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, 2002

/ /  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, 2002 were
approximately $22,995,000.

The aggregate market value of the outstanding Common Stock held by
non-affiliates as of March 5, 2003 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, 2003, 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 22, 2003 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 of 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-nine years, the
Company has grown from one office in the District of Columbia and $250,000 in
assets to six 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 $26 million of shareholders'
equity at December 31, 2002. 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 ten convenient
locations. As a part of the Star , Plus/Visa networks , 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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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 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 2001 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, Mr. Chapman and Dr. Williams, 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, 2003, 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 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


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<PAGE>


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.

EMPLOYEES

         As of December 31, 2002, 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 $138,000 in
2002, $169,000 in 2001 and $87,000 in 2000. 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
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, 2001, 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


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<PAGE>

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.

         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


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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, 2002, 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 14.51% and 15.77%
respectively, and a Leverage Capital Ratio equal to approximately 7.40%.

         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

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<PAGE>

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 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, 2002, 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. Payment of deposit insurance
premiums will have an adverse effect on earnings. 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.


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         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 PROPERTIES.

         The Bank currently operates ten offices, six 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 2001 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 $39,993 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 five year
term at a current annual rent of $80,980, subject to annual increases. 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 $53,267, subject to annual
increase. The Oxon Hill office 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 option, for a five year term at a current annual rental of $34,440,
subject to annual increases. This lease has expired and management is currently
renegotiating a new lease. 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, 2002.

                                    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 3 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, 2002,
there were 668,360 shares of Common Stock outstanding, held of record by
approximately 571 shareholders.


                                       8
<PAGE>


         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, 2002 the Bank would not need
prior approval from OCC unless a declaration of dividends exceeded $6,676,000.
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 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,
                                        ---------------------------------------
                                          2002    2001    2000    1999    1998
                                        ----------------------------------------
Net income per common share              $3.03   $4.18   $3.20    $2.50  $(2.06)
Dividends paid per common share          $0.70   $0.70   $0.60    $0.15  $ 0.51

         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


                                       9
<PAGE>

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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

         The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America and follow general practices within the industry in which it operates.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available.

         The most significant accounting policies followed by the Company are
presented in Note 1 to the consolidated financial statements. These policies,
along with the disclosures presented in the other financial statement notes and
in this financial review, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions, and estimates
underlying those amounts, management has identified the determination of the
allowance for loan losses, to be the accounting area that requires the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.

         The allowance for loan losses represents management's estimate of
probable credit losses inherent in the loan portfolio. Determining the amount of
the allowance for loan losses is considered a critical accounting estimate
because it requires significant judgment and the use of estimates related to the
amount and timing of expected future cash flows on impaired loans, estimated
losses on pools of homogeneous loans based on historical loss experience, and
consideration of current economic trends and conditions, all of which may be
susceptible to significant change. The loan portfolio also represents the second
largest asset type on the consolidated balance sheet as of December 31, 2002.
Note 1 to the consolidated financial statements describes the methodology used
to determine the allowance for loan losses and a discussion of the factors
driving changes in the amount of the allowance for loan losses is included in
the Credit Risk Management section of this financial review.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

         Note 1 to the consolidated financial statements discusses new
accounting policies adopted by the Company during 2002 and the expected impact
of accounting policies recently issued or proposed but not yet required to be
adopted. To the extent the adoption of new accounting standards materially
affects the Company's financial condition, results or operations, or liquidity,
the impacts are discussed in the applicable section(s) of this financial review
and notes to the consolidated financial statements.


                                       10
<PAGE>


RESULTS OF OPERATIONS

Years Ended December 31, 2002 and 2001

         Overview - Net income was $2,047 for 2002 compared with $2,822 in 2001,
a decrease of 27%. Earnings per common share were $3.03 in 2002 compared with
$4.18 in 2001. The decrease in net income was primarily attributable to an
increase of $1,462 in non-interest expenses, a decrease of $323 in non-interest
income, offset by an increase in net interest income of $262, and a decrease in
taxes of $748. Return on average assets was .68% for 2002, down from .99% for
2001. Return on average equity was 8.43% for 2002, compared with 13.27% for
2001.

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.

                                                   2002      2001     2000
                                               ---------------------------------
Return on average assets                            .68%      .99%      .80%
Return on average equity                           8.43%    13.27%    13.35%
Ratio of dividends to net income                  23.10%    16.73%    18.76%
Average shareholders' equity to average assets     8.07%     7.49%     6.02%
Net income per share                             $ 3.03    $ 4.18    $ 3.20


         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.

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


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                   -------------------------------------------------------------------------------------------------
                                                2002                              2001                           2000
                                    ------------------------------    --------------------------    --------------------------------
                                                                                           Amount                         Amount
                                    Average   Average  Amount Paid    Average   Average   Paid or    Average    Average   Paid or
                                    Balance     Rate    or Earned     Balance     Rate     Earned     Balance     Rate     Earned
                                    -------     ----    ---------     -------     ----     ------     -------     ----     ------
ASSETS                                                              (dollars in thousands)
<S>                                <C>         <C>       <C>         <C>          <C>     <C>       <C>           <C>     <C>
Loans, net                         $131,722    8.33%     $ 10,976    $128,631     8.92%    $11,474   $115,689     9.23%   $10,676
Taxable securities                  108,166    5.31%        5,741     107,007     6.29%      6,728    112,330     6.58%     7,387
Non-taxable securities (2)           28,144    7.88%        2,217      19,245     8.06%      1,552     19,359     7.58%     1,467
Federal funds sold                   14,211    1.65%          235       9,506     3.59%        341      2,744     6.05%       166
Interest-bearing deposits held        1,303    2.53%           33         969     4.02%         39        984     5.49%        54
                                   --------              --------    --------              -------   --------             -------
Total interest-earning assets       283,546    6.77%     $ 19,202     265,358     7.59%    $20,134    251,106     7.87%   $19,750
Cash and due from banks              10,734                            11,537                          10,576
Bank premises and                     2,430                             2,184                           2,254
    equipment, net
Other assets                          4,241                             4,935                           5,297
                                   --------                          --------                        --------
Total assets                       $300,951                          $284,014                        $269,233
                                   ========                          ========                        ========

LIABILITIES AND SHAREHOLDERS'
 EQUITY

Interest-bearing demand deposits   $ 25,247    0.37%     $     93    $ 25,012     0.55%    $   138   $ 27,233     0.55%   $   151
Savings deposits                     65,095    1.77%        1,151      60,715     2.49%      1,513     60,802     2.26%     1,377
Time deposits                        72,963    2.69         1,962      59,470     3.92%      2,332     58,852     4.07%     2,396
                                   --------              --------    --------              -------   --------             -------
Total interest-bearing deposits     163,305    1.96%        3,206     145,197     2.74%      3,983    146,887     2.67%     3,924
Short-term borrowings                36,147    1.28%          462      48,155     3.04%      1,462     42,336     5.41%     2,292
Long-term borrowings                  7,709    5.86%          453       1,902     5.05%         96         --                  --
                                   --------              --------    --------              -------   --------             -------
Total interest-bearing liabilities  207,161    1.99%        4,121     195,254     2.84%      5,541    189,223     3.29%   $ 6,216
Noninterest-bearing liabilities      67,749                            65,645                          62,006
Other liabilities                     1,765                             1,848                           1,807
Shareholders' equity                 24,276                            21,267                          16,197
                                   --------                          --------                        --------
Total liabilities and
shareholders' equity               $300,951                          $284,014                        $269,233
                                   ========                          ========                        ========

NET INTEREST INCOME AND NET YIELD
 ON INTEREST-EARNING ASSETS
Net interest income                                      $ 15,081                          $14,593                        $13,534
                                                         ========                          =======                        =======
Interest rate spread                           4.78%                              4.75%                           4.58%
Net yield on average interest-
 earning assets                                5.32%                              5.50%                           5.39%
Average interest-earning assets
 to average interest-bearing
 liabilities                                 136.87%                            135.90%                         132.70%
</TABLE>


(1)  Yields on securities available for sale have been computed based upon the
     historical cost of such securities and do not give effect to changes in
     fair value of such securities, which are reflected as a component of
     stockholder's equity. Non-accruing loans are included in average balances.

(2)  Yields on non-taxable securities are presented on a tax-equivalent basis
     (reduced by the nondeductible portion of interest expense) using a 34% tax
     rate and where applicable. Interest income and net interest income reported
     in the Company's consolidated statements of income were $18,448 and $14,327
     for 2002, $19,606 and $14,065 for 2001, and $19,251 and $13,035 for 2000.


                                       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,           YEAR ENDED DECEMBER 31,
                                                2002 VS. 2001                     2001 VS 2000
                                          INCREASE (DECREASE) DUE TO        INCREASE (DECREASE) DUE TO
                                      ---------------------------------   -------------------------------
(dollars in thousands)                 VOLUME       RATE        TOTAL      VOLUME       RATE        TOTAL
<S>                                   <C>         <C>         <C>         <C>         <C>         <C>
Loans                                 $   276     $  (774)    $  (498)    $ 1,194     $  (396)    $   798
Taxable securities                         73      (1,060)       (987)       (350)       (309)       (659)
Non-taxable securities                    718         (53)        665          (9)         94          85
Federal funds sold                        169        (275)       (106)        409        (234)        175
Interest-bearing deposits held             13         (19)         (6)         (1)        (14)        (15)
                                      -------     -------     -------     -------     -------     -------
Total interest-earning assets           1,249      (2,181)       (932)      1,243        (859)        384

Deposits
Interest-bearing demand deposits            1         (46)        (45)        (12)         (1)        (13)
Savings deposits                          109        (471)       (362)         (2)        138         136
Time deposits                             529        (899)       (370)         25         (89)        (64)
                                      -------     -------     -------     -------     -------     -------
Total interest-bearing deposits           639      (1,416)       (777)         11          48          59
Borrowings                               (112)       (532)       (643)        187        (921)       (734)
                                      -------     -------     -------     -------     -------     -------
Total interest-bearing liabilities        527      (1,948)     (1,420)        198        (873)       (675)
                                      -------     -------     -------     -------     -------     -------
Net interest income                   $   722     $  (233)    $   488     $ 1,045     $    14     $ 1,059
                                      =======     =======     =======     =======     =======     =======
</TABLE>


On a tax equivalent basis, net interest income for 2002 increased $489 or 3%
over 2001. Average interest-earning assets increased by $18,188 or 7%, resulting
primarily from an increase in non-taxable securities of $8,899 or 46%, an
increase of federal funds sold of $4,705 or 49%, and an increase in loans of
$3,091 or 2%. Average interest-bearing liabilities increased by $11,907 or 6%,
resulting primarily from an increase in time deposits $13,493 or 23%, an
increase in long-term borrowings of $5,807 or 305%, and an increase in savings
deposits of $4,380 or 7%, offset by a decrease in short-term borrowings of
$12,008 or 25%.

         The net interest rate spread increased 3 basis points, from 4.75% in
2001 to 4.78% in 2002. The increase is a result of a 82 basis point decrease in
the average rate yield on interest-bearing assets versus a 85 basis point {this
is not reflected in table 1] decrease in rates paid on average interest bearing
liabilities. The yield on loans in 2002 decreased 59 basis points from 2001 due
to the continued impact of the declining interest rate environment which
resulted in a 475 basis point decline in market rates in the second half of 2001
and an additional 50 basis point decline in November 2002. The yield and average
balances on mortgage-backed securities were 5.72% and $55,939 for 2002 and 6.42%
and $63,614 for 2001, respectively. The decline in yields reflects the general
declines in market rates.

         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 2002 or 2001. 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
appropriate for 2002. There can be no assurance, however, that future provisions
for loan losses will not be required.




                                       13
<PAGE>

         Non-interest Income- Non-interest income decreased $323 or 7% to $4,547
for 2002 from $4,870 for 2001. The primary component of non-interest income is
service charges on deposit and checking accounts, and gains or losses on sale of
securities and loans. The decrease in non-interest income was primarily a result
of a decrease in gains on loans, declining $281 to $6 in 2002, from $287 in
2001. This was offset somewhat by the increase in security gains of $74 to $512
in 2002 from $438 in 2001. The declining interest rate environment in 2001 and
2002 allowed management to take advantage of investment strategies that were
instituted over the past several years and realize market gains on securities
held in the investment portfolio. Other fee income increased $95 or 10% and
primarily represented surcharges on non-depositors utilizing the Bank's ATM
services. Service charges on deposit accounts decreased $116 or 4%.

         Non-interest Expense- Non-interest expense for 2002 was $16,502 an
increase of $1,462 or10% over 2001. The composition of the increase consists of
a $755 increase in salary and employee benefits, an increase of $31 in furniture
and equipment expenses, an increase of $24 in data processing, and an increase
of $81 in occupancy expenses and an increase of $703 in other expenses, offset
by a decrease in advertising expenses of $132. The increase in salaries were due
primarily higher health insurance cost and to additional personnel in operations
and accounting departments, coupled with a full year of salaries for the two
Wal-mart branches that were opened in the second and third quarters of 2001. The
increases in other non-interest expenses were due largely to an increase in
professional fees of $286 to $675 and was attributed management seeking
professional consultants to improve overall efficiency in key departments and to
generate additional fee income.

         Provision for Income Taxes- The provision for income taxes for 2002 was
$325, compared to $1,073 for 2001, reflecting a decrease of $725 or 70% due
primarily to lower income and higher tax-exempt income relative to taxable
income. The effective tax rate was 13.7% for 2002, compared to 27.5% for 2001.

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, 2002. 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 76%, with a cumulative negative (liability) gap of $21
million, representing 7% of assets. This position 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)                                            4 TO 12      WITHIN 12
                                                   0-90 DAYS       MONTHS       MONTHS       1-5 YEARS   OVER 5 YEARS     TOTALS
<S>                                                <C>           <C>           <C>           <C>           <C>          <C>
 Loans (1) (2)                                     $  13,667     $   1,312     $  14,979     $  63,486     $  58,399    $ 136,864
 Investment Securities (3)                            17,118        29,416        46,534        44,861        45,840      137,235
 Federal funds Sold                                    5,900            --         5,900            --            --        5,900
  Interest Bearing Bank Balances:                          --           887           887            --            --          887

                                                   ---------     ---------     ---------     ---------     ---------    ---------
TOTAL EARNING ASSETS                              $  36,685     $  31,615     $  68,300     $ 108,347     $ 104,239    $ 280,886
                                                   =========     =========     =========     =========     =========    =========
Percent of total earnings assets                       13.06%        11.26%        24.32%        38.57%        37.11%      100.00%

Interest-bearing liabilities
Time COD's of $100M or more                        $  10,567     $  17,705     $  28,272     $   4,264     $      --    $  32,536
 Savings,Now, MMDA'S and
    other time deposit (3)                             4,197        12,591        16,788        95,131            --      111,919
 Time COD'S less than $100M                            3,949        15,560        19,509         4,790            --       24,299
 Borrowed funds                                       25,084            --        25,084         4,000            --       29,084
                                                   ---------     ---------     ---------     ---------     ---------    ---------

TOTAL INTEREST BEARING LIABILITIES                 $  43,797     $  45,856     $  89,653     $ 108,185     $      --    $ 197,838
                                                   =========     =========     =========     =========     =========    =========
 Interest-sensitivity gap                          $  (7,112)    $ (14,241)    $ (21,353)    $     162     $ 104,239    $  83,048
 Cumulative interest-sensitivity gap               $  (7,112)    $ (21,353)    $ (21,353)    $ (21,191)    $  83,048    $  83,048
Ratio of earning assets to interest-bearing
   liabilities (gap ratio)                             83.76%        68.94%        76.18%       100.15%           --       141.98%
Cumulative ratio of earnings assets to interest-
   bearing liabilities (cumulative gap ratio)          83.76%        76.18%        76.18%        89.29%       141.98%      141.98%
Cumulative interest-sensitivity gap as a
   percent of total assets                             (2.41%)       (7.23%)       (7.23%)       (7.18%)       28.12%       28.12%
                                                   =========     =========     =========     =========     =========    =========
</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 2002 pay-
             down experience was $7,084. However, $40,638 in mortgage back
             securities have an expected average life of three years or less
             and $5,713 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, 2002,
2001, and 2000.

<TABLE>
<CAPTION>
                                                  ------------------------------------------------------------
                                                     2002    PERCENT     2001     PERCENT    2000      PERCENT
                                                  ------------------------------------------------------------
ASSETS                                                               (dollars in thousands)
<S>                                               <C>        <C>       <C>        <C>       <C>        <C>
     Loans, net                                   $134,859    45.66%   $135,514    45.87%   $128,047    48.19%
     Investment securities                         137,235    46.47%    127,365    43.11%    121,842    45.86%
     Federal funds sold                              5,900     2.00%     14,100     4.77%         --     0.00%
     Interest-bearing deposits
         in other banks                                887     0.30%        882     0.30%      1,305     0.49%
                                                  --------   ------    --------   ------    --------   ------
     TOTAL EARNINGS ASSETS                         278,881    94.43%    277,861    94.05%    251,194    94.54%

     Cash and due from banks                         8,890     3.01%     11,059     3.74%      8,553     3.22%
     Bank premises and equipment                     3,455     1.17%      2,374     0.80%      2,073     0.78%
     Other assets                                    4,110     1.39%      4,128     1.41%      3,883     1.46%
                                                  --------   ------    --------   ------    --------   ------
     TOTAL ASSETS                                 $295,336    100.0%   $295,422    100.0%   $265,703   100.00%
                                                  ========   ======    ========   ======    ========   ======
LIABILITIES AND SHAREHOLDERS' EQUITY

     Demand deposits                              $ 68,432    23.16%   $ 63,869    21.62%   $ 63,207    23.79%
     Savings, NOW and MMDA                         111,919    37.90%     95,096    32.19%     93,159    35.06%
     Time deposits $100,000 or more                 24,299     8.23%     25,109     8.50%     13,713     5.16%
     Other time deposits                            32,536    11.02%     32,916    11.14%     32,868    12.37%
                                                  --------   ------    --------   ------    --------   ------
     TOTAL DEPOSITS                                237,186    80.31%    216,990    73.45%    202,947    76.38%

     Short term borrowings                          25,084     8.49%     43,483    14.72%     42,033    15.82%
     Long term borrowings                            4,000     1.35%     10,000     3.38%         --     0.00%
     Accrued expenses and other liabilities          2,825     0.96%      1,798     0.61%        930     0.35%
                                                  --------   ------    --------   ------    --------   ------
     TOTAL LIABILITIES                             269,095    91.11%    272,271    92.16%    245,910    92.55%

     Shareholders' equity                           26,241     8.89%     23,151     7.84%     19,793     7.45%
                                                  --------   ------    --------   ------    --------   ------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $295,336   100.00%   $295,422   100.00%   $265,703    100.0%
                                                  ========   ======    ========   ======    ========   ======
</TABLE>


         Overview- Total assets were essentially unchanged from December 31,
2001 to December 31, 2002, however, the composition of the balance sheet did
reflect changes. The changes in the balance sheet were primarily attributable to
an increase in investments of $9,870, a decrease of $8,200 in federal funds
sold, and an increase in bank premises of $1,081. On the liability side of the
balance sheet, short-term borrowings decreased $18,399, savings deposits
increased $16,823, long-term borrowings decreased $6,000 and demand deposits
increased $4,563. The change in composition and interest cost is primarily the
result of one large deposit relationship shifting approximately $13 million in
funds from retail repurchase agreements (short-term borrowings) to a money
market account relationship (included in savings deposits).

         Loans- Net loans outstanding at December 31, 2002 were $134,859, a
decrease of $655 or less than 1%, from year-end 2001. The composition of the
loan portfolio is summarized in Table 6. The change in loans composition
consisted primarily of an increase in residential 1 to 4 family loans of $4,168,
offset by a decrease in commercial loans of $4,549, a decrease in consumer loans
of $895 and a decrease in commercial real estate loans of $760.




                                       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)           2002    PERCENT     2001     PERCENT     2000     PERCENT     1999     PERCENT     1998    PERCENT
                             ------------------------------------------------------------------------------------------------------
<S>                           <C>        <C>       <C>        <C>       <C>        <C>       <C>       <C>        <C>      <C>
Commercial                    $  8,686     6.32%   $ 13,235     9.49%   $ 10,958     8.28%   $ 10,046    15.11%   $ 16,568   15.11%

Residential 1 to 4 family       62,907    45.79%     58,739    42.13%     56,611    42.78%     52,826    46.62%     51,097   46.62%

Commercial real estate          60,333    43.05%     59,905    42.97%     58,772    44.41%     40,125    30.62%     33,560   30.62%

Consumer loans                   6,650     4.84%      7,545     5.41%      5,993     4.53%      4,803     7.65%      8,388    7.65%
                              --------   ------    --------   ------    --------   ------    --------   ------    --------  ------
Total                         $138,576   100.00%   $139,424   100.00%   $132,334   100.00%   $107,800   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, 2002. Nonaccrual loans are excluded from
the presentation.

                                      AFTER ONE YEAR
                           ONE YEAR    THROUGH FIVE       AFTER
(dollars in thousands)     OR LESS        YEARS         FIVE YEARS     TOTAL
                           --------   --------------    ----------   --------
 Fixed rate                 $ 7,154       $63,333        $58,399     $128,886
 Variable rate                7,825           153             --        7,978
                            -------       -------        -------     --------
Total                       $14,979       $63,486        $58,399     $136,864
                            =======       =======        =======     ========

At December 31, 2002, the aggregate amount of loans due after one year with
fixed interest rates was $121,732.

TABLE 8. INVESTMENT PORTFOLIO MATURITY SCHEDULES

         Table 8 summarizes the maturity and average yield of the Company's
investment portfolio at December 31, 2002. Yields on non-taxable securities have
been computed on a tax equivalent basis using a 34% tax rate.


<TABLE>
<CAPTION>

                                                       After One But            After Five But
(dollars in thousands)         Within One Year        Within Five Years         Within Ten Years             After Ten Years
                            -----------------------------------------------------------------------------------------------------
                             Amount       Yield       Amount       Yield        Amount        Yield        Amount        Yield
<S>                         <C>            <C>       <C>            <c>        <C>             <c>        <C>            <C>
U.S. Treasury               $    999       1.55%     $     --         --       $     --          --       $     --         --
U.S. Government agencies      20,487       4.72%       20,979       5.36%            --          --          7,756       5.60%
State and political
subdivisions                     623       8.70%        2,354       8.25%        26,657        7.74%      $  2,726       7.80%
Other                             --         --            --         --          1,246        5.04%            --
Mortgage-backed
securities                        --         --            --         --             --          --             --         --
                            --------      -----      --------      -----       --------       -----       --------      -----
Total                       $ 22,109       4.69%     $ 23,333       5.65%      $ 27,903        5.35%      $ 10,482       6.17%
                            ========      =====      ========      =====       ========       =====       ========      =====

<CAPTION>


(dollars in thousands)         Mortgage Backed             Total
                            ------------------------------------------
                              Amount      Yield      Amount     Yield
<S>                          <C>           <C>      <C>         <C>
U.S. Treasury                $     --        --     $    999    1.55%
U.S. Government agencies           --        --       49,222    5.13%
State and political
subdivisions                       --        --       32,360    7.80%
Other                              --                  1,246    5.04%
Mortgage-backed
securities                     53,408      6.58%      53,408    6.58%
                             --------     -----     --------   -----
Total                        $ 53,408      6.58%    $137,235    6.30%
                             ========     =====     ========   =====
</TABLE>


         Securities- The carrying value of the Company's securities portfolio
increased $9,870 or 8% from $127,365 at December 31, 2001, to $137,235 at
December 31, 2002. The increase in the investment portfolio consisted primarily
of an increase in U.S. Government and Agency securities of $10,194, an increase
in state and political subdivision of $2,540 offset by a decrease in mortgage
backed securities of $8,928. The yield on taxable securities decreased from
6.29% for 2001 to 5.31% for 2002. The tax equivalent yield for non-taxable
securities decreased from 8.06% for 2001 to 7.88% for 2002. The mortgage-backed



                                       17
<PAGE>

securities portfolio had a weighted average remaining maturity of 2.19 years at
December 31, 2002, compared to 3.34 years at December 31, 2001 (utilizing
Bloomberg's street consensus). The collateral underlying all the mortgage-backed
securities is guaranteed by one of the "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,
                                                            -----------------------------------------------------------------
                                                               2002          2001          2000         1999          1998
                                                            -----------------------------------------------------------------
                                                                               (dollars in thousands)
<S>                                                         <C>           <C>           <C>          <C>           <C>
Total loans outstanding at year end                         $ 138,576     $ 139,424     $ 132,334    $ 107,800     $ 109,613
Average loans outstanding during year                         131,722       128,631       115,689       99,863       113,286

Allowance for loan losses at beginning of year                  3,283         3,580         4,272        4,700         1,702
Loans charged off:

   Commercial                                                     320           349           611          466         1,571
   Real estate mortgage                                           131           168            83          198             0
   Installment loans to individuals                               270           340            56          150           249
                                                             ---------------------------------------------------------------
Total charge-offs                                                 721           857           750          814         1,820

Recoveries of loans previously charged-off
   Commercial                                                     266           157           270          332           151
   Real estate mortgage                                           123           239             3           20             0
   Installment loans to individuals                               108           164            44           34            64
                                                             ---------------------------------------------------------------
Total recoveries                                                  497           560           317          386           215

Net charge-offs                                                   224           297           433        1,605           759

(Reversals) Additions to allowance charged to
operations                                                          0             0          (259)           0         4,603
                                                             ===============================================================
Allowance for loan losses at end of period                   $  3,059     $   3,283     $   3,580     $  4,272      $  4,700

Ratios of net charge-offs during year to average                0.17%         0.23%         0.37%        0.43%         1.42%
outstanding loans during year

Ratio of allowance for possible loan losses to total loans      2.21%         2.35%         2.71%        3.96%         4.29%

</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.

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                  -----------------------------------------------------------------------------------------------------------------
                    2002    Percent (2)     2001     Percent (2)    2000   Percent (2)    1999    Percent (2)    1998    Percent (2)
                  -----------------------------------------------------------------------------------------------------------------
                                                           (dollars in thousands)
<S>               <C>         <C>         <C>          <C>        <C>       <C>         <C>         <C>         <C>        <C>
Commercial (1)    $ 1,685      49.37%     $ 1,919       52.46%    $ 1,956    52.69%     $ 1,927      46.54%     $ 3,461     45.73%
Real estate
Mortgage              589      45.79%         396       42.13%        512    42.78%         543      49.00%         406     46.62%
Consumer              306       4.84%         252        5.41%        175     4.53%         173       4.46%         280      7.65%
Unallocated           479         --          716          --         937       --        1,629        --           553        --
                 --------     -------     -------      -------    -------   -------     -------     -------     -------    -------
Total            $ 3,059      100.00%     $ 3,283      100.00%    $ 3,580   100.00%     $ 4,272     100.00%     $ 4,700    100.00%
                 ========     =======     =======      =======    =======   =======     =======     =======     =======    =======
</TABLE>

(1)  Includes commercial real estate loans.
(2)  Percentage of loans outstanding.


         The allowance for loan losses was $3,059 at December 31, 2002, as
compared to $3,283 December 31, 2001. The ratio of the allowance for loan losses
to total loans at December 31, 2002 and 2001 was 2.21% and 2.35%, respectively.
At December 31, 2002, non-performing assets to total assets was 1.14% compared
to 1.05% at December 31, 2001. Net charge-offs decreased $73 to $224 for 2002
from $297 for 2001. No provision was made for 2002 or 2001. Additionally, the
unallocated portion of the allowance decreased to $479 from $716 at year-end
2002. Also see comment referring to non-performing assets.

         The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses inherent in the loan portfolio
and is based on the size and current risk characteristics of the loan portfolio,
an assessment of individual problem loans and actual loss experience, current
economic events in specific industries and geographical areas, including
unemployment levels, and other pertinent factors, including regulatory guidance
and general economic conditions. Determination of the allowance is inherently
subjective as it requires significant estimates, including the amounts and
timing of expected future cash flows on impaired loans, estimated losses on
pools of homogenous loans based on historical loss experience, and consideration
of current economic trends, all of which may be susceptible to significant
change. Loan losses are charged off against the allowance, while recoveries of
amounts previously charged off are credited to the allowance. A provision for
loan losses is charged to operations based on management's periodic evaluation
of the factors previously mentioned, as well as other pertinent factors.
Evaluations are conducted at least quarterly and more often if deemed necessary.

         The allowance for loan losses consists of a specific component and a
nonspecific 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 specific component of the allowance for
loan losses reflects expected losses resulting from analysis developed through
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 specific 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. As of December 31, 2002,
the amount of the allowance that was attributed to specific credits was $1,083
or 35.4% of the allowance which compares to $911 or 27.7% as of December 31,
2001. The primary reason for the increase was as a increase in new classified
loans.


                                       19
<PAGE>

         The nonspecific portion of the allowance reflects management's estimate
of probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. In addition, the nonspecific allowance includes a component
that explicitly accounts for the inherent imprecision in loan loss migration
models. Historical loss experience data used to establish estimates may not
precisely correspond to the current portfolio. The uncertainty surrounding the
strength and timing of economic cycles, including management's concerns over the
effects of the prolonged economic downturn in the current cycle, also affects
the model's estimates of loss. The historical losses used in the migration
analysis may not be representative of actual losses inherent in the portfolio
that have not yet been realized. The nonspecific portion of the allowance as of
December 31, 2002 was $1,976 or 64.6% of the allowance, which compares to $2,372
or 72.3% of the allowance at December 31, 2001. The primary reason for the
decrease was as a result of the change in classification of several loans and
the pay-off of several larger problem assets.

         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, 2002, 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 adequacy of the
allowance for loan losses realized in the future will prove accurate, or that
additional provisions or charge-offs will not be required.

TABLE 11 - NON-PERFORMING ASSETS

          Table 11 sets forth information concerning non-performing assets.


<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------------
                                                            2002        2001        2000       1999       1998
                                                          -----------------------------------------------------
                                                                     (dollars in thousands)
<S>                                                       <C>         <C>         <C>        <C>        <C>
Non-accrual loans (1)                                     $ 1,712     $ 2,462     $ 1,733    $ 2,819    $ 5,003
Loans past due 90 days or more and still accruing           1,662         645         659        275      1,474
Foreclosed properties                                          --          --          --        265        525
                                                          -------     -------     -------    -------    -------
Total                                                     $ 3,374     $ 3,107     $ 2,392    $ 3,359    $ 7,002
                                                          =======     =======     =======    =======    =======
Non-performing assets to gross loans and foreclosed
       properties at period end                              2.43%       2.22%       1.81%      3.11%      6.36%
Non-performing loans to total loans                          2.43%       2.22%       1.81%      2.87%      5.91%
Non-performing assets to total assets at period end          1.14%       1.05%       0.89%      1.27%      2.59%

</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 2002 for non-accrual loans had the loans been current in
     accordance with their original terms was $142. 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.




                                       20
<PAGE>

         Non-performing assets at year-end 2002 were $3,374, an increase of $267
or 9% from year-end 2001. 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, 2001. Non-accrual loans totaled $1,712 at
year-end 2002 and consisted of $822 in commercial real estate loans, $780 in
residential real estate loans and $110 in consumer loans. This represented a
decrease of $750 or 30% from year-end 2001. As of December 31, 2002, loans past
due 90 days or more and still accruing totaled $1,662, an increase of $1,017 or
158%, and consisted of $995 in residential real estate loans, $507 in commercial
loans $109 in commercial real estate loans and $37 in consumer loans. The
increase in loans past due 90 days or more centered in residential loans
increasing $600 and commercial loans increasing $501 from year-end 2001. At
year-end 2002, non-performing assets in the amount of $3,374 represented 13% of
total capital as well as 13% at year-end 2001. Additionally, at year-end 2002,
non-performing assets in the amount of $3,374 and loans with possible credit
problems in the amount of $5,027 which combined totaled $8,401 or 32% of total
capital compared to $12,583 or 54% at year-end 2001, reflecting a decrease of
$4,182 or 33%.

         At December 31, 2002, there were $5,027 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 fifteen loans, totaling
$4,333, fully collateralized by real estate, three of which represent $2,831 of
the total. The remaining $694 consists of six commercial loans, secured
primarily by accounts receivable and various business equipment.

LIQUIDITY RISK MANAGEMENT

         The objective of liquidity management is to ensure the cash flow
requirements of depositors and borrowers, as well as the operating cash needs of
the Company, are met, taking into account all on- and off-balance sheet funding
demands. Liquidity management also includes ensuring cash flow needs are met at
a reasonable cost. Liquidity risk arises from the possibility the Company may
not be able to satisfy current or future financial commitments, or the Company
may become unduly reliant on alternative funding sources. The Company maintains
a liquidity risk management policy to address and manage this risk. The policy
identifies the primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity, and establishes minimum liquidity
requirements which comply with regulatory guidance. The liquidity position is
continually monitored and reported on quarterly to the Asset/Liability
Management Committee, and the Board of Directors.

         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 $20,196 or 9%, from December 31, 2001 to
December 31, 2002.

         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,
2002, $25,084 of repurchase agreements with an average rate of 1.17% were
outstanding. As noted above, the decline in repurchase agreements and the
increase in deposits relate largely to the decision of one depositor to shift
$13 million of funds from repurchase agreements to a deposit account. See Note 7
to the consolidated financial statements for additional information regarding
the Company's short-term borrowings. During 2002, the Company had borrowings of
$4,000 of long term funds under advances from the Federal Home Loan Bank. These
borrowings were reduced from $10,000 at year-end 2001. 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, 2002 and 2001 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.




                                       21
<PAGE>

         Legislation has 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 with 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, 2002
                                                    ------------------------------------------------------
                                                                    (dollars in thousands)
                                                    3 Months or   4 to 6    7 to 12    Over 12
                                                        Less      Months     Months    Months      Total
<S>                                                   <C>        <C>        <C>        <C>        <C>
Time certificates of deposit of $100M or more         $10,567    $ 8,854    $ 8,851    $ 4,264    $32,536
Time certificates of deposit less than $100M            3,949      9,210      6,350      4,790     24,299
                                                      -------    -------    -------    -------    -------
Total                                                 $14,516    $18,064    $15,201    $ 9,054    $56,835
                                                      =======    =======    =======    =======    =======
</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, 2002, that the Company and
the Bank met all the capital adequacy requirements to which they are subject. As
of December 31, 2002, 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 disclosures 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.




                                       22
<PAGE>

ITEM 7. FINANCIAL STATEMENTS.


                          INDEPENDENT AUDITORS' REPORT


The Audit Committee of the Board of Directors and Shareholders
 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, 2002 and
2001 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,
2002, IBW Financial Corporation's subsidiary, 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, 2002 and 2001, 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, 2003




                                       23
<PAGE>



IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS
                                                                                2002        2001
<S>                                                                           <C>         <C>
    Cash and cash equivalents:
    Cash and due from banks                                                   $  8,890    $ 11,059
    Federal funds sold                                                           5,900      14,100
                                                                              --------    --------
                      Total cash and cash equivalents                           14,790      25,159
                                                                              --------    --------
   Interest-bearing deposits in other banks                                        887         882

   Securities available-for-sale, at fair value                                137,235     127,365

   Loans receivable - net of allowance for loan losses
     of $3,059 and $3,283                                                      134,859     135,514
   Bank premises and equipment - net                                             3,455       2,374
   Accrued interest receivable                                                   1,909       1,928
   Other assets                                                                  2,201       2,200
                                                                              --------    --------
 TOTAL ASSETS                                                                 $295,336    $295,422
                                                                              ========    ========
 LIABILITIES AND SHAREHOLDERS' EQUITY

 LIABILITIES:
    Noninterest bearing deposits                                              $ 68,432    $ 63,869
    Interest bearing deposits                                                  168,754     153,121
                                                                              --------    --------
                      Total deposits                                           237,186     216,990

    Short-term borrowings                                                       25,084      43,483
    Long-term borrowings                                                         4,000      10,000
    Accrued expenses and other liabilities                                       2,825       1,798
                                                                              --------    --------
Total liabilities                                                              269,095     272,271

Shareholders' Equity:
     Preferred stock - $1 par value; 1,000,000 (500,000 voting and 500,000
        nonvoting) authorized; 20,000 Series A nonvoting
        issued and outstanding, stated at liquidation value                        500         500
    Common stock - $1 par value; 1,000,000 shares authorized;
       668,360 issued and outstanding                                              668         668
    Additional paid in capital                                                   5,051       5,051
    Retained earnings                                                           16,310      14,756
    Accumulated other comprehensive income                                       3,712       2,176
                                                                              --------    --------
                      Total shareholders' equity                                26,241      23,151
                                                                              --------    --------
 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                   $295,336    $295,422
                                                                              ========    ========

</TABLE>

See notes to consolidated financial statements.



                                       24


<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in Thousands, Except  per Share Data)

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------
                                                                         2002                   2001
<S>                                                                    <C>                    <C>
INTEREST INCOME:
    Interest and fees on loans                                         $10,976                $11,474
    U.S. Treasury securities                                                19                     45
    Obligations of U.S. Government
        agencies and corporations                                        2,422                  2,342
    Collateralized mortgage obligations                                  3,200                  4,085
    Obligations of states and political subdivisions                     1,490                  1,157
    Bank balances and other securities                                     106                    151
    Federal funds sold                                                     235                    352
                                                                       -------                -------

                      Total interest income                             18,448                 19,606
                                                                       -------                -------
INTEREST EXPENSE:
    Interest-bearing deposits                                            2,507                  3,231
    Time certificates over $100,000                                        699                    752
    Short term borrowings                                                  462                  1,474
    Long term borrowings                                                   453                     84
                                                                       -------                -------

                      Total interest expense                             4,121                  5,541
                                                                       -------                -------

NET INTEREST INCOME                                                     14,327                 14,065
                                                                       -------                -------

PROVISION FOR LOAN LOSSES                                                   --                     --
                                                                       -------                -------
NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES                                                          14,327                 14,065
                                                                       -------                -------
NONINTEREST INCOME:
    Service charges on deposit and checking accounts                     2,922                  3,038
    Other fee income                                                     1,001                    906
    Gain on sale of securities                                             512                    438
    Gain on sale of loans                                                    6                    287
    Other operating income                                                 106                    201
                                                                       -------                -------

                      Total noninterest income                           4,547                  4,870
                                                                       -------                -------

NONINTEREST EXPENSE:
    Salaries and employee benefits                                       9,175                  8,420
    Occupancy                                                              916                    835
    Furniture and equipment                                              1,224                  1,193
    Data processing                                                        854                    830
    Advertising                                                            195                    327
    Other                                                                4,138                  3,435
                                                                       -------                -------

                      Total noninterest expense                         16,502                 15,040
                                                                       -------                -------

</TABLE>


                                       25

<PAGE>

IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME  (Continued)
YEARS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in Thousands, Except  per Share Data)
--------------------------------------------------------------------------------

INCOME BEFORE INCOME TAXES                               $  2,372       $  3,895

INCOME TAX PROVISION                                          325          1,073
                                                         --------       --------

NET INCOME                                               $  2,047       $  2,822
                                                         ========       ========

BASIC AND DILUTED NET INCOME PER COMMON SHARE            $   3.03       $   4.18
                                                         ========       ========

WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING             668,360        668,360
                                                         ========       ========

See notes to consolidated financial statements.





                                       26

<PAGE>

IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in Thousands, Except  per Share Data)

<TABLE>
<CAPTION>


-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                        ACCUMULATED
                                               PREFERRED     COMMON      CAPITAL      RETAINED      OTHER COMPREHENSIVE
                                                 STOCK       STOCK       SURPLUS      EARNINGS          INCOME (LOSS)      TOTAL
<S>                                             <C>         <C>          <C>          <C>                <C>              <C>


BALANCE, JANUARY 1, 2001                        $   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)                                                                                    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


   Net income                                                                            2,047                 --            2,047
   Other comprehensive income, net of tax
     (unrealized gains on securities
     available-for-sale)                                                                                    1,536            1,536
                                                                                                                          --------

          Total comprehensive income                 --           --           --           --                 --            3,583

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

BALANCE, DECEMBER 31, 2002                      $   500     $    668     $  5,051     $ 16,310           $  3,712         $ 26,241
                                                =======     ========     ========     ========           ========         ========

</TABLE>


See notes to consolidated financial statements.

                                       27

<PAGE>

IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in Thousands)

<TABLE>
<CAPTION>

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

                                                                                 2002                2001
<S>                                                                            <C>                 <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                 $  2,047            $  2,822
    Adjustments to reconcile net income
        to net cash provided by operating activities:
        Depreciation                                                                507                 448
        Amortization of goodwill and intangibles                                    103                 163
        Deferred income taxes                                                       131                  34
        Amortization of investment premiums                                         393                 233
        Gain on sale of investment securities                                      (512)               (438)
        Gain on sale of loans                                                        --                (287)
        Decrease in accrued interest receivable                                      19                  82
        Increase in other assets                                                   (367)               (524)
        Increase in accrued expenses and other liabilities                        1,027                 868
                                                                               --------            --------

                      Net cash provided by operating activities                   3,348               3,401
                                                                               --------            --------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from principal payments on securities available-for-sale            19,751              21,778
    Proceeds from maturities of investment securities available-for-sale         18,234              14,372
    Proceeds from sale of investment securities available-for-sale               20,775              23,430
    Purchase of investment securities available-for-sale                        (66,843)            (63,869)
    Net  increase in interest-bearing deposits in banks                              (5)                423
    Net decrease (increase) in loans                                                655             (20,667)
    Proceeds from sale of loans                                                      --              13,487
    Additions to bank premises and equipment, net                                (1,588)               (749)
                                                                               --------            --------
                      Net cash used in investing activities                      (9,021)            (11,795)
                                                                               --------            --------

</TABLE>



                                       28

<PAGE>

IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
(Dollars in Thousands)

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------
                                                                             2002                  2001
<S>                                                                        <C>                   <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in deposits                                               $ 20,196              $ 14,043
    Net (decrease) increase in short term borrowings                        (18,399)                1,450
    (Decrease) increase in long term borrowings                              (6,000)               10,000
    Dividends paid                                                             (493)                 (493)
                                                                           --------              --------

                Net cash (used) provided in financing activities             (4,696)               25,000
                                                                           --------              --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                        (10,369)               16,606

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

CASH AND CASH EQUIVALENTS AT END OF YEAR                                   $ 14,790              $ 25,159
                                                                           ========              ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    Income tax payments                                                    $    365              $    710
                                                                           --------              --------

    Interest payments                                                      $  4,513              $  5,779
                                                                           --------              --------

</TABLE>


See notes to consolidated financial statements.


                                       29


<PAGE>



IBW FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------------------------------------------------

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. Investment in Federal Reserve Bank and Federal Home Loan Bank
stock are considered restricted as to marketability.

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 adequate by management to absorb probable losses inherent in the
loan portfolio and is based on the size and current risk characteristics of the
loan portfolio, an assessment of individual problem loans and actual loss
experience, current

                                       30

<PAGE>


economic events in specific industries and geographical areas, including
unemployment levels, and other pertinent factors, including regulatory guidance
and general economic conditions. Determination of the allowance is inherently
subjective as it requires significant estimates, including the amounts and
timing of expected future cash flows on impaired loans, estimated losses on
pools of homogenous loans based on historical loss experience, and consideration
of current economic trends, all of which may be susceptible to significant
change. Loan losses are charged off against the allowance, while recoveries of
amounts previously charged off are credited to the allowance. A provision for
loan losses is charged to operations based on management's periodic evaluation
of the factors previously mentioned, as well as other pertinent factors.
Evaluations are conducted at least quarterly and more often if deemed necessary.

The allowance for loan losses consists of a specific component and a nonspecific
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 specific component of the allowance for loan losses
reflects expected losses resulting from analysis developed through 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 specific 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 nonspecific portion of the allowance reflects management's estimate of
probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. In addition, the nonspecific allowance includes a component
that explicitly accounts for the inherent imprecision in loan loss migration
models. Historical loss experience data used to establish estimates may not
precisely correspond to the current portfolio. The uncertainty surrounding the
strength and timing of economic cycles, including management's concerns over the
effects of the prolonged economic downturn in the current cycle, also affects
the model's estimates of loss. The historical losses used in the migration
analysis may not be representative of actual losses inherent in the portfolio
that have not yet been realized.

Depreciable Assets - Properties and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of the
assets. Useful lives range from three to 10 years for furniture, fixtures, and
equipment; three to five years for software, hardware, and data handling
equipment; and 10 to 40 years for buildings and building improvements. Land
improvements are amortized over a period of 15 years; and leasehold improvements
are amortized over the term of the respective lease plus the optional renewal
period, if applicable. Maintenance and repairs are charged to expense as
incurred, while improvements which extend the useful life are capitalized and
depreciated over the estimated remaining life of the asset.

Long-lived depreciable assets are evaluated periodically for impairment when
events or changes in circumstances indicate the carrying amount may not be
recoverable. Impairment exists when the expected undiscounted future cash flows
of a long-lived asset are less than its carrying value. In that event, the
Corporation recognizes a loss for the difference between the carrying amount and
the estimated fair value of the asset based on a quoted market price, if
applicable, or a discounted cash flow analysis.

Advertising Costs - Advertising costs are generally expensed as incurred.

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


                                       31
<PAGE>


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
noninterest 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 $2,022 and $2,797 for
the years ended December 31, 2002 and 2001, respectively. EPS is computed based
on the weighted average number of common shares outstanding during the year
(668,360 for both 2002 and 2001). Basic and diluted EPS are the same, as the
Corporation had no dilutive common stock equivalents outstanding as of December
31, 2002 or 2001 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.

Intangible Assets - Intangible assets represent the excess cost over the fair
value of net assets acquired. The Company's intangible assets are core deposit
intangibles and unidentifiable intangible assets resulting from branch
acquisitions. All intangible assets are tested annually for impairment and are
being amortized on a straight-line basis over varying periods not exceeding 15
years. See New Accounting Pronouncements and Note 6 for additional information
regarding 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 $2,240 and $3,141, at December 31, 2002
and 2001, respectively.

New Accounting Pronouncements - 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 were effective for years beginning after December 15, 2001, and its adoption
did not affect the financial position or results of operations of the Company.

In October 2002, the Financial Accounting Standards Board issued SFAS No. 147,
"Acquisitions of Certain Financial Institutions" SFAS No. 147 amends SFAS No. 72
"Accounting for Certain Acquisitions of Banking and Thrift Institutions". SFAS
No. 147 addresses unidentifiable intangible assets resulting from acquisitions
of entire or less-than-whole financial institutions where the fair value of
liabilities assumed exceeds the fair value of tangible and identifiable
intangible assets acquired. The Statement allows for the recognition of goodwill
where the transaction in which an unidentifiable intangible asset arose was a
business combination. The transitional provisions of SFAS No. 147 allow for the
reclassification of unidentifiable intangible assets that meet certain criteria
to goodwill and the restatement of earnings for any amortization of the
reclassified goodwill that occurred since SFAS No. 142 was adopted. Transitional
provisions were effective on October 1, 2002, with earlier application
permitted. Acquisitions of bank branches by the Company did not meet the
criteria of a business combination and therefore the adoption of SFAS No. 147
had no effect on 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 2002 presentation.



                                       32
<PAGE>

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.

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 2001 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, 2003, 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.



                                       33
<PAGE>

3. INVESTMENT SECURITIES

At December 31, 2002 and 2001, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):


<TABLE>
<CAPTION>

                                                                         DECEMBER 31, 2002
                                                  -----------------------------------------------------------------
                                                                     GROSS             GROSS
                                                  AMORTIZED        UNREALIZED        UNREALIZED         ESTIMATED
                                                     COST            GAINS             LOSSES           FAIR VALUE
<S>                                               <C>               <C>               <C>                <C>

U.S. Treasury Notes                               $    999          $     --          $     --           $    999
U.S. Government Agencies                            46,868             2,355                (1)            49,222

Mortgage-Backed Securities:
    Pass-through securities:
        Guaranteed by GNMA                               5                --                --                  5
        Issued by FNMA and FHLMC                     6,903               150                --              7,053

Collateralized Mortgage Obligations:
        Collateralized by FNMA, FHLMC and
            GNMA mortgage-backed securities         44,871             1,492               (13)            46,350

Securities issued by states and
    political subdivisions:
        General obligations                         17,655               943                --             18,598
        Revenue obligations                         13,088               674                --             13,762
                                                  --------          --------          --------           --------
Total debt securities                              130,389             5,614               (14)           135,989

Federal Reserve Bank stock                             208                --                --                208
Federal Home Loan Bank stock                           884                --                --                884
Marketable equity securities                           129                25                --                154
                                                  --------          --------          --------           --------

Total equity securities                              1,221                25                --              1,246
                                                  --------          --------          --------           --------

TOTAL                                             $131,610          $  5,639          $    (14)          $137,235
                                                  ========          ========          ========           ========

</TABLE>



                                       34
<PAGE>


<TABLE>
<CAPTION>


                                                                             DECEMBER 31, 2001
                                                    -----------------------------------------------------------------
                                                                         GROSS             GROSS
                                                     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 subdivisions:
        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

Federal Reserve Bank Stock                                208                --                --                208
Federal Home Loan Bank Stock                            1,045                --                --              1,045
Marketable equity securities                              126                26                --                152
                                                     --------          --------          --------           --------

Total equity securities                                 1,379                26                --              1,405
                                                     --------          --------          --------           --------

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

</TABLE>


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,
2002. 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).



                                       35
<PAGE>

                                                  DECEMBER 31, 2002
                                              -------------------------
                                                              ESTIMATED
                                              AMORTIZED         FAIR
                                                 COST           VALUE

Due in one year or less                       $ 21,684        $ 22,109
Due after one year through five years           21,945          23,333
Due five through ten years                      32,438          34,413
Due after ten years                              2,543           2,726
Mortgage-backed securities                      51,779          53,408
                                              --------        --------
Total debt securities                          130,389         135,989

Federal Reserve Bank Stock                         208             208
Federal Home Loan Bank Stock                       884             884
Marketable securities                              129             154
                                              --------        --------
Total equity securities                          1,221           1,246

TOTAL                                         $131,610        $138,481
                                              ========        ========

Proceeds from the sale of securities available-for-sale were $20,657 and $23,430
for the year ended December 31, 2002 and 2001, respectively, and resulted in
realized gains of $512 for 2002 and $438 for 2001.

Securities of $30,395 and $7,719 at December 31, 2002 and 2001 were pledged as
collateral for public deposits and for other purposes required by law. At
December 31, 2002 and 2001, the carrying value of securities underlying
repurchase agreements was $39,431 and $50,528, respectively.

4. LOANS RECEIVABLE

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

                                                            2002          2001

Real estate loans:
    Collateralized by residential property:
        First mortgages                                   $ 60,678      $ 57,454
        Second mortgages                                     2,229         1,285
    Collateralized by non-residential properties            60,333        59,905
Commercial                                                   8,686        13,235
Installment                                                  6,650         7,545
                                                          --------      --------

     Total                                                 138,576       139,424

Less:
    Deferred fees and costs, net                               658           627
    Allowance for loan losses                                3,059         3,283
                                                          --------      --------
Net loans                                                 $134,859      $135,514
                                                          ========      ========


                                       36


<PAGE>


Major loan concentrations are as follows (in thousands):

                                                             2002          2001

Church loans collateralized by real estate                 $21,423       $20,250
Installment loans to churches                                   34            59
Commercial loans to churches                                   285           948
                                                           -------       -------
Total loans to churches                                    $21,742       $21,257
                                                           =======       =======

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:

                                                        2002              2001

Balance, beginning of year                            $ 3,283           $ 3,580
    Provision for loan losses
    Recoveries
                                                          497               560
    Charge-offs
                                                         (721)             (857)
                                                      -------           -------
Balance, end of year                                  $ 3,059           $ 3,283
                                                      =======           =======

At December 31, 2002 and 2001, loans that were considered to be impaired totaled
$1,712 and $2,462, respectively. The related allowance allocated to impaired
loans was $251 and $239 at December 31, 2002 and 2001, respectively. The average
balance of impaired loans for the years ended December 31, 2002 and 2001 was
$1,756 and $1,613, respectively. Interest income that was not recorded on
impaired loans for the years ended December 31, 2002 and 2001 was $142 and $103,
respectively.

Loans serviced for others and not reflected in the balance sheets are $16,099
and $19,441 at December 31, 2002 and 2001, respectively. Servicing loans for
others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and foreclosure processing. Loan
servicing income is recorded on the accrual basis and includes servicing fees
from investors and certain charges collected from borrowers, such as late
payment fees. Mortgage servicing rights capitalized during 2002, 2001, and 2000
totaled $0, $199, and $0, respectively.

Amortization of mortgage servicing rights totaled $34, $34 and $5, respectively.
Net servicing rights assets totaled $166, $200, and $33 at December 31, 2002,
2001, and 2000 respectively.

5. BANK PREMISES AND EQUIPMENT

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

                                                         2002             2001

Bank premises                                          $ 2,665          $ 2,389
Furniture, fixtures, and equipment                       5,496            4,388
                                                       -------          -------

Total                                                  $ 8,161          $ 6,777

Less accumulated depreciation                           (4,706)          (4,403)
                                                       -------          -------

Bank premises and equipment, net                       $ 3,455          $ 2,374
                                                       =======          =======


                                       37
<PAGE>

Depreciation expense for the years ended December 31, 2002 and 2001 is $507 and
$448, respectively.

6. INTANGIBLE ASSETS

The significant components of acquired intangible assets are as follows: as of
December 31:

<TABLE>
<CAPTION>
                                               2002                                            2001
-----------------------------------------------------------------------------------------------------------------------------------
                                                                         WEIGHT                                         WEIGHTED
                                    GROSS                      NET       AVERAGE     GROSS                     NET       AVERAGE
                                   CARRYING  ACCUMULATED     CARRYING   REMAINING   CARRYING  ACCUMULATED    CARRYING   REMAINING
(In thousands)                      AMOUNT   AMORTIZATION     AMOUNT       LIFE      AMOUNT   AMORTIZATION    AMOUNT      LIFE
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>        <C>           <C>        <C>         <C>          <C>          <C>      <C>

Unidentifiable intangible              821        468           353        6.5         821          413          408      7.5
  assets resulting
  from branch acquisitions
Core deposit intangible assets         905        905            --         --         905          857           48      0.5
                                   -------    -------        ------       ----     -------      -------        -----     ----

Total                              $ 1,726    $ 1,373        $  353                $ 1,726      $ 1,270        $ 456
                                   =======    =======        ======                =======      =======        =====
</TABLE>

Future annual estimated annual amortization expense: (In thousands)

                   2003       $55
                   2004        55
                   2005        55
                   2006        55
                   2007        55

7. DEPOSITS

Deposits consist of the following (in thousands) at December 31, 2002:

<TABLE>
<CAPTION>
                                       DEMAND       SAVINGS       TIME         TOTAL
<S>                                   <C>          <C>          <C>          <C>

Individuals, partnerships, and
    corporations                      $ 65,411     $ 89,859     $ 52,635     $207,905
U.S. government                            967           --          200        1,167
States and political subdivisions           --       22,060        4,000       26,060
Certified and official checks            2,054           --           --        2,054
                                      --------     --------     --------     --------

Total                                 $ 68,432     $111,919     $ 56,835     $237,186
                                      ========     ========     ========     ========
Weighted average interest rate                         1.29%        2.53%
                                                   ========     ========
</TABLE>


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                      $ 61,339     $ 95,096     $ 50,740     $207,175
U.S. Government                             85           --        2,285        2,370
States and political subdivisions            4           --        5,000        5,004
Certified and official checks            2,441           --           --        2,441
                                      --------     --------     --------     --------

Total                                 $ 63,869     $ 95,096     $ 58,025     $216,990
                                      ========     ========     ========     ========
Weighted average interest rate                         1.74%        3.66%
                                                   ========     ========
</TABLE>

                                       38
<PAGE>

Demand deposits represent non-interest-bearing deposit accounts. Individual
certificates of deposit of $100 or more at December 31, 2002 and 2001, totaling
$32,536 and $25,109, respectively, are included in time deposits. The Bank has
no brokered deposits.

At December 31, 2002, the scheduled maturities of Time Deposits are as follows
(in thousands):

                                                       AVERAGE RATE
2003                                 $ 47,779             2.57%
2004 and 2005                                             2.26%
                                        8,942
After 2005                                114             5.50%
                                     --------
                                     $ 56,835
                                     ========

8. SHORT-TERM BORROWINGS

At December 31, 2002 and 2001, securities sold under agreements to repurchase
were $25,084 and $43,483 respectively. The outstanding repurchase agreements had
an average interest rate of 1.17% and 1.43% at December 31, 2002 and 2001,
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, 2002 and 2001 had a fair value of $39,431 and
$54,198, respectively. All outstanding repurchase agreements at December 31,
2002 and 2001 matured on January 1, 2003 and 2002, respectively. The average
balance and the average interest rate for the year ended December 31, 2002 and
2001 were $36,147 and 1.28% and $48,155 and 3.24%, respectively. The maximum
amounts outstanding during the years ended 2002 and 2001 were $44,982 and
$29,885, respectively.

9. 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 $4,000 was outstanding at
December 31, 2002. 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, 2002, the Company has a long-term advance from the FHLB,
with a fixed rate of interest of 4.53%. This advance is scheduled to mature in
2006. There are no call provisions associated with these borrowings, however
prepayment penalties may apply. The Company paid off a $6,000 borrowing during
2002.

10. 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, 2002 the Bank would not need prior
approval from OCC unless a declaration of dividends exceeded $6,676.

11. 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.


                                       39
<PAGE>


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, 2002, that the Corporation and
Bank meet all the capital adequacy requirements to which they are subject.

As of December 31, 2002, 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.

The Corporation's and the Bank's required and actual capital amounts and ratios
at December 31, 2002 and 2001, are set forth in the following table (in
thousands):



12. INCOME TAXES

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

<TABLE>
<CAPTION>

                                                                                                           TO BE CATEGORIZED AS
                                                                                                          WELL CAPITALIZED UNDER
                                                                              FOR CAPITAL ADEQUACY      PROMPT CORRECTIVE ACTION
                                                           ACTUAL                   PURPOSES                    PROVISIONS
                                                  --------------------------------------------------     -------------------------
                                                  AMOUNT           RATIO      AMOUNT         RATIO           AMOUNT     RATIO
<S>                                               <C>              <C>        <C>             <C>            <C>        <C>

As of December 31, 2002
    Total capital (to risk-weighted assets)
            Corporation                           $24,084          15.88%     12,133          8.00%            $N/A       N/A%
            Bank                                   23,892          15.77      12,120          8.00           15,150     10.00
    Tier I capital (to risk-weighted assets)
            Corporation                            22,176          14.63       6,063          4.00              N/A       N/A
            Bank                                   21,984          14.51       6,060          4.00            9,091      6.00
    Tier I capital (to average assets)
            Corporation                            22,176           7.46      11,354          4.00              N/A       N/A
            Bank                                   21,984           7.40      11,883          4.00           14,854      5.00

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

</TABLE>


                                       40
<PAGE>

12.  INCOME TAXES

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


                                                   2002          2001

Current:
    Federal income tax                            $  159        $  824
    State and local income tax                        35           215
                                                  ------        ------

                                                     194         1,039

Deferred:
    Federal income tax                               107            27
    State income tax                                  24             7
                                                  ------        ------
                                                     131            34
                                                  ------        ------
Total                                             $  325        $1,073
                                                  ======        ======

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


                                                   2002         2001

Provisions for losses on loans and other
    real estate owned                                65            43
Loss from prior period                               --          (797)
Valuation allowance                                  --           797
Deferred loan fees                                   55            31
Depreciation                                      $   8         $ (23)
Other                                                 3           (17)
                                                  -----         -----

Total                                             $ 131         $  34
                                                  =====         =====

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>
                                                    2002                   2001
                                            AMOUNT       PERCENT    AMOUNT       PERCENT
<S>                                        <C>           <C>       <C>           <C>

Federal tax expense at statutory rate      $   806        34.0%    $ 1,324        34.0%
State tax expense, net  of federal tax
   benefit                                       9         0.4%         91         2.3%
Tax-exempt interest                           (471)      (19.9)%      (323)       (8.3)%
Other                                          (19)       (0.8)%       (19)       (0.5)%
                                           -------       -----     -------       -----

Total                                      $   325        13.7%    $ 1,073        27.5%
                                           =======       =====     =======       =====

</TABLE>


                                       41
<PAGE>

The tax effects of items comprising the Company's deferred tax assets
(liabilities) at December 31, 2002 and 2001 are as follows (in thousands):

                                                            2002          2001
Deferred tax assets:
Allowance for losses on loans and other real
 estate owned                                              $   804      $   869
Deferred loan fees                                             177          232
Other                                                           98          101
Net operating loss associated with prior period
 restatement                                                   797          797
                                                           -------      -------
        Total deferred tax assets                            1,876        1,999
                                                           -------      -------
Valuation allowance                                           (797)        (797)
                                                           -------      -------
Deferred tax assets - net                                    1,079        1,202
                                                           -------      -------

Deferred tax liabilities:
   Unrealized gain on available-for-sale securities         (1,903)      (1,072)
   Depreciation                                                (89)         (81)
   Other                                                       (17)         (17)
                                                           -------      -------
        Total deferred tax liabilities                      (2,009)      (1,170)
                                                           -------      -------

        Net deferred tax (liabilities) assets              $  (930)     $    32
                                                           =======      =======

A valuation allowance was established for the tax benefit resulting from a 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.

13. 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 for
both 2002 and 2001.

14. 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 $138 and
$169 were made for 2002 and 2001, respectively. At December 31, 2002 and 2001,
the ESOP held 54,720, or 8.2% of the outstanding shares of the Company's common
stock.

15. 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, 2002 and 2001 the Bank had commitments to fund loans outstanding
for approximately $18,094 and $29,000, respectively. The Bank also has standby
letters of credit outstanding at December 31, 2002 and 2001 in the amount of
$330 and $261, 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.


                                       42
<PAGE>


At December 31, 2002, 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):

         2003               $325
         2004                204
         2005                179
         2006                 65
         2007                 48
         After 2007          112
                            ----
         Total              $933
                            ====

Rent expense for the years ended December 31, 2002 and 2001 was $409 and $329,
respectively.

16. 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, 2002 and 2001. 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.

(IN THOUSANDS)                    DECEMBER 31, 2002          DECEMBER 31, 2001
                                ---------------------      ---------------------
                                 CARRYING      FAIR         CARRYING     FAIR
                                  VALUE        VALUE         VALUE       VALUE

Assets:
  Cash and cash equivalents      $ 14,790   $ 14,790         $ 25,159   $ 25,159
  Interest-bearing deposits           887        887              882        882
  Investment securities           137,235    135,235          127,365    127,365
  Loans, net                      134,859    137,730          135,514    137,619
  Accrued interest receivable       1,909      1,909            1,928      1,928

Liabilities:
  Deposits                       $237,186   $237,581         $216,990   $217,407
  Short term borrowings            25,084     25,084           43,483     43,483
  Long term borrowings              4,000      4,470           10,000      9,796
  Accrued interest payable            293        293              454        454


                                       43
<PAGE>


17. RELATED PARTY TRANSACTIONS

In the normal course of banking business, loans are made to officers and
directors. At December 31, 2002 and 2001, these loans totaled $649 and $640,
respectively.

                                                  2002       2001
                                                 ------     ------
Related party loans - beginning of year:         $  640     $  449
 New loans granted                               $  288     $  239
 Repayments                                         279         48
Related party loans - end of year:               $  649     $  640

18. OTHER EXPENSES

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

                                            YEARS ENDED DECEMBER 31
                                            -----------------------
(In thousands)                                 2002         2001
                                            ----------   ----------

Director fees                                 $  263       $  214
Professional fees                                675          389
Loan collection and repossession expenses        180          178
Bank security                                    316          248
Other                                          2,704        2,406
                                              ------       ------

Total Other Expenses                          $4,138       $3,435
                                              ------       ------

19. PARENT COMPANY FINANCIAL INFORMATION

The summarized financial statements of IBW Financial Corporation (parent company
only) as of December 31, 2002 and 2001, and for the years ended December 31,
2002 and 2001, follow (in thousands):

Balance Sheets                                               2002          2001
--------------
Assets:
    Deposits with subsidiary                               $    53       $    65
    Securities available-for-sale                              154           152
    Investment in subsidiary - equity method                26,049        22,949
                                                           -------       -------
        Total Assets                                       $26,256       $23,166
                                                           =======       =======

Liabilities and Shareholders' Equity:
    Liabilities:
        Other                                                   15            15
                                                           -------       -------

            Total Liabilities                                   15            15
                                                           -------       -------

Shareholders' Equity
    Preferred stock                                            500           500
    Common stock                                               668           668
    Additional paid in capital                               5,051         5,051
    Retained earnings                                       16,310        14,756
    Accumulated other comprehensive income                   3,712         2,176
                                                           -------       -------

            Total Shareholders' Equity                      26,241        23,151
                                                           -------       -------

Total Liabilities and Shareholders' Equity                 $26,256       $23,166
                                                           =======       =======



                                       44
<PAGE>

<TABLE>
<CAPTION>


Statements of Income                                                        2002                  2001
--------------------
<S>                                                                       <C>                    <C>

Dividends from subsidiary and other income                                $   483                $   493
Expenses                                                                       --                     --
                                                                          -------                -------
Income before undistributed net earnings of subsidiary                        483                    493
Equity in undistributed net earnings of subsidiary                          1,564                  2,329
                                                                          -------                -------
Net income                                                                $ 2,047                $ 2,822
                                                                          =======                =======

Statements of Cash Flows
------------------------

Cash Flows from Operating Activities:
    Net income                                                            $ 2,047                $ 2,822
    Adjustments to reconcile net income to net
        cash provided by operating activities:
        Equity in undistributed net earnings of subsidiary                 (1,564)                (2,329)
        Other                                                                  (2)                    55
                                                                          -------                -------

                Net cash provided by operating activities                     481                    548
                                                                          -------                -------

Cash Flows from Financing Activities: payment of dividends                   (493)                  (493)
                                                                          -------                -------

(Decrease) Increase in Deposits with Subsidiary                               (12)                    55

Deposits with Subsidiary, Beginning of the Year                                65                     10
                                                                          -------                -------

Deposits with Subsidiary, Ending of the Year                              $    53                $    65
                                                                          =======                =======

</TABLE>


                                       45
<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 7 of the Company's definitive proxy
statement for the Annual Meeting of Shareholders to be held on April 22, 2003.

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 22, 2003.

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

         The Company does not maintain any equity compensation plans. The other
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 22, 2003.

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 22, 2003.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

Exhibit No.          Description of Exhibits
-----------          -----------------------

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

            The sole subsidiary of the Registrant is Industrial Bank, National
            Association, a national banking association organized under the
            laws of the United States

99(a)                Certification of B. Doyle Mitchell, Jr.
99(b)                Certification of Thomas A. Wilson, Jr.

-----------------
(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.

                                       46
<PAGE>


(B) REPORTS ON FORM 8-K

         No reports on Form 8-K were filed during the fourth quarter of 2002.

ITEM 14. CONTROLS AND PROCEDURES

         Within the ninety days prior to the filing of this report, the
Company's management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Bank's disclosure controls and
procedures, as defined in Rule 13a-14 under the Securities Exchange Act of 1934.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
adequate. There were no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in the Company's
internal controls or in other factors subsequent to the date of the evaluation
that could significantly affect those controls.



                                       47
<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 27, 2003                            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 27, 2003
--------------------------
Clinton W. Chapman


/s/ B. Doyle Mitchell, Jr.    President, Chief Executive Officer           March 27, 2003
--------------------------    And Director (Principal Executive Officer)
B. Doyle Mitchell, Jr.


/s/ Massie S. Fleming         Secretary and Director                       March 27, 2003
--------------------------
Massie S. Fleming


/s/ Robert R. Hagans          Director                                     March 27, 2003
--------------------------
Robert R. Hagans

/s/ Benjamin L. King          Vice Chairman of the Board                   March 27, 2003
--------------------------    of Directors
Benjamin L. King


/s/ Cynthia T. Mitchell       Director                                     March 27, 2003
--------------------------
Cynthia T. Mitchell


/s/ Emerson A. Williams       Director                                     March __, 2003
--------------------------
Emerson A. Williams


/s/ Thomas A. Wilson          Senior Vice President, Treasurer             March 27, 2003
--------------------------    (Principal Financial and
Thomas A. Wilson, Jr.         Accounting Officer)



/s/ Pamela King               Director                                     March 27, 2003
--------------------------
Pamela King

</TABLE>


                                       48
<PAGE>


                           SECTION 302 CERTIFICATION

I, B. Doyle Mitchell, Jr., President and Chief Executive Officer of IBW
Financial Corporation, certify that:

1.    I have reviewed this annual report on Form 10-KSB of IBW Financial
      Corporation;

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

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

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

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

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

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

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

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

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

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


Date: March 27, 2003                       /s/ B. Doyle Mitchell, Jr.
                                           -------------------------------------
                                           B. Doyle Mitchell, Jr.
                                           President and Chief Executive Officer


                                       49
<PAGE>


                           SECTION 302 CERTIFICATION

I, Thomas A. Wilson, Jr., Senior Vice President, Treasurer and Chief Financial
Officer of IBW Financial Corporation, certify that:

1.    I have reviewed this annual report on Form 10-KSB of IBW Financial
      Corporation;

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

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

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

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

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

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

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

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

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

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


Date: March 27, 2003                      /s/ Thomas A. Wilson, Jr.
                                          ----------------------------------
                                          Thomas A. Wilson, Jr.
                                          Senior Vice President, Treasurer,
                                          Chief Financial Officer



                                       50