3
<PAGE>

to comply with the provisions of the Formal Agreement could subject the Bank and
its directors to additional enforcement actions,  including but not limited to a
cease and desist order, a safety and soundness order or civil money penalties.

MARKET AREA AND COMPETITION

         The Bank's primary market area consists of the District of Columbia,
and Prince George's County, Maryland. The Washington Metropolitan Statistical
Area, (the "Washington MSA"), of which the Bank's market area forms a part, is a
highly competitive one, in which a large number of regional and national,
majority owned and managed, multi-bank holding companies operate, in addition to
numerous small and medium sized community banks. Additionally, a large number of
thrift institutions and non-bank financial service providers, including
insurance companies, brokerage firms, credit unions, mortgage companies,
consumer finance companies, mutual funds and other types of financial
institutions compete in the Washington MSA for investment dollars and lending
business. As a result of changes in federal and state banking legislation,
competitors not already in the Bank's market may seek to enter such market. The
District of Columbia, Maryland and Virginia have each enacted legislation
permitting banks organized or based in other jurisdictions to establish or
acquire banks or branches in such jurisdictions.

         Notwithstanding the foregoing, Prince George's County has been the
subject of hearings before the House of Representatives Committee on Banking,
Finance and Urban Affairs regarding the relative unavailability of banking
services in that county. Prince George's County, which has a majority minority
population, was found to have approximately half as many traditional banking or
thrift branches per capita as neighboring Montgomery County, which has a
majority non-minority population. Prince George's was also found to have a
substantially higher number of non-traditional banking entities, such as check
cashing outlets. The Company believes that Prince George's County provides
substantial opportunity for growth and expansion.

EMPLOYEES

         As of December 31, 2001, the Bank had 168 full time equivalent
employees. None of the Bank's employees are represented by any collective
bargaining group, and the Bank believes that its employee relations are good.
The Bank provides a benefit program which includes health and dental insurance,
life and long term disability insurance and an employee stock ownership plan for
substantially all full time employees. Annual contributions to the employee
stock ownership plan are determined by the Board, and amounted to $169,000 in
2001, $87,000 in 2000 and $52,500 in 1999. The Company does not have any
employees who are not also employees of the Bank.

REGULATION

         The following summaries of statutes and regulations affecting bank
holding companies do not purport to be complete discussions of all aspects of
such statutes and regulations and are qualified in their entirety by reference
to the full text thereof.

         Holding Company Regulation. The Company is a registered bank holding
company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). As
a registered bank holding company, the Company is required to file with the
Board of Governors of the Federal Reserve (the "Federal Reserve") an annual
report, certain periodic reports and such reports and additional information as
the Federal Reserve may require pursuant to the BHCA, and is subject to
examination and inspection by the Federal Reserve.

         BHCA - Activities and Other Limitations. The BHCA prohibits a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasing such ownership or
control of any bank, without prior approval of the Federal Reserve.

         The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve has determined to be so closely related
to banking or to managing or controlling banks as to be a proper incident
thereto. In making such determinations, the Federal Reserve is required to weigh
the expected benefit to the public, such as greater convenience, increased


                                       4
<PAGE>

competition or gains in efficiency, against the possible adverse effects, such
as undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.

         The Federal Reserve has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include: making or servicing loans such as would be made by a
mortgage company, consumer finance company, credit card company, or factoring
company; performing trust company functions; performing certain data processing
operations; providing limited securities brokerage services; acting as an
investment or financial advisor; ownership or operation of a savings
association; acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full-payout, non-operating basis;
providing tax planning and preparation services; operating a collection agency;
and providing certain courier services. The Federal Reserve also has determined
that certain other activities, including real estate brokerage and syndication,
land development, property management and underwriting life insurance not
related to credit transactions, are not closely related to banking and a proper
incident thereto.

         Effective on March 11, 2000, the Gramm Leach-Bliley Act of 1999 (the
"GLB Act") allows a bank holding company or other company to certify status as a
financial holding company, which allows such company to engage in activities
that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto. The
GLB Act allows a wider array of companies to own banks, which could result in
companies with resources substantially in excess of the Company's entering into
competition with the Company and the Bank.

         Commitments to Subsidiary Banks. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances when it might not do so
absent such policy.

         Limitations of Acquisitions of Common Stock. The federal Change in Bank
Control Act prohibits a person or group from acquiring "control" of a bank
holding company unless the Federal Reserve has been given 60 days' prior written
notice of such proposed acquisition and within that time period the Federal
Reserve has not issued a notice disapproving the proposed acquisition or
extending for up to another 30 days the period during which such a disapproval
may be issued. An acquisition may be made prior to expiration of the disapproval
period if the Federal Reserve issues written notice of its intent not to
disapprove the action. Under a rebuttable presumption established by the Federal
Reserve, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act would, under the circumstances set forth in the presumption,
constitute the acquisition of control.

         In addition, with limited exceptions, any "company" would be required
to obtain the approval of the Federal Reserve under the BHCA before acquiring
25% (5% in the case of an acquiror that is a bank holding company) or more of
the outstanding Common Stock of, or such lesser number of shares as constitute
control over, the Company. Such approval would be contingent upon, among other
things, the acquiror registering as a bank holding company, divesting all
impermissible holdings and ceasing any activities not permissible for a bank
holding company.

         The Federal Reserve has adopted capital adequacy guidelines pursuant to
which it assesses the adequacy of an institution's capital. These guidelines are
substantially identical to those which are applicable to the Bank discussed
below.

         Bank Regulation. The Bank is subject to extensive regulation and
examination by the Office of the Comptroller of Currency ("OCC") and by the
FDIC, which insures its deposits to the maximum extent permitted by law. The
federal laws and regulations which are applicable to national banks regulate,
among other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds and
the nature and amount of collateral for certain loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and the
deposit insurance funds, and not for the purpose of protecting stockholders.


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         The GLB Act made substantial changes in the historic restrictions on
non-bank activities of bank holding companies, and allows affiliations between
types of companies that were previously prohibited. The GLB Act also allows
national banks to engage in a wider array of non banking activities through
"financial subsidiaries."

         Capital Adequacy Guidelines. The Federal Reserve, the OCC and the FDIC
have all adopted risk based capital adequacy guidelines pursuant to which they
assess the adequacy of capital in examining and supervising banks and bank
holding companies and in analyzing bank regulatory applications. Risk-based
capital requirements, determine the adequacy of capital based on the risk
inherent in various classes of assets and off-balance sheet items.

         National banks are required to meet a minimum ratio of total qualifying
capital (the sum of core capital (Tier 1) and supplementary capital (Tier 2)) to
risk weighted assets of 8%. At least half of this amount (4%) should be in the
form of core capital. These requirements apply to the Bank and will apply to the
Company (a bank holding company) so long as its total assets equal $150,000,000
or more.

         Tier 1 Capital for national banks generally consists of the sum of
common stockholders' equity and perpetual preferred stock (subject in the case
of the latter to limitations on the kind and amount of such stock which may be
included as Tier 1 Capital), less goodwill, without adjustment for unrealized
gain or loss on securities classified as available for sale in accordance with
FAS 115. Tier 2 Capital consists of the following: hybrid capital instruments;
perpetual preferred stock which is not otherwise eligible to be included as Tier
1 Capital; term subordinated debt and intermediate-term preferred stock; and,
subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based
capital) for assets such as cash and certain U.S. government and agency
securities, to 100% for the bulk of assets which are typically held by a bank
holding company, including certain multi-family residential and commercial real
estate loans, commercial business loans and consumer loans. Residential first
mortgage loans on one to four family residential real estate and certain
seasoned multi-family residential real estate loans, which are not 90 days or
more past-due or non-performing and which have been made in accordance with
prudent underwriting standards are assigned a 50% level in the risk-weighing
system, as are certain privately-issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to
take into account certain risk characteristics.

         In addition to the risk based capital requirements, the OCC has
established a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total
adjusted assets) requirement for the most highly-rated national banks, with an
additional cushion of at least 100 to 200 basis points for all other national
banks, which effectively increases the minimum Leverage Capital Ratio for such
other banks to 4.0% - 5.0% or more. Under the OCC's regulations, highest-rated
banks are those that the OCC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, those which are considered a strong banking organization. A national
bank having less than the minimum Leverage Capital Ratio requirement shall,
within 60 days of the date as of which it fails to comply with such requirement,
submit to the applicable OCC district office for review and approval a
reasonable plan describing the means and timing by which the bank shall achieve
its minimum Leverage Capital Ratio requirement. A national bank which fails to
file such plan with the OCC is deemed to be operating in an unsafe and unsound
manner, and could subject the bank to a cease-and-desist order from the OCC. The
OCC's regulations also provide that any insured depository institution with a
Leverage Capital Ratio that is less than 2.0% is deemed to be operating in an
unsafe or unsound condition pursuant to Section 8(a) of the FDIA and is subject
to potential termination of deposit insurance. However, such an institution will
not be subject to an enforcement proceeding thereunder, solely on account of its
capital ratios, if it has entered into and is in compliance with a written
agreement with the OCC to increase its Leverage Capital Ratio to such level as
the OCC deems appropriate and to take such other action as may be necessary for
the institution to be operated in a safe and sound manner. The OCC capital
regulations also provide, among other things, for the issuance by the OCC or its
designee(s) of a capital directive, which is a final order issued to a bank that
fails to maintain minimum capital or to restore its capital to the minimum
capital requirement within a specified time period. Such directive is
enforceable in the same manner as a final cease-and-desist order.

         At December 31, 2001, the Bank was in compliance with all minimum
federal regulatory capital requirements which are generally applicable to
national banks, as well as the capital requirements of the interim capital
assistance. As of such date, the Bank had a Tier 1 Risk Based Capital Ratio and
a Total Risk Based Capital Ratio equal to approximately 13.39% and 14.65%
respectively, and a Leverage Capital Ratio equal to approximately 6.87%.


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         Prompt Corrective Action. Under Section 38 of the FDIA, the federal
banking agencies have promulgated substantially similar regulations to implement
a system of prompt corrective action. Under the regulations, a bank shall be
deemed to be: (i) "well capitalized" if it has a Total Risk Based Capital Ratio
of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage
Capital Ratio of 5.0% or more and is not subject to any written capital order or
directive; (ii) "adequately capitalized" if it has a Total Risk Based Capital
Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0% or more and a
Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a Total Risk Based Capital Ratio that is less than 8.0%, a Tier 1 Risk
based Capital Ratio that is less than 4.0% or a Leverage Capital Ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a Total Risk Based Capital Ratio that is less than
6.0%, a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage
Capital Ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

         An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date the institution receives notice or is deemed to have
notice that it is undercapitalized, significantly undercapitalized or critically
undercapitalized. A federal banking agency must provide the institution with
written notice of approval or disapproval within 60 days after receiving a
capital restoration plan, subject to extensions by the applicable agency.

         An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary at such time to restore the relevant capital measures of the
institution to the levels required for the institution to be classified as
adequately capitalized. Such a guaranty shall expire after the federal banking
agency notifies the institution that it has remained adequately capitalized for
each of four consecutive calendar quarters. An institution which fails to submit
a written capital restoration plan within the requisite period, including any
required performance guaranty, or fails in any material respect to implement a
capital restoration plan, shall be subject to the restrictions in Section 38 of
the FDIA which are applicable to significantly undercapitalized institutions.

         A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership. The general
rule and current position of the OCC is that the FDIC will be appointed as
receiver within 90 days after a bank becomes critically undercapitalized unless
extremely good cause is shown and an extension is agreed to between the OCC and
the FDIC. In general, good cause is defined as capital which has been raised and
is imminently available for infusion into the Bank except for certain technical
requirements which may delay the infusion for a period of time beyond the 90 day
time period.

         Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which (i) restrict payment
of capital distributions and management fees; (ii) require that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital; (iii) require submission of a capital restoration plan;
(iv) restrict the growth of the institution's assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency
for an undercapitalized institution also may take any number of discretionary
supervisory actions if the agency determines that any of these actions is
necessary to resolve the problems of the institution at the least possible
long-term cost to the deposit insurance fund, subject in certain cases to
specified procedures. These discretionary supervisory actions include: requiring
the institution to raise additional capital; restricting transactions with
affiliates; requiring divestiture of the institution or the sale of the
institution to a willing purchaser; and any other supervisory action that the
agency deems appropriate. These and additional mandatory and permissive
supervisory actions may be taken with respect to significantly undercapitalized
and critically undercapitalized institutions.

         Additionally, under Section 11(c)(5) of the FDIA, a conservator or
receiver may be appointed for an institution where: (i) an institution's
obligations exceed its assets; (ii) there is substantial dissipation of the
institution's assets or earnings as a result of any violation of law or any
unsafe or unsound practice; (iii) the institution is in an unsafe or

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<PAGE>

unsound condition; (iv) there is a willful violation of a cease-and-desist
order; (v) the institution is unable to pay its obligations in the ordinary
course of business; (vi) losses or threatened losses deplete all or
substantially all of an institution's capital, and there is no reasonable
prospect of becoming "adequately capitalized" without assistance; (vii) there is
any violation of law or unsafe or unsound practice or condition that is likely
to cause insolvency or substantial dissipation of assets or earnings, weaken the
institution's condition, or otherwise seriously prejudice the interests of
depositors or the insurance fund; (viii) an institution ceases to be insured;
(ix) the institution is undercapitalized and has no reasonable prospect that it
will become adequately capitalized, fails to become adequately capitalized when
required to do so, or fails to submit or materially implement a capital
restoration plan; or (x) the institution is critically undercapitalized or
otherwise has substantially insufficient capital.

         At December 31, 2001, the Bank was a "well capitalized" institution for
purposes of Section 38 of the FDIA.

         Deposit Insurance Premiums. The FDIA establishes a risk based deposit
insurance assessment system. Under applicable regulations, deposit premium
assessments are determined based upon a matrix formed utilizing capital
categories - well capitalized, adequately capitalized and undercapitalized -
defined in the same manner as those categories are defined for purposes of
Section 38 of the FDIA. Each of these groups is then divided into three
subgroups which reflect varying levels of supervisory concern, from those which
are considered healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from 0.04% of insured deposits for well
capitalized institutions having the lowest level of supervisory concern, to
0.31% of insured deposits for undercapitalized institutions having the highest
level of supervisory concern. In general, while the Bank Insurance Fund of the
FDIC ("BIF") maintains a reserve ratio of 1.25% or greater, no deposit insurance
premiums are required. When the BIF reserve ratio falls below that level, all
insured banks would be required to pay premiums at a uniform rate of 0.23% of
insured deposits. Certain studies by the FDIC and other agencies project that
the BIF will fall below the required reserve ratio in 2002, which may result in
the imposition of deposit premiums at the uniform rate in 2003, although there
can be no assurance of this. The Bank is also required to pay an additional
assessment in connection with the repayment of the "Fico bonds" issued in
connection with the resolution of the savings and loan crisis.

         Regulatory Enforcement Authority. The enforcement authority of the
federal banking regulators includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and
institution-affiliated parties. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.

ITEM 2.  DESCRIPTION OF PROPERTY.

         The Bank currently operates eleven offices, seven in the District of
Columbia, three in Prince George's County, Maryland, and one in Charles County,
Maryland. The Bank owns its office located at 4812 Georgia Avenue, NW and its
branch offices located at 2000 11th Street, NW and 45th and Blaine Streets, NE.
The Georgia Avenue office, which is also the principal executive office of the
Company, consists of a 6,000 square foot stand alone building with drive-in
facilities, and a separate 2,000 square foot building housing the Bank's
operations center next door. The 11th Street office is housed in a 4,000 square
foot building, and an adjacent 2,000 square foot building houses the loan
operations center. The Blaine Street office occupies an approximately 2,000
square foot stand alone building, with drive-in facilities, near the Benning
Road Metro Station. The Bank leases the remainder of its offices. The 14th and U
Streets office is located in a 1,922 square foot storefront, under a lease which
commenced in 1988, for a ten year term and one optional ten year renewal term at
a fixed rent of $28,830 per year. The Bank's F Street office is located in a
1,273 square foot storefront under a lease commencing in 1991, for a ten year
term at a current annual rent of $75,351, subject to annual increases. The
American University office is located in a 962 square foot storefront under a
five year lease, which commenced in 1992, with one five year renewal option, at
a current annual rent of $25,588, subject to annual increase. The Forestville,
Maryland office is located in a 2,696 square foot storefront with drive-in
facilities, and is occupied under a lease which commenced in 1994 for a five
year term at a current annual rental of $29,008, subject to annual increase. The
Oxon Hill office, the main office of the Bank, is a 10,531 square foot, two
story building with drive in facilities, having a new lease beginning January
2002, for a two year period and a two year renewal option. The annual rent is
$92,270 with a 3% increase at the two year renewal period. The Company is
responsible for all operating and maintenance expenses on the Oxon Hill
property. The Brookland/Woodridge office, which opened in 1997, is located in
2610 Rhode Island Avenue, NE and occupied under a lease, commencing in 1997,
with one five year renewal

                                       8
<PAGE>

option, for a five year term at a current annual rental of $27,000, subject to
annual increases. The Company has leases for the Clinton and Waldorf, Maryland
Wal-Mart branches, which were opened in the second quarter of 2001. Each has a
five year lease requiring an annual payment of $24,000, and has two five year
renewal options.

         The Company believes that its existing facilities are adequate to
conduct its business.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is involved in routine legal proceedings in the ordinary
course of its business. In the opinion of management, final disposition of these
proceedings will not have a material adverse effect on the financial condition
or results of operations of the Company.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 2001.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.

MARKET FOR COMMON STOCK AND DIVIDENDS

         There does not currently exist an organized public trading market for
shares of the Company's Common Stock. Trading in the Company's Common Stock has
been sporadic, and consists of private trades conducted without brokers. The
Company is aware of approximately 4 trades of the Common Stock since January 1,
2001, three at $13 per share, and the last trade known to the Company, a trade
of 2,500 shares at $14 per share on June 8, 2001. There may be other trades of
which the Company is either not aware, or with respect to which the Company is
not aware of the price. These trades and transactions do not necessarily reflect
the intrinsic or market values of the Common Stock. As of December 31, 2001,
there were 668,360 shares of Common Stock outstanding, held of record by
approximately 571 shareholders.

         During 2000, the Company resumed the payment of regular dividends,
which had been suspended during 1998 and 1999 as a result of additional expenses
incurred in respect of the provision for loan losses and increased levels of
non-performing and problem assets. There can be no assurance, however, that the
Company will continue to have earnings at a level sufficient to support the
payment of dividends, or that it will in the future elect to pay dividends. As
the Bank is the primary source of funds for payment of dividends by the Company,
the inability of the Bank to pay dividends could adversely affect the ability of
the Company to pay dividends.

         Dividends on the Common Stock are subject to the prior payment of
dividends on the Series A Preferred Stock. As of the date hereof, there is no
default in the payment of dividend on the Series A Preferred Stock.

         Regulations of the OCC place a limit on the amount of dividends the
Bank may pay to the Company without prior approval. Prior approval of the OCC is
required to pay dividends which exceed the Bank's net profits for the current
year plus its retained net profits for the preceding two calendar years, less
required transfers to surplus. As of December 31, 2001 the Bank would not need
prior approval from OCC unless a declaration of dividends exceeded $3,633,000.
Under District of Columbia law, the Company may generally pay cash dividends at
any time when it is not insolvent and where its net assets exceed its stated
capital (the par value of all outstanding shares), and where payment of the
dividend will not cause the Company to become insolvent or to have its stated
capital exceed its net assets. The Federal Reserve and the OCC also have
authority to prohibit a bank from paying dividends if the Federal Reserve or the
OCC deems such payment to be an unsafe or unsound practice.

         The Federal Reserve has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding
companies. Compliance with such standards, as presently in effect, or as they
may be amended from time to time, could possibly limit the amount of dividends
that the Company may pay in the future. In 1985, the Federal Reserve issued a
policy statement on the payment of cash dividends by bank holding companies. In
the statement, the Federal Reserve expressed its view that a holding company
experiencing earnings weaknesses should


                                       9
<PAGE>

not pay cash  dividends  exceeding  its net income,  or which could only be
funded in ways that weakened the holding company's  financial health, such as by
borrowing.

         As a depository institution, the deposits of which are insured by the
FDIC, the Bank may not pay dividends or distribute any of its capital assets
while it remains in default on any assessment due the FDIC. The Bank currently
is not in default under any of its obligations to the FDIC.

         Set forth below is certain financial information relating to the
Company's dividend history for the past five fiscal years.

                                                 Year Ended December 31,
                                              -----------------------------
                                               2001        2000        1999
                                               ----        ----        ----
Net income per common share                   $4.18       $3.20       $2.50
Dividends paid per common share               $0.70       $0.60       $0.15

         The payment of dividends by the Company depends largely upon the
ability of the Bank to declare and pay dividends to the Company, as the
principal source of the Company's revenue is dividends paid by the Bank. Future
dividends will depend primarily upon the Bank's earnings, financial condition,
and need for funds, as well as governmental policies and regulations applicable
to the Company and the Bank.

RECENT SALES OF UNREGISTERED SHARES

         During the past three fiscal years, the Company has not sold any
securities without registration under the Securities Act of 1933.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

         The following financial review presents a discussion of the results of
operations, an analysis of the asset and liability structure of the Company, and
its sources of liquidity and capital resources and should be read in conjunction
with the consolidated financial statements. All dollar amounts shown in this
management's discussion and analysis are in thousands, except with respect to
per share data.

         General-The Company's net income depends primarily on net interest
income, which is the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. Non-interest
income, such as customer deposit account services charges, late charges on loans
and other sources of income also affect net income. The Company's operating
expenses, other than interest expense, consist principally of compensation and
employee benefits, occupancy, data processing, provision for loan losses and
other operating expenses. The Company's net income is significantly affected by
general economic conditions in the Washington, DC metropolitan area and policies
of regulatory authorities.

         Subsequent Development. In December 2001, Management became aware of a
possible error in the reconciliation process for one of the Bank's correspondent
bank accounts. In January 2002, following investigation, Management confirmed
the presence of an error in the reconciliation process as a result of which an
inappropriate reconciling item had been perpetuated for several years. The item
in question is more than three years old. While efforts to determine the origin
of the reconciling item continue, Management concluded that it is not
appropriate to continue to record this item as an asset of the Bank and the
Company. Accordingly, on January 31, 2002, the opening retained earnings
balances of the Bank as of January 1, 1999, and of the Company on a consolidated
basis, have been reduced by $2.343 million. As discussed in Note 11 to the
consolidated financial statements for the year ended December 31, 2001, included
as part of this report, the Company has established a valuation allowance for
the tax benefit resulting from the adjustment.

         Following the adjustment, the Company and Bank remain in compliance
with all regulatory capital requirements, and the Bank continues to be
classified as "well capitalized" for purposes of the prompt corrective action
provisions of ss.38 of the Federal Deposit Insurance Act.


                                       10
<PAGE>


         Management is continuing its review of the historical activity in its
correspondent bank accounts to determine the origin of the item and whether any
recovery relating to this matter is available.

RESULTS OF OPERATIONS

Years Ended December 31, 2001 and 2000

         Overview-Net income was $2,822 for 2001 compared with $2,162 in 2000,
an increase of 31%. Earnings per common share were $4.18 in 2001 compared with
$3.20 in 2000. The increase in net income was primarily attributable to an
increase of $1,030 in net interest income, an increase of $1,085 in non-interest
income, offset by an increase in non-interest expenses of $767, and an increase
in taxes of $429. Return on average assets was .99% for 2001, up from .80% for
2000. Return on average equity was 13.27% for 2001, compared with 13.35% for
2000.

TABLE 1. FINANCIAL OVERVIEW

         The following table summarizes net income divided by average assets and
average shareholders' equity, dividend pay-out ratio (dividends declared per
common share divided by net income per common share) and shareholders' equity to
assets ratio (average shareholders' equity divided by average total assets) for
each of the years listed below.

                                                  2001       2000       1999
                                                 -----------------------------
Return on average assets                            .99%       .80%       .61%
Return on average equity                          13.27%     13.35%     10.90%
Net income per share                             $ 4.18     $ 3.20     $ 2.50
Ratio of dividends to net income                  16.73%     18.76%      5.98%
Average shareholders' equity to average assets     7.49%      6.02%      5.66%

         Net Interest Income- Net interest income is the principal source of
earnings for the Company. It is affected by a number of factors including the
level, pricing and maturity of interest-earning assets and interest-bearing
liabilities, interest rate fluctuations, and asset quality. Information
concerning the Company's interest-earning assets, interest-bearing liabilities,
net interest income, and interest rate spreads, and net yield on
interest-earning assets is presented in Table 2. Changes in the Company's
interest income and interest expense resulting from changes in interest rates
and in the volume of interest-earning assets and interest-bearing liabilities
are presented in Table 3.


                                       11
<PAGE>


TABLE 2. AVERAGE BALANCE AND NET INTEREST INCOME ANALYSIS (1)

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                     --------------------------------------------------------------------------------------------
                                                  2001                           2000                            1999
                                     --------------------------------------------------------------------------------------------
                                                           Amount                         Amount                          Amount
                                      Average   Average    Paid or    Average  Average    Paid or     Average   Average   Paid or
                                      Balance    Rate      Earned     Balance   Rate      Earned      Balance     Rate    Earned
                                     --------------------------------------------------------------------------------------------
ASSETS                                                                 (dollars in thousands)
<S>                                  <C>        <C>        <C>       <C>       <C>        <C>       <C>        <C>        <C>
Loans, net                           $ 128,631    8.92%    $11,474   $ 115,689   9.23%    $10,676   $  99,863    9.13%    $ 9,115
Taxable securities                     107,007    6.29%      6,728     112,330   6.58%      7,387     130,684    5.61%      7,336
Non-taxable securities (2)              19,245    8.06%      1,552      19,359   7.58%      1,467      13,016    8.08%      1,052
Federal funds sold                       9,506    3.59%        341       2,744   6.05%        166      12,657    4.70%        595
Interest-bearing deposits held             969    4.02%         39         984   5.49%         54         914    4.38%         40
                                     ---------             -------   ---------            -------   ---------             -------
Total interest-earning assets          265,358    7.59%    $20,134     251,106   7.87%    $19,750     257,134    7.05%     18,138
Cash and due from banks                 11,537                          10,576                          9,826
Bank premises and equipment, net         2,184                           2,254                          2,441

Other assets                             4,935                           5,297                          5,427
                                     ----------                      ---------                      ---------
Total assets                         $ 284,014                       $ 269,233                      $ 274,828
                                     ==========                      =========                      =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing demand deposits       $25,012    0.55%       $138     $27,233   0.55%       $151     $29,853    1.60%       $479
Savings deposits                        60,715    2.49%      1,513      60,802   2.26%      1,377      63,417    2.47%      1,566
Time deposits                           59,470    3.92%      2,332      58,852   4.07%      2,396      69,477    3.53%      2,455
                                     ---------             -------   ---------            -------   ---------             -------
Total interest-bearing deposits        145,197    2.74%      3,983     146,887   2.67%      3,924     162,747    2.77%      4,500
Short-term borrowings                   48,155    3.04%      1,462      42,336   5.41%      2,292      35,787    3.94%      1,409
Long-term borrowings                     1,902    5.05%         96           -                  -           -                   -
                                     ---------             -------   ---------            -------   ---------             -------
Total interest-bearing liabilities     195,254    2.84%      5,541     189,223   3.29%     $6,216     198,534    2.98%     $5,909
Noninterest-bearing liabilities         65,645                          62,006                         59,178
Other liabilities                        1,848                           1,807                          1,564

Total liabilities                      262,747                         253,036                        259,276
                                     ---------                       ---------                      ---------
Shareholders' equity                    21,267                          16,197                         15,552
                                     ---------                       ---------                      ---------
Total liabilities and
shareholders' equity                 $ 284,014                       $ 269,233                      $ 274,828
                                     =========                       =========                      =========

NET INTEREST INCOME AND NET YIELDS
   ON INTEREST-EARNING ASSET
Net interest income                                        $14,593                        $13,534                         $12,229
                                                           =======                        =======                     ===========
Interest rate spread                              4.75%                          4.58%                           4.07%
Net yield on average interest-earning assets      5.50%                          5.39%                           4.76%
Average interest-earning assets to average
interest-bearing liabilities                    135.90%                        132.70%                         129.52%
</TABLE>

(1)    Yields on securities available for sale have been computed based upon the
       historical cost of such securities. Non-accruing loans are included in
       average balances and do not give effect to changes in fair value of such
       securities, which are reflected as a component of stockholder's equity
(2)    Yields on non-taxable securities are presented on a tax-equivalent basis
       using a 34% tax rate. Interest income and net interest income reported in
       the Company's consolidated statements of income were $19,606 and $14,065
       for 2001, $19,251 and $13,035 for 2000, and $17,780 and $11,871 for 1999.


                                       12
<PAGE>


TABLE 3. RATE/VOLUME ANALYSIS OF TAX EQUIVALENT NET INTEREST INCOME

         Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is affected by
changes in the volume of interest-earning assets and interest-bearing
liabilities. The following table sets forth the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in the
volume of interest-earning assets and interest-bearing liabilities and from
changes in yields and rates. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to volume and the
change due to rate. Interest income on tax-exempt securities is presented on a
taxable-equivalent basis.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                        -----------------------------------------------------------------------
                                                 2001 VS. 2000                         2000 VS. 1999
                                        --------------------------------
(dollars in thousands)                    INCREASE (DECREASE) DUE TO             INCREASE (DECREASE) DUE TO
                                        --------------------------------       --------------------------------
                                         VOLUME         RATE      TOTAL        VOLUME       RATE        TOTAL
                                        --------------------------------       --------------------------------
<S>                                     <C>           <C>       <C>           <C>          <C>         <C>
Loans                                   $  1,194      $ (396)   $   798       $  1,445     $   116     $ 1,561
Taxable securities                          (350)       (309)      (659)        (1,030)      1,081          51
Non-taxable securities                        (9)         94         85            512         (97)        415
Federal funds sold                           409        (234)       175           (466)         37        (429)
Interest-bearing deposits                     (1)        (14)       (15)             3          11          14
                                        -------------------------------       --------------------------------
Total interest income                      1,243        (859)       384            464       1,148       1,612
Deposits
Interest-bearing demand deposits             (12)         (1)       (13)           (42)       (286)       (328)
Savings deposits                              (2)        138        136            (65)       (124)       (189)
Time deposits                                 25         (89)       (64)          (375)        316         (59)
                                        -------------------------------       --------------------------------
Total interest-bearing deposits               11          48         59           (482)        (94)       (576)
Borrowings                                   187        (921)      (734)           258         625         883
                                        -------------------------------       --------------------------------
Total interest-bearing liabilities           198        (873)      (675)          (224)        531         307
                                        -------------------------------       --------------------------------
Net interest income                     $  1,045      $   14    $ 1,059       $    688     $   617     $ 1,305
                                        ===============================       ================================
</TABLE>

On a tax equivalent basis, net interest income for 2001 increased $1,059 or 67%
over 2000. Average interest-earning assets increased by $14,252 or 6%, resulting
primarily from an increase in net loans of $12,942 or 11%, an increase of
federal funds sold of $6,762 or 246%, and an increase in short-term borrowings
of $5,819 or 14%, offset by decreases in taxable securities of $5,323 or 5%.

         The interest rate spread increased 17 basis points or approximately 4%,
from 4.58% in 2000 to 4.75% in 2001. The increase is a result of a 28 basis
point decrease in the average rate earned on interest-earning assets versus a 45
basis point decrease in rates paid on average interest bearing liabilities. The
yield on loans in 2001 decreased 31 basis points from 2000 due to declining
interest rate environment. The yield and average balances on mortgage-backed
securities were 6.42% and $63,614 for 2001 and 6.51% and $73,316 for 2000,
respectively.

         Average interest-bearing liabilities increased $6,031, or 3%, comprised
primarily of increases in short and long term borrowings, offset by a $2,221
decline in interest-bearing demand deposits. The average rate on short term
borrowings declined 237 basis points, reflecting the dramatic 475 basis point
cut in market interest rate benchmarks effected by the Federal Reserve in 2001.
Short-term borrowings (comprised of repurchase agreements and federal funds
purchased) increased $5,819, or 14%, and long term borrowings increased $1,902.
The Company had no long term borrowings in 2000.

Provision for Loan Losses-The Company maintains an allowance for loan losses to
absorb losses on existing loans that may become uncollectible. No provisions
were recorded in 2001 compared to a reverse provision of $259 in 2000.
Management believes that the allowance for loan losses is adequate to absorb
potential losses inherent in the loan portfolio. As losses on loans are not
statistically predictable and are dependent upon economic conditions in the
Bank's marketplace, future provisions or reversals for loan losses may decrease
or increase from the levels deemed

                                       13
<PAGE>

appropriate for 2001. There can be no assurance, however, that future provisions
for loan losses will not be required.

         Non-interest Income- Non-interest income increased $1,085 or 29% to
$4,870 for 2001 from $3,785 for 2000. The primary components of non-interest
income is service charges on deposit and checking accounts, and gains or losses
on sale of securities and loans. The significant increase in non-interest income
was primarily derived from gains on securities of $438, as opposed to securities
losses of $200 in 2000, and gains from the sale of loans of $287 in 2001. The
declining interest rate environment in 2001 allowed management to take advantage
of investment strategies that were instituted over the past several years. Other
fee income increased $61 or 7% and primarily represented surcharges on
non-depositors utilizing the Bank's ATM services. Service charges on deposit
accounts increased $87 or 3%.

         Non-interest Expense- Non-interest expense for 2001 was $15,040 an
increase of $767 or 5% over 2000. The composition of the increase consists of an
increase of $298 in salary and employee benefits, an increase of $183 in
furniture and equipment expenses, an increase of $68 in advertising expenses, an
increase of $45 in data processing, and an increase of $116 in occupancy
expenses and an increase of $57 in other expenses. The increases in non-interest
expenses were due largely to the opening of two in store branches in Wal-Marts,
and normal increases in other non-interest expenses.

         Provision for Income Taxes- The provision for income taxes for 2001 was
$1,073, compared to $644 for 2000, reflecting an increase of $429 or 67% due
primarily to higher income before taxes and lower tax-exempt income relative to
taxable income. The effective tax rate was 27.5% for 2001, compared to 23.0% for
2000.

ASSET/LIABILITY MANAGEMENT

         Interest rate sensitivity gap ("gap") analysis measures the difference
between the assets and liabilities repricing or maturing within specified time
periods. An asset-sensitive position indicates that there are more
rate-sensitive assets than rate-sensitive liabilities repricing or maturing
within a specified time period, which would generally imply a favorable impact
on net interest income in periods of rising interest rates and a negative impact
in periods of falling interest rates. A liability-sensitive position would
generally imply a negative impact in net interest income in periods of rising
interest rates and a positive impact in periods of falling rates.

         Table 4 presents an analysis of the Company's interest-sensitivity gap
position at December 31, 2001. Asset prepayments and liability decay rates are
estimated based on the Company's experience. Non-maturity deposits such as
savings, NOW accounts and money markets do not have a stipulated maturity. Of
these deposits, 15% are prorated over the one year period while the balance is
placed in the one to five year period. Time deposits are allocated according to
their contractual maturities. As summarized in Table 4, the Company's one-year
cumulative gap ratio is 78%, with a cumulative gap of $22 million and
representative 8% of assets. This portion reflects a liability-sensitive
position where more liabilities than assets re-price during the one-year period.

         Generally, a liability-sensitive position would result in an adverse
impact on net income during a period of rising interest rates, and a positive
impact on net interest income in a period of declining interest rates.

         Gap analysis has limitations because it cannot measure the effect of
interest rate movements and competitive pressures on the repricing and maturity
characteristics of interest-earning assets and liabilities indicated as
repricing within a stated period may in fact reprice at different times at
different volumes. Further, in the event of change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in calculating Table 4.


                                       14
<PAGE>


TABLE 4. RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
(dollars in thousands)                             0-90 DAYS     4 TO 12     WITHIN 12   1-5 YEARS    OVER 5        TOTALS
                                                                  MONTHS       MONTHS                 YEARS
                                                   -------------------------------------------------------------------------
<S>                                                <C>           <C>         <C>         <C>         <C>          <C>
Loans (1) (2)                                      $  23,138     $  5,923    $  29,061   $  35,004   $  72,897    $ 136,962
Investment Securities  (3)                             9,904       23,249    $  33,153      60,845      33,367      127,365
Federal funds Sold                                    14,100            -    $  14,100           -           -       14,100
Interest Bearing Bank Balances:                            -          882    $     882           -           -          882
                                                   -------------------------------------------------------------------------
TOTAL EARNING ASSETS                               $  47,142     $ 30,054    $  77,196   $  95,849   $ 106,264    $ 279,309
                                                   =========================================================================
Percent of total earnings assets                       16.88%       10.76%       27.64%      34.32%      38.05%      100.00%
Interest-bearing liabilities
Time COD's of $100M or more                        $   3,868     $  9,342    $  13,210   $  11,899   $       -    $  25,109
 Savings, Now, MMDA'S and other time deposit           3,640       10,919       14,559      82,496           -       97,055
Time COD'S less than $100M                            11,895       16,243       28,138       4,778           -       32,916
Borrowed funds                                        43,483            -       43,483       5,000       5,000       53,483
                                                   -------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES                 $  62,886     $ 36,504    $  99,390   $ 104,173   $   5,000    $ 208,563
                                                   =========================================================================
Interest-sensitivity gap                           $ (15,744)    $ (6,450)   $ (22,194)  $  (8,324)  $ 101,264    $  70,746

Cumulative interest-sensitivity gap                $ (15,744)    $(22,194)   $ (22,194)  $ (30,518)  $  70,746    $  70,746
Ratio of earning assets to interest-bearing
liabilities (gap ratio)                                74.96%       82.33%       77.67%      92.01%   2,125.28%      133.92%
Cumulative ratio of earnings assets to interest-
bearing liabilities (cumulative gap ratio)             74.96%       77.67%       77.67%      85.01%     133.92%      133.92%
Cumulative interest-sensitivity gap as a percent
of total assets                                        (5.33%)      (7.51%)      (7.51%)    (10.33%)     23.95%       23.95%
                                                   =========================================================================
</TABLE>

(1)      Non-accruing loans are excluded from loan totals.
(2)      Loans have been included based on their contractual maturities.
(3)      15% of Savings, NOW, MMDA, and other time deposits are in the one year
         category with balance in the one to five years category.
(4)      Mortgage-backed securities have been included based on their estimated
         remaining maturities, utilizing the most recent quarter pay-down
         experience and prorated outward. Fourth quarter 2001 pay-down
         experience was $6,397. However, $37,376 in mortgage back securities
         have an expected average life of three years or less and $24,118 have
         an expected average life of more than three years


                                       15
<PAGE>


TABLE 5. FINANCIAL CONDITION

         Table 5 sets forth information concerning the composition of the
Company's assets, liabilities and shareholders' equity at December 31, 2001,
2000, and 1999.
<TABLE>
<CAPTION>
ASSETS                                                                  (dollars in thousands)

                                                     2001     Percent     2000      Percent     1999      Percent
                                                   ---------------------------------------------------------------
<S>                                                <C>         <C>       <C>         <C>       <C>         <C>
     Loans, net                                    $135,514    45.87%    $128,047    48.19%    $102,998    39.18%
     Investment securities                          127,365    43.11%     121,842    45.86%     137,970    52.49%
     Federal funds sold                              14,100     4.77%           -     0.00%       1,700     0.65%
     Interest-bearing deposits in other banks           882     0.30%       1,305     0.49%         988     0.38%
                                                   ---------------------------------------------------------------
     TOTAL EARNINGS ASSETS                          277,861    94.05%     251,194    94.54%     243,656    92.70%

     Cash and due from banks                         11,059     3.74%       8,553     3.22%      11,390     4.33%
     Bank premises and equipment                      2,374     0.80%       2,073     0.78%       2,389     0.91%
     Other assets                                     4,128     1.41%       3,883     1.46%       5,416     2.06%
                                                   ---------------------------------------------------------------
     TOTAL ASSETS                                  $295,422    100.0%    $265,703   100.00%    $262,851   100.00%
                                                   ===============================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
     Demand deposits                               $ 63,869    21.62%    $ 63,207    23.79%    $ 60,739    23.11%
     Savings, NOW and MMDA                           95,096    32.19%      93,159    35.06%     100,632    38.29%
     Time deposits $100,000 or more                  25,109     8.50%      13,713     5.16%      16,329     6.21%
     Other time deposits                             32,916    11.14%      32,868    12.37%      34,774    13.23%

     TOTAL DEPOSITS                                 216,990    73.45%     202,947    76.38%     212,474    80.84%
                                                   ---------------------------------------------------------------

     Short term borrowings                           43,483    14.72%      42,033    15.82%      33,733    12.83%
     Long term borrowings                            10,000     3.38%           -     0.00%           -     0.00%
     Accrued expenses and other liabilities           1,798     0.61%         930     0.35%       1,496     0.57%
                                                   ---------------------------------------------------------------
     TOTAL LIABILITIES                              272,271    92.16%     245,910    92.55%     247,703    94.24%

     Shareholders' equity                            23,151     7.84%      19,793     7.45%      15,148     5.76%
                                                   ---------------------------------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $295,422   100.00%    $265,703   100.00%    $262,851    100.0%
                                                   ===============================================================
</TABLE>


         Overview- Total assets increased $29,719 from December 31, 2000 to
December 31, 2001. The increase was primarily attributable to net increase of
$7,467 in loans, an increase in investments of $5,523, an increase of $14,100 in
Federal funds sold and a increase in cash and due from banks of $2,506. This net
increase in assets was funded by an increase in deposits of $14,043. an increase
in long-term borrowings of $10,000, an increase in short-term borrowings of
$1,450, and an increase of $3,358 in stockholders' equity.

         Loans- Net loans outstanding at December 31, 2001 were $135,514, an
increase of $7,467 or 6%, from year end 2000. The composition of the loan
portfolio is summarized in Table 6. The increase in loans consisted primarily of
an increase in commercial real estate loans of $1,133, an increase of $2,128 in
residential 1 to 4 family loans, an increase of $1,552 in installment loans, and
an increase in commercial loans of $2,277.


                                       16
<PAGE>


TABLE 6. LOAN PORTFOLIO COMPOSITION

         The following table shows the composition of the Company's loan
portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                                          December 31,
                              -------------------------------------------------------------------------------------------------
  (DOLLARS IN THOUSANDS)         2001   PERCENT     2000    PERCENT      1999   PERCENT     1998    PERCENT     1997    PERCENT
                              -------------------------------------------------------------------------------------------------
<S>                          <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
Commercial                    $ 13,235    9.49%   $ 10,958    8.28%   $ 10,046    9.32%   $ 16,568   15.11%   $ 23,145   19.51%
Residential 1 to 4 family       58,739   42.13%     56,611   42.78%     52,826   49.00%     51,097   46.62%     52,077   43.89%
Commercial real estate          59,905   42.97%     58,772   44.41%     40,125   37.22%     33,560   30.62%     38,499   32.45%
Consumer loans                   7,545    5.41%      5,993    4.53%      4,803    4.46%      8,388    7.65%      4,925    4.15%
                             --------------------------------------------------------------------------------------------------
Total                        $ 139,424  100.00%  $ 132,334  100.00%  $ 107,800  100.00%  $ 109,613  100.00%  $ 118,646  100.00%
                             ==================================================================================================
</TABLE>

TABLE 7. MATURITY OF LOAN PORTFOLIO - FIXED RATE AND VARIABLE RATE

        Table 7 summarizes the contractual maturity of the Company's fixed and
floating rate loans, at December 31, 2001. Nonaccrual loans are excluded from
the presentation.

(dollars in thousands)                AFTER ONE YEAR     AFTER
                        ONE YEAR       THROUGH FIVE      FIVE
                        OR LESS           YEARS          YEARS          TOTAL
                        -------------------------------------------------------
 Fixed rate             $  9,321        $ 35,004        $ 72,897      $ 117,222
 Variable rate            19,740               -               -         19,740
                        -------------------------------------------------------
Total                   $ 29,061        $ 35,004        $ 72,897      $ 136,962
                        =======================================================

At December 31, 2001, the aggregate amount of loans due after one year with
fixed interest rates was $107,901.

TABLE 8. INVESTMENT PORTFOLIO MATURITY SCHEDULES

        Table 8 summarizes the maturity and average yield of the Company's
investment portfolio at December 31, 2001. Yields on non-taxable securities have
been computed on a tax equivalent basis using a 34% tax rate.
<TABLE>
<CAPTION>

(dollars in thousands)                     After One But    After Five But        After
                             Within           Within           Within             Ten            Mortgage
                            One Year        Five Years        Ten Years           Years           Backed            Total
                         -----------------------------------------------------------------------------------------------------
                         Amount    Yield  Amount   Yield   Amount    Yield   Amount   Yield   Amount   Yield   Amount    Yield
                         -----------------------------------------------------------------------------------------------------
<S>                      <C>       <C>    <C>      <C>     <C>       <C>     <C>      <C>     <C>      <C>     <C>       <C>
U.S. Treasury            $   498   2.35%  $    -           $     -           $     -          $     -          $    498  2.35%
U.S. Government
  agencies                 8,612   5.78%   27,871  6.04%     3,046   5.78%         -                -            39,529  5.96%
State and political
  subdivisions                 -      -         -     -      1,005   7.39%   $23,432  7.89%         -            24,437  7.87%
Other                          -      -         -     -      1,405   5.54%         -                -             1,405  5.54%
Mortgage-backed
  securities                   -      -         -     -          -      -          -     -     61,496  5.90%     61,496  5.90%
                         -----------------------------------------------------------------------------------------------------
Total                    $ 9,110   5.59%  $27,871  6.04%   $ 5,456   6.01%   $23,432  7.89%   $61,496  5.90%   $127,365  6.28%
                         =====================================================================================================
</TABLE>

         Securities- The carrying value of the Company's securities portfolio
increased $5,523 or 5% from $121,842 at December 31, 2000, to $127,365 at
December 31, 2001. The increase in the investment portfolio consisted primarily
of an increase in U.S. Government and Agency securities of $7,858, an increase
in state and political subdivision of $2,540 offset by a decrease in mortgage
backed securities of $4,883. The yield on taxable securities decreased from
6.58% for 2000 to 6.29% for 2001. The tax equivalent yield for non-taxable
securities increased from 7.58% for 2000 to 8.06% for 2001. The mortgage-backed
securities portfolio had a weighted average remaining maturity of 3.34 years at
December 31, 2001, compared to 2.86 years at December 31, 2000 (utilizing
Bloomberg's street consensus). The collateral underlying all the mortgage-backed
securities is guaranteed by one of the

                                       17

<PAGE>

"quasi-governmental" agencies, and therefore maintains a risk weight of 20% for
risk based capital purposes. Management's analysis of mortgage-related
securities includes, but is not limited to, the average lives, seasonality,
coupon and historic behavior (including prepayment history) of each particular
security over its life, as affected by various interest rate environments.
Stress tests are performed on each security on a quarterly basis as part of
Management's ongoing analysis. There are no issuers of securities other than
governmental agencies, whose securities held by the Company, have a book value
in excess of 10% of the Company shareholders' equity. The Company's securities
portfolio is also presented in Note 3 to the consolidated financial statements.

TABLE 9. LOAN LOSS AND RECOVERY EXPERIENCE

         Asset Quality -See Note 1 to the consolidated financial statements for
a discussion of the Company's policy for establishing the allowance for loan
losses. Table 9 sets forth the activity in the allowance for loan losses for the
last five years.

<TABLE>
<CAPTION>
                                                                              Year ended December 31,
                                                               2001          2000          1999          1998         1997
                                                            -----------------------------------------------------------------
                                                                               (dollars in thousands)

<S>                                                         <C>           <C>           <C>          <C>           <C>
Total loans outstanding at year end                         $ 139,424     $ 132,334     $ 107,800    $ 109,613     $ 118,646
Average loans outstanding during year                         128,631       115,689        99,863      113,286       111,856

Allowance for loan losses at beginning of year                  3,580         4,272         4,700        1,702         1,266
Loans charged off:
   Commercial                                                     349           611           466        1,571           451
   Real estate mortgage                                           168            83           198            0           256
   Installment loans to individuals                               340            56           150          249           182
                                                            -----------------------------------------------------------------
Total charge-offs                                                 857           750           814        1,820           889

Recoveries of loans previously charged-off
   Commercial                                                     157           270           332          151            81
   Real estate mortgage                                           239             3            20            0             0
   Installment loans to individuals                               164            44            34           64            49
                                                            -----------------------------------------------------------------
Total recoveries                                                  560           317           386          215           130

Net charge-offs                                                   297           433           428        1,605           759

(Reversals) Additions to allowance charged to
  operations                                                        0          (259)            0        4,603         1,195
                                                            =================================================================

Allowance for loan losses at end of period                  $   3,283     $   3,580     $   4,272     $  4,700      $  1,702

Ratios of net charge-offs during year to average
  outstanding loans during year                                  0.23%         0.37%         0.43%        1.42%         0.68%

Ratio of allowance for possible loan losses to total
  loans                                                          2.35%         2.71%         3.96%        4.29%         1.43%
</TABLE>


                                       18
<PAGE>


TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

         Table 10 sets for the allocation of the allowance for loan losses as of
the dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.



<PAGE>

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                    ---------------------------------------------------------------------------------------------
                      2001    PERCENT    2000    PERCENT    1999    PERCENT    1998    PERCENT    1997    PERCENT
                    ---------------------------------------------------------------------------------------------
                                                         (dollars in thousands)
<S>                 <C>        <C>     <C>        <C>     <C>        <C>      <C>       <C>     <C>        <C>
Commercial (1)      $ 1,919    52.46%  $ 1,956    52.69%  $ 1,927    46.54%   $ 3,461   45.73%  $ 1,378    51.96%
Real estate
Mortgage                396    42.13%      512    42.78%      543    49.00%       406   46.62%      117    43.89%
Consumer                252     5.41%      175     4.53%      173     4.46%       280    7.65%      182     4.15%
Unallocated             716        -       937        -     1,629         -       553       -        25        -
                    ---------------------------------------------------------------------------------------------
Total               $ 3,283   100.00%  $ 3,580   100.00%  $ 4,272   100.00%   $ 4,700  100.00%  $ 1,702   100.00%
                    =============================================================================================
</TABLE>

(1) Includes commercial real estate loans.

         The allowance for loan losses was $3,283 at December 31, 2001, as
compared to $3,580 December 31, 2000. The ratio of the allowance for loan losses
to total loans at December 31, 2001 and 2000 was 2.35% and 2.71%, respectively.
At December 31, 2001, non-performing assets to total assets was 1.05% compared
to 0.89% at December 31, 2000. Net charge-offs decreased $136 to $297 for 2001
from $433 for 2000. No provision was required for 2001 while a reverse provision
for loan losses of $259 was recorded in 2000. Additionally, the unallocated
portion of the allowance decreased to $716 from $937 at year-end 2001. Also see
comment referring to non-performing assets.

         The level of the allowance for loan losses is determined by management
on the basis of various assumptions and judgments. These include levels and
trends of past due and non-accrual loans, trends in volume and changes in terms,
effects of policy changes, experience and depth of management, anticipated
economic conditions in the Washington, DC metropolitan area, concentrations of
credit, the composition of the loan portfolio, prior loan loss experience, and
the ongoing and periodic reviews of the loan portfolio by the Company's internal
and external loan review function. For impaired loans the Company establishes
reserves in accordance with SFAS 114 and SFAS 118, and for non-impaired loans
uses an allocation approach which relies on historical loan loss experience,
adjusted to reflect current conditions and trends. Note 1 to the consolidated
financial statements describes the Company's policy for determining whether a
loan is impaired.

         Although management believes that it uses the best information
available to make such determinations that the allowance for loan losses is
adequate at December 31, 2001, future adjustments to the allowance may be
necessary, and net income could be significantly affected, if circumstances
and/or economic conditions differ substantially from the assumptions used in
making the initial determination. Any downturn in the real estate market or
general economic conditions in the Washington, DC metropolitan area could result
in the Company experiencing increased levels of non-performing assets and
charge-offs, significant provisions for loan losses, and significant reductions
in net income. Additionally, various regulatory agencies periodically review the
Company's allowance for loan losses. Such agencies may require the recognition
of additions to the allowance based on their judgments of information available
to them at the time of their examination. In light of the foregoing, there can
be no assurance that management's determination as to the future adequacy of the
allowance for loan losses will prove accurate, or that additional provision of
charge-offs will not be required.

TABLE 11 - NON-PERFORMING ASSETS

         Table 11 sets forth information concerning non-performing assets.


                                       19

<PAGE>

<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                         2001        2000        1999         1998        1997
                                                       ---------------------------------------------------------
                                                                         (dollars in thousands)
<S>                                                    <C>         <C>         <C>          <C>         <C>
Non-accrual loans (1)                                  $ 2,462     $ 1,733     $ 2,819      $ 5,003     $   852
Loans past due 90 days or more and still accruing          645         659         275        1,474         753
Foreclosed properties                                        -           -         265          525         522
Total                                                  $ 3,107     $ 2,392     $ 3,359      $ 7,002     $ 2,127
                                                       =========================================================

Non-performing assets to gross loans and foreclosed
     properties at period end                             2.22%       1.81%       3.11%        6.36%       1.78%
Non-performing loans to total loans                       2.22%       1.81%       2.87%        5.91%       1.35%
Non-performing assets to total assets at period end       1.05%       0.89%       1.27%        2.59%       0.85%
</TABLE>

(1) Loans are placed on non-accrual status when in the opinion of management
the collection of additional interest is unlikely or a specific loan meets the
criteria for non-accrual status established by regulatory authorities. No
interest is taken into income on non-accrual loans unless received in cash. A
loan remains on non-accrual status until the loan is current to both principal
and interest and the borrower demonstrates the ability to pay and remain
current, or the loan becomes well secured and is in the process of collection.
The gross interest income that would have been recorded in 2001 for non-accrual
loans at December 31, 2001 had the loans been current in accordance with their
original terms was $103. See Note 1 to the consolidated financial statements.
The Bank charges loans against the allowance for loan losses when it determines
that principal and interest or portions thereof become uncollectible. This is
determined through an analysis of each individual credit, including the
financial condition and repayment capacity of the borrower, and of the
sufficiency of the collateral, if any.

         Non-performing assets at year-end 2001 were $3,107, an increase of $715
or 30% from year-end 2000. The increase was primarily attributable to
Management's continued review of the loan portfolio and in light of developments
in individual loans since December 31, 2000. Non-accrual loans totaled $2,462
for year-end 2001 and consisted of $1,772 in commercial real estate loans, $623
in residential real estate loans and $67 in commercial loans. This represented
an increase of $729 or 42% from year-end 2000. As of December 31, 2001, loans
past due 90 days or more and still accruing totaled $645, a decrease of $14 or
2%. At year-end 2001, non-performing assets represented 13% of total capital
compared to 12% at year-end 2000. Additionally, at year-end 2001, non-performing
assets and loans with possible credit problems totaled $12,583 or 54% of total
capital compared to $9,669 or 49% at year-end 2000.

         At December 31, 2001, there were $9,476 of loans not reflected in the
table above, where known information about possible credit problems of borrowers
caused management to have serious doubts as to the ability of the borrower to
comply with present loan repayment terms and that may result in disclosure of
such loans in the future. Included in the total are eighteen loans, totaling
$8,285, fully collateralized by real estate, six of which represent $6,405 of
the total. The remaining $1,191 consists of ten commercial loans, secured
primarily by accounts receivable and various business equipment.

         Deposits, Other Sources of Funds and Liquidity- Deposits are generally
the most important source of the Company's funds for lending, investing, and
other business purposes. Deposit inflows and outflows are significantly
influenced by general interest rates, market conditions, and competitive
factors. Total deposits increased by $14,043 or 7%, from December 31, 2000 to
December 31, 2001.

         The Company also raises funds by selling securities under agreements to
repurchase. These fixed coupon overnight agreements are accounted for as
financing transactions, and the obligations to repurchase the securities are
reflected as a liability in the consolidated balance sheet. At December 31,
2001, $43,483 of repurchase agreements with an average rate of 1.43% were
outstanding. See Note 7 to the consolidated financial statements for additional
information regarding the Company's short term borrowings. During 2001, the
Company had also borrowed an aggregate of $10,000 of long term funds under
advances from the Federal Home Loan Bank. See Note 8 to the consolidated
financial statements.

         The Company's principal sources of funds are deposits, repayments and
maturities of loans and securities, proceeds from the sale of securities and
funds provided by operations. The Company's sources and uses of cash for the
years ended December 31, 2001 and 2000 are presented in the consolidated
statement of cash flows. The Company anticipates that it will have sufficient
funds available to meet current and future commitments.



                                       20
<PAGE>


         Bills have been introduced in each of the last three Congresses which
would permit banks to pay interest on checking and demand deposit accounts
established by businesses, a practice which is currently prohibited by
regulation. If the legislation effectively permitting the payment of interest on
business demand deposits is enacted, of which there can be no assurance, it is
likely that we may be required to pay interest on some portion of our
noninterest bearing deposits in order to compete against other banks. As a
significant portion of the Company's deposits are non-interest bearing demand
deposits established by businesses, payment of interest on these deposits could
have a significant negative impact on our net income, net interest income,
interest margin, return on assets and equity, and other indices of financial
performance.

TABLE 12. TIME DEPOSIT MATURITY SCHEDULE

         Table 12 presents certain information related to the Company's time
deposits.

<TABLE>
<CAPTION>
                                                                         At December 31, 2001
                                                     ------------------------------------------------------------
                                                                        (dollars in thousands)
                                                     3 Months      4 to 6      7 to 12      Over 12       Total
                                                     or Less       Months       Months       Months
<S>                                                  <C>          <C>          <C>          <C>          <C>
Time certificates of deposit of $100M or more        $  3,868     $  5,861     $  3,481     $ 11,899     $ 25,109
Time certificates of deposit less than $100M           11,895        7,193        9,050        4,778       32,916
                                                     --------     --------      -------     --------     --------
Total                                                $ 15,763     $ 13,054     $ 12,531     $ 16,677     $ 58,025
</TABLE>

         Shareholder's Equity and Other Matters - The payment of dividends by
the Company depends largely upon the ability of the Bank to declare and pay
dividends to the Company, as the principal source of the Company's revenue is
dividends paid by the Bank. Future dividends will depend primarily upon the
Bank's earnings, financial condition, and need for funds, as well as
governmental policies and regulations applicable to the Company and the Bank.
Refer to Note 9 to the consolidated financial statements for additional
information related to the Company's dividend paying authority.

         The Company and the Bank are subject to certain regulatory capital
requirements. Management believes, as of December 31, 2001, that the Company and
the Bank meet all the capital adequacy requirements to which they are subject.
As of December 31, 2001, the most recent notification from the Office of the
Comptroller of Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. Refer to Note 10 to the
consolidated financial statements for additional related to regulatory capital
requirements.

         Effect of Inflation - The consolidated financial statements and related
data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States of America which require the
measurement of financial position and results of operations in terms of
historical dollars (except investment securities) without considering the
relative purchasing power of money over time because of inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services. In the
current interest rate environment, liquidity, maturity structure, and quality of
the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.

         Formal Agreement with the OCC. On August 25, 1998, the Bank entered
into a Formal Agreement (the "Agreement") with the Office of the Comptroller of
the Currency (the "OCC"). The Agreement requires the Bank to undertake certain
actions within designated timeframes from the date the agreement was entered
into, and to operate in compliance with the provisions thereof during its term.
See Item 1 for additional information regarding the Formal Agreement.


                                       21
<PAGE>


ITEM 7. FINANCIAL STATEMENTS.

                          INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Directors
of  IBW Financial Corporation and Subsidiary

We have audited the accompanying consolidated balance sheets of IBW Financial
Corporation and Subsidiary (the "Company") as of December 31, 2001 and 2000 and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

As discussed in Note 2 to the financial statements, at December 31, 2001, IBW
Financial Corporation's subsidiary, the Industrial Bank, National Association,
is operating under a formal agreement with the Office of the Comptroller of the
Currency (the "OCC") dated August 25,1998, that requires it to meet certain
prescribed actions in accordance with OCC specified deadlines.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IBW Financial
Corporation and subsidiary at December 31, 2001 and 2000, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principals generally accepted in the United States of America.

/s/  Stegman & Company

Baltimore, Maryland
February 6, 2002


                                       22
<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT  PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS
                                                                            2001            2000
<S>                                                                       <C>             <C>
    Cash and cash equivalents:
    Cash and due from banks                                               $ 11,059        $  8,553
    Federal funds sold                                                      14,100               -
                                                                          --------        --------

                      Total cash and cash equivalents                       25,159           8,553
                                                                          --------        --------

   Interest-bearing deposits in other banks                                    882           1,305

   Securities available-for-sale, at fair value                            127,365         121,842

   Loans receivable - net of allowance for loan losses
     of $3,283 and $3,580                                                  135,514         128,047
   Bank premises and equipment - net                                         2,374           2,073
   Accrued interest receivable                                               1,928           2,010
   Other assets                                                              2,200           1,873
                                                                          --------        --------
                     Total Assets                                         $295,422        $265,703
                                                                          ========        ========

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
    Noninterest bearing deposits                                          $ 63,869        $ 63,207
    Interest bearing deposits                                              153,121         139,740
                                                                          --------        --------

                      Total deposits                                       216,990         202,947

    Short term borrowings                                                   43,483          42,033
    Long term borrowings                                                    10,000               -
    Accrued expenses and other liabilities                                   1,798             930
                                                                          --------        --------

                      Total liabilities                                    272,271         245,910

Shareholders' Equity:
     Preferred stock - $1 par value; 1,000,000 (500,000 voting and
        500,000 nonvoting) authorized; 20,000 Series A nonvoting               500             500
        issued and outstanding, stated at liquidation value
    Common stock - $1 par value; 1,000,000 shares authorized;
       668,360 issued and outstanding                                          668             668
    Capital surplus                                                          5,051           5,051
    Retained earnings                                                       14,756          12,427
    Accumulated other comprehensive income                                   2,176           1,147
                                                                          --------        --------

                      Total shareholders' equity                            23,151          19,793
                                                                          --------        --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                $295,422        $265,703
                                                                          ========        ========
</TABLE>


See notes to consolidated financial statements.

                                       23
<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                               2001             2000
<S>                                                          <C>              <C>
INTEREST INCOME:
    Interest and fees on loans                               $ 11,474         $ 10,676
    U.S. Treasury securities                                       45               63
    Obligations of U.S. Government
        agencies and corporations                               2,342            2,377
    Collateralized mortgage obligations                         4,085            4,775
    Obligations of states and political subdivisions            1,157            1,053
    Bank balances and other securities                            151              141
    Federal funds sold                                            352              166
                                                             --------         --------

                      Total interest income                    19,606           19,251
                                                             --------         --------

INTEREST EXPENSE:
    Interest-bearing deposits                                   3,231            3,270
    Time certificates over $100,000                               752              654
    Short term borrowings                                       1,474            2,292
    Long term borrowings                                           84                -
                                                             --------         --------

                      Total interest expense                    5,541            6,216
                                                             --------         --------

NET INTEREST INCOME                                            14,065           13,035
                                                             --------         --------

PROVISION FOR (REVERSAL OF) LOAN LOSSES                             -             (259)
                                                             --------         --------

NET INTEREST INCOME AFTER PROVISION FOR (REVERSAL OF)
   LOAN LOSSES                                                 14,065           13,294
                                                             --------         --------

NONINTEREST INCOME:
    Service charges on deposit and checking accounts            3,038            2,951
    Other fee income                                              906              845
    Gain (loss) on sale of securities                             438             (200)
    Gain on sale of loans                                         287                -
    Other operating income                                        201              189
                                                             --------         --------

                      Total noninterest income                  4,870            3,785
                                                             --------         --------

NONINTEREST EXPENSE:
    Salaries and employee benefits                              8,420            8,122
    Occupancy                                                     835              719
    Furniture and equipment                                     1,193            1,010
    Data processing                                               830              785
    Advertising                                                   327              259
    Other                                                       3,435            3,378
                                                             --------         --------
                      Total noninterest expense                15,040           14,273
                                                             --------         --------
</TABLE>


                                       24


<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Continued)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

<S>                                                          <C>             <C>
INCOME BEFORE INCOME TAXES                                   $  3,895        $  2,806
INCOME TAX PROVISION                                            1,073             644
                                                             --------         --------
NET INCOME                                                   $  2,822        $  2,162
                                                             ========        ========
BASIC AND DILUTED NET INCOME PER COMMON SHARE                $   4.18        $   3.20
                                                             ========        ========
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING                 668,360         668,360
                                                             ========        ========

</TABLE>

See notes to consolidated financial statements.


                                       25
<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT  PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                        ACCUMULATED
                                                                                                           OTHER
                                                   PREFERRED     COMMON      CAPITAL       RETAINED    COMPREHENSIVE
                                                    STOCK        STOCK       SURPLUS       EARNINGS    INCOME (LOSS)    TOTAL
<S>              <C>                               <C>          <C>          <C>           <C>           <C>           <C>
BALANCE, JANUARY 1, 2000 (previously reported)     $    500     $    668     $  5,051      $ 13,034      $ (1,762)     $ 17,491
                                                                                                                       --------
Restatement for correction of an error                    -            -            -        (2,343)            -             -

BALANCE, JANUARY 1, 2000 (restated)                $    500     $    668     $  5,051      $ 10,691      $ (1,762)     $ 15,148
                                                                                                                       --------
BALANCE, JANUARY 1, 2000                           $    500     $    668     $  5,051      $ 10,691      $ (1,762)     $ 15,148
                                                                                                                       --------
   Net income
                                                          -            -            -         2,162             -         2,162
   Other comprehensive income, net of tax
     (unrealized gains on securities
     available-for-sale of $3,040, net of
      reclassification adjustment for losses
      of $131 included in net income)                     -            -            -             -         2,909         2,909
                                                                                                                       --------
          Total comprehensive income (loss)               -            -            -             -             -         5,071

Cash dividends paid:
    Preferred stock $1.25 per share                       -            -            -           (25)            -           (25)
    Common stock $0.60 per share                          -            -            -          (401)            -          (401)
                                                   --------     --------     --------      --------      --------      --------

BALANCE, DECEMBER 31, 2000                              500          668        5,051        12,427         1,147        19,793
                                                                                                                       --------

   Net income                                                                                 2,822             -         2,822
   Other comprehensive income, net of tax
     (unrealized gains on securities
     available-for-sale of $1,346, net of
      reclassification adjustment for gains
      of $317 included in net income)                     -            -            -             -         1,029         1,029
                                                                                                                       --------

          Total comprehensive income                      -            -            -             -             -         3,851

Cash dividends paid:
    Preferred stock $1.25 per share                       -            -            -           (25)            -           (25)
    Common stock $0.70 per share                          -            -            -          (468)            -          (468)
                                                   --------     --------     --------      --------      --------      --------

BALANCE, DECEMBER 31, 2001                         $    500     $    668     $  5,051      $ 14,756      $  2,176      $ 23,151
                                                   ========     ========     ========      ========      ========      ========
</TABLE>

See notes to consolidated financial statements.


                                       26
<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  2001             2000
<S>                                                                             <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                  $  2,822         $  2,162
    Adjustments to reconcile net income
         to net cash provided by operating activities:
        Depreciation                                                                 448              431
        Amortization of goodwill and intangibles                                     163              161
        (Reversal of) Provision for loan losses                                        -             (259)
        Deferred income taxes                                                         34              186
        Accretion/amortization of premium                                            233              327
        (Gain) loss on sale of real estate owned                                       -               (1)
        (Gain) Loss on sale of investment securities                                (438)             200
        Gain on sale of loans                                                       (287)               -
        (Decrease) Increase in accrued interest receivable                            82             (345)
        (Increase) Decrease in other assets                                         (524)            (426)
        (Increase) decrease in accrued expenses and other liabilities                868             (566)
                                                                                --------         --------

                      Net cash provided by operating activities                    3,401            1,870
                                                                                --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from principal payments on securities available-for-sale             21,778           12,864
    Proceeds from maturities of investment securities available-for-sale          14,372           12,646
    Proceeds from sale of investment securities available-for-sale                23,430           20,997
    Purchase of investment securities available-for-sale                         (63,869)         (26,304)
    Net (increase) decrease in interest-bearing deposits in banks                    423             (317)
    Net (increase) decrease in loans                                             (20,667)         (24,790)
    Proceeds from sale of loans                                                   13,487                -
    Additions to bank premises and equipment, net                                   (749)            (116)
    Proceeds from sale of real estate owned                                            -              266
                                                                                --------         --------

                      Net cash used in investing activities                      (11,795)          (4,754)
                                                                                --------         --------

</TABLE>

See notes to consolidated financial statements.


                                       27
<PAGE>

IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 2001             2000
<S>                                                                            <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase (decrease) in deposits                                        $ 14,043         $ (9,527)
    Net increase in short term borrowings                                         1,450            8,300
    Increase in long term borrowings                                             10,000                -
    Dividends paid                                                                 (493)            (426)
                                                                               --------         --------

                       Net cash (used) provided in financing activities          25,000           (1,653)
                                                                               --------         --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             16,606           (4,537)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    8,553           13,090
                                                                               --------         --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                       $ 25,159         $  8,553
                                                                               --------         --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

        Income tax payments                                                    $    710         $    591
                                                                               --------         --------

        Interest payments                                                      $  5,779         $  6,168
                                                                               --------         --------
</TABLE>

See notes to consolidated financial statements.


                                       28
<PAGE>


IBW FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------------------------------------------------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IBW Financial Corporation (the "Corporation") is a one bank holding company for
its wholly owned subsidiary, Industrial Bank, National Association (the "Bank").
The accounting and reporting policies of IBW Financial Corporation and
subsidiary (the "Company") conform to accounting principles generally accepted
in the United States of America and prevailing practices within the banking
industry. The following summarizes the significant accounting policies.

Consolidation - The consolidated financial statements include the accounts of
the Corporation and the Bank. All significant inter-company transactions and
balances have been eliminated.

Use of Estimates - The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. In addition, there are inherent risks and
uncertainties related to the operation of a financial institution, such as
credit and interest rate risk. The possibility exists that because of changing
economic conditions, unforeseen changes could occur and have an adverse effect
on the Company's financial position.

Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses.
Management believes that the allowance for loan losses is sufficient to address
the risks in the current loan portfolio. While management uses available
information to recognize losses on loans, future additions to the allowances may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination processes,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examinations.

Investment Securities - The Company may segregate its investment securities into
the following three categories: trading, held-to-maturity, and
available-for-sale. Trading securities are purchased and held principally for
the purpose of reselling them within a short period of time. Their unrealized
gains and losses are included in earnings. Securities classified as
held-to-maturity are accounted for at amortized cost, and require the Company to
have both the positive intent and ability to hold these securities to maturity.
Securities not classified as either trading or held-to-maturity are considered
to be available-for-sale. Unrealized gains and losses on available-for-sale
securities are excluded from earnings and reported, net of deferred taxes, as
accumulated other comprehensive income, a separate component of shareholders'
equity. Realized gains or losses on the sale of investment securities are
reported in earnings and determined using the adjusted cost of the specific
security sold.

Loans - Loans are reported at the principal amount outstanding net of deferred
fees and costs and the allowance for possible loan losses. Interest on loans is
accrued at the contractual rate based upon the principal amount outstanding.
Loan fees and related direct loan origination costs are deferred and recognized
over the life of the loan as an adjustment to the yield of the loan as part of
interest income. Loans are placed on non-accrual status when management deems
the collectibility of interest is doubtful. Interest ultimately collected is
recorded in the period received. Accruals are resumed on loans only when they
are brought fully current with respect to interest and principal and when, in
the judgment of management, the loan is estimated to be fully collectible as to
both principal and interest.

Allowance for Loan Losses - The allowance for loan losses is maintained at a
level believed by management to be adequate to provide for known and inherent
risks in the loan portfolio and commitments to extend credit. The Company's
policy for determination of the adequacy of the allowance is based on an
evaluation of past loan loss experience; current economic conditions; volume,
growth, and composition of the loan portfolio; and other relevant factors. The
allowance is increased by provisions for loan losses charged against income and
recoveries and

                                       29
<PAGE>

reduced by charge-offs and reversals of prior years' provisions. The Company's
policy measuring impairment on impaired loans is based on the fair value of the
collateral. The Company considers a loan impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company's policy considers all current information, including the
borrower's ability to repay, the fair value of the collateral, and other
pertinent information in determining if a loan is impaired. The Company
generally considers residential real estate loans and installment loans to be
smaller balance homogenous loans, which are aggregated and collectively
evaluated for measurement of impairment. The amount of loan losses the Company
may ultimately realize could differ from these estimates.

The allowance for loan losses consists of an allocated component and an
unallocated component. The components of allowance for loan losses represent an
estimation done pursuant to either Statement of Financial Accounting Standards
("SFAS") No. 5 "Accounting for Contingencies", or SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan". The allocated component of the allowance
for loan losses reflects expected losses resulting from analysis developed
through specific credit allocations for individual loans and historical loss
experience for each loan category. The specific credit allocations are based on
a regular analysis of all loans over a fixed-dollar amount where the internal
credit rating is at or below a predetermined classification. The historical loan
loss element is determined statistically using a loss migration analysis that
examines loss experience and the related internal gradings of loans charged-off.
The loss migration analysis is performed quarterly and loss factors are updated
regularly based on actual experience. The allocated component of the allowance
for loan losses also includes management's determination of the amounts
necessary for concentrations and changes in portfolio mix and volume.

The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions, as well as specific economic factors
in the individual markets in which the Company operates. This determination
inherently involves a higher risk of uncertainty and considers current risk
factors that may not have yet manifested themselves in the Company's historical
loss factors used to determine the allocated component of the allowance and it
recognizes knowledge of the portfolio may be incomplete.

Bank Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operations on a
straight-line basis over the estimated useful lives of assets which range from
approximately three to forty years.

Other Real Estate Owned - Other real estate owned represents properties acquired
through foreclosures or other proceedings in satisfaction of indebtedness. At
the date of acquisition such property is recorded at the lower of cost or fair
value. Subsequent to acquisition, the property is carried at the lower of the
fair value, less estimated costs to sell, or its new cost basis. Write-downs to
fair value, less estimated costs to sell, at the date of acquisition are charged
to the allowance for losses. Declines in fair value, operating expenses, and
gains or losses on the disposition of other real estate are reported in non
interest expense. The amounts the Company will ultimately realize on disposition
of these properties could differ from management's current estimates.

Earnings Per Share ("EPS") - Net income available to common shareholders is
adjusted to give effect to dividends on preferred stock. Net income available to
common shareholders for basic and diluted EPS purposes is $2,797 and $2,137 for
the years ended December 31, 2001 and 2000, respectively. EPS is computed based
on the weighted average number of common shares outstanding during the year
(668,360 for both 2001 and 2000). Basic and diluted EPS are the same, as the
Corporation had no dilutive common stock equivalents outstanding as of December
31, 2001 or 2000 and for the years then ended.

Income Taxes - The Corporation and its wholly owned subsidiary file a
consolidated federal income tax return. Deferred income tax assets and
liabilities are computed annually for differences between financial statement
and tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future based on the enacted tax laws and rates
applicable to periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period adjusted for the change during the period
in deferred tax assets and liabilities.

Intangibles - At December 31, 2001 and 2000, other assets included other
identifiable intangibles of $408, and $463, net of accumulated amortization of
$413,and $358, and core deposit intangibles of $48, and $154, net of

                                       30

<PAGE>

accumulated amortization of $857, and $696, respectively. Other identifiable
intangibles had been amortized over fifteen years and the core deposit
intangibles are being amortized over eight years, both on the straight-line
basis. See discussion under New Accounting Pronouncements regarding future
accounting treatment of intangible assets.

Statement of Cash Flows - For purposes of the consolidated statement of cash
flows, cash equivalents are highly liquid investments with original maturities
of three months or less. Included in cash and due from banks were required
deposits at the Federal Reserve Bank of $3,141 and $5,500, at December 31, 2001
and 2000, respectively.

New Accounting Pronouncements - In July 2001, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 102, "Selected
Loan Loss Allowance Methodology and Documentation Issues". SAB 102 summarizes
certain SEC views on the development, documentation, and application of a
systematic methodology as required by Financial Reporting Release No. 28 for
determining allowances for loan and lease losses in accordance with accounting
principles generally accepted in the United States of America. In particular,
the guidance focuses on the documentation the staff normally would expect
registrants to prepare and maintain in support of their allowance for loan
losses.

SAB 102 provides parallel guidance to the federal banking agencies' guidance
issued through the Federal Financial Institutions Examination Council as
interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses
Methodologies and Documentation for Banks and Savings Institutions". The
adoption of SAB 102 had no affect on the financial position or results of
operations of the Company.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies criteria that intangible assets acquired in a purchase method
business combination must be recognized and reported apart from goodwill. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121. "Accounting for the
Impairment of Long-Lived Assets to be Disposed Of".

The provisions of SFAS Nos. 141 and 142 were adopted by the Company as required
effective July 1, 2001, and January 1, 2002, respectively. The adoption of SFAS
Nos. 141 and 142 had no affect on the financial position or results of
operations of the Company.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which
supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses in
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. The provisions of SFAS No. 144 are effective for years beginning after
December 15, 2001, and its adoption is not expected to affect the financial
position or results of operations of the Company.

Reclassifications - Certain reclassifications have been made to the prior year's
consolidated financial statements to conform to the 2001 presentation.

2.       FORMAL AGREEMENT

On August 25, 1998, the Bank entered into a Formal Agreement (the "Agreement")
with the Office of the Comptroller of the Currency (the OCC). The Agreement
requires the Bank to undertake certain actions within designated timeframes from
the date the Agreement was entered into, and to operate in compliance with the
provisions thereof during its term.


                                       31
<PAGE>

Among the actions required by the Agreement are the following: (i) Within thirty
days, the Bank shall employ an independent management consultant to perform a
study of the Bank's management structure and staffing requirements, including a
report identifying staffing requirements, job descriptions and evaluations for
senior officers, and evaluating organizational structure. The Board of Directors
(the Board) is required to adopt within thirty days of the receipt of the
report, a plan to eliminate any deficiencies in management, staffing, or
supervision of management; (ii) The Board is required to take steps to obtain
current and satisfactory credit information on loans without such information,
and to insure that proper collateral documentation is maintained. Management may
not grant, renew, alter, restructure or extend a loan without proper
documentation and analysis of credit, purpose and anticipated source of
repayment. In absence of such information, such loans may be made only upon
certification of a majority of the Board why obtaining such information would be
detrimental to the best interest of the Bank; (iii) Within thirty days the Board
shall adopt a written program to eliminate the basis of criticism for assets
rated "doubtful", "substandard" or "other assets especially mentioned;" (iv)
Within thirty days the Board shall establish a loan review system to assure
timely identification and categorization of problem credits and implement a
process to insure the loan review function is independent; (v) Within sixty days
the Board shall review and revise the Bank's loan policy based upon the guidance
on Loan Portfolio Management in the Comptroller's Manual for National Bank
Examiners. Within thirty days thereafter, the Board shall develop a process to
ensure accountability for lending personnel; (vi) The Board shall notify the
Assistant Deputy Comptroller before all loan sales; (vii) Within sixty days, the
Board shall develop a written program to improve and strengthen collection
efforts; (viii) Within ninety days the Board shall develop a profit plan to
improve and sustain the Bank's earnings; (ix) Within 120 days, the Board shall
adopt and implement a strategic plan for the Bank covering at least three years,
including objectives for earnings performance, balance sheet mix, off-balance
sheet activities, liability structure, capital adequacy, reduction in the volume
of non-performing assets, product line development and market segments intended
to be developed, together with strategies to achieve those objectives; (x) The
Board shall take all steps necessary to correct any violation of law, rule or
regulation cited in any report of examination; (xi) Within thirty days the Bank
shall submit a revised written project plan with respect to Year 2000 compliance
of the Bank's information and environmental systems, including a testing plan
and, within sixty days, a remediation contingency plan in the event any systems
are not compliant by the date set forth in the plan.

Compliance with the Agreement is to be monitored by a committee (the
"Committee") of at least three directors, none of whom is an employee of the
Bank or a family member of an employee. The Committee, presently composed of
four directors, is required to submit written progress reports on a monthly
basis. The Agreement requires the Bank to make periodic reports and filings with
the OCC.

The Agreement does not contain any capital directive or other requirement that
the Bank increase its capital, or maintain a minimum level of capital in excess
of generally applicable regulatory capital requirements.

As of January 22, 2001, the Bank had submitted to the OCC all of the written
plans, policies and other information required by the Agreement, and all
revisions requested by the OCC, although certain submissions were made outside
of the time limits required by the Agreement.

There can be no assurance that the Bank's regulators will deem the Bank to be
compliant under the Agreement, or that they will not require additional
compliance efforts. Failure to comply with the provisions of the Agreement could
subject the Bank and its directors to additional enforcement actions, including
but not limited to a cease and desist order, a safety and soundness order or
civil money penalties. If the directors of the Bank become subject to civil
money penalties or other actions, the Company or the Bank may be obligated to
indemnify such directors.


                                       32
<PAGE>


3.       INVESTMENT SECURITIES

At December 31, 2001 and 2000, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                        December 31, 2001
-----------------------------------------------------------------------------------------------------------------------------
                                                              Amortized         Unrealized        Unrealized       Estimated
                                                                 Cost             Gains             Losses        Fair Value
<S>                                                           <C>              <C>               <C>               <C>
U.S. Treasury Notes                                           $     498        $       -         $       -         $     498
U.S. Government Agencies                                         37,858            1,699               (28)           39,529

Mortgage-Backed Securities:
    Pass-through securities:
        Guaranteed by GNMA                                           11                1                 -                12
        Issued by FNMA and FHLMC                                  4,645               17                 -             4,662

Collateralized Mortgage Obligations:
        Collateralized by FNMA, FHLMC and
          GNMA mortgage-backed securities                        55,845            1,157              (180)           56,822

Securities issued by states and political subdivision:
        General obligations                                      15,451              305              (100)           15,656
        Revenue obligations                                       7,578              249               (51)            7,776
        Taxable obligations                                         915               90                 -             1,005
                                                              ---------        ---------         ---------         ---------
Total debt securities                                           122,801            3,518              (359)          125,960

Equity securities                                                 1,379               26                 -             1,405
                                                              ---------        ---------         ---------         ---------

TOTAL                                                         $ 124,180        $   3,544         $    (359)        $ 127,365
                                                              =========        =========         =========         =========
<CAPTION>

                                                                                     December 31, 2000
                                                              --------------------------------------------------------------
                                                              Amortized          Unrealized      Unrealized       Estimated
                                                                Cost               Gains           Losses         Fair Value
<S>                                                           <C>              <C>               <C>               <C>
U.S. Treasury Notes                                           $     999        $       -         $      (1)        $     998
U.S. Government Agencies                                         30,192            1,028               (49)           31,171

Mortgage-Backed Securities:
    Pass-through securities:
        Guaranteed by GNMA                                           19                1                 -                20
        Issued by FNMA and FHLMC                                      5                -                 -                 5

Collateralized Mortgage Obligations:
        Collateralized by FNMA, FHLMC and
            GNMA mortgage-backed securities                      66,289              388              (323)           66,354

Securities issued by states and political subdivision:
        General obligations                                      13,232              339               (42)           13,529
        Revenue obligations                                       5,509              263               (18)            5,754
        Taxable obligations                                       2,477              137                 -             2,614
                                                              ---------        ---------         ---------         ---------
Total debt securities                                           118,722            2,156              (433)          120,445
Equity securities                                                 1,380               17                 -             1,397
                                                              ---------        ---------         ---------         ---------
TOTAL                                                         $ 120,102        $   2,173         $    (433)        $ 121,842
                                                              =========        =========         =========         =========

</TABLE>


                                       33
<PAGE>


The following is a summary of the amortized cost and estimated fair value of
debt securities available-for-sale by contractual maturity as of December 31,
2001. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties (in thousands).

                                                December 31, 2001
                                             ------------------------
                                                             Estimated
                                             Amortized         Fair
                                               Cost            Value

Due in one year or less                      $  8,937        $  9,110
Due after one year through five years          26,373          27,871
Due five through ten years                      3,959           4,051
Due after ten years                            23,029          23,432
Pass through securities                            11              12
Collateralized mortgage obligations            60,492          61,484
                                             --------        --------
Total debt securities                         122,801         125,960
Equity securities                               1,379           1,405

TOTAL                                        $124,180        $127,365
                                             ========        ========


Proceeds from the sale of securities available-for-sale were $23,430 and $20,997
for the year ended December 31, 2001 and 2000, respectively, and resulted in
realized gains of $438 for 2001 and realized losses of $200 for 2000.

Securities of $7,719 and $3,613 at December 31, 2001 and 2000 were pledged as
collateral for public deposits and for other purposes required by law. At
December 31, 2001 and 2000, the carrying value of securities underlying
repurchase agreements was $50,528 and $63,369, respectively.

4.       LOANS RECEIVABLE

Loans receivable consist of the following (in thousands) at December 31:


                                                          2001            2000

Real estate loans:
    Collateralized by residential property:
        First mortgages                                 $ 57,454        $ 55,304
        Second mortgages                                   1,285           1,307
    Collateralized by non-residential properties          59,905          58,772
Commercial                                                13,235          10,958
Installment                                                7,545           5,993
                                                        --------        --------

     Total
                                                         139,424         132,334

Less:
    Deferred fees and costs, net                             627             707
    Allowance for loan losses                              3,283           3,580
                                                        --------        --------

Net loans                                               $135,514        $128,047
                                                        ========        ========



                                       34
<PAGE>



Major loan concentrations are as follows (in thousands):


                                                    2001           2000

Church loans collateralized by real estate        $20,250        $16,020
Installment loans to churches                          59             51
Commercial loans to churches                          948            710
                                                  -------        -------
Total loans to churches                           $21,257        $16,781
                                                  =======        =======


Substantially all of the Bank's loans have been made to borrowers within the
Washington, DC metropolitan area. Accordingly, the ability of the Bank's
borrowers to repay their loans is dependent upon the economy in the Washington,
DC metropolitan area.

A summary of transactions in the allowance for loan losses is as follows (in
thousands) at December 31:


                                                          2001            2000

Balance, beginning of year                              $ 3,580         $ 4,272

         Provision for (Reversal of ) loan losses             -            (259)
         Recoveries                                         560             317
         Charge-offs                                       (857)           (750)
                                                        -------         -------

Balance, end of year                                    $ 3,283         $ 3,580
                                                        =======         =======


At December 31, 2001 and 2000, loans that were considered to be impaired totaled
$1,637 and $1,350, respectively. The related allowance allocated to impaired
loans was $239 and $318 at December 31, 2001 and 2000, respectively. The average
balance of impaired loans for the years ended December 31, 2001 and 2000 was
$1,613 and $2,187, respectively. Interest income that was not recorded on
impaired loans for the years ended December 31, 2001 and 2000, was $103 and
$197, respectively.

5.       BANK PREMISES AND EQUIPMENT

The major categories of bank premises and equipment are as follows (in
thousands):


                                           2001             2000

Bank premises                             $ 2,389         $ 2,389
Furniture, fixtures, and equipment          4,388           3,645
                                          -------         -------

Total                                     $ 6,777         $ 6,034

Less accumulated depreciation              (4,403)         (3,961)
                                          -------         -------

Bank premises and equipment, net          $ 2,374         $ 2,073
                                          =======         =======


Depreciation expense for the years ended December 31, 2001 and 2000 is $448 and
$431, respectively.


                                       35
<PAGE>



6.       DEPOSITS

Deposits consist of the following (in thousands) at December 31, 2001:

<TABLE>
<CAPTION>
                                          Demand          Savings            Time           Total
<S>                                      <C>              <C>              <C>             <C>
Individuals, partnerships, and
    corporations                         $ 63,577         $ 87,497         $ 58,339        $209,413
U.S. government                                85                -            2,285           2,370
States and political subdivisions               4                -            5,000           5,004
Certified and official checks                 203                -                -             203
                                         --------         --------         --------        --------

Total                                    $ 63,869         $ 87,497         $ 65,624        $216,990
                                         ========         ========         ========        ========

Weighted average interest rate                                1.70%            3.46%
                                                          ========         ========
</TABLE>


Deposits consist of the following (in thousands) at December 31, 2000:

<TABLE>
<CAPTION>
                                          Demand          Savings            Time            Total
<S>                                      <C>              <C>              <C>             <C>
Individuals, partnerships, and
    corporations                         $ 59,837         $ 85,323         $ 46,894        $192,054
U.S. Government                                82                -            2,190           2,272
States and political subdivisions               -                -            5,333           5,333
Certified and official checks               3,288                -                -           3,288
                                         --------         --------         --------        --------

Total                                    $ 63,207         $ 85,323         $ 54,417        $202,947
                                         ========         ========         ========        ========

Weighted average interest rate                                1.75%            4.45%
                                                          ========         ========
</TABLE>


Demand deposits represent non-interest-bearing deposit accounts. Individual
certificates of deposit of $100 or more at December 31, 2001 and 2000, totaling
$16,329 and $13,713, respectively, are included in time deposits. The Bank has
no brokered deposits.

At December 31, 2001, the scheduled maturities of Time Deposits are as follows
(in thousands):

                                Average Rate
2002        $48,859                 3.48%
2003         11,765                 4.13%
2006          5,000                 1.75%
            -------
            $65,624


7.       SHORT-TERM BORROWINGS

At December 31, 2001 and 2000, securities sold under agreements to repurchase
were $43,483 and $41,133 respectively. The outstanding repurchase agreements had
an average interest rate of 1.43% and 5.40% at December 31, 2001 and 2000,
respectively. These are fixed coupon agreements that are treated as financing
transactions, and the obligations to repurchase are reflected as a liability in
the consolidated balance sheets. The amount of the securities underlying the
agreements remains in the asset account. The securities are held in a segregated
account by the Company's custodian. The securities underlying the repurchase
agreements at December 31, 2001 and 2000 had a fair value of $54,198 and
$63,369, respectively. All outstanding repurchase agreements at December 31,
2001 and


                                       36
<PAGE>

2000 matured on January 1, 2000 and 2000, respectively. The average balance and
the average interest rate for the year ended December 31, 2001 and 2000 were
$48,155 and 3.03% and $39,176 and 5.30%, respectively.

8.       LONG-TERM DEBT

The Company has a line of credit arrangement with the Federal Home Loan Bank of
Atlanta (the "FHLB") under which it may borrow up to $25,000 at interest rates
based upon current market conditions, of which $10,000 was outstanding at
December 31, 2001. The Company has pledged, under a blanket lien, all qualifying
residential mortgage loans as collateral under the borrowing agreement with the
FHLB. At December 31, 2001, the Company had two $5.0 million long-term advances
from the FHLB, with fixed rates of interest of 4.53% and 5.49%. The advances are
scheduled to mature in 2006 and 2011. There are no call provisions associated
with these borrowings, however prepayment penalties may apply.

9.       SHAREHOLDERS' EQUITY

Regulations of the OCC place a limit on the amount of dividends the Bank may pay
to the Corporation without prior approval. Prior approval of the OCC is required
to pay dividends which exceed the Bank's net profits for the current year plus
its retained net profits for the preceding two calendar years, less required
transfers to surplus. As of December 31, 2001 the Bank would not need prior
approval from OCC unless a declaration of dividends exceeded $3,633.

10.      REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital, as defined in the regulations, to risk-weighted
assets, as defined, and of Tier 1 Capital, as defined, to average assets, as
defined. Management believes, as of December 31, 2001, that the Corporation and
Bank meet all the capital adequacy requirements to which they are subject.

As of December 31, 2001, the most recent notification from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as adequately capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage
ratios, as set forth in the table below. There are no conditions or events since
that notification that management believes have changed the institution's
category.


                                       37
<PAGE>


The Corporation's and the Bank's required and actual capital amounts and ratios
at December 31, 2001 and 2000, are set forth in the following table (in
thousands):

<TABLE>
<CAPTION>
                                                                                 To Be Categorized as
                                                                                Well Capitalized Under
                                                          For Capital Adequacy     Prompt Corrective
                                              Actual              Purposes         Action Provisions
                                       ---------------------------------------------------------------
                                       Amount      Ratio     Amount     Ratio    Amount      Ratio
<S>                                    <C>         <C>       <C>        <C>
As of December 31, 2001
    Total capital (to risk-
        weighted assets):
            Corporation                $22,429     14.77%    12,152     8.00%     N/A         N/A
            Bank                        22,237     14.65     12,139     8.00    $15,174      10.00%

    Tier I capital (to risk-
        weighted assets)
            Corporation                 20,515     13.51      6,076     4.00      N/A         N/A
            Bank                        20,313     13.39      6,070     4.00      9,105       6.00

    Tier I capital (to
      average assets)
            Corporation                 20,515      6.94     11,828     4.00      N/A         N/A
            Bank                        20,313      6.87     11,822     4.00     14,778       5.00

As of December 31, 2000
    Total capital (to risk-
        weighted assets)
            Corporation                $19,727     14.95%    10,559     8.00%     N/A         N/A
            Bank                        19,537     14.58     10,759     8.00    $13,448      10.00%

    Tier I capital (to risk-
        weighted assets)
            Corporation                 18,024     13.66      5,280     4.00      N/A         N/A
            Bank                        17,833     13.31      5,380     4.00      8,070       6.00

    Tier I capital (to
         average assets)
            Corporation                 18,024      6.58     10,963     4.00      N/A         N/A
            Bank                        17,833      6.51     10,957     4.00     13,696       5.00
</TABLE>


                                       38
<PAGE>

11.      INCOME TAXES

The provision for income taxes consists of the following (in thousands) for the
years ended December 31:


                                       2001          2000

Current:
    Federal income tax                $  824        $  458
    State and local income tax           215             -
                                      ------        ------
                                       1,039           458
Deferred:
    Federal income tax                    27           186
    State income tax                       7             -
                                      ------        ------
                                          34           186
                                      ------        ------
Total                                 $1,073        $  644
                                      ======        ======


The components of the deferred tax expense resulting from net temporary
differences are as follows (in thousands) for the years ended December 31:


                                                 2001          2000

Provisions for losses on loans and other
    real estate owned                              43           302
Loss from prior period                           (797)            -
Valuation allowance                               797             -
Deferred loan fees                                 31           (66)
Depreciation                                    $ (23)        $ (31)
Other                                             (17)          (19)
                                                -----         -----
Total                                           $  34         $ 186
                                                =====         =====



The following reconciles the federal statutory income tax rate of 34% to the
effective income tax rate (in thousands) for the years ended December 31:

<TABLE>
<CAPTION>
                                               Amount         Percent       Amount         Percent

<S>                                           <C>               <C>         <C>              <C>
Federal tax expense at statutory rate         $ 1,324           34.0%       $   954          34.0%
State tax expense, net  of federal tax
   benefit                                         91            2.3%             -             0%
Tax-exempt interest                              (323)          (8.3)%         (300)        (10.7)%
Other                                             (19)          (0.5)%          (10)         (0.3)%
                                              -------           ----        -------          -----
Total                                         $ 1,073           27.5%       $   644          23.0%
                                              =======           ====        =======          =====
</TABLE>


                                       39
<PAGE>


The tax effects of items comprising the Company's deferred tax assets
(liabilities) at December 31, 2001 and 2000 are as follows (in thousands):


                                                           2001         2000

Deferred tax assets:
Allowance for losses on loans and other real
 estate owned                                            $   869       $   912
Deferred loan fees                                           232           263
Other                                                        101            84
Loss from prior period                                       797             -
                                                         -------       -------
        Total deferred tax assets                          1,999         1,259
                                                         -------       -------
Valuation allowance                                         (797)            -
                                                         -------       -------
Deferred tax assets - net                                  1,202         1,259
                                                         -------       -------

Deferred tax liabilities:
   Unrealized gain on available-for-sale securities       (1,072)         (585)
   Depreciation                                              (81)         (104)
   Other                                                     (17)          (17)
                                                         -------       -------
        Total deferred tax liabilities                    (1,170)         (706)
                                                         -------       -------

        Net deferred tax assets                          $    32       $   553
                                                         =======       =======


A valuation allowance was established for the tax benefit resulting from the
loss discovered in 2001 that occurred in a prior period. Because the ultimate
recovery of the tax benefit associated with the loss is not considered more
likely than not, a valuation reserve was established. If management determines
in the future that all or a portion of the valuation allowance is no longer
warranted, any adjustment will affect the Company's earnings in the year such
determination is made.

12.      PROFIT SHARING PLAN

The Company has a profit sharing plan, qualifying under Section 401(k) of the
Internal Revenue Code, for those employees who meet the eligibility requirements
set for in the plan. The plan does not require the Company to match the
participants' contributions. The Company contributions to the plan were $160 in
2001 and $152 in 2000.

13.      EMPLOYEE STOCK OWNERSHIP PLAN

In 1986, the Bank implemented an Employee Stock Ownership Plan (ESOP) that
covers substantially all full-time employees. Annual contributions to the plan
are determined by the Company's Board of Directors. Contributions of $169 and
$87, were made for 2001 and 2000, respectively. At December 31, 2001 and 2000,
the ESOP held 54,720, or 8.2% of the outstanding shares of the Company's common
stock.

14.      COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are outstanding various commitments and
contingent liabilities, such as commitments to extend credit, which are not
shown in the accompanying consolidated financial statements. The Company does
not anticipate any material losses as a result of these transactions. At
December 31, 2001 and 2000 the Bank had outstanding commitments to fund loans
for approximately $29,000 and $27,713, respectively. The Bank also has
outstanding standby letters of credit at December 31, 2001 and 2000 in the
amount of $261 and $387, respectively. Such commitments and standby letters of
credit are subject to the Bank's normal underwriting standards. Since many of
the commitments are expected to expire without being completely drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.


                                       40
<PAGE>


At December 31, 2001, the Bank was committed for future minimum annual payments
under noncancelable long-term lease agreements for the rental of office space as
follows (in thousands):

     2002                 $   315
     2003                     281
     2004                     179
     2005                     137
     2006                      96
                          -------
     Total                $ 1,008
                          =======

Rent expense for the years ended December 31, 2001 and 2000 was $329 and $291,
respectively.

15.      ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has determined the fair value of its financial instruments using the
following assumptions:

Cash and Cash Equivalents, Interest-Bearing Deposits, Accrued Interest
Receivable and Payable, and Repurchase Agreements - The fair value was estimated
to equal the carrying value due to the short-term nature of these financial
instruments.

Securities - The fair value was estimated based on quoted market prices, dealer
quotes and prices obtained from independent pricing services.

Loans - The fair value was estimated by discounting the estimated future cash
flows using current rates on loans with similar credit risks and terms. It was
assumed that no prepayments would occur due to the short-term nature of the
portfolio (five years or less) and based upon the Company's historical
experience.

Deposits - The fair value of demand and savings deposits was estimated to equal
the carrying value due to the short-term nature of the financial instruments.
The fair value of time deposits was estimated by discounting the estimated
future cash flows using current rates on time deposits with similar maturities.

Commitments to Fund Loans and Standby Letters of Credit - The majority of the
Bank's commitments to grant loans and standby letters of credit are generally
unassignable by either the Bank or the borrower, they only have value to the
bank and the borrower.

The fair value estimates presented are based on pertinent information available
as of December 31, 2001 and 2000. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented are not necessarily indicative of the amounts that the
Company could realize in a current market transaction. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.

<TABLE>
<CAPTION>

(In thousands)                            December 31, 2001               December 31, 2000
                                       ------------------------        ------------------------
                                        Carrying         Fair          Carrying         Fair
                                         Value          Value            Value          Value
<S>                                    <C>             <C>             <C>             <C>
Assets:
    Cash and cash equivalents          $ 25,159        $ 25,159        $  8,553        $  8,553
    Interest-bearing deposits               882             882           1,305           1,305
    Investment securities               127,365         127,365         121,842         121,842
    Loans, net                          135,514         137,619         128,047         128,680
    Accrued interest receivable           1,928           1,928           2,010           2,010

Liabilities:
    Deposits                           $216,990        $217,407        $202,947        $202,809
    Short term borrowings                43,483          43,483          42,033          42,033
    Long term borrowings                 10,000           9,796               -               -
    Accrued interest payable                454             454             484             484
</TABLE>


                                       41
<PAGE>

16.      RELATED PARTY TRANSACTIONS

In the normal course of banking business, loans are made to officers and
directors. At December 31, 2001 and 2000, these loans totaled $640 and $449,
respectively.

17.      OTHER EXPENSES

Other expenses in the Consolidated Statements of Income include the following:

                                                      Years ended
                                                       December 31
                                                 --------------------
(In  thousands)                                   2001          2000
                                                 ------        ------

Director fees                                    $  214        $  265
Professional fees                                   389           306
Loan collection and repossession expenses           178           391
Bank security                                       248           320
Other                                             2,406         2,096
                                                 ------        ------

Total Other Expenses                             $3,435        $3,378
                                                 ======        ======


18.      PRIOR PERIOD RESTATEMENT

In December 2001, management became aware of a possible error in the
reconciliation process for one of the Bank's correspondent bank accounts. In
January 2002, following investigation, management confirmed the presence of an
error in the reconciliation process as a result of which an inappropriate
reconciling item in the amount of $2.3million had been perpetuated for several
years. The item in question is more than three years old.

While efforts to determine the origin of the reconciling item continue,
management has concluded that it is not appropriate to continue to record this
item as an asset of the Bank and the Company. Accordingly, the opening retained
earnings balances of the Company have been reduced by $2.3million.

Management is continuing its review of the historical activity in its
correspondent bank accounts to determine the origin of the item and whether any
recovery relating to this matter is available.

Set forth below are the Company's historically reported total stockholders'
equity and the effects of the reduction in the opening retained earnings balance
on the Company's total stockholder's equity.

                                                     December 31, 2000
                                                    ------------------
(Dollars in thousands)

Total stockholders' equity - Company
   As reported                                            $22,136
   Adjustment                                              (2,343)
                                                          -------
      Adjusted total stockholders' equity - Company       $19,793


Following the adjustment, the Company and Bank remain in compliance with all
regulatory capital requirements, and the Bank continues to be classified as
"well capitalized" for purposes of the prompt corrective action provisions of
ss.38 of the Federal Deposit Insurance Act.


                                       42
<PAGE>


19.      PARENT COMPANY FINANCIAL INFORMATION

The summarized financial statements of IBW Financial Corporation (parent company
only) as of December 31, 2001 and 2000, and for the years ended December 31,
2001 and 2000, follow (in thousands):

Balance Sheets                                             2001          2000
--------------
Assets:
    Deposits with subsidiary                             $    65        $    10
    Interest bearing deposits in banks                         -              -
    Securities available-for-sale                            152            144
    Other assets                                               -             61
    Investment in subsidiary - method equity              22,949         19,590
        Total Assets                                     $23,166        $19,805
                                                         =======        =======
Liabilities and Shareholders' Equity:
    Liabilities:
        Borrowings                                       $     -        $     -
        Other                                                 15             12
                                                         -------        -------
                                Total Liabilities             15             12
                                                         -------        -------
Shareholders' Equity
    Preferred stock                                          500            500
    Common stock                                             668            668
    Capital surplus                                        5,051          5,051
    Retained earnings                                     14,756         12,427
    Accumulated other comprehensive income                 2,176          1,147
                                                         -------        -------
            Total Shareholders' Equity                    23,151         19,793
                                                         -------        -------
Total Liabilities and Shareholders' Equity               $23,166        $19,805
                                                         =======        =======

Statements of Income                                       2001           2000
--------------------
Dividends from subsidiary and other income                $  493        $  841
Expenses                                                       -            20
                                                          ------        ------
Income before undistributed net earnings of subsidiary       493           821
Equity in undistributed net earnings of subsidiary         2,329         1,341
                                                          ------        ------
Net income                                                $2,822        $2,162
                                                          ======        ======


                                       43
<PAGE>

<TABLE>
<CAPTION>

Statements of Cash Flows
------------------------
<S>                                                                        <C>             <C>
Cash Flows from Operating Activities:
    Net income                                                             $ 2,822         $ 2,162
    Adjustments to reconcile net income to net
        cash provided by operating activities:
        Equity in undistributed net earnings of subsidiary                  (2,329)         (1,336)
        Other                                                                   55             (11)
                                                                           -------         -------
                Net cash provided by operating activities                      548             815
                                                                           -------         -------
Cash Flows from Investing Activities:
    Maturity (Purchase) of interest bearing deposits                           296             296
                                                                           -------         -------
                Net cash provided by (used in) investing activities            296             296
                                                                           -------         -------
Cash Flows from Financing Activities:
    Repayment of short-term borrowings                                           -          (1,000)
    Payment of dividends                                                      (493)           (426)
                Net cash used in financing activities                         (493)         (1,426)
                                                                           -------         -------
(Decrease) Increase in Deposits with Subsidiary                                 55            (315)
Deposits with Subsidiary, Beginning of the Year                                 10             325
                                                                           -------         -------

</TABLE>

                                       44
<PAGE>


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.

         None.

                                    Part III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         The information required by this Item is incorporated by reference to,
the material appearing at pages 4 to 7of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on April 23, 2002.

ITEM 10. EXECUTIVE COMPENSATION.

         The information required by this Item is incorporated by reference to,
the material appearing at pages 6 and 7 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on April 23, 2002.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information required by this Item is incorporated by reference to,
the material appearing at pages 3 to 4 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on April 23, 2002.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this Item is incorporated by reference to,
the material appearing at page 7 of the Company's definitive proxy statement for
the Annual Meeting of Shareholders to be held on April 23, 2002.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

<TABLE>
<CAPTION>

Exhibit No.  Description of Exhibits
<S>          <C>
3(a)         Certificate of Incorporation of the Company, as amended (1)
3(b)         Bylaws of the Company (2)
4(a)         Specimen certificate for the common stock, $1 par value, of the Company (3)
4(b)         Designation of the Series A Non-Voting Preferred Stock (4)
11           Statement Regarding Computation of Per Share Earnings
21           Subsidiaries of the Registrant
</TABLE>

         The sole subsidiary of the Registrant is Industrial Bank, National
         Association, a national banking association organized under the laws of
         the United States
-----------------------------
(1)      Incorporated by reference to Exhibit 1 to the Company's  Current Report
         on Form 8-K, dated September 25, 1997.
(2)      Incorporated by reference to Exhibit 2(b) to the Company's Registration
         Statement on Form 10-SB
(3)      Incorporated  by reference to Exhibit 3 to the  Company's  Registration
         Statement on Form 10-SB
(4)      Incorporated by reference to Exhibit 2 to the Company's  Current Report
         on Form 8-K, dated September 25, 1997.

(b)  REPORTS ON FORM 8-K

         No reports on Form 8-K were filed during the fourth quarter of 2001.



                                       45
<PAGE>


                                   SIGNATURES

         In accordance with Section 13 of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                           IBW FINANCIAL CORPORATION


March 20, 2002                             By: /s/ B. Doyle Mitchell, Jr.
                                               ---------------------------------
                                               B. Doyle Mitchell, Jr., President

         In accordance with the Exchange Act, 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>
                  Signature                          Position                           Date
<S>                                         <C>                                         <C>
 /s/ Clinton W. Chapman                     Chairman of the Board of Directors          March 21, 2002
------------------------------------
Clinton W. Chapman


 /s/ George S. Windsor                      Vice Chairman of the Board of Directors     March 20, 2002
------------------------------------
George S. Windsor


 /s/ B. Doyle Mitchell, Jr.                 President, Chief Executive Officer          March 20, 2002
------------------------------------        and Director (Principal Executive Officer)
B. Doyle Mitchell, Jr.


 /s/ Massie S. Fleming                      Director                                    March 20, 2002
------------------------------------
Massie S. Fleming


 /s/ Robert R. Hagans                       Director                                    March 20, 2002
------------------------------------
Robert R. Hagans


 /s/ Benjamin L. King                       Secretary and Director                      March 20, 2002
------------------------------------
Benjamin L. King


 /s/ Cynthia T. Mitchell                    Director                                    March 21, 2002
------------------------------------
Cynthia T. Mitchell


 /s/ Emerson A. Williams                    Director                                    March 21, 2002
------------------------------------
Emerson A. Williams


 /s/ Thomas A. Wilson                       Senior Vice President, Treasurer            March 20, 2002
------------------------------------        (Principal Financial and
Thomas A. Wilson, Jr.                       Accounting Officer)

</TABLE>



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