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, 2003.

         [ ] 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 20021
         (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, 2003 were
approximately $22,466,000.

The aggregate market value of the outstanding Common Stock held by
non-affiliates as of March 5, 2004 was approximately $4,359,017 (based on the
most recent trade known to the Company). See "Market for Common Stock and
Dividends").

As of March 5, 2004, 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 2004 Annual Meeting
       of Shareholders are incorporated by reference in part III hereof.


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         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 seventy years, the Bank
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 $303
million in total assets and $26 million of shareholders' equity at December 31,
2003. During the first quarter of 2004, the Bank closed two underperforming
offices located in Wal-mart stores. 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 customer based served by the Bank is predominately African-American.

         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


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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.

         Lending Activities - The Bank offers a wide array of lending services
to its customers, including commercial loans, commercial real estate loans,
lines of credit, equipment financing, construction loans, letters of credit,
residential mortgages, personal loans, auto loans and home equity loans and
lines of credit. Loan terms, including interest rates, loan-to-value ratios, and
maturities, are tailored as much as possible to meet the needs of the borrower
within prudent lending guidelines in terms of interest rate risk and credit
risk.

         When considering loan requests, the primary factors taken into
consideration are the purpose, the cash flow and financial condition of the
borrower, primary and secondary repayment sources, the value of the underlying
collateral, if applicable, and the character and integrity of the borrower.
These factors are evaluated in a number of ways including an analysis of
financial statements, credit history, trade references and visits to the
borrower's place of business.

         Commercial loans are generally considered to have a higher degree of
risk of default or loss than other types of loans, such as residential real
estate loans, because repayment may be affected by general economic conditions,
interest rates, the quality of management of the business, and other factors
which may cause a borrower to be unable to repay its obligations. General
economic conditions can directly or indirectly affect the quality of small and
mid-sized business loans. The Bank manages the loan portfolio to avoid high
concentrations of similar industry loan types and/or property types in relation
to total capital.

         The lending activities in which we engage carry the risk that borrowers
will be unable to perform on their obligations. As such, interest rate policies
of the Federal Reserve Board and general economic conditions, nationally and in
our primary market area will have a significant impact on our results of
operations. To the extent that economic conditions deteriorate, business and
individual borrowers may be less able to meet their obligations in a timely
manner, resulting in decreased earnings or losses to the Bank. To the extent
that loans are secured by real estate, adverse conditions in the real estate
market may reduce the ability of the borrower to generate the necessary cash
flow for repayment of the loan and reduce our ability to collect the full amount
of the loan upon a default. These same external factors could also negatively
impact collateral values. To the extent that the Bank makes fixed rate loans,
general increases in interest rates will tend to reduce our spread as the
interest rates we must pay for deposits increase. Interest rates may also
adversely affect the value of property pledged as security for loans.

         We constantly strive to mitigate risks in the event of unforeseen
threats to the loan portfolio as a result of an economic downturn or other
negative influences. Plans for mitigating inherent risks in managing loan assets
include carefully enforcing loan policies and procedures, evaluating each
borrower's industry and business plan during the underwriting process,
identifying and monitoring primary and alternative sources for repayment,
obtaining collateral that is margined to minimize loss in the event of
liquidation, ongoing tests of borrower credit worthiness and cash flow, ongoing
collateral evaluations and site inspections and monitoring of economic and
market trends

         At December 31, 2003, the Bank's statutory lending limit to any single
borrower was $3,897 subject to certain exceptions provided under applicable law.
As of December 31, 2003, the Bank's credit exposure to its largest borrower did
not exceed $3,463.

         Commercial Loans: Commercial loans are written for any legitimate
business purpose including the financing of plant and equipment, interim working
capital pending collection of accounts receivable, permanent working capital for
growth and the acquisition and construction of real estate projects. The Bank's
commercial loan portfolio reflects a diverse group of borrowers with no
significant concentration in any borrower, or group of borrowers. Personal
guarantees by principals of borrowing entities is a standard requirement and
loans are typically priced to float at a factor at or above the prime lending
rate.

         Commercial real estate loans generally represent borrower occupied
transactions with a principal reliance on the borrowing businesses' ability to
repay or investor transactions focused on tenant quality, occupancy and expense
controls, as well as prudent guidelines for assessing real estate values. Risks
inherent in managing a


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commercial real estate portfolio relate to either sudden or gradual drops in
property values as a result of a general or local economic downturn. A decline
in real estate values can cause loan to value margins to increase and diminish
the Bank's equity cushion on both an individual and portfolio basis. The Bank
attempts to mitigate commercial real estate lending risks by carefully
underwriting each loan of this type to address the perceived risks in the
individual transaction. Generally, the Bank requires a loan-to-value ratio of
80% of the lesser of cost or appraisal for owner occupied transactions and 75%
for investor transactions. A borrower's ability to repay is carefully analyzed.
An approved list of commercial real estate appraisers selected on the basis of a
reputation for quality and accuracy has been established. Each appraisal is
scrutinized in an effort to insure compliance with established appraisal
guidelines and conformity with current comparable market values. The Bank
generally requires personal guarantees on all loans to closely-held entities as
a matter of policy. Borrowers are required to provide, at a minimum, annual
corporate, partnership and personal financial statements to comply with Bank
policy. Interest rate risk to the Bank is mitigated by using either floating
interest rates or by fixing rates for an intermediate period of time, generally
less than five years. While loan amortizations may be approved for up to 360
months, loans generally have a call provision (maturity date) of 10 years or
less.

         Commercial term loans are used to provide funds for equipment and
general corporate needs. This loan category is designed to support borrowers who
have a proven ability to service debt over a term generally not to exceed 84
months. The Bank typically requires a first lien position on the collateral
financed and other business assets and guarantees from owners having at least a
20% interest in the business. Interest rates on commercial term loans generally
float or are fixed for a term not to exceed five years. Management carefully
monitors industry and collateral concentrations to avoid loan exposures to a
large group of similar industries and/or similar collateral. Commercial loans
are evaluated for historical and projected cash flow, balance sheet strength and
primary and secondary repayment sources. Commercial term loan documents include
certain financial and performance covenants and require borrowers to forward
regular financial information on both the business and on personal guarantors at
least annually. In certain cases, this information is required more frequently,
depending on the degree to which lenders desire information to monitor a
borrower's financial condition and compliance with loan covenants. Key person
life insurance is required as appropriate and as necessary to mitigate the risk
associated with the loss of a primary owner or manager.

         Commercial lines of credit are used to finance a business borrower's
short-term or seasonal credit needs and advances are often based on a percentage
of eligible receivables and inventory. In addition to the risks inherent in term
loan facilities, line of credit borrowers typically require additional
monitoring to protect the lender against diminishing collateral values.
Commercial lines of credit are generally revolving in nature and payable on
demand. The Bank generally requires at least an annual rest period (for seasonal
borrowers) and regular financial information (monthly or quarterly financial
statements, monthly accounts receivable agings, borrowing base certificates,
etc.) for borrowers with rapid growth and permanent working capital financing
needs. Advances against collateral are generally margined, limiting advances on
eligible receivables to 75-80% of current accounts. Lines of credit and term
loans to the same borrowers are generally cross-defaulted and
cross-collateralized. Industry and collateral concentration disciplines are the
same as those used in managing the commercial term loan portfolio. Interest rate
charges on this group of loans generally float at a factor at or above the prime
lending rate. Generally, personal guarantees are also required on these loans.

         Consumer Loans. Loans are considered for any worthwhile personal
purpose on a case-by-case basis, such as financing of tuition, household
expenditures, home and automobile financing. Consumer credit facilities are
underwritten to focus on the borrower's credit record, length and stability of
employment, income to service debt and quality of collateral. Residential real
estate loans held in portfolio are limited to advances of 90% of loan to
appraised value. Maximum debt to income ratio established by loan policy is 40%
and maximum unsecured revolving debt will not exceed 10% of net worth.
Installment loan terms range out to 72 months and are priced at fixed interest
rate. Home equity loans amortize over 5-15 years and are fixed rate while home
equity lines are revolving with 10-year maturities and have floating rates tied
to the prime rate.

         Loan Administration. As part of its internal loan administration
process, the Bank's Directors Loan Committee, comprised of directors, reviews
all loans 30-days delinquent, loans on the watch list, loans rated special
mention, substandard, or doubtful and other loans of concern at least quarterly.
The Committee also reviews new


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loan production, credit concentrations, loan loss reserves, declined loans,
documentation exceptions, loan policy exceptions, new products and pricing. The
Committee commissions periodic documentation and internal control reviews by
outside vendors to complement internal audit and credit administration
oversight.

         Investment Activities. The investment policy of the Bank is an integral
part of its overall asset/liability management program. The investment policy is
to establish a portfolio which will provide liquidity necessary to facilitate
funding of loans and to cover deposit fluctuations while at the same time
achieving a satisfactory return on the funds invested. The Bank seeks to
maximize earnings from its investment portfolio consistent with the safety and
liquidity of those investment assets.

         The securities in which the Bank may invest are subject to regulation
and are limited to securities which are considered investment grade securities.
In addition, the Bank's internal investment policy restricts investments to the
following categories: U.S. Treasury securities; obligations of U.S. government
agencies; mortgage-backed securities or collateralized mortgage securities
issued by Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation; and Government National Mortgage Association, or securities of
states and political subdivisions. The Bank has sought to maximize returns on
the investment portfolio thorough investment in non-taxable securities

FORMAL AGREEMENT

         On April 21, 2003, Industrial Bank, N.A., the Company's subsidiary
bank, entered into a new Formal Agreement (the "Agreement") with the Office of
the Comptroller of the Currency (the "OCC"). The Agreement was amended on March
22, 2004.

         As amended, the Agreement is focused largely on adoption and
implementation of programs and internal controls to ensure compliance with the
Bank Secrecy Act, with the requirement to file Suspicious Activity Reports, and
with consumer laws and regulations, and with the development and implementation
of information technology and internet banking security policies and procedures,
including procedures and policies related to security of Bank and customer
information. It also requires additional planning and procedures with respect to
disaster recovery procedures and the retention, monitoring and oversight of
third party vendors. It also requires the Board to take all necessary steps to
ensure that Bank management corrects each violation of law, rule or regulation
cited in the current Report of Examination prepared by the OCC and in any
subsequent report of examination. It requires the Bank to adopt, implement and
ensure adherence to a performance management program designed to ensure
accountability through a review process to demonstrate that the Board is
discharging its responsibility to properly supervise management.

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

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

         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. While the Bank believes that it has made significant
progress in addressing many of the requirements of the Agreement, and is
continuing its compliance efforts, it is not currently in full compliance with
the Agreement. 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


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holding companies operate, in addition to numerous small and medium sized
community banks. Additionally, a large number of thrift institutions and
non-bank financial service providers, including insurance companies, brokerage
firms, credit unions, mortgage companies, consumer finance companies, mutual
funds and other types of financial institutions compete in the Washington MSA
for investment dollars and lending business. As a result of changes in federal
and state banking legislation, competitors not already in the Bank's market may
seek to enter such market. The District of Columbia, Maryland and Virginia have
each enacted legislation permitting banks organized or based in other
jurisdictions to establish or acquire banks or branches in such jurisdictions.

EMPLOYEES

         As of December 31, 2003, the Bank had 160 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 $100,000 in
2003, $138,000 in 2002 and $169,000 in 2001. 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.


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         Effective on March 11, 2002, the Gramm Leach-Bliley Act of 1999 (the
"GLB Act") allows a bank holding company or other company to certify status as a
financial holding company, which allows such company to engage in activities
that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that
are deemed financial in nature, such as underwriting insurance or acting as an
insurance principal, agent or broker, underwriting, dealing in or making markets
in securities, and engaging in merchant banking under certain restrictions. It
also authorizes the Federal Reserve Board to determine by regulation what other
activities are financial in nature, or incidental or complementary thereto. The
GLB Act allows a wider array of companies to own banks, which could result in
companies with resources substantially in excess of the Company's entering into
competition with the Company and the Bank.

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

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

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

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

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

         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.


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

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

         At December 31, 2003, 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 14.29% and 15.55%
respectively, and a Leverage Capital Ratio equal to approximately 7.55%.

         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


                                       8

<PAGE>

Capital Ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

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

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

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

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

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


                                       9

<PAGE>

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, 2003, the Bank's capital levels were sufficient to be
classified as "well capitalized" for purposes of Section 38 of the FDIA.
However, as a result of the Formal Agreement, the Bank is considered to be
"adequately capitalized".

         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.

         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 eight offices, six in the District of
Columbia, and two in Prince George's County, Maryland. The Bank owns its office
located at 4812 Georgia Avenue, NW and its branch offices located at 2002 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 expiring in 2010, at a current rent of $40,792 per
year. The Bank's F Street office is located in a 1,273 square foot storefront
under a lease expiring at the end of 2005 at a current annual rent of $80,313,
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 expiring in June 2004 at a current annual rental of $26,152. The Oxon Hill
office is a 10,531 square foot, two story building with drive in facilities,
having a new lease beginning January 2003, 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
expiring in August 2004, at a current annual rental of $22,896, subject to
annual increases.

         During the fourth quarter of 2003, management decided to close the two
in-store Wal-Mart branches in the first quarter 2004. Lease and other expenses
associated with these two locations have been accelerated to the closing dates.

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


                                       10

<PAGE>


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, 2003.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.

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 6 trades of the Common Stock since January 1,
2001. The last trade known to the Company was a trade of 1,301 shares at a price
believed to be in the range of $12.00 or $13.00 per share in October 2003. The
company understands that two other blocks of a similar size were purchased at
the same time at a similar price. The company was not involved in the
transactions and has only limited range information about the transactions. The
company knows of a trade of 500 shares at $14.00 in August 2003. The Company
does not have information as to the price at which the other two trades
occurred. 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, 2003, there were 668,360 shares of Common Stock
outstanding, held of record by approximately 527 shareholders.

         The Company has proposed for the approval of shareholders at the 2004
annual meeting, a one for 101 reverse split of the common stock, which would
result in holders of 100 or fewer shares receiving cash in exchange for their
shares, at a rate of $36.50 per pre-split share. The reverse split would be
followed by a 101 for one forward split. As a result of the reverse/forward
split, it is expected that approximately 281 shareholders of record would be
cashed out, approximately 13,000 shares would be redeemed, and the Company would
be able to cease reporting under the Securities Act of 1934.

         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, 2003 the Bank would not need
prior approval from OCC unless a declaration of dividends exceeded $6,553,000.
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


                                       11

<PAGE>


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,
                                      -----------------------------------
                                      2003    2002   2001     2000   1999
                                      ----    ----   ----     ----   ----
Net income per common share          $3.01   $3.03   $4.18   $3.20   $2.50
Dividends paid per common share      $0.80   $0.70   $0.70   $0.60   $0.15

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

RECENT SALES OF UNREGISTERED SHARES.

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

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS.

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

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


                                       12

<PAGE>

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
largest asset type on the consolidated balance sheet as of December 31, 2003.
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 2003 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.

RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)

Years Ended December 31, 2003 and 2002

         Overview - Net income was $2,037 for 2003 compared with $2,047 in 2002,
a decrease of $10 or less than 1% from a year ago. Earnings per common share was
$3.01 in 2003 compared with $3.03 in 2002. The decrease in net income was
primarily attributable to an increase in the provision for loan losses of $735,
an increase in non-interest expenses of $153 offset by an increase of $718 in
non-interest income, an increase in net interest income of $13, and a decrease
in taxes of $157. Return on average assets was .67% for 2003, down from .68% for
2002. Return on average equity was 7.70% for 2003, compared with 8.43% for 2002.


                                       13

<PAGE>

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.

                                                       2003     2002      2001
                                                       -----------------------
Return on average assets                                 .67%     .68%     .99%
Return on average equity                                7.70%    8.43%   13.27%
Dividend pay-out ratio                                 26.57%   23.10%   16.73%
Average shareholders' equity to average assets          8.72%    8.07%    7.49%
Net income per common share                            $3.01    $3.03    $4.18


         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 changes in the volume of interest-earning assets and interest-bearing
liabilities are presented in Table 3.


                                       14

<PAGE>


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


<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                   -------------------------------------------------------------------
                                                 2003                              2002
                                   -------------------------------------------------------------------
                                      Average    Average    Amount      Average   Average    Amount
                                      Balance     Rate     Paid or      Balance     Rate    Paid or
                                                            Earned                           Earned
ASSETS                                                    (dollars in thousands)

<S>                                   <C>         <C>        <C>        <C>          <C>      <C>
Loans, net                            $148,704    7.73%      $11,489    $131,722     8.33%    $10,976
Taxable securities                     100,046    4.12%        4,126     108,166     5.31%      5,741
Non-taxable securities (2)              29,088    7.86%        2,285      28,144     7.88%      2,217
Federal funds sold                       4,855    1.03%           50      14,211     1.65%        235
Interest-bearing deposits held           1,238    2.26%           28       1,303     2.53%         33
                                      --------                ------    --------              -------
Total interest-earning assets          283,931    6.33%      $17,978    $283,546     6.77%    $19,202
Cash and due from banks                 10,067                            10,734
Bank premises and                        3,462                             2,430
    equipment, net
Other assets                             5,624                             4,241
                                      --------                          --------
Total assets                          $303,084                          $300,951
                                      ========                          ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing demand deposits      $ 25,917    0.50%      $   129    $ 25,247     0.44%    $   112
Savings deposits                        92,630    1.20%        1,114      81,378     1.43%      1,165
Time deposits                           57,560    2.06%        1,186      56,680     3.40%      1,929
                                      --------    ----       -------    --------              -------
Total interest-bearing deposits        176,107    1.38%        2,429     163,305     1.96%      3,206
Short-term borrowings                   27,130    0.93%          251      36,147     1.28%        462
Long-term borrowings                     4,000    4.53%          181       7,709     5.86%        453
                                      --------               -------    --------              -------
Total interest-bearing liabilities     207,237    1.38%        2,861     207,161     1.99%      4,121
Noninterest-bearing liabilities         68,672                            67,749
Other liabilities                          733                             1,765
Shareholders' equity                    26,442                            24,276
                                      --------                          --------
Total liabilities and
  shareholders' equity                $303,084                          $300,951
                                      ========                          ========

NET INTEREST INCOME AND NET
  YIELD ON INTEREST-EARNING ASSETS

Net interest income                                          $15,117                          $15,081
                                                             =======                          =======
Interest rate spread                              4.95%                              4.78%
Net yield on average interest-
earning assets                                    5.32%                              5.32%
Average interest-earning assets
to average interest-bearing
liabilities                                     137.01%                            136.87%
</TABLE>


<TABLE>
<CAPTION>
                                         Year Ended December 31,
                                   ----------------------------------
                                                 2001
                                   ----------------------------------
                                      Average    Average      Amount
                                      Balance      Rate      Paid or
                                                              Earned
ASSETS                                   (dollars in thousands)

<S>                                  <C>         <C>         <C>
Loans, net                           $128,631      8.92%     $11,474
Taxable securities                    107,007      6.29%       6,728
Non-taxable securities (2)             19,245      8.06%       1,552
Federal funds sold                      9,506      3.59%         341
Interest-bearing deposits held            969      4.02%          39
                                     --------                -------
Total interest-earning assets         265,358      7.59%     $20,134
Cash and due from banks                11,537
Bank premises and                       2,184
    equipment, net
Other assets                            4,935
Total assets                         $284,014
                                     ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Interest-bearing demand deposits     $ 25,012      0.62%     $   154
Savings deposits                       68,747      2.42%       1,666
Time deposits                          51,438      4.21%       2,163
                                     --------                -------
Total interest-bearing deposits       145,197      2.74%       3,983
Short-term borrowings                  48,155      3.04%       1,462
Long-term borrowings                    1,902      5.05%          96
                                     --------                -------
Total interest-bearing liabilities    195,254      2.84%       5,541
Noninterest-bearing liabilities        65,645
Other liabilities                       1,848
Shareholders' equity                   21,267
                                     --------
Total liabilities and
  shareholders' equity               $284,014
                                     ========

NET INTEREST INCOME AND NET
  YIELD ON INTEREST-EARNING ASSETS

Net interest income                                          $14,593
                                                             =======
Interest rate spread                               4.75%
Net yield on average interest-
earning assets                                     5.50%
Average interest-earning assets
to average interest-bearing
interest-bearing liabilities                     135.90%
</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 where applicable. Interest income and net
              interest income reported in the Company's consolidated statements
              of income were $17,201 and $14,340 for 2003, $18,448 and $14,327
              for 2002, and $19,606 and $14,065 for 2001.


                                       15

<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,
                                             ------------------------------         ------------------------------
                                                     2003 VS. 2002                           2002 VS 2001
                                              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                                        $1,415    $  (902)     $   513         $  276     $  (774)    $  (498)
Taxable securities                             (431)    (1,184)      (1,615)            73      (1,060)       (987)
Non-taxable securities                           74         (6)          68            718         (53)        665
Federal funds sold                             (155)       (30)        (185)           169        (275)       (106)
Interest-bearing deposits held                   (2)        (3)          (5)            13         (19)         (6)
                                             ------    -------      -------            ---     -------     -------
Total interest-earning assets                   901     (2,125)      (1,224)         1,249      (2,181)       (932)

Deposits
Interest-bearing demand deposits                  3         14           17              1         (43)        (42)
Savings deposits                                161       (212)         (51)           306        (807)       (501)
Time deposits                                    30       (773)        (743)           220        (454)       (234)
                                               ----    -------      -------           ----     -------     -------
Total interest-bearing deposits                 194       (971)        (777)           527      (1,304)       (777)
Short-term borrowings                           (89)      (122)        (211)          (365)       (635)     (1,000)
Long-term borrowings                           (218)       (54)        (272)           293          64         357
                                             ------    -------      -------          -----     -------     -------
Total interest-bearing liabilities             (113)      (978)      (1,260)           455      (1,875)     (1,420)
                                             ------    -------      -------          -----     -------     -------
Net interest income                          $1,014    $(1,147)     $    36         $  794     $  (306)    $   488
                                             ======    ========     =======         ======     =======     =======
</TABLE>


On a tax-equivalent basis, net interest income for 2003 increased $36 or less
than 1% over 2002. Average interest-earning assets only increased by $385 or
less than 1%, but resulting primarily due to an increase in loans of $16,982 or
13%, and an increase in non-taxable securities of $944 or 3%, offset primarily
by decreases in federal funds sold of $9,356 or 66%, and taxable securities of
$8,120 or 7%. Average interest-bearing liabilities remained relatively constant
during 2003 at $207 million, with a shift resulting in an increased in interest
bearing deposits of $12,802 or 8% and a decrease in borrowings of $12,726 or
29%.

         The net interest rate spread increased 17 basis points, from 4.78% in
2002 to 4.95% in 2003. The increase is a result of a 44 basis point decrease in
the average yield on interest-earning assets versus a 61 basis points decrease
in rates paid on average interest bearing liabilities. The yield on loans in
2003 decreased 60 basis points from 2002 due to the continued impact of the
declining interest rate environment which resulted in historical low residential
mortgage rates. The decline in yields reflects the general declines in market
rates.

         Interest income from taxable securities decreased $1,615 or 28% to
$4,126 for the year ended December 31, 2003 compared to $5,741 for 2002. This
decrease in interest income on taxable securities is attributed primarily with
the historical low interest environment over the past year, coupled with the
accelerated increase in the amortization of premiums on mortgage-backed
securities resulting from faster pay-downs. In 2003, the principal paydowns on
mortgage-backed securities totaled $39,226 compared to $19,751 in 2002. As a
result of this low interest environment, the average yield on taxable securities
decreased 119 basis points to 4.12% for 2003 compared to 5.31% for 2002.


                                       16

<PAGE>


         Provision for Loan Losses-The Company maintains an allowance for loan
losses to absorb losses on existing loans that may become uncollectible. A
provision for loan losses of $735 was recorded in 2003 compared to no provision
in 2002. The increase in the provision for loan losses was primarily attributed
to one commercial loan in the amount of $726 that was charged off in 2003.
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 as of December 31, 2003. There
can be no assurance, however, that future provisions for loan losses will not be
required.

         Non-interest Income- Non-interest income increased $718 or 16% to
$5,265 for 2003 from $4,547 for 2002. 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 increase in non-interest income was
primarily a result of an increase in gains on securities of $395 or 77%, an
increase in service charges of $224 or 8% and an increase in other income of
$109 or 103%. The declining interest rate environment in 2003 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. The increase in service charges on deposits was a result
of a new service charge structure that was implemented in January 2003. Other
operating income increase was due primarily to the acquisition of Bank Owned
Life Insurance (BOLI). BOLI is a whole life insurance policy on certain officers
of the Bank with the Bank as beneficiary in the event of death of the officer.
Income is recognized as the appreciation in underlying cash surrender value and
is not taxable under current tax regulations. If the policy is redeemed for its
cash value the appreciation in value becomes taxable. BOLI is carried as an
asset on the books of the Bank under the category "Other assets". The Company
acquired $5.4 million in BOLI in June of 2003 and recognized $173 in
non-interest income in 2003.

         Non-interest Expense- Non-interest expense for 2003 was $16,655, an
increase of $153 or 1% over 2002. The composition of the increase consists of a
$366 or 4% increase in salary and employee benefits, an increase of $222 or 18%
in furniture and equipment expenses, an increase of $62 or 7% in occupancy
expenses, and an increase of $9 in advertising expenses, offset by a decrease in
other expenses of $423 or 10% and a decrease in data processing expenses of $83
or 10%.

         The increase in salaries was due primarily to increased personnel cost
associated with the hiring of several key personnel in 2002 and their respective
full year cost in 2003, coupled with normal salary increases.

         The increase in furniture and equipment expense was due primarily to
increased costs associated with computer equipment and data processing equipment
including depreciation. During the later part of 2002, the Company installed a
new state-of-the-art reader sorter equipment which alone accounted for an
increase in depreciation expense of $100.

         Provision for Income Taxes- The provision for income taxes for 2003 was
$178, compared to $325 for 2002, reflecting a decrease of $147 or 45% due
primarily to higher tax-exempt income relative to taxable income. The effective
tax rate was 8.0% for 2003, compared to 13.7% for 2002. The percentage of tax
exempt income to total interest income has increased each of the past three
years while net income has declined. Additionally, federally tax exempt income
as a percentage of net income before taxes was approximately 69% and 62% for the
years ended December 31, 2003 and 2002, respectively. The Bank also invests in
certain obligations that are exempt from state income taxes which has
effectively eliminated state tax expense in 2003. As a result of the levels of
tax exempt interest income, the Company is subject to the Alternative Minimum
Tax ("AMT") for federal tax purposes. Any AMT taxes paid will result in a credit
that is available to reduce future federal tax liabilities once the Company is
not subject to AMT.

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


                                       17

<PAGE>

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, 2003. 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 remaining
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 91%, with a cumulative negative
(liability) gap of $8 million, representing 3% 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 which 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.

TABLE 4. RATE SENSITIVITY ANALYSIS

<TABLE>
<CAPTION>
                                                                  4 TO 12      WITHIN 12                     OVER
(dollars in thousands)                             0-90 DAYS      MONTHS         MONTHS      1-5 YEARS      5 YEARS      TOTALS

<S>                                                <C>           <C>           <C>           <C>           <C>          <C>
 Loans (1) (2)                                     $  12,618     $  13,753     $  26,371     $  71,250     $  69,202    $ 166,823
 Investment Securities (3)(4)                         30,843        19,325        50,168        37,759        26,829      114,756
 Federal funds Sold                                       --            --            --            --            --           --
 Interest Bearing Bank Balances:                         183           154           337         1,000            --        1,337
                                                   ---------     ---------     ---------     ---------     ---------    ---------
 TOTAL EARNING ASSETS                              $  43,644     $  33,232     $  76,876     $ 110,009     $  96,031    $ 282,916
                                                   =========     =========     =========     =========     =========    =========
Percent of total earnings assets                       15.43%        11.75%        27.17%        38.88%        33.94%      100.00%

Interest-bearing liabilities
Time COD's of $100M or more                        $   4,699     $   8,470     $  13,169     $  15,133     $      --    $  28,302
 Savings,Now, MMDA'S and
    other time deposit (3)                             4,375        13,124        17,499        99,158            --      116,657
 Time COD'S less than $100M                            9,360        16,555        25,915         4,807            --       30,722
 Borrowed funds                                       28,313            --        28,313         4,000            --       32,313
                                                   ---------     ---------     ---------     ---------     ---------    ---------

TOTAL INTEREST BEARING LIABILITIES                 $  46,747     $  38,149     $  84,896     $ 123,098     $      --    $ 207,994
                                                   =========     =========     =========     =========     =========    =========
 Interest-sensitivity gap                          $  (3,103)    $  (4,917)    $  (8,020)    $ (13,089)    $  96,031    $  74,922
 Cumulative interest-sensitivity gap               $  (3,103)    $  (8,020)    $  (8,020)    $ (21,109)    $  74,922    $  74,922
Ratio of earning assets to interest-bearing
   liabilities (gap ratio)                             93.36%        87.11%        90.55%        89.37%           --       136.02%
Cumulative ratio of earnings assets to interest-
   bearing liabilities (cumulative gap ratio)          93.36%        90.55%        90.55%        89.85%       136.02%      136.02%
Cumulative interest-sensitivity gap as a
   percent of total assets                             (1.15%)       (2.97%)       (2.97%)       (7.82%)       27.75%       27.75%
                                                   =========     =========     =========     =========     =========    =========
</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 2003 pay-down
         experience was $8,234. However, $26,527 in mortgage back securities
         have an expected average life of 1.92 years.


                                       18

<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, 2003,
2002, and 2001.

<TABLE>
<CAPTION>
                                                    ---------------------------------------------------------------------------
                                                       2003        PERCENT       2002        PERCENT      2001        PERCENT
                                                    ---------------------------------------------------------------------------
ASSETS                                                                          (dollars in thousands)

<S>                                                    <C>          <C>          <C>          <C>         <C>          <C>
     Loans, net                                        $164,816      54.46%      $134,859      45.66%     $135,514      45.87%
     Investment securities                              114,756      37.92%       137,235      46.47%      127,365      43.11%
     Federal funds sold                                      --       0.00%         5,900       2.00%       14,100       4.77%
     Interest-bearing deposits
         in other banks                                   1,337       0.44%           887       0.30%          882       0.30%
                                                       --------     ------       --------     ------      --------     ------
     TOTAL EARNINGS ASSETS                              280,909      92.82%       278,881      94.43%      277,861      94.05%
     Cash and due from banks                              9,194       3.04%         8,890       3.01%       11,059       3.74%
     Bank premises and equipment                          3,362       1.11%         3,455       1.17%        2,374       0.80%
     Other assets                                         9,172       3.03%         4,110       1.39%        4,128       1.41%
                                                       --------     ------       --------     ------      --------     ------
     TOTAL ASSETS                                      $302,637      100.0%      $295,336      100.0%     $295,422      100.0%
                                                       ========     ======       ========     ======      ========     ======

LIABILITIES AND SHAREHOLDERS' EQUITY

     Demand deposits                                   $ 66,243      21.89%      $ 68,432      23.16%     $ 63,869      21.62%
     Savings, NOW and MMDA                              116,657      38.55%       111,919      37.90%       95,096      32.19%
     Time deposits $100,000 or more                      28,302       9.35%        24,299       8.23%       25,109       8.50%
     Other time deposits                                 30,722      10.15%        32,536      11.02%       32,916      11.14%
                                                       --------     ------       --------     ------      --------     ------
     TOTAL DEPOSITS                                     241,924      79.94%       237,186      80.31%      216,990      73.45%
     Short term borrowings                               28,313       9.36%        25,084       8.49%       43,483      14.72%
     Long term borrowings                                 4,000       1.32%         4,000       1.35%       10,000       3.38%
     Accrued expenses and other liabilities               2,042       0.67%         2,825       0.96%        1,798       0.61%
                                                       --------     ------       --------     ------      --------     ------
     TOTAL LIABILITIES                                  276,279      91.29%       269,095      91.11%      272,271      92.16%
     Shareholders' equity                                26,358       8.71%        26,241       8.89%       23,151       7.84%
                                                       --------     ------       --------     ------      --------     ------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY        $302,637     100.00%      $295,336     100.00%     $295,422     100.00%
                                                       ========     ======       ========     ======      ========     ======
</TABLE>



         Overview- Total assets increased $7,301 from December 31, 2002 to
December 31, 2003 primarily due to an increase in loans of $29,957 and other
assets $5,062 due to the purchase of BOLI of $5,400 in June 2003. These
increases were offset by a decrease in investments of $22,479 and Fed Funds sold
of $5,900. On the liability side of the balance sheet, short-term borrowings
increased $3,229, savings deposits increased $4,738, and demand deposits
increased $2,189.

         Loans- Net loans outstanding at December 31, 2003 were $164,816, an
increase of $29,957 or 22%, from year-end 2002. The composition of the loan
portfolio is summarized in Table 6. The change in loan composition consisted
primarily of an increase in residential 1 to 4 family loans of $18,925, an
increase in commercial real estate loans of $6,519, an increase in consumer
loans of $2,570 and an increase in commercial loans of $1,864.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

         An allowance for loan losses is maintained at a level considered
adequate to provide for loan losses existing as of the balance sheet date.
Management is responsible for determining the adequacy of the allowance for loan
losses and the periodic provisioning for estimated losses included in the
financial statements. The evaluation process


                                       19

<PAGE>

is undertaken on a quarterly basis, but may increase in frequency should
conditions arise that would require management's prompt attention, such as any
material effect on the allowance for loan losses or any development which may
indicate an adverse trend in asset quality. The methodology employed for
assessing the appropriateness of the allowance consists of the following
criteria: 1) Establishment of reserve amounts for all specifically identified
criticized assets that have been designated as requiring attention by
management's internal loan review program, bank regulatory examinations or the
external loan review and 2) An allocation to the remaining loans giving effect
to historical loss experience over several years. Please refer to the discussion
under the caption "Allowance for Loan Losses" in Note 1 to the Consolidated
Financial Statements for additional information regarding the underlying
methodology management employs in determining the allowance.

         The allowance for loan losses was $3.0 million and $3.1 million as of
December 31, 2003 and December 31, 2002, or 1.8% of total loans at December 31,
2003, compared to 2.2% at December 31, 2002. A provision for loan losses of $735
was made during 2003 compared to no provision for loan losses for the year 2002.
The decrease in the allowance for loan losses since December 31, 2002 reflects
net charged off loans of $820 and the $735 provision. Non-performing assets
increased $500 or less than 15% to $3,874 from $3,374 at year-end 2002,
reflecting an increase in loans past due 90 days or more.

         The $735 provision recorded in 2003 was affected by the level of charge
offs during 2003, consisting primarily of the charge-off of one commercial loan
in the amount of $726. The loss was experienced on a loan to a professional
firm, guaranteed by the principals of the firm and collateralized by accounts
receivable and certificates of deposit. The loan became delinquent during the
first quarter of 2003, as numerous attempts to contact the borrower were
unsuccessful. As a result, the entire amount of the loan, net of the deposits,
was charged-off in June of 2003. The level of the allowance is affected by
several factors, including the following:

    o    Increase in residential mortgage loans of $19 million since December
         31, 2002. Residential mortgage loans comprise 49% of the loan portfolio
         compared to 46% as of December 31, 2002. Over the past three years, the
         Company has not experienced any net loss with respect to residential
         mortgage loans, recognizing net recoveries of $99.

    o    Loans collateralized by real estate comprise 88% of the loan portfolio.
         The Maryland and Washington DC market in which the Company operates
         continues to experience significant increases in real estate values.
         This increase in value in real estate has helped to insulate the
         Company from the need to recognize losses on loans classified as
         non-performing, and from the effects of a slow economy in the Company's
         market.

    o    Analysis of individually significant loans classified as non-performing
         indicated the allowance allocated to those loans reflects the losses
         associated with those loans in management's judgment.

         When determining the provision for loan losses, management assesses the
risk inherent in its loan portfolio based on information available at such time
relating to the volume and type of lending conducted, the Company's historical
loan loss experience, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, any concentrations
of credit, the experience and ability of the depth in the lending staff, and
trends in the local and national economy. At December 31, 2003 non-performing
assets totaled $3.9 million, or 2.3% of total loans, compared to $3.4 million at
year-end 2002, or 2.4% of total loans. At December 31, 2003, the Company's
allowance for loan losses was $3.0 million compared to $3.1 million at year-end
2002, resulting in a ratio of the allowance to total loans of 1.8% and 2.2%,
respectively over these two periods. As a result of the changes in the
composition of the portfolio and the collateral underlying non-performing and
potential problem loans, the Company believes that the allowance remains
adequate. See also the "Non-Performing Assets" section for additional
information related to the Company's problem assets and allowance for loan
losses.


                                       20

<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)       2003   PERCENT     2002    PERCENT     2001    PERCENT     2000     PERCENT     1999     PERCENT
                            ---------------------------------------------------------------------------------------------------
<S>                         <C>       <C>       <C>       <C>       <C>       <C>       <C>        <C>       <C>        <C>
Commercial                  $ 10,550    6.26%   $  8,686    6.32%   $ 13,235    9.49%   $ 10,958     8.28%   $ 10,046     15.11%
Residential 1 to 4 family     81,832   48.58%     62,907   45.79%     58,739   42.13%     56,611    42.78%     52,826     46.62%
Commercial real estate        66,852   39.69%     60,333   43.05%     59,905   42.97%     58,772    44.41%     40,125     30.62%

Consumer loans                 9,220    5.47%      6,650    4.84%      7,545    5.41%      5,993     4.53%      4,803      7.65%
                            --------  ------    --------  ------    --------  ------    --------   ------    --------    ------
Total                       $168,454  100.00%   $138,576  100.00%   $139,424  100.00%   $132,334   100.00%   $107,800    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, 2003. Nonaccrual loans are excluded from
the presentation.

                                        AFTER ONE YEAR
                             ONE YEAR    THROUGH FIVE   AFTER FIVE
(dollars in thousands)       OR LESS         YEARS         YEARS        TOTAL
 Fixed rate                  $ 17,059      $ 71,250      $ 69,202     $157,511
 Variable rate                  9,312          --            --          9,312
                             --------      --------      --------     --------
Total                        $ 26,371      $ 71,250      $ 69,202     $166,823
                             ========      ========      ========     ========



At December 31, 2003, the aggregate amount of loans due after one year with
fixed interest rates was $140,452.

TABLE 8. INVESTMENT PORTFOLIO MATURITY SCHEDULES

        Table 8 summarizes the maturity and average yield of the Company's
investment portfolio at December 31, 2003. 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  Mortgage-Backed      Total
                           -------------------------------------------------------------------------------------------------------
                           Amount   Yield   Amount    Yield    Amount   Yield    Amount   Yield    Amount  Yield   Amount    Yield


<S>                        <C>       <C>    <C>        <C>    <C>        <C>     <C>      <C>     <C>       <C>   <C>         <C>
U.S. Treasury              $ 1,004   0.87%  $    --     --    $    --     --     $   --    --     $    --    --   $  1,004    0.87%

U.S. Government agencies    22,025   1.54%   34,578    4.28%    3,779    5.11%       --    --          --    --     60,382    3.33%
State and political
subdivisions                   612   8.70%    3,180    8.33%   19,379    7.72%   $2,496   7.93         --    --     25,667    7.83%
Other                           --    --         --     --      1,176    4.48%       --                --    --      1,176    4.49%
Mortgage-backed
securities                      --    --         --     --         --     --         --    --      26,527   5.27%   26,527    5.27%
                           -------   ---    -------    ---    -------    ---     ------   ---     -------   ---   --------    ---
Total                      $23,641   1.70%  $37,758    4.62%  $24,334    7.16%   $2,496   7.93%   $26,527   5.27% $114,756    4.73%
                           =======   ===    =======    ===    =======    ===     ======   ===     =======   ===   ========    ===
</TABLE>


         Securities- The carrying value of the Company's securities portfolio
decreased $22,479 or 8% from $137,235 at December 31, 2002, to $114,756 at
December 31, 2003. The decrease in the investment portfolio consisted primarily
of an increase in U.S. Government and Agency securities of $11,160, offset by a
decrease in state and political subdivision of $6,693, and by a decrease in
mortgage backed securities of $26,881. The yield on taxable securities decreased
from 6.30% for 2002 to 4.73% for 2003. The tax equivalent yield for non-taxable


                                       21

<PAGE>

securities decreased from 7.88% for 2002 to 7.86% for 2003. The mortgage-backed
securities portfolio had a weighted average remaining maturity of 1.92 years at
December 31, 2003, compared to 2.19 years at December 31, 2002 (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,
                                                        ---------------------------------------------------------------------
                                                            2003          2002          2001          2000         1999
                                                        ---------------------------------------------------------------------
                                                                               (dollars in thousands)

<S>                                                         <C>           <C>           <C>          <C>           <C>
Total loans outstanding at year end                         $ 168,454     $ 138,576     $ 139,424    $ 132,334     $ 107,800
Average loans outstanding during year                         151,531       131,722       128,631      115,689        99,863

Allowance for loan losses at beginning of year                  3,059         3,283         3,580        4,272         4,700
Loans charged off:

   Commercial                                                     886           320           349          611           466
   Real estate mortgage                                            15           131           168           83           198
   Installment loans to individuals                               285           270           340           56           150
                                                        ---------------------------------------------------------------------
Total charge-offs                                               1,186           721           857          750           814

Recoveries of loans previously charged-off
   Commercial                                                     159           266           157          270           332
   Real estate mortgage                                            51           123           239            3            20
   Installment loans to individuals                               156           108           164           44            34
                                                        ---------------------------------------------------------------------
Total recoveries                                                  366           497           560          317           386

Net charge-offs                                                   820           224           297          433         1,605

(Reversals) Additions to allowance charged to
operations                                                        735             0             0         (259)            0
                                                        =====================================================================

Allowance for loan losses at end of period                   $  2,974     $   3,059     $   3,283     $  3,580      $  4,272

Ratios of net charge-offs during year to average                 0.55%         0.17%         0.23%        0.37%         0.43%
outstanding loans during year

Ratio of allowance for possible loan losses to total             1.77%         2.21%         2.35%        2.71%         3.96%
loans
</TABLE>


                                       22

<PAGE>


TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

        Table 10 reflects 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,
                    -------------------------------------------------------------------------------------------------------------
                     2003     PERCENT (2)    2002   PERCENT (2)   2001      PERCENT (2)  2000     PERCENT (2)   1999  PERCENT (2)
                    -------------------------------------------------------------------------------------------------------------
                                                              (dollars in thousands)
<S>                 <C>          <C>       <C>         <C>       <C>           <C>      <C>          <C>     <C>         <C>
Commercial (1)      $ 1,700      45.95%    $ 1,685     49.37%    $ 1,919       52.46%   $1,956       52.69%  $ 1,927     46.54%
Real estate
Mortgage                870      48.58%        589     45.79%        396       42.13%      512       42.78%      543     49.00%
Consumer                273       5.47%        306      4.84%        252        5.41%       175       4.53%      173      4.46%
Unallocated             131         --         479        --         716          --       937          --      1,629       --
                    -------     ------     -------    ------     -------      ------    ------      ------    -------   ------
Total               $ 2,974     100.00%    $ 3,059    100.00%    $ 3,283      100.00%   $3,580      100.00%   $ 4,272   100.00%
                    =======     ======     =======    ======     =======      ======    ======      ======    =======   ======
</TABLE>

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

         The allowance for loan losses was $2,974 at December 31, 2003, as
compared to $3,059 December 31, 2002. The ratio of the allowance for loan losses
to total loans at December 31, 2003 and 2002 was 1.77% and 2.21%, respectively.
At December 31, 2003, non-performing assets to total assets was 1.28% compared
to 1.14% at December 31, 2002. Net charge-offs increased $596 to $820 for 2003
from $224 for 2002. A provision of $735 was made during 2003 compared to no
provision for 2002. Additionally, the unallocated portion of the allowance
decreased to $132 at year end 2003 from $479 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, 2003,
the amount of the allowance that was attributed to specific credits was $1,393
or 46.8% of the allowance which compares to $911 or 27.7% as of December 31,
2002. The primary reason for the increase was an increase in classified loans.


                                       23

<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, 2003 was $1,581 or 53.2% of the allowance, which compares to $2,372
or 72.3% of the allowance at December 31, 2002. The primary reason for the
decrease was as a result of the change in classification of several loans, the
charge-off of one large commercial loan that was not specifically allocated at
this time last year, 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, 2003, 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 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,
                                                                  ------------------------------------------------------------
                                                                    2003        2002        2001         2000        1999
                                                                  ------------------------------------------------------------
                                                                                     (dollars in thousands)
<S>                                                               <C>         <C>         <C>          <C>         <C>
Non-accrual loans (1)                                             $ 1,631     $ 1,712     $ 2,462      $ 1,733     $ 2,819
Loans past due 90 days or more and still accruing                   2,243       1,662         645          659         275
Foreclosed properties                                                  --          --          --           --         265
                                                                  -------     -------     -------      -------     -------
Total                                                             $ 3,874     $ 3,374     $ 3,107      $ 2,392     $ 3,359
                                                                  =======     =======     =======      =======     =======
Non-performing assets to gross loans and foreclosed
       properties at period end                                      2.30%       2.43%       2.22%        1.81%       3.11%
Non-performing loans to total loans                                  2.30%       2.43%       2.22%        1.81%       2.87%
Non-performing assets to total assets at period end                  1.28%       1.14%       1.05%        0.89%       1.27%
</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 2003 for non-accrual loans had the loans been
             current in accordance with their original terms was $151. 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.


                                       24

<PAGE>


         Non-performing assets at year-end 2003 were $3,874, an increase of $500
or 15% from year-end 2002. 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, 2002. Non-accrual loans totaled $1,631 at
year-end 2003 and consisted of $638 in commercial real estate loans, $870 in
residential real estate loans and $123 in consumer loans. This represented a
decrease of $81 or 5% from year-end 2002. As of December 31, 2003, loans past
due 90 days or more and still accruing totaled $2,243, an increase of $581 or
35%, and consisted of $1,731 in residential real estate loans, $330 in
commercial loans and $182 in consumer loans. The increase in loans past due 90
days or more centered in residential loans increasing $736 from year-end 2002.
At year-end 2003, non-performing assets represented 15% of total capital as well
as 13% at year-end 2002. Additionally, at year-end 2003, non-performing assets
and loans with possible credit problems totaled $14,200, or 54% of total
capital, compared to $8,401or 32% at year-end 2002, reflecting an increase of
$5,799 or 69%.

         At December 31, 2003, there were $10,326 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 thirty-one loans, totaling
$10,267, fully collateralized by real estate, three of which represent $5,290 of
the total. The remaining $59 consists of six commercial loans.

LIQUIDITY RISK MANAGEMENT

         The objective of liquidity management is to ensure that 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 $4,738 or 2%, from December 31, 2002 to
December 31, 2003.

         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,
2003, $25,313 of repurchase agreements with an average rate of .90% were
outstanding. The average amount of repurchase agreements during 2003 declined
$9,861 from $36,147 in 2002 to $26,286 in 2003, largely as a result of the
decision of one depositor to shift $13 million of funds from repurchase
agreements to a deposit account. See Note 8 to the consolidated financial
statements for additional information regarding the Company's short-term
borrowings. During 2003, the Company had borrowings of $4,000 of long-term funds
and $3,000 in short-term funds under advances from the Federal Home Loan Bank.
See Notes 8 and 9 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, 2003 and 2002 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.

         Legislation has been introduced in each of the last several Congress
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


                                       25

<PAGE>

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 maturity information related to the Company's
time deposits.

<TABLE>
<CAPTION>
                                                                                  At December 31, 2003
                                                             -------------------------------------------------------------
                                                                                 (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                  $ 4,699       $ 6,011       $ 2,459      $15,133    $28,302
Time certificates of deposit less than $100M                     9,360         7,920         8,635        4,807     30,722
                                                               -------       -------       -------      -------    -------
Total                                                          $14,059       $13,931       $11,094      $19,940    $59,024
                                                               =======       =======       =======      =======    =======
</TABLE>


OFF BALANCE SHEET ARRANGEMENTS

          Credit-Related Financial Instruments. The Company is a party to credit
related financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters of credit and
commercial letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
consolidated balance sheets.

         The Company's exposure to credit loss is represented by the contractual
amount of these commitments. The Company follows the same credit policies in
making commitments as it does for on-balance sheet instruments. At December 31,
2003 and 2002, the following financial instruments were outstanding whose
contract amounts represent credit risk:

                                                2003               2002
                                              ---------          --------
                                                (Dollars in thousands)

      Commitments to extend credit             $20,458            $18,283
      Stand-by letters-of-credit               $   280            $   330

         Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The commitments for equity lines of credit may
expire without being drawn upon. Therefore, the total commitments amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.

         Unfunded commitments under commercial lines-of-credit, revolving credit
lines and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines-of-credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.

         Commercial and standby letters-of-credit are conditional commitments
issued by the Company to guarantee the performance of a customer to a third
party. Those letters-of-credit are primarily issued to support public and
private borrowing arrangements. Essentially all letters-of-credit issued have
expiration dates within one year. The credit risk involved in issuing
letters-of-credit is essentially the same as that involved in extending loan
facilities to customers. The Company generally holds collateral supporting those
commitments if deemed necessary.


                                       26

<PAGE>

         With the exception of these off-balance sheet arrangements, the Company
has no off-balance sheet arrangements that have or are reasonably likely to have
a current or future effect on the Company's financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources, that is material to investors. For
further information, see Note 15 to the consolidated financial statements.

         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 10 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, 2003, that the Company and
the Bank met all the capital adequacy requirements to which they are subject. As
of December 31, 2003, 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 11 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 April 21, 2003, the Bank entered into
a Formal Agreement (the "Agreement") with the Office of the Comptroller of the
Currency (the "OCC"). The Agreement was amended on March 22, 2004. 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.


                                       27

<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, 2003 and 2002 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, 2003, 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 April 21, 2003, 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, 2003 and 2002, and the results of
their operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

/s/  Stegman & Company

Baltimore, Maryland
February 6, 2004


                                       28

<PAGE>



IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS
                                                                                2003        2002

<S>                                                                           <C>         <C>
    Cash and cash equivalents:
    Cash and due from banks                                                   $  9,194    $  8,890
    Federal funds sold                                                              --       5,900
                                                                              --------    --------
                      Total cash and cash equivalents                            9,194      14,790
                                                                              --------    --------
   Interest-bearing deposits in other banks                                      1,337         887

   Securities available-for-sale, at fair value                                114,756     137,235

   Loans receivable - net of allowance for loan losses
     of $2,974 (2003) and $3,059 (2002)                                        164,816     134,859
   Bank premises and equipment - net                                             3,362       3,455
   Accrued interest receivable                                                   1,690       1,909
   Bank owned life insurance                                                     5,573          --
   Other assets                                                                  1,909       2,201
                                                                              --------    --------
TOTAL ASSETS                                                                  $302,637    $295,336
                                                                              ========    ========
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
    Noninterest bearing deposits                                              $ 66,243    $ 68,432
    Interest bearing deposits                                                  175,681     168,754
                                                                              --------    --------
                      Total deposits                                           241,924     237,186

    Short-term borrowings                                                       28,313      25,084
    Long-term borrowings                                                         4,000       4,000
    Accrued expenses and other liabilities                                       2,042       2,825
                                                                              --------    --------
                      Total Liabilities                                       $276,279    $269,095
                                                                              --------    --------
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                                                           17,787      16,310
    Accumulated other comprehensive income                                       2,352       3,712
                                                                              --------    --------
                      Total shareholders' equity                                26,358      26,241
                                                                              --------    --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                    $302,637    $295,336
                                                                              ========    ========
</TABLE>


See notes to consolidated financial statements


                                       29

<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 AND 2002
(DOLLARS IN THOUSANDS, EXCEPT  PER SHARE DATA)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                  2003        2002
<S>                                                                           <C>         <C>
INTEREST INCOME:
    Interest and fees on loans                                                $ 11,489    $ 10,976
    U.S. Treasury securities                                                        11          19
    Obligations of U.S. Government
        agencies and corporations                                                2,158       2,422
    Collateralized mortgage obligations                                          1,906       3,200
    Obligations of states and political subdivisions                             1,508       1,490
    Bank balances and other securities                                              79         106
    Federal funds sold                                                              50         235
                                                                              --------    --------
                      Total interest income                                     17,201      18,448
                                                                              --------    --------
INTEREST EXPENSE:
    Interest-bearing deposits                                                    1,860       2,507
    Time certificates over $100,000                                                569         699
    Short term borrowings                                                          251         462
    Long term borrowings                                                           181         453
                                                                              --------    --------
                      Total interest expense                                     2,861       4,121
                                                                              --------    --------
NET INTEREST INCOME                                                             14,340      14,327
PROVISION FOR LOAN LOSSES                                                          735          --
                                                                              --------    --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                             13,605      14,327
                                                                              --------    --------
NONINTEREST INCOME:
    Service charges on deposit and checking accounts                             3,146       2,922
    Other fee income                                                               997       1,001
    Gain on sale of securities                                                     907         512
    Gain on sale of loans                                                           --           6
    Other operating income                                                         215         106
                                                                              --------    --------
                      Total noninterest income                                   5,265       4,547
                                                                              --------    --------
NONINTEREST EXPENSE:
    Salaries and employee benefits                                               9,541       9,175
    Occupancy                                                                      978         916
    Furniture and equipment                                                      1,446       1,224
    Data processing                                                                771         854
    Advertising                                                                    204         195
    Other                                                                        3,715       4,138
                                                                              --------    --------
                      Total noninterest expense                                 16,655      16,502
                                                                              --------    --------
INCOME BEFORE INCOME TAXES                                                    $  2,215    $  2,372
INCOME TAX PROVISION                                                               178         325

NET INCOME                                                                    $  2,037    $  2,047
                                                                              ========    ========
BASIC AND DILUTED NET INCOME PER COMMON SHARE                                 $   3.01    $   3.03
                                                                              ========    ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                                     668,360     668,360
                                                                              ========    ========
</TABLE>

See notes to consolidated financial statements.


                                       30

<PAGE>



IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003 AND 2002
(DOLLARS IN THOUSANDS, EXCEPT  PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                       ADDITIONAL                   ACCUMULATED
                                             PREFERRED      COMMON      PAID-IN     RETAINED    OTHER COMPREHENSIVE
                                               STOCK        STOCK       CAPTIAL     EARNINGS        INCOME (LOSS)          TOTAL
<S>                                          <C>          <C>          <C>         <C>                <C>                <C>
BALANCE, JANUARY 1, 2002                     $    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


   Net income                                                                         2,037                 --              2,037
   Other comprehensive income, net of tax
     (unrealized loss on securities
     available-for-sale)                                                                                (1,360)            (1,360)
                                                                                                                         --------

          Total comprehensive income               --           --           --          --                 --                677

Cash dividends paid:
    Preferred stock $1.25 per share                --           --           --         (25)                                  (25)
    Common stock $0.80 per share                   --           --           --        (535)                --               (535)
                                             --------     --------     --------    --------           --------           --------

BALANCE, DECEMBER 31, 2003                   $    500     $    668     $  5,051    $ 17,787           $  2,352           $ 26,358
                                             ========     ========     ========    ========           ========           ========
</TABLE>

See notes to consolidated financial statements.


                                       31

<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                               2003         2002

<S>                                                                         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                              $  2,037     $  2,047
    Adjustments to reconcile net income
         to net cash provided by operating activities:
        Depreciation                                                             633          507
        Amortization of intangible assets                                         55          103
        Deferred income taxes                                                     76          131
        Amortization of investment premiums                                      821          393
        Gain on sale of investment securities                                   (907)        (512)
        Decrease in accrued interest receivable                                  219           19
        Decrease/(Increase) in other assets                                       64         (367)
        (Decrease)/Increase in accrued expenses and other liabilities           (109)       1,027
                                                                            --------     --------
                      Net cash provided by operating activities                2,889        3,348
                                                                            --------     --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from principal payments on securities available-for-sale         39,226       19,751
    Proceeds from maturities of investment securities available-for-sale      33,104       18,234
    Proceeds from sale of investment securities available-for-sale            25,601       20,775
    Purchase of investment securities available-for-sale                     (77,476)     (66,843)
    Net  increase in interest-bearing deposits in banks                         (450)          (5)
    Net (increase) decrease in loans                                         (29,957)         655
    Additions to bank premises and equipment, net                               (540)      (1,588)
    Purchase of BOLI                                                          (5,400)          --
                                                                            --------     --------
                      Net cash used in investing activities                  (15,892)      (9,021)
                                                                            --------     --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in deposits                                                $  4,738     $ 20,196
    Net increase (decrease) in short term borrowings                           3,229      (18,399)
    (Decrease) increase in long term borrowings                                   --       (6,000)
    Dividends paid                                                              (560)        (493)
                                                                            --------     --------
                       Net cash provided (used) in financing activities        7,407       (4,696)
                                                                            --------     --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                     (5,596)     (10,369)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                14,790       25,159
                                                                            --------     --------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                    $  9,194     $ 14,790
                                                                            ========     ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

        Income tax payments                                                 $    150     $    365
                                                                            --------     --------
        Interest payments                                                   $  2,971     $  4,513
                                                                            --------     --------
</TABLE>

See notes to consolidated financial statements.


                                       32

<PAGE>


IBW FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002
-------------------------------------------------------------------------------
(Dollars in thousands, except per share data)

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.

Nature of Business - The principal business of the Company is to make loans and
other investments and to accept time and demand deposits. The Company's primary
market areas are in the District of Columbia and surrounding areas, although the
Company's business development efforts generate business outside of these areas.
The Company offers a broad range of banking products, including a full line of
business and personal savings and checking accounts, money market demand
accounts, certificates of deposit, and other banking services. The Company funds
a variety of loan types including commercial and residential real estate loans,
commercial term loans and lines of credit, consumer loans, and letters of
credit. The Company's customers are primarily individuals and small businesses.

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. Declines in the fair value
of individual securities below their cost that are other than temporary result
in write-downs of the individual securities to their fair value. Factors
affecting the determination of whether an other-than-temporary impairment has
occurred include a downgrading of the security by a rating agency, a significant
deterioration in the financial condition of the issuer, or that management would
not have the intent and ability to hold a security for a period of time
sufficient to allow for any anticipated recovery in


                                       33

<PAGE>


fair value. The Company classifies all of its securities as available-for-sale.

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.

Loans are considered impaired when, based on current information, it is probable
that the Company will not collect all principal and interest payments according
to contractual terms. Generally, loans are considered impaired once principal
and interest payments are past due and they are placed on non-accrual.
Management also considers the financial condition of the borrower, cash flows of
the loan and the value of the related collateral. Impaired loans do not include
large groups of smaller balances homogenous credits such as residential real
estate, consumer installment loans, and commercial leases, which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (usually ninety
days or less) provided eventual collection of all amounts due is expected.
Impaired loans are measured based on the present value of future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, the Company may measure impairment based on a loan's observable
market price or the fair value of the collateral, if the loan is collateral
dependent. The Company recognizes interest income on impaired loans on a cash
basis if the borrower demonstrates the ability to meet the contractual
obligation and collateral is sufficient. If there is doubt regarding the
borrower's ability to make payments or the collateral is not sufficient,
payments received are accounted for as a reduction in principal.

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 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


                                       34

<PAGE>

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
Company 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 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.

Transfer of Financial Assets - Transfers of financial assets are accounted for
as sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when; (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.

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 $2,012 and $2,022 for
the years ended December 31, 2003 and 2002, respectively. EPS is computed based
on the weighted average number of common shares outstanding during the year
(668,360 for both 2003 and 2002). Basic and diluted EPS are the same, as the
Company had no dilutive common stock equivalents outstanding as of December 31,
2003 or 2002 and for the years then ended.

Income Taxes - The Company 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 based upon the results of
operations, adjusted for permanent differences between items of income or
expense reported in the financial statements and those reported for tax
purposes.


                                       35

<PAGE>


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 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 $2,258 and $2,240, at December 31, 2003
and 2002, respectively.

New Accounting Pronouncements - In April 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. There was no material
impact on the Company's financial condition or results of operations upon
adoption of this Statement.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both a liability and equity. It
requires that an issuer classify certain financial instruments as a liability,
although the financial instrument may previously have been classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003 and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. There was no material impact on
the Company's financial condition or results of operations upon adoption of this
Statement.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which covers guarantees such as standby
letters of credit, performance guarantees, and direct or indirect guarantees of
the indebtedness of others, but not guarantees of funding. FIN 45 requires a
guarantor to recognize, at the inception of a guarantee, a liability in an
amount equal to the fair value of the obligation undertaken in issuing the
guarantee, and requires disclosure about the maximum potential payments that
might be required, as well as the collateral or other recourse obtainable. The
recognition and measurement provisions of FIN 45 were effective on a prospective
basis after December 31, 2003, and its adoption by the Company on January 1,
2003 has not had a significant effect on the Company's consolidated financial
statements.

Reclassifications - Certain reclassifications have been made to the prior year's
consolidated financial statements to conform to the 2003 presentation.

2.       FORMAL AGREEMENT

         On April 21, 2003, Industrial Bank, N.A., the Company's subsidiary
bank, entered into a new Formal Agreement (the "Agreement") with the Office of
the Comptroller of the Currency (the "OCC"). The Agreement was amended on March
22, 2004.

         As amended, the Agreement is focused largely on adoption and
implementation of programs and internal controls to ensure compliance with the
Bank Secrecy Act, with the requirement to file Suspicious Activity Reports, and
with consumer laws and regulations, and with the development and implementation
of information technology and internet banking security policies and procedures,
including procedures and policies related to security of Bank and customer
information. It also requires additional planning and procedures with respect to
disaster recovery procedures and the retention, monitoring and oversight of
third party vendors. It also requires the Board to take all necessary steps to
ensure that Bank management corrects each violation of law, rule or regulation
cited in the current Report of Examination prepared by the OCC and in any
subsequent report of examination. It requires the Bank to adopt, implement and
ensure adherence to a performance management program designed to ensure
accountability through a


                                       36

<PAGE>

review process to demonstrate that the Board is discharging its responsibility
to properly supervise management.

         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 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.

         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. While the Bank believes that it has made significant
progress in addressing many of the requirements of the Agreement, and is
continuing its compliance efforts, it is not currently in full compliance with
the Agreement. 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.

3.       INVESTMENT SECURITIES

At December 31, 2003 and 2002, the amortized cost and approximate fair value of
securities available-for-sale were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31, 2003
                                                                            --------------------------------------------------
                                                                                           GROSS        GROSS
                                                                            AMORTIZED    UNREALIZED    UNREALIZED    ESTIMATED
                                                                              COST         GAINS        LOSSES       FAIR VALUE

<S>                                                                         <C>          <C>           <C>           <C>
U.S. Treasury Notes                                                         $   1,003    $       1     $      --     $   1,004
U.S. Government Agencies                                                       59,045        1,400           (63)       60,382

Mortgage-Backed Securities:
    Pass-through securities:
        Guaranteed by GNMA                                                          2           --            --             2
        Issued by FNMA and FHLMC                                                5,346          138            (3)        5,481

Collateralized Mortgage Obligations:
        Collateralized by FNMA, FHLMC and
            GNMA mortgage-backed securities                                    20,586          461            (3)       21,044

Securities issued by states and political subdivisions:
        General obligations                                                    14,261          924            --        15,185
        Revenue obligations                                                     9,815          667            --        10,482
                                                                            ---------    ---------     ---------     ---------
Total debt securities                                                         110,058        3,591           (69)      113,580
                                                                            ---------    ---------     ---------     ---------

Federal Reserve Bank stock                                                        208           --            --           208
Federal Home Loan Bank stock                                                      797           --            --           797
Marketable equity securities                                                      129           42            --           171
                                                                            ---------    ---------     ---------     ---------
Total equity securities                                                         1,134           42            --         1,176
                                                                            ---------    ---------     ---------     ---------

TOTAL                                                                       $ 111,192    $   3,633     $     (69)    $ 114,756
                                                                            =========    =========     =========     =========
</TABLE>


                                       37

<PAGE>


<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>



Gross unrealized losses and fair value by length of time that the individual
available-for-sale securities have been in a continuous unrealized loss position
at December 31, 2003 are as follows:

<TABLE>
<CAPTION>
                                      Continuous unrealized losses existing
                                                        for:
                                      -------------------------------------
                                      Less than 12             More than 12       Total Unrealized
                     Fair Value          months                   months               Losses
                     ----------       ------------             ------------       ----------------
<S>                    <C>               <C>                   <C>                    <C>

U.S. Agency            $20,181           $   (63)              $     0                $   (63)
Mortgage-backed        $ 3,643           $    (6)              $     0                     (6)
                       -------           -------               -------                -------
                       $23,824           $   (69)              $     0                $   (69)
                       =======           =======               =======                =======
</TABLE>

The available-for-sale investment portfolio has a fair value of approximately
$115 million of which approximately $24 million of the securities have some
unrealized losses from their purchase price. Of these securities, $20 million,
or 85%, are government agency bonds and $4 million, or 15% are mortgage-backed
securities. All of the bonds are rated AAA. The securities representing the
unrealized losses in the available-for-sale portfolio all have modest duration
risk, low credit risk, and less than 1% loss when compared to book value. The
unrealized losses that exist are the result of market changes in interest rates
since the original purchase. These factors coupled with the fact the Company has
both the intent and ability to hold these investments for a period of time
sufficient to allow for any anticipated recovery in fair value substantiates
that the unrealized losses in the available-for-sale portfolio are temporary.


                                       38

<PAGE>


The following is a summary of the amortized cost and estimated fair value of
debt securities available-for-sale by contractual maturity as of December 31,
2003. 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

                                                           ESTIMATED
                                            AMORTIZED         FAIR
                                              COST           VALUE

Due in one year or less                     $ 23,546       $ 23,641
Due after one year through five years         36,490         37,759
Due five through ten years                    21,845         23,157
Due after ten years                            2,243          2,496
Mortgage-backed securities                    25,934         26,527
                                            --------       --------
Total debt securities                        110,058        113,580

Federal Reserve Bank Stock                       208            208
Federal Home Loan Bank Stoc                      797            797
Marketable securities                            129            171
                                            --------       --------
Total equity securities                        1,134          1,176

TOTAL                                       $111,192       $114,756
                                            ========       ========



Proceeds from the sale of securities available-for-sale were $25,601 and $20,775
for the years ended December 31, 2003 and 2002, respectively, and resulted in
realized gains of $907 for 2003 and $512 for 2002.

Securities of $30,620 and $30,395 at December 31, 2003 and 2002 were pledged as
collateral for public deposits and for other purposes required by law. At
December 31, 2003 and 2002, the carrying value of securities underlying
repurchase agreements was $31,985 and $39,431, respectively.

4.       LOANS RECEIVABLE

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

                                                              2003       2002
                                                            -------------------
Real estate loans:
    Collateralized by residential property:
        First mortgages                                     $ 79,227   $ 60,678
        Second mortgages                                       2,605      2,229
    Collateralized by non-residential properties              66,852     60,333
Commercial                                                    10,550      8,686
Installment                                                       --         --
     Total

                                                             168,454    138,576

Less:
    Deferred fees and costs, net                                 664        658
    Allowance for loan losses                                  2,974      3,059
                                                            --------   --------

Net loans                                                   $164,816   $134,859
                                                            ========   ========


                                       39

<PAGE>

Major loan concentrations are as follows (in thousands):


                                                              2003       2002
                                                            -------------------
Church loans collateralized by real
   estate                                                   $ 21,892   $ 21,423
Installment loans to churches                                     44         34
Commercial loans to churches                                     625        285
                                                            --------   --------
Total loans to churches                                     $ 22,561   $ 21,742
                                                            ========   ========

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:

                                      2003           2002

Balance, beginning of year          $ 3,059        $ 3,283
    Provision for loan losses           735             --
    Recoveries                          366            497
    Charge-offs                      (1,186)          (721)
                                    -------        -------
Balance, end of year                $ 2,974        $ 3,059
                                    =======        =======

At December 31, 2003 and 2002, loans that were considered to be impaired totaled
$1,631 and $1,712, respectively. The related allowance allocated to impaired
loans was $263 and $251 at December 31, 2003 and 2002, respectively. The average
balance of impaired loans for the years ended December 31, 2003 and 2002 was
$1,912 and $1,756, respectively. Interest income that was not recorded on
impaired loans for the years ended December 31, 2003 and 2002 was $151 and $142,
respectively.

Loans serviced for others and not reflected in the balance sheets are $9,279 and
$16,099 at December 31, 2003 and 2002, 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. There were no mortgage servicing rights capitalized during 2003 and 2002.

Amortization of mortgage servicing rights totaled $34 for both years ended
December 31, 2003 and 2002. Net servicing rights assets totaled $132 and $166 at
December 31, 2003 and 2002, respectively.

5.       BANK PREMISES AND EQUIPMENT

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

                                           2003           2002
Bank premises                            $ 2,677        $ 2,665
Furniture, fixtures, and equipment         6,024          5,496
                                         -------        -------
TOTAL                                    $ 8,701        $ 8,161
Less accumulated depreciation             (5,339)        (4,706)
                                         -------        -------
Bank premises and equipment, net         $ 3,362        $ 3,455
                                         =======        =======


                                       40

<PAGE>


Depreciation expense for the years ended December 31, 2003 and 2002 is $633 and
$507, respectively.

6.       INTANGIBLE ASSETS

The significant components of acquired intangible assets are as follows as of
December 31 (in thousands):

<TABLE>
<CAPTION>
                                              2003                                                2002
                           ---------------------------------------------     -----------------------------------------------
                                                              WEIGHTED                                            WEIGHTED
                            GROSS                    NET      AVERAGE         GROSS                      NET      AVERAGE
                          CARRYING   ACCUMULATED   CARRYING  REMAINING       CARRYING   ACCUMULATED   CARRYING   REMAINING
                           AMOUNT    AMORTIZATION   AMOUNT   LIFE (YEARS)    AMOUNT     AMORTIZATION   AMOUNT    LIFE (YEARS)
                                                             -----------     --------                 --------   -----------

<S>                         <C>          <C>         <C>         <C>          <C>           <C>         <C>         <C>
Unidentifiable
  intangible
  assets resulting
  from branch
  acquisitions              $821         $523        $298        5.5          $ 821         $468        $353        6.5
</TABLE>


Future annual estimated annual amortization expense (in thousands):

     2004          $55
     2005           55
     2006           55
     2007           55
     2008           55

7.       DEPOSITS

Deposits consist of the following (in thousands) at December 31, 2003:

<TABLE>
<CAPTION>
                                                DEMAND        SAVINGS        TIME         TOTAL

<S>                                             <C>           <C>          <C>          <C>
Individuals, partnerships, and
    corporations                                $88,911       $78,099      $54,824      $221,834
U.S. government                                      18            --          100           118
States and political subdivisions                    --        13,516        4,100        17,616
Certified and official checks                     2,356            --           --         2,356
                                                -------       -------      -------      --------
Total                                           $91,285       $91,615      $59,024      $241,924
                                                =======       =======      =======      ========
Weighted average interest rate                                 0.82%        1.61%
                                                               =====        =====
</TABLE>


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>


                                       41

<PAGE>


Demand deposits represent non-interest-bearing deposit accounts. Individual
certificates of deposit of $100 or more at December 31, 2003 and 2002, totaling
$28,302 and $32,536, respectively, are included in time deposits. The Bank has
no brokered deposits.

At December 31, 2003, the scheduled maturities of Time Deposits are as follows
(in thousands):

                                                               AVERAGE RATE
2004                                           $39,083             1.33%
2005 and 2006                                   13,468             1.94%
After 2006                                       6,473             2.57%
                                               -------
                                               $59,024

8.       SHORT-TERM BORROWINGS

At December 31, 2003 and 2002, securities sold under agreements to repurchase
were $25,313 and $25,084 respectively. The outstanding repurchase agreements had
an average interest rate of 0.90% and 1.17% at December 31, 2003 and 2002,
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, 2003 and 2002 had a fair value of $31,985 and
$39,431, respectively. All outstanding repurchase agreements at December 31,
2003 and 2002 matured on January 1, 2004 and 2003, respectively. The average
balance and the average interest rate for the year ended December 31, 2003 and
2002 were $26,286 and 0.98% and $36,147 and 1.28%, respectively. The maximum
amounts outstanding during the years ended 2003 and 2002 were $30,916 and
$44,982, respectively. At December 31, 2003, the Company has a $3,000 short-term
advance (within one year) from the FHLB, with a fixed rate of interest of 1.15%.

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 $7,000 was outstanding at
December 31, 2003. 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, 2003, the Company has a $4,000 long-term advance from the
FHLB, with a fixed rate of interest of 4.53%. The long-term advance is scheduled
to mature in 2006. There are no call provisions associated with these
borrowings, however prepayment penalties may apply.

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, 2003 the Bank would not need prior
approval from OCC unless a declaration of dividends exceeded $6,553.

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


                                       42

<PAGE>

accounting practices. The Bank's capital amounts and its classification under
the regulatory framework for prompt corrective action are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios of
total and Tier 1 capital, as defined in the regulations, to risk-weighted
assets, as defined, and of Tier 1 Capital, as defined, to average assets, as
defined. Management believes, as of December 31, 2003, that the Corporation and
Bank meet all the capital adequacy requirements to which they are subject.

As of December 31, 2003, 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, 2003 and 2002, are set forth in the following table (in
thousands):

<TABLE>
<CAPTION>
                                                                                                  TO BE CATEGORIZED AS
                                                                                                    WELL CAPITALIZED
                                                                                                      UNDER PROMPT
                                                                           FOR CAPITAL             CORRECTIVE ACTION
                                                   ACTUAL               ADEQUACY PURPOSES              PROVISIONS
                                              AMOUNT      RATIO         AMOUNT       RATIO         AMOUNT       RATIO
 <S>                                            <C>         <C>            <C>          <C>           <C>         <C>
 As of December 31, 2003
     Total capital (to risk-weighted
       assets)
             Corporation                        $25,764     15.85%         13,006       8.00%           $N/A        N/A%
             Bank                                25,254     15.55          12,993       8.00          16,241      10.00
     Tier I capital (to risk-weighted
       assets)
             Corporation                         23,722     14.59           6,503       4.00             N/A        N/A
             Bank                                23,212     14.29           6,496       4.00           9,745       6.00
     Tier I capital (to average assets)
             Corporation                         23,722      7.72          12,298       4.00             N/A        N/A
             Bank                                23,212      7.55          12,291       4.00           8,120       5.00
 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
</TABLE>


                                       43

<PAGE>


12.      INCOME TAXES

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

                                        2003           2002

Current:
    Federal income tax                 $ 84            $159
    State income tax                     18              35
                                       ----            ----

                                        102             194

Deferred:
    Federal income tax                   63             107
    State income tax                     13              24
                                       ----            ----
                                         76             131
                                       ----            ----
Total                                  $178            $325
                                       ====            ====


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

                                                      2003             2002

Provisions for losses on loans and other
    real estate owned                                 $ 67              65
Deferred loan fees                                     (69)             55
Depreciation                                            77            $  8
Other                                                    1               3
                                                      ----            ----
Total                                                 $ 76            $131
                                                      ====            ====



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>
                                                              2003                               2002
                                                    AMOUNT           PERCENT           AMOUNT           PERCENT

<S>                                                  <C>              <C>               <C>              <C>
Federal tax expense at statutory rate                $ 753            34.0%             $ 806            34.0%
State tax expense, net of federal tax benefit           --              --                  9             0.4%
Tax-exempt interest                                   (494)          (22.3)%             (471)          (19.9)%
BOLI                                                   (22)           (1.0)%               --              --
Other                                                  (59)           (2.7)%              (19)           (0.8)%
                                                     -----           ------             -----           -----
Total                                                $ 178             8.0%             $ 325            13.7%
                                                     =====           =====              =====           =====
</TABLE>


                                       44

<PAGE>


The tax effects of items comprising the Company's deferred tax assets
(liabilities) at December 31, 2003 and 2002 are as follows (in thousands):

                                                            2003        2002
Deferred tax assets:
Allowance for losses on loans and other real
 estate owned                                             $   737     $   804
Deferred loan fees                                            246         177
Other                                                          97          98
Net operating loss associated with prior period
 restatement                                                  797         797
                                                          -------     -------
        Total deferred tax assets                           1,877       1,876
Valuation allowance                                          (797)       (797)
                                                          -------     -------
Deferred tax assets - net                                   1,080       1,079
                                                          -------     -------

Deferred tax liabilities:
   Unrealized gain on available-for-sale securities        (1,197)     (1,903)
   Depreciation                                              (166)        (89)
   Other                                                      (17)        (17)
                                                          -------     -------
        Total deferred tax liabilities                     (1,380)     (2,009)
                                                          -------     -------
        Net deferred tax liabilities assets               $  (300)    $  (930)
                                                          =======     =======

A valuation allowance was established for the tax benefit resulting from a loss
discovered in 2002 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 $146 and
$160 for 2003 and 2002, respectively.

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 $100 and
$138 were made for 2003 and 2002, respectively. At December 31, 2003 and 2002,
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, 2003 and 2002 the Bank had commitments to fund loans outstanding
for approximately $20,458 and $18,283, respectively. The Bank also has standby
letters of credit outstanding at December 31, 2003 and 2002 in the amount of
$280 and $330, 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.


                                       45

<PAGE>


At December 31, 2003, 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):

2004                                      $401
2005                                       129
2006                                        47
2007                                        43
2008                                        44
After 2008                                  88
                                          ----
Total                                     $752
                                          ====

Rent expense for the years ended December 31, 2003 and 2002 was $395 and $409,
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, 2003 and 2002. 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.


                                       46

<PAGE>


<TABLE>
<CAPTION>
(IN THOUSANDS)                           DECEMBER 31, 2003             DECEMBER 31, 2002
                                      -----------------------       -----------------------
                                        CARRYING       FAIR         CARRYING         FAIR
                                         VALUE        VALUE          VALUE          VALUE
<S>                                   <C>            <C>            <C>            <C>
Assets:
    Cash and cash equivalents         $  9,194       $  9,194       $ 14,790       $ 14,790
    Interest-bearing deposits            1,337          1,337            887            887
    Investment securities              114,756        114,756        137,235        137,235
    Loans, net                         164,816        166,931        134,859        137,730
    Accrued interest receivable          1,690          1,690          1,909          1,909

Liabilities:
    Deposits                          $241,924       $242,313       $237,186       $237,581
    Short term borrowings               28,313         28,313         25,084         25,084
    Long term borrowings                 4,000          4,085          4,000          4,470
    Accrued interest payable               293            293            293            293
</TABLE>

17.      RELATED PARTY TRANSACTIONS

In the normal course of banking business, loans are made to officers and
directors. At December 31, 2003 and 2002, these loans totaled $1,133 and $649,
respectively.

Related party loans - beginning of year:                $  649       $ 640
   New loans granted                                    $  591       $ 288
   Change in employee status                            $  235          --
   Repayments                                           $ (342)      $(279)
                                                        ------       -----
Related party loans - end of year:                      $1,133       $ 649

18.      OTHER EXPENSES

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

                                                     YEARS ENDED DECEMBER 31
                                                     ------------------------
(In thousands)                                        2003              2002
                                                     ------           -------

Director fees                                        $  217           $  263
Professional fees                                       479              675
Loan collection and repossession expenses                81              180
Bank security                                           329              316
Other                                                 2,609            2,704
                                                     ------           ------
Total Other Expenses                                 $3,715           $4,138
                                                     ======           ======


                                       47

<PAGE>


19.      PARENT COMPANY FINANCIAL INFORMATION

The condensed financial statements of IBW Financial Corporation (parent company
only) as of December 31, 2003 and 2002, and for the years ended December 31,
2003 and 2002, follow (in thousands):

Balance Sheets                                       2003          2002
--------------
Assets:
    Deposits with subsidiary                       $   361       $    53
    Securities available-for-sale                      171           154
    Investment in subsidiary - equity method        25,848        26,049
        Total Assets                               $26,380       $26,256
                                                   =======       =======
Liabilities and Shareholders' Equity:
    Liabilities:
        Other                                      $    22       $    15
                                                   -------       -------
            Total Liabilities                           22            15
                                                   -------       -------
Shareholders' Equity
    Preferred stock                                    500           500
    Common stock                                       668           668
    Additional paid in capital                       5,051         5,051
    Retained earnings                               17,787        16,310
    Accumulated other comprehensive income           2,352         3,712
                                                   -------       -------
            Total Shareholders' Equity              26,358        26,241
                                                   -------       -------

Total Liabilities and Shareholders' Equity         $26,380       $26,256
                                                   =======       =======


                                       48

<PAGE>


<TABLE>
<CAPTION>
Statements of Income                                              2003           2002
--------------------
<S>                                                              <C>            <C>
Dividends from subsidiary and other income                       $   876        $   483
Expenses                                                               8             --
                                                                 -------        -------
Income before undistributed net earnings of subsidiary               868            483
Equity in undistributed net earnings of subsidiary                 1,169          1,564
                                                                 -------        -------
Net income                                                       $ 2,037        $ 2,047
                                                                 =======        =======

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

Cash Flows from Operating Activities:
    Net income                                                   $ 2,037        $ 2,047
    Adjustments to reconcile net income to net
        cash provided by operating activities:
        Equity in undistributed net earnings of subsidiary         1,169         (1,564)
        Other                                                         --             (2)
                                                                 -------        -------
                Net cash provided by operating activities            868            481
Cash Flows from Financing Activities: payment of dividends          (560)          (493)
                                                                 -------        -------
Increase (Decrease) in Deposits with Subsidiary                      308            (12)

Deposits with Subsidiary, Beginning of the Year                       53             65
                                                                 -------        -------
Deposits with Subsidiary, Ending of the Year                     $   361        $    53
                                                                 =======        =======
</TABLE>



ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.

         None.

ITEM 8A.  CONTROLS AND PROCEDURES

         The Company's management, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer,
evaluated, as of the last day of the period covered by this report, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-15(e) 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 changes in the Bank's internal control
over financial reporting (as defined in Rule 13a-15 under the Securities Act of
1934) during the quarter ended December 31, 2003 that has materially affected,
or is reasonably likely to materially affect, the Bank's internal control over
financial reporting.

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Code of Ethics. The Company has adopted a Code of Ethics that applies
to the President and Senior Vice President/Chief Financial Officer. The Company
will provide a copy of the Code of Ethics without charge upon written request
directed to Thomas Mclaurin, Vice President - Corporate Affairs, IBW Financial
Corporation, 4912 Georgia Avenue, Washington DC 20011. The information required
by this Item is incorporated by reference to, the material appearing under the
captions "Election of Directors - Directors and Nominees for Election as
Director" and "-


                                       49

<PAGE>

Meetings, Committees and Processes of the Board of Directors" and "Management
and Executive Compensation - Executive Officers Who are Not Directors" in the
Company's definitive proxy statement for the 2004 Annual Meeting of
Shareholders.

ITEM 10.  EXECUTIVE COMPENSATION.

         The information required by this Item is incorporated by reference to,
the material appearing under the captions "Management and Executive Compensation
- Executive Compensation" and "- Compliance with Section 16(a) of the Securities
Act of 1934" in the Company's definitive proxy statement for the 2004 Annual
Meeting of Shareholders.

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 under the caption "Share Ownership of Directors, Executive Officers
and Certain Beneficial Owners" in the Company's definitive proxy statement for
the 2004 Annual Meeting of Shareholders.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by this Item is incorporated by reference to,
the material appearing under the caption - "Management and Executive
Compensation - Certain Relationship and Related Transactions" in the Company's
definitive proxy statement for the 2004 Annual Meeting of Shareholders.


                                       50

<PAGE>


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

31(a)             Section 302 Certification of B. Doyle Mitchell, Jr.
31(b)             Section 302 Certification of Thomas A. Wilson, Jr.
32(a)             Certification of B. Doyle Mitchell, Jr.
32(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.

(B)  REPORTS ON FORM 8-K

         No reports on Form 8-K were filed during the fourth quarter of 2003.

Item 14. Principal Accountant Fees and Services The information required by this
Item is incorporated by reference to the material appearing under the caption
"Independent Public Accountant - Fees Paid to Independent Accounting Firm" in
the Company's definitive proxy statement for the 2004 Annual Meeting of
Shareholders.


                                       51

<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 30, 2004                   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 30, 2004
------------------------------------
Clinton W. Chapman

 /s/ B. Doyle Mitchell, Jr.                 President, Chief Executive Officer          March 30, 2004
------------------------------------        And Director (Principal Executive Officer)
B. Doyle Mitchell, Jr.

 /s/ Massie S. Fleming                      Secretary and Director                      March 30, 2004
------------------------------------
Massie S. Fleming

 /s/ Robert R. Hagans                       Director                                    March 30, 2004
------------------------------------
Robert R. Hagans

 /s/ Benjamin L. King                       Vice Chairman of the Board                  March 30, 2004
------------------------------------          of Directors
Benjamin L. King

/s/ Pamela King                             Director                                    March 30, 2004
------------------------------------
Pamela King

 /s/ Cynthia T. Mitchell                    Director                                    March 30, 2004
------------------------------------
Cynthia T. Mitchell

 /s/ Emerson A. Williams                    Director                                    March 30, 2004
------------------------------------
Emerson A. Williams

 /s/ Thomas A. Wilson                       Senior Vice President, Treasurer            March 30, 2004
------------------------------------        (Principal Financial and
Thomas A. Wilson, Jr.                       Accounting Officer)

</TABLE>


                                       52