Exhibit 13

       Annual Report to Shareholders for the Year Ended December 31, 1997

<PAGE>


          Where we're GOING has everything to do with where we've BEEN


                              [Graphics Omitted]


<PAGE>

Annual Message To Shareholders

Throughout  1997,  Industrial  Bank, N.A. (IBNA) remained true to our mission of
continuously  improving  long-term  profitability,   community  development  and
customer service.  In an industry that has become increasingly  impersonal,  our
focus on personal  service has become a competitive  advantage.  Many steps have
been  taken  to  retain  this  edge,   including   conducting  the  Bank's  most
comprehensive  market research ever to keep us attuned to existing and potential
customer needs, industry advances and economic trends.

We also  restructured  Branch  Administration  into a Retail  Banking  Division;
strengthened our mortgage department infrastructure;  employed new technology to
keep us competitive  in loan  underwriting;  and utilized bond programs,  in the
District  and Prince  George's  County,  which  allowed  us to offer  first-time
homebuyers below-market rate loans.

IBNA  continued  to expand in 1997 with the  opening of the  Brookland/Woodridge
branch.  The  event  received  unprecedented  community,  government  and  media
participation, and deposits exceeded our year-end projections.  Additionally, we
began long-range strategic planning and organizational development with the help
of  developmental  specialists  to reshape the Bank's  structure,  processes and
operations over the next three to five years.

During 1997, the Bank's financial condition  continued to strengthen,  with a 20
percent increase in earnings due to improved asset quality,  controlled overhead
expense and increased non-interest income. Capital grew to over $20 million, the
highest ever in the Bank's history, and our total capital ratio is 17 percent.

With the start of the new year came the  retirement of EVP Massie  Fleming after
46 years of service. We are pleased that she will continue to serve on the Board
of Directors. Another board member, Mrs. Margaret Stewart, resigned in February.
Her business  acumen was a great resource and we are thankful for her service to
the Bank.

As we move  forward  into 1998 and the next  millennium,  we will  continue  our
diligent  efforts in laying a strong  foundation for the future.  We will take a
more  conservative  credit  posture to protect  against  unanticipated  economic
upheavals.  And, we will keep our energies  focused on our most prized assets --
our employees and our customers.

/s/  Clinton W. Chapman                     /s/   B. Doyle Mitchell, Jr. 
---------------------------                 --------------------------- 
Clinton W. Chapman                          B. Doyle Mitchell, Jr.
Chairman of the Board                       President

<PAGE>
IBW Financial Corporation
INDUSTRIAL BANK, N.A.
BOARD OF DIRECTORS

B. Doyle Mitchell, Jr., President
Massie S. Fleming, Executive Vice President
Clinton W. Chapman,  Esq.,  Chairman of the Board,  Senior Partner,  Chapman and
Chapman, Attorneys
Cynthia T. Mitchell, Educator
Emerson A. Williams, M.D., Physician
Marjorie H. Parker, Ph.D., Educator
George H. Windsor,  Esq., Vice Chairman of the Board,  Cobb,  Howard,  Hayes and
Windsor, Attorneys
Margaret B. Stewart, President, Stewart Funeral Home (retired 1998)
Robert L. White, LL.D., Chairman, N.A.P.F.E. Credit Union
Benjamin L. King, CPA, Secretary of the Board, Consultant


IBW FINANCIAL CORPORATION OFFICERS

Clinton W. Chapman,  Esq.,  Chairman of the Board,  Senior Partner,  Chapman and
Chapman, Attorneys
B. Doyle Mitchell, Jr., President, Chief Executive Officer
Massie S. Fleming, Executive Vice President
Benjamin L. King, CPA, Secretary of the Board, Consultant
<PAGE>
<TABLE>
<CAPTION>
<S>                        <C>    <C>                         <C>                                 <C>  
                                                              Evelyn Y. Robinson                   CUSTOMER SERVICE
                                                              Assistant Secretary                  MANAGERS (CONT.)
                                                                                                                   
                                                              ASSISTANT VICE-PRESIDENTS            Haile M. DeBass 
                       [Graphics Omitted]
                                                                                                   Georgia Avenue Office   
                                                              Nathan W. Evans, CPA                             
                                                              Internal Auditor                     Veronica Henry 
                                                                                                   Forestville Office
                                                              Reta G. Felder                                         
                                                              Commercial Loans                     Ruth Mathis       
                                                                                                   Reeves Center Office
                                                              Patricia A. Mitchell                                    
                                                              Commercial Real Estate Loans         Cora B. Stancil    
                                                                                                   J.H. Mitchell Office 
                                                              Debra B. Thornton                                                 
                                                              Director, Human Resources            Estee Wells        
                                                                                                   J.H. Mitchell Office
                                                              Vernard J. Tyson                                                 
                                                              Consumer Loans                      DC ADVISORY BOARD   
                                                                                                                   
                                                              Garfield M. Vann                    Yetta W. Galiber,   
                                                              Accounting                          Chairman            
                                                                                                  ViCurtis Hinton     
                                                              Sharon B. Zimmerman                 H. Greig Cummings   
                                                              Director, Marketing                 Patricia C. Lightfoot
                                                              Community Reinvestment              Ronald K. Crockett
INDUSTRIAL BANK, N.A.                                                                             Dr. Ettyce Moore      
OFFICERS                                                      RETAIL BANKING OFFICERS             William R. Claytor, MD 
Executives                     VICE-PRESIDENTS                Jeffrey A. Banks                    Rev. A. Knighton Stanley
B. Doyle Mitchell, Jr.         Claude O. Barrington           American University Office          Warren Strudwick, MD  
President                      Bank Counsel                   Reeves Center Office                Patricia A. Mitchell 
                                                                                                  Elizabeth Lisboa-Farrow
Massie S. Fleming              Michael S. Betton              Herbert C. Harris, Jr.              James N. McGuffey         
Executive Vice President       Information Systems            Georgia Avenue Office               Maximo Pierola         
                               Wilfred Braveboy               Elizabeth Hundley                   Fay G. Knight 
David G. Poole                 Real Estate Loans              J.H. Mitchell Office                Secretary     
Senior Vice President,                                                                              
Operations                     Rodney D. Epps                 Marilyn L. Jumalon                                         
                               Communications                 Oxon Hill Office                               
Richard Williams, Jr.                                         Forestville Office                  
Senior Vice President,         Effie M. Faucett                                                            
Chief Lending Officer          Operations                     Saundra G. Turpin                   PRINCE GEORGE'S        
                                                              Brookland/Woodridge Office          ADVISORY BOARD      
Thomas A. Wilson, Jr.          JB Holston                     F Street Office                                            
Senior Vice President,         Retail Banking Division                                            Wayne Clarke           
Controller                                                    CUSTOMER SERVICE MANAGERS           Charles Dukes, Jr.     
                               Vinson T. McCarty                                                                
                               Consumer Loans                 Elmira Bell                         Reverend Gloria Miller 
Lester W. Johnson                                             Brookland/Woodridge Office                      
Senior Vice President,         Roy Moss, Jr.                                                      Duane W. Oates         
Chief Credit Officer           Commercial Loans               Pamela Branch                       Chuck Royster                    
                                                              Georgia Avenue Office               Pastor John A. Cherry  
                                                                                                  Norma Stewart          
                                                              Joyce L. Burns                          
                                                              F Street Office                     Rev. Eugene Weathers   
                                                                                                       
                                                              Rovenia Daniels                     Fay G. Knight,       
                                                              11th Street Office                  Secretary            
</TABLE>
<PAGE>
1997: Hard Work Pays Off

In 1997, considerable progress was made to position Industrial Bank as the first
choice for individuals  seeking a  locally-based,  autonomous  institution  that
prides itself on one-on-one  customer service.  Throughout the year,  Industrial
Bank  continued  to make  strides  to  establish  itself  as a  forward-looking,
community-based   bank  without  straying  from  its  history  of  long-standing
traditions and values.

A Different Kind Of Structure

Steps were taken to completely  restructure Branch  Administration.  Renamed the
Retail Banking  Division,  the  department is now divided into six groups,  each
headed  by a Retail  Banking  Officer  (RBO).  In  addition  to  managing  their
respective  branches,  the RBO's  now have the  responsibility  of new  business
development,  community  relations  and  enhancing a friendly  and  professional
office  environment.  It is our  belief  that this  reorganization  will  ensure
effective relationships among the various departments within the bank as well as
foster an environment of quality personal service.


                               [Graphics Omitted]

<PAGE>
Strong And Growing

Continuing our growth strategy and our commitment to the Washington Metropolitan
community,  IBNA opened our ninth local branch office in the Brookland/Woodridge
neighborhood of Northeast Washington, D.C. Community leaders, who played a large
role in bringing Industrial Bank to the Brookland/Woodridge  location,  strongly
believed that the bank would play a significant  role in the  revitalization  of
the area -- and it has. Additionally,  by the end of 1997 the new branch had not
only met, but had surpassed its projections of new business (deposit growth).

A Positive Atmosphere

IBNA  recognizes  that the key to quality  customer  service is a satisfied work
force.  As a result,  we are committed to providing a challenging  and equitable
working environment for our employees.  This year, branch employees were offered
Service Excellence Training; a new 401(k) retirement plan was established; and a
new short-term disability benefits package was added at no cost to the employee.
IBNA  realizes the  importance of quality  compensation  packages and has worked
hard to ensure that the bank remains competitive within the industry.


                               [Graphics Omitted]

<PAGE>

1998: Making Things Happen

With the approach of the 21st  century,  IBNA has chosen to respond to a growing
customer desire for an alternative to big name,  impersonal  banking giants.  As
Washington's  largest African  American-owned  commercial bank, IBNA understands
the needs of the various  communities and plans to launch an aggressive campaign
to capture a larger share of the local markets.

Staying Competitive

IBNA's number one priority is to continue to explore and launch new products and
services targeted to meet the needs of the Washington Metropolitan community. In
1998, IBNA's focus will be to aggressively market mortgage services; promote the
VISA Check Card; and provide cash management  programs and 24-hour telephone and
PC banking. Additionally,  IBNA has plans to repackage products for a variety of
target audiences including youth, young professionals, senior citizens and small
businesses.

                             [Graphics Omitted]
<PAGE>
Spreading The Word

Building  awareness of IBNA's  products,  personal  services and benefits is the
means to the expansion of IBNA's unique position in the marketplace. An enhanced
corporate image will be established in 1998 through a new,  ongoing  advertising
and marketing  campaign.  This campaign was designed to build on the strength of
the  Industrial  Bank  name  and  to  positively  reflect  IBNA's   longstanding
commitment  to  meeting  the  needs  of   individuals,   small   businesses  and
organizations.

It Takes Teamwork

Growth and  professional  development of employees  continues to be of paramount
importance.  An emphasis on training and employee  development in 1998 will help
to achieve higher levels of customer  retention and personal  customer  service.
The  professional  environment  will  continue  to  foster,  promote  and reward
teamwork through employee incentive programs.  Additionally, we are initiating a
comprehensive  analysis of our  facilities to accommodate  personnel  growth and
technological advances over the next five years.


                               [Graphics Omitted]


 <PAGE>
<TABLE>
<S>                                                                                    <C>
An Ongoing Commitment                                                                   
                                                                                        Washington    
For over 60 years,  Industrial Bank has delivered  essential banking services to                                  
the Washington Metropolitan  Community.  Throughout the years, IBNA's commitment        Georgia Avenue                           
can be seen not only in its role as a vital financial  institution,  but also as        ATM - Drive-in                           
an active participant in a variety of charitable projects.                              4812 Georgia Avenue, N.W.                 
                                                                                        Washington, D.C. 20011                  
With nine branch offices located throughout  communities in the area, Industrial        (202) 722-2025                          
Bank  has  had the  opportunity  to  participate  in  many  worthwhile  programs                                              
including:                                                                              Frank D. Reeves Municipal Center office   
                                                                                        ATM and Metro Green Line                  
                                                                                        2000 Fourteenth Street, N.W.              
                                                                                        Washington, D.C. 20009                    
ACORN Bank Fair                                                                         (202) 722-2075                            
                                                                                                                                  
Annual Georgia Avenue Clean-up Day                                                      U Street office                           
                                                                                        ATM and Metro Green Line                  
Banks-In-School Program                                                                 2000 Eleventh Street, N.W.                
                                                                                        Washington, D.C. 20001                    
Black Business Entrepreneur Expo                                                        (202) 722-2050                            
                                                                                                                                  
Black History Month                                                                     F Street office Metro Center              
                                                                                        1317 F Street, N.W.                       
Cardoza High School's Banking and Sports Management Partnership                         Washington, D.C. 20004                    
                                                                                        (202) 722-2060                            
Collective Banking Group Job Fair                                                                                                 
                                                                                         J.H. Mitchell office                     
Community Empowerment Day                                                                ATM - Drive-In                           
                                                                                         Metro Benning Road                       
Coolidge High School Career Day                                                          45th and Blaine Streets, N.E.            
                                                                                         Washington, D.C. 20019                   
MANNA House-Raising Project on U Street                                                  (202) 722-2065                           
                                                                                                                                  
Neighborhood Advisory Boards                                                             Brookland Woodridge Office               
                                                                                         2012 Rhode Island Ave., N.E.             
Prince George's County Housing Fair                                                      Washington, D.C. 20018                   
                                                                                         (202) 722-2038                           
Small Business/Home Buyer Seminars                                                                                                
                                                                                         American  University Office              
Ward 5 Community Day                                                                     ATM                                      
                                                                                         4400 Massachusetts Avenue, N.W.          
As well as many others...                                                                Washington, D.C. 20016                   
                                                                                         (202) 722-2053                           
                                                                                                                                  
Maryland                                                                                 Loan Department                          
                                                                                         2002 Eleventh Street, N.W.               
                                                                                         Washington, D.C. 20001                   
Oxon Hill Office and            Forestville office                                       (202) 722-2080                           
Maryland lending division       ATM - Drive-in                                                                                    
ATM - Drive-in                  7610 Pennsylvania Avenue                                 ATM AT Providence Hospital               
1900 John Hanson Lane           Forestville, MD 20747                                    1150 Varnum Street, N.E.                 
Oxon Hill, MD 20745             (301) 735-4440                                           Washington, D.C. 20017                   
(301) 839-4600                                                                                                                    
                                                                                         ATM AT WASHINGTON                        
                                                                                         CONVENTION CENTER                        
                                                                                         906 Ninth Street, N.W.                   
                                                                                         Washington, D.C. 20005                   
                                                                                                                                  
                                                                                         ATM At ONE JUDICIARY SQUARE              
                                                                                         441 Fourth Street, N.W.                  
                                                                                         Washington, D.C. 20001                   
</TABLE>
<PAGE>
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
                                                                                       December 31, 1997
                                                           (dollars in thousands, except per-share data)
--------------------------------------------------------------------------------------------------------
                                                                      1997          1996     CHANGE
FOR THE YEAR
<S>                                                                    <C>            <C>        <C>   
Net Income                                                             $1,576         $1,313     20.03%
   Cash Dividends Declared - Common and Preferred                         398            383      3.92%
   Earning Per Common Share                                              2.44           2.06     18.45%
   Cash Dividends Paid Per Common Share                                   .60            .60      0.00%
   Return on Average Assets                                               .64            .57     12.28%
   Average Share Outstanding                                          645,195        637,160      1.26%

AT YEAR END
   Total Assets                                                      $250,702       $235,788      6.33%
   Loans - Net of Allowance for Loan Losses                           115,476        108,611      7.24%
   Deposits                                                           208,196        206,084      1.02%
   Shareholders' Equity                                                20,177         17,318     16.51%
   Shareholders' Equity to Assets                                        8.05%          7.34%     9.67%
   Risk-Based Capital Ratios (IBNA):
             Tier1                                                         15%            15%     0.00%
             Total                                                         17%            16%     6.25%
             Book Value Per Common Share                               $29.44         $27.18      8.31%
--------------------------------------------------------------------------------------------------------
</TABLE>





                               [GRAPHICS OMITTED]




<PAGE>
                          INDEPENDENT AUDITOR'S REPORT

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

We have audited the  accompanying  consolidated  balance sheets of IBW Financial
Corporation  and subsidiary  (the Company) as of December 31, 1997 and 1996, 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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of IBW Financial  Corporation  and
subsidiary  at December 31, 1997 and 1996,  and the results of their  operations
and their  cash  flows for the years then  ended in  conformity  with  generally
accepted accounting principles.

/s/ Deloitte & Touche, LLP
Washington, D.C.
February 27, 1998

<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                             DECEMBER 31, 1997 and 1996
                                                               (dollars in thousands, except share data)
--------------------------------------------------------------------------------------------------------
ASSETS
                                                                           1997             1996
<S>                                                                       <C>               <C>   
Cash and cash equivalents:
         Cash and due from banks                                          $11,842           $13,692
         Federal funds sold                                                11,500             8,300
                                                                          -------          --------
          Total cash and cash equivalents                                  23,342            21,992

Interest-bearing deposits in banks                                          3,000             3,000
Securities available-for-sale, at fair value                              101,106            94,824

Loans receivable - net of allowance for loan losses
         of $1,702 in 1997 and $1,266 in 1996                             116,476           108,611
Real Estate owned - net                                                       522             1,310
Bank premises and equipment - net                                           2,672             2,452
Other Assets                                                                3,500             3,499
Deferred Income Taxes                                                          84               100
                                                                          -------          --------
TOTAL ASSETS                                                              250,702          $235,788
                                                                          =======          ========
===================================================================================================
</TABLE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                         1997             1996
<S>                                                                 <C>                 <C>   
LIABILITIES:
     Demand deposits                                                      $52,922           $50,840
     Time and savings deposits                                            155,274           155,244
                                                                          -------           -------
                  Total deposits                                          208,196           206,084
     Repurchase agreements                                                 19,496            10,466
     Other liabilities                                                      1,833               920
     Note payable                                                           1,000             1,000
                                                                         --------          --------
                  Total Liabilities                                      $230,525          $218,470
                                                                         --------          --------
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
     Common stock - $1 par value: 1,000,000 shares authorized;
       668,360 and 637,160 shares issued and outstanding                      668               637
     Capital surplus                                                        5,051             4,329
     Retained earnings                                                     13,183            12,005
     Unrealized gain on available-for-sale securities,
       net of taxes of $393 in 1997 and $179 in 1996                          775               347
                                                                         --------          --------
            Total shareholders' equity                                     20,177            17,318
                                                                         --------          --------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                          $250,702          $235,788
                                                                         ========          ========


See notes to consolidated financial statements.
===================================================================================================
</TABLE>

                                       11

<PAGE>
CONSOLIDATED STATEMENTS OF  INCOME
<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31, 1997 AND 1996
                                                         (dollars in thousands, except share data)
----------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>   
                                                                    1997              1996
INTEREST INCOME:
     Interest and fees on loans                                   $10,434           $9,401
     U.S. Treasury securities                                       1,261            1,511
     Obligations of U.S. Government
       agencies and corporations                                      501            1,069
     Collateralized mortgage obligations                            3,797            2,597
     Obligations of states and political subdivisions                 864              699
     Bank balances and other securities                               229              162
     Federal funds sold                                               372              622
                                                                  -------          -------
              Total interest income                                17,458           16,061
                                                                  -------          -------
INTEREST EXPENSE:
         Interest-bearing deposits                                  4,329            4,523
         Time certificates over $100,000                              767              676
         Repurchase agreements                                        767              153
         Note payable                                                  53               53
                                                                  -------          -------
                  Total interest expense                            5,916            5,405
                                                                  -------          -------

NET INTEREST INCOME:                                               11,542           10,656
PROVISION FOR LOAN LOSSES                                           1,195              510
                                                                  -------          -------
NET INTEREST INCOME AFTER PROVISION
         FOR LOAN LOSSES                                           10,347           10,146
                                                                  -------          -------
NONINTEREST INCOME:
         Service charges on deposit and checking accounts           2,540            2,266
         Gain on sale of securities                                   242              109
         Other operating income                                       552              245
                                                                  -------          -------
                  Total noninterest income                          3,334            2,620
                                                                  -------          -------
NONINTEREST EXPENSE:
         Salaries and employee benefits                             6,213            5,782
         Occupancy                                                    716              671
         Furniture and equipment                                      625              562
         Data processing                                              606              572
         Other                                                      3,485            3,349
                                                                  -------          -------
                  Total noninterest expense                        11,645           10,936
                                                                  -------          -------
INCOME BEFORE INCOME TAXES                                          2,036            1,830
PROVISION FOR INCOME TAXES                                            460              517
                                                                  -------           ------
NET INCOME                                                         $1,576           $1,313
                                                                  =======           ======
EARNINGS PER COMMON SHARE - Basic and diluted                       $2.44            $2.06
                                                                  =======           ======
See notes to consolidated financial statements.
===================================================================================================
</TABLE>

                                       12


                                      
<PAGE>
CONSOLIDATED STATEMENTS
CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,1997 AND 1996
                                                                          (dollars in thousands, except share data)
-------------------------------------------------------------------------------------------------------------------
                                                                                  Net Unrealized
                                                                                     Gain
                               Preferred   Common     Capital  Retained           on Securities
                                 Stock      Stock     Surplus  Earnings          Available-for-Sale        Total
<S>                               <C>        <C>       <C>       <C>                  <C>                  <C>   
BALANCE, January 1, 1996              -      $637      $4,329    11,075               $514                 16,555
     Dividends, $0.60 per share       -         -           -      (383)                 -                   (383)
     Change in unrealized gains
        on available-for-sale
        securities, net of taxes      -         -           -         -               (167)                  (167)

     Net income                       -         -           -     1,313                  -                  1,313
                                   ----      ----      ------    ------               ----                 ------
BALANCE, DECEMBER 31, 1996            -       637       4,329    12,005                347                 17,318
     Issuance of preferred stock    500         -           -         -                  -                    500
     Issuance of common stock         -        31         722         -                  -                    753  
     Dividends, $0.60 per share       -         -           -      (398)                 -                   (398)
     Change in unrealized
        gains on available-
        for-sale securities,
        net of taxes                  -         -           -         -                428                    428
     Net Income                       -         -           -     1,576                  -                  1,576
                                   ----      ----      ------     -----               ----                 ------
BALANCE, DECEMBER 31, 1997         $500      $668      $5,051    13,183                775                 20,177
                                   ====      ====      ======    ======               ====                 ======
See notes to consolidated financial statements.
-----------------------------------------------------------------------------------------------------------------
</TABLE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,1997 AND 1996
                                                                       (dollars in thousands)
---------------------------------------------------------------------------------------------
                                                                   1997                1996   
<S>                                                              <C>                  <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:                                                         
     Net income                                                  $1,576               $1,313  
     Adjustment to reconcile net income                                                       
       to net cash provided by operating activities:                                          
     Depreciation                                                   352                  319  
     Amortization of goodwill and intangibles                       149                  216  
     Accretion/amortization of premium                              643                  396  
     Deferred income taxes                                           16                 (147) 
     Loss on sale of real estate owned                               22                   32  
     Gain on sale of investment securities                                                    
       available-for-sale                                          (152)                (109) 
     Gain on sale of securities - trading                           (90)                   -  
     Provision for loan on real estate owned                        108                  223  
     Provision for loan losses                                    1,195                  510  
     Interest capitalized on securities                            (873)                   -  
     (Increase) decrease in other assets                           (148)                 116  
     Increase (decrease) in other liabilities                       913                 (254) 
          Sale of investment securities - trading                 3,164                    -  
                                                                  -----                -----  
           Net cash provided by operating activities              6,875                2,615  
                                                                  -----                -----  
-----------------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)

                                                      DECEMBER 31, 1997 AND 1996
                                                          (dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      1997           1996
<S>                                                               <C>            <C>
   CASH FLOWS FROM INVESTING ACTIVITIES:
    Net increase in loans                                            (12,364)       (16,793)
    Additions to bank premises and equipment, net                       (572)          (412)
    Proceeds from principal payments on securities
      available-for-sale                                              11,432          7,326
    Net increase in net interest-bearing deposits in banks                --         (3,000)
    Proceeds from sale of real estate owned                            1,048            194
    Proceeds from maturities of securities available-for-sale          8,962         26,695
    Proceeds from sale of securities available-for-sale                8,105         20,510
    Purchase of investment securities available-for-sale             (34,133)       (62,497)
                                                                     -------        -------
       Net cash used in investing activities                         (17,522)       (27,977)
                                                                     -------        -------
   CASH FLOWS FROM FINANCING ACTIVITIES:
    Cash dividends                                                      (398)          (383)
    Net increase in deposits                                           2,112          2,385
    Net increase in repurchase agreements                              9,030         10,466
    Sale of common and preferred stock, net                            1,253             --
                                                                     -------        -------
       Net cash provided by financing activities                      11,997         12,468
                                                                     -------        -------
   NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                                        1,350        (12,894)
   CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                                 21,992         34,886
                                                                     -------        -------
   CASH AND CASH EQUIVALENTS AT END OF YEAR                        $  23,342      $  21,992
                                                                   =========      =========
   SUPPLEMENTAL DISCLOSURES OF CASH FLOW
    INFORMATION:
   CASH PAID DURING THE YEAR FOR:
      Income taxes                                                 $     503      $     518
                                                                   =========      =========
      Interest                                                     $   5,301      $   5,290
                                                                   =========      =========
   NON CASH TRANSACTIONS:
      Noncash transfers of loans to real estate owned              $     390      $     809
                                                                   =========      =========
      Securitization of mortgage loans                             $   3,103      $      --
                                                                   =========      =========
</TABLE>

See notes to consolidated financial statements.


                                       14

<PAGE>
Notes to Consolidated FINANCIAL Statements
YEARS ENDED DECEMBER 31, 1997 and 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

IBW Financial  Corporation  (Corporation)  became a unitary bank holding company
and its  wholly  owned  subsidiary  Industrial  Bank of  Washington  (the  Bank)
converted  from a District  of  Columbia  chartered  bank to a national  banking
association and changed its name to Industrial Bank,  National  Association (the
Bank) on July 1, 1995. The  accounting  and reporting  policies of IBW Financial
Corporation  and  subsidiary  (the  Company)   conform  to  generally   accepted
accounting principles 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  intercompany  transactions  and
balances have been eliminated.

Use of Estimates - The  preparation of financial  statements in accordance  with
generally accepted  accounting  principles 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.

Securities - The Company accounts for securities in accordance with Statement of
Financial   Accounting   Standards  (SFAS)  No.  115,   Accounting  for  Certain
Investments in Debt and Equity Securities (SFAS No. 115). This standard requires
debt and equity securities to be segregated 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 a separate  component of  shareholders'  equity until
realized.  Realized  gains or losses on the sale of  investment  securities  are
reported in earnings  and  determined  using the  adjusted  cost of the specific
security sold.

Loans - For balance sheet presentation, loans are presented net of deferred fees
and costs.  Interest on loans is accrued and  recorded as income  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 nonaccrual
status  when  management  deems the  collectibility  of  interest  is  doubtful.
Interest ultimately collected is recorded in the period received.

Allowance  for Loan Losses - The  allowance  for loan losses is  maintained at a
level  believed by  management  to be adequate to provide for known and inherent
risks in the loan  portfolio  and  commitments  to extend  credit.  Management's
determination of the adequacy of the allowance is based on an evaluation of past
loan  loss  experience;   current  economic  conditions;   volume,  growth,  and
composition of the loan portfolio;  and other relevant factors. The allowance is
increased by provisions  for loan losses  charged  against income and recoveries
and reduced by  charge-offs.  In  accordance  with SFAS No. 114,  Accounting  by
Creditors for Impairment of a Loan, the Company measures  impairment on impaired
loans based on the fair value of the  collateral.  In  accordance  with SFAS No.
114, the Company  considers a loan impaired when,  based on current  information
and  events,  it is  probable  that the  Company  will be unable to collect  all
amounts due according to the contractual terms of the loan agreement. Management
considers all current  information,  including the borrower's  ability to repay,
the fair value of the collateral, and other pertinent information in determining
if a loan is impaired.  For the  purposes of applying  SFAS No. 114, the Company
considers  residential  real estate  loans and  installment  loans to be smaller
balance,  homogenous loans, which are aggregated and collectively  evaluated for
measurement of impairment.  The amount of loan losses the Company may ultimately
realize could differ from these estimates.

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

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 loan losses.  Declines in fair value,  operating  expenses,
and gains or losses on the  dispositions  of other real  estate are  reported in
other expense. The amounts the Company will ultimately realize on disposition of
these properties could differ from management's current estimates.

                                       15
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)

Earnings  Per Share -  Earnings  per  share is  computed  based on the  weighted
average  number of common  shares  outstanding  during  the year.  The  weighted
average number of common shares outstanding during 1997 and 1996 was 645,195 and
637,160,  respectively.  In March  1997,  SFAS No. 128,  Earnings  Per Share was
issued.  SFAS No. 128 supersedes  APB No. 15 to conform  earnings per share with
international standards as well as to simplify the complexity of the computation
under APB No.  15. In  summary,  SFAS No.  128  replaces  the  previous  primary
earnings per share (EPS) calculation with a basic EPS calculation. The basic EPS
differs from the primary EPS  calculation in that the basic EPS does not include
any potentially dilutive securities. Fully dilutive EPS is replaced with diluted
EPS and should be disclosed  regardless of its dilutive  impact on EPS. SFAS No.
128 is effective for both interim and annual  periods  ending after December 15,
1997.  Basic and  diluted  EPS are the same for IBW as the  Company had no stock
options or other potentially dilutive securities  outstanding as of December 31,
1997.

Income  Taxes  -  The  Corporation  and  its  wholly  owned  subsidiary  file  a
consolidated federal income tax return. The Company accounts for income taxes in
accordance with SFAS No. 109,  Accounting for Income Taxes.  Deferred income tax
assets and liabilities are computed  annually for differences  between financial
statement and tax basis of assets and liabilities that will result in taxable or
deductible  amounts  in the  future  based on the  enacted  tax  laws and  rates
applicable to periods in which the  differences  are expected to affect  taxable
income. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount expected to be realized.  Income tax expense is the tax
payable or refundable  for the period  adjusted for the change during the period
in deferred tax assets and liabilities.

Intangibles - At December 31, 1997 and 1996,  other assets included  goodwill of
$610,000 and $665,000,  net of accumulated  amortization of $55,000 and $105,000
and core  deposit  intangibles  of $420,000  and  $514,000,  net of  accumulated
amortization of $94,000 and $242,000, respectively.  Goodwill is being amortized
over 15  years  and the  core  deposit  intangibles  over 8  years,  both on the
straight-line basis. 

Statement  of Cash Flows - For  purposes of the  consolidated  statement of cash
flows, cash equivalents are highly liquid  investments with original  maturities
of three  months or less.  Included  in cash and due from  banks  were  required
deposits at the Federal  Reserve Bank of $3,962,000  and  $4,070,000 at December
31, 1997 and 1996, respectively.

Reclassification - Certain items in the financial  statements for 1996 have been
reclassified to conform to the 1997 presentation.

New Accounting  Pronouncement - In June 1996, the Financial Accounting Standards
Board issued SFAS No. 125,  Accounting  for Transfers and Servicing of Financial
Assets  and  Extinguishments  of  Liabilities  (SFAS No.  125).  SFAS No. 125 is
effective for transfers and servicing of financial assets and  extinguishment of
liabilities   occurring   after   December  31,  1996,  and  is  to  be  applied
prospectively.   Earlier  or  retroactive  application  is  not  permitted.  The
provisions  of SFAS  No.  125  relating  to  repurchase  agreements,  securities
lending, and other similar transactions and pledged collateral have been delayed
until after  December 31, 1997, by SFAS No. 127,  Deferral of the Effective Date
of Certain  Provisions of FASB  Statement No. 125, an Amendment of FASB No. 125.
SFAS No. 125 provides  accounting  and  reporting  standards  for  transfers and
servicing  of  financial  assets  and  extinguishment  of  liabilities  based on
consistent  application  of a  financial  components  approach  that  focuses on
control.  Under this approach,  after a transfer of financial  assets, an entity
recognizes  the  financial  and  servicing  assets it controls and  derecognizes
liabilities  extinguished.  SFAS  No.  125  provides  consistent  standards  for
distinguishing  transfers of financial assets that are sales from transfers that
are secured borrowings.  This standard supersedes SFAS No. 76, Extinguishment of
Debt,  and No. 77,  Reporting by Transferors  for Transfers of Receivables  with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights, and amends SFAS
No. 115 and No. 65,  Accounting for Certain  Mortgage  Banking  Activities.  The
Company  adopted this standard,  except for the  provisions  delayed by SFAS No.
127,  effective  January 1, 1997.  The adoption of this  standard did not have a
material  impact  on  the  Corporation's   financial  condition  or  results  of
operations.

In June 1997, SFAS No. 130, Reporting Comprehensive Income, was issued. SFAS No.
130 requires  comprehensive  income to be reported in a financial statement that
is displayed with the same  prominence as other  financial  statements,  thereby
permitting  companies to display the  components of other  comprehensive  income
below the total for net income in an income statement,  in a separate  statement
that  begins  with net  income,  or in a  statement  of changes to equity.  Such
requirement  would apply to all enterprises that provide a full set of financial
statements.  This  statement  is  effective  for fiscal  years  beginning  after
December 15, 1997.  Reclassification of financial statements for earlier periods
for comparative purposes is required.

Additionally,  during June of 1997,  the FASB  issued SFAS No. 131,  Disclosures
about  Segments  of  an  Enterprise  and  Related  Information.   SFAS  No.  131
establishes  standards for the way that public  enterprises  report  information
about operating segments in annual financial  statements and requires that those
enterprises  report selected  information  about  operating  segments in interim
financial  reports issued to  shareholders.  It also  establishes  standards for
related  disclosures  about products and services,  geographic  areas, and major
customers.  SFAS No. 131 is effective for financial  statements  beginning after
December 15, 1997.

The  implementation  of SFAS 130 and SFAS 131 will only impact the reporting and
presentation  of certain  components of the Company's  financial  statements and
related footnote disclosures.
                                       16
<PAGE>
2. SECURITIES

At December 31, 1997 and 1996, the amortized cost and approximate  fair value of
securities available-for-sale were as follows (in thousands):

                                                               DECEMBER 31, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                         AMORTIZED     UNREALIZED     UNREALIZED       FAIR
                                            COST          GAINS         LOSSES         VALUE

<S>                                     <C>           <C>            <C>            <C>
U.S. Treasury Notes                       $18,985        $   30         $  (1)       $ 19,014
U.S. Government Agencies                   11,480            21            (2)         11,499

Mortgage-Backed Securities:
 Pass-through securities:
   Guaranteed by GNMA                          66             3            --              69
   Issued by FNMA and FHLMC                    10             2            --              12

 Collaterized Mortgage Obligations:
   Collateralized by FNMA, FHLMC and
    GNMA mortgage-backed securities        56,273           531          (114)         56,690

Securities issued by states and
 political subdivision:
   General obligations                      9,849           540            (6)         10,383
   Revenue obligations                      2,191           152            --           2,343
Other                                       1,079            17            --           1,096
                                          -------        ------         -------      --------
TOTAL                                     $99,933        $1,296         $(123)       $101,106
                                          =======        ======         =======      ========
</TABLE>
================================================================================
                                                              DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                          AMORTIZED     UNREALIZED     UNREALIZED       FAIR
                                             COST          GAINS         LOSSES         VALUE
<S>                                      <C>           <C>            <C>            <C>
U.S. Treasury Notes                        $20,386         $144          $  (5)       $20,525
U.S. Government Agencies                     8,002           55             --          8,057

Mortgage-Backed Securities:
 Pass-through securities:
   Guaranteed by GNMA                           86            3             --             89
   Issued by FNMA and FHLMC                    879            3             (3)           879
 
Collateralized Mortgage Obligations:
   Collateralized by FNMA
    mortgage-backed securities              50,060          410            (81)        50,389

Securities issued by states and
 political subdivision:
   General obligations                      13,393          258           (235)        13,416
   Revenue obligations                       1,205           38            (61)         1,182
Other                                          287           --             --            287
                                           -------         ----          -------      -------
TOTAL                                      $94,298         $911          $(385)       $94,824
                                           =======         ====          =======      =======
</TABLE>
================================================================================

                                       17

<PAGE>
SECURITIES (CONT.)

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

                                                              DECEMBER 31, 1997
--------------------------------------------------------------------------------
                                                           ESTIMATED
                                        AMORTIZED COST     FAIR VALUE
  Due in one year or less                   $19,980        $ 20,010
  Due after one year through five years      11,564          11,599
  Due after ten years                        12,040          12,726
  Mortgage-backed securities                 56,349          56,771
                                            -------        --------
  Total                                     $99,933        $101,106
                                            =======        ========
================================================================================

Proceeds  from the sale of securities  available-for-sale  were  $8,105,000  and
$20,510,000  for the year ended  December 31, 1997 and 1996,  respectively,  and
resulted in gross  realized  gains of $152,000 and  $138,000 and gross  realized
losses of $1,000 and  $29,000 for the years  ended  December  31, 1997 and 1996,
respectively.  Proceeds from the sale of trading  securities were  approximately
$3,164,000  for the year ended December 31, 1997, and resulted in gross realized
gains of approximately $90,000.

Securities of  $9,840,000  and  $4,870,000  at December 31, 1997 and 1996,  were
pledged as collateral  for public  deposits and for other  purposes  required by
law. At December 31, 1997 and 1996, the carrying value of securities  underlying
repurchase agreements was $19,840,000 and $11,718,000, respectively.

================================================================================
3. LOANS RECEIVABLE

      Loans receivable consists of the following (in thousands) at December 31:
--------------------------------------------------------------------------------
                                                        1997         1996
   Real estate loans:
    Collateralized by residential property:
      First mortgages                                 $ 48,247     $ 50,807
      Second mortgages                                   3,830        2,069
    Collateralized by non-residential properties        38,499       24,442
   Commercial                                           23,145       28,232
   Installment                                           4,925        4,692
                                                      --------     --------
      Total                                            118,646      110,242
   Less:
    Deferred fees and costs, net                           468          365
    Allowance for loans losses                           1,702        1,266
                                                      --------     --------
   Net loans                                          $116,476     $108,611
                                                      ========     ========
================================================================================
Substantially  all of the Bank's  loans have been made to  borrowers  within the
Washington,  D.C.  metropolitan  area.  Accordingly,  the  ability of the Bank's
borrowers to repay their loans is dependent upon the economy in the  Washington,
D.C. metropolitan area.
<TABLE>                                                          
<CAPTION>                                                                                                                       
                        Major loan concentrations are                         A summary of transactions in the allowance for loan
                            as follows (in thousands):                         losses is as follows (in thousands) at December 31: 
--------------------------------------------------------          ------------------------------------------------------------------
                                      1997         1996                                                         1997        1996   
<S>                                <C>          <C>                  <C>                                      <C>         <C>      
  Church loans collateralized                                        Balance, beginning of year               $1,266      $1,177   
    by real estate                  $10,904      $ 9,401                                    
  Installment loans                                                       Add: Provision charged to expense    1,195         510   
    to churches                          36          192                       Recoveries                        130         337   
  Commercial loans                                                       
    to churches                       1,733          492                  Deduct: Charge-offs                   (889)       (758)  
                                    -------      -------                                                       ------      ------  
  Total loans to churches           $12,673      $10,085             Balance, end of year                     $1,702      $1,266   
                                    =======      =======                                                       ======      ======
===============================================================      ===============================================================
</TABLE>

                                       18

<PAGE>  
LOAN RECEIVABLE (CONT.)

At December 31, 1997 and 1996,  loans that were  considered to be impaired under
SFAS  No.  114  totaled  $852,000  and  $1,960,000,  respectively.  The  related
allowance  allocated to impaired loans was $251,000 and $272,000 at December 31,
1997 and 1996, respectively. The average balance of impaired loans for the years
ended December 31, 1997 and 1996, was $1,984,000 and  $1,251,000,  respectively.
Interest  income that was not  recorded  on  impaired  loans for the years ended
December 31, 1997 and 1996, was $223,000 and $101,000, respectively.
================================================================================
4. BANK PREMISES AND EQUIPMENT

The  major  categories  of  bank  premises  and  equipment  are as  follows  (in
thousands):
--------------------------------------------------------------------------------
                                              1997          1996
   Bank premises                           $  2,276      $  2,276
   Furniture, fixtures, and equipment         3,330         2,745
                                           --------      --------
   Total                                      5,606         5,021
   Less accumulated depreciation             (2,934)       (2,569)
                                           --------      --------
   Bank premises and equipment, net        $  2,672      $  2,452
                                           ========      ========
--------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1997 and 1996, is $352,000
and $319,000, respectively.
================================================================================
5. DEPOSITS
                                Deposits consist of the following (in thousands)
                                                               DECEMBER 31, 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     DEMAND      SAVINGS       TIME         TOTAL
<S>                                                <C>          <C>         <C>          <C>
   Individuals, partnerships, and corporations      $50,334      $92,462     $57,539      $200,335
   U.S. government                                       37           --       1,014         1,051
   States and political subdivisions                    242           --       4,259         4,501
   Certified and official checks                      2,309           --          --         2,309
                                                    -------      -------     -------      --------
   Total                                            $52,922      $92,462     $62,812      $208,196
                                                    =======      =======     =======      ========
==================================================================================================
</TABLE>

                                Deposits consist of the following (in thousands)
                                                               DECEMBER 31, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     DEMAND       SAVINGS      TIME          TOTAL
<S>                                                <C>          <C>           <C>          <C>
   Individuals, partnerships, and corporations      $47,969      $109,020    $41,711      $198,700
   U.S. government                                      341            --      1,113         1,454
   States and political subdivisions                    245            --      3,400         3,645
   Certified and official checks                      2,285            --         --         2,285
                                                    -------      --------    -------      --------
   Total                                            $50,840      $109,020    $46,224      $206,084
                                                    =======      ========    =======      ========
==================================================================================================
</TABLE>
Demand  deposits  represent  noninterest-bearing  deposit  accounts.  Individual
certificates of deposit of $100,000 or more December 31, 1997 and 1996, totaling
$16,807,000 and $14,246,000, respectively, are included in time deposits.

                        At December 31, 1997,  the scheduled  maturities of Time
                                         Deposits are as follows (in thousands):
                        --------------------------------------------------------

                                                 1998      $58,456
                                                 1999        4,199
                                                 2000          157
                                                           -------
                                                           $62,812
                                                           =======

                                       19

<PAGE>
================================================================================
6. REPURCHASE AGREEMENTS

At December  31, 1997,  securities  sold under  agreements  to  repurchase  were
$19,496,000.  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 sheet.  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 agreements at
December 31, 1997, had a fair value of $19,840,000.  All outstanding  agreements
at December 31, 1997, matured on January 1, 1998. The outstanding agreements had
an average  interest rate of 4.26% at December 31, 1997. The average balance and
the average interest rate for the year ended December 31, 1997, were $16,820,000
and 4.56%. During 1997, the maximum month-end balance was $19,496,000.

================================================================================
7. NOTE PAYABLE

In  connection  with the  acquisition/assumption  of  certain  Resolution  Trust
Corporation  (RTC) assets and  liabilities in 1994, the Corporation and the Bank
executed an Interim Capital  Assistance  Agreement  (Agreement) with the RTC. In
accordance with the provisions of the Agreement and the related Promissory Note,
the Corporation  borrowed $1,000,000 from the RTC. As required by the Agreement,
the Corporation  invested all the proceeds in the Bank. The Corporation  pledged
to the RTC all the issued and outstanding shares of capital stock of the Bank to
secure the Promissory Note. The note payable accrues interest at a variable rate
based on the 13-week U.S. Treasury Bill rate, reset quarterly. The interest rate
at December 31, 1997, was 5.187%.  The outstanding  principal balance matures on
July 3, 2000.

The Agreement prevents the Bank from declaring or paying dividends,  issuing any
of its  capital  stock,  or  options  or  other  rights  thereto,  repurchasing,
redeeming  or  retiring  any of its  outstanding  capital  stock,  or making any
distribution  of its assets to the  Corporation.  However,  the  Agreement  does
provide  for the  payment of  dividends  by the Bank if (i) there is no event of
default in existence  under the Agreement or the Promissory  Note, (ii) the Bank
would not cause an event of default by the  declaration or payment of dividends,
and (iii) the declaration or payment of any such dividends are not prohibited by
or objected to by the Bank's  primary  regulator.  Additionally,  the  Agreement
limits  the  types  of  transactions  that  the Bank  can  enter  into  with the
Corporation. Further, the Agreement requires that the Bank maintain its tangible
capital ratio,  calculated in accordance with the regulations  prescribed by the
Office of the  Comptroller  of the  Currency  in excess of 5.22%.  Finally,  the
Agreement  provides for the full repayment of the note payable prior to the sale
or disposition of all or  substantially  all of the Bank's assets or a change in
control of the Bank.

================================================================================
8. SHAREHOLDERS' EQUITY

On September  29, 1997,  the Company  completed the sale of 31,200 shares of its
common stock and 20,000 shares of its Series A Non-Voting  Preferred Stock, in a
private  placement  transaction,  to the Federal National  Mortgage  Association
(Fannie  Mae),  at a price of $25.00  per share of common  stock and  $25.00 per
share of  Series A  Non-Voting  Preferred  Stock for a total  purchase  price of
$1,280,000.   The  shares  of  common  stock  issued  to  Fannie  Mae  represent
approximately 4.67% of the outstanding shares of the Company's common stock, and
the  shares  of  Series  A  Non-Voting  Preferred  Stock  represent  all  of the
authorized  shares of that series. 

The  Corporation  has  contributed  $980,000  of the  proceeds  of the  sale  to
Industrial  Bank,  the wholly owned  subsidiary of the  Corporation,  for use in
connection with its mortgage and  housing-related  lending  operations,  and the
promotion of affordable  housing in its market area. The remaining proceeds will
be retained at the Corporation for general corporate  purposes. 

Under the stock purchase  agreement,  the Company is restricted  from taking any
action, including the repurchase,  redemption,  or other reduction in the number
of  outstanding  shares of capital  stock,  but not including the  incurrence of
losses that would result in the value of the Shares  representing 10% or more of
the  equity of the  Company,  or the  shares of common  stock sold to Fannie Mae
representing 5% or more of the outstanding common stock. The Company has certain
rights under the agreement to repurchase the Shares under certain circumstances.

                                       20
<PAGE>
================================================================================
9. 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  financial statements.  Under
capital  adequacy  guidelines  and  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 sheet items as calculated under regulated accounting practices.  The
Corporation's and the Bank's capital amounts and the Bank's 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 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, 1997, that the Corporation and Bank meet
all the capital adequacy requirements to which they are subject.

As of December 31, 1997 and 1996,  the most recent  notification  from Office of
the Comptroller of Currency  categorized the Bank as well capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized,  the Bank must  maintain  minimum  total  risk-based,  Tier 1 risk-
based, and Tier 1 leverage ratios.  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,  1997  and  1996,  are  set  for in the  following  table  (in
thousands):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                  FOR CAPITAL     TO BE CATEGORIZED AS  WELL
                                                                   ADEQUACY       CAPITALIZED UNDER PROMPT
                                                 ACTUAL            PURPOSES       CORRECTIVE ACTION PROVISIONS
                                           -------------------------------------------------------------------
                                             AMOUNT    RATIO     AMOUNT    RATIO   AMOUNT   RATIO
<S>                                        <C>        <C>     <C>         <C>     <C>      <C>
As of December 31, 1997
------------------------------------------
 Total capital (to risk weighted assets):
   Corporation                              $19,876      16%    $ 9,666     8%       N/A     N/A
   Bank                                      20,148      17       9,652     8      12,064    10
 Tier I capital (to risk weighted assets)
   Corporation                               18,369      15       4,833     4        N/A     N/A
   Bank                                      18,641      15       4,826     4       7,239     6
 Tier I capital (to average assets)
   Corporation                               18,369       8       9,787     4        N/A     N/A
   Bank                                      18,641       8       9,782     4      12,227     5

As of December 31, 1996
------------------------------------------
Total capital (to risk weighted assets)
   Corporation                               17,058      16       8,761     8        N/A     N/A
   Bank                                      17,799      16       8,751     8      10,939    10
 Tier I capital (to risk weighted assets)
   Corporation                               15,792      14       4,381     4        N/A     N/A
   Bank                                      16,533      15       4,376     4       6,564     6
 Tier I capital (to average assets)
   Corporation                               15,792       7       9,379     4        N/A     N/A
   Bank                                      16,533       7       9,368     4      11,711     5

</TABLE>

                                       21
<PAGE>
================================================================================
10. INCOME TAXES

The  provision  for income taxes  consists of the  following  (in  thousands) at
December 31:
--------------------------------------------------------------------------------
                                      1997        1996
   Current:
    Federal income tax              $  552      $  587
    State and local income tax          51          77
                                    ------      ------
                                       603         664
   Deferred:
    Federal income tax                (143)       (147)
                                    ------      ------
   Total                            $  460      $  517
                                    ======      ======

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

The  components  of the  deferred  tax  (benefit)  expense  resulting  from  net
temporary differences are as follows (in thousands) at December 31:
--------------------------------------------------------------------------------
                                                 1997         1996
   Depreciation                                 $    5       $    9
   Provisions for losses on loans and Real
    Estate Owned                                   (96)         (88)
   Deferred loan fees                              (37)         (53)
   Other                                           (15)         (15)
                                                 ------       ------
   Total                                        $ (143)      $ (147)
                                                 ======       ======
================================================================================
The following  reconciles  the federal  statutory  income tax rate of 34% to the
effective income tax rate (in thousands) at December 31:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                  1997                    1996
                                           AMOUNT       RATE       AMOUNT       RATE
<S>                                       <C>        <C>          <C>        <C>
Federal tax expense at statutory rate      $  692        34%       $  623       34%
State tax expense, net of federal tax
 benefit                                      130         6            52        3
Tax-exempt interest                          (267)      (13)         (145)      (7)
Other                                         (95)       (4)          (13)      (2)
                                           ------       ------     ------       -----
Total                                      $  460        23%       $  517       28%
                                           ======       =====      ======       ====
</TABLE>
================================================================================
The  tax  effects  of  items  comprising  the  Company's   deferred  tax  assets
(liabilities) at December 31, 1997 and 1996, are as follows (in thousands):
--------------------------------------------------------------------------------
                                                            1997         1996
   Deferred tax assets:
    Allowances for losses on loans and
      other real estate owned                              $  345       $  249
    Deferred loan fees                                        188          142
    Pension costs                                              45           --
    Other                                                      45           29
                                                           ------       ------
   Total deferred tax assets                                  623          420
                                                           ------       ------
   Deferred tax liabilities:
    Unrealized gain on available-for-sale securities       $ (393)      $ (179)
    Depreciation                                             (129)        (124)
    Other                                                     (17)         (17)
   Total deferred tax liabilities                            (539)        (320)
                                                           ------       ------
   Net deferred tax assets                                 $   84       $  100
                                                           ======       ======
================================================================================

                                       22

<PAGE>
================================================================================
11. RETIREMENT PLAN

The  Company  has a  noncontributory,  defined  benefit  pension  plan  covering
substantially all employees.  In anticipation of terminating the retirement plan
and  settling  the  benefit  obligation  in 1997,  the  Company  adopted  a plan
amendment that curtailed the accrual of benefits for all participants  effective
May 5, 1996. The Company  recognized a loss on the curtailment of  approximately
$46,000.  Prior  to  the  curtailment,  the  Company's  funding  policy  was  to
contribute  annually the required  amount  computed in its actuarial  valuation.
Contributions  are  intended  to provide  not only for  benefits  attributed  to
service to date but also for those expected to be earned in the future. Benefits
are determined based on compensation  levels and length of service as defined by
the Plan. The Company is currently anticipating that the Plan will be terminated
in 1998.

Net  pension  cost for  1997 and 1996  included  the  following  components  (in
thousands) at December 31:
--------------------------------------------------------------------------------
                                                        1997        1996
   Benefit cost for service during the period         $   --      $   79
   Interest cost on projected benefit obligation         207         196
   Return on plan assets                                (441)       (237)
   Asset gain deferral                                   164          --
   Net amortization                                       --         (10)
   Funding of projected benefit obligation                --         143

                                                      ------      ------
   Net pension cost                                   $  (70)     $  171
                                                      ======      ======
================================================================================
The following  table sets forth the plan's funded status and amounts  recognized
in the Company's balance sheet at December 31, 1997 and 1996 (in thousands):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                1997           1996
<S>                                                           <C>            <C>      
   Projected benefit obligation                               $ (2,704)      $ (3,178)
   Plan at fair value                                            3,066          3,445
                                                              --------       --------
   Plan assets in excess (less than) benefit obligation            362            267
   Unrecognized transition asset                                   (93)          (104)
                                                              --------       --------
   Prepaid pension costs                                      $    269       $    163
                                                              ========       ========
</TABLE>
The weigthed average  discount rate and rate of increase in future  compensation
levels used in determining the actuarial  present value of the projected benefit
obligation was 7% as of December 31, 1997 and 1996. The expected  long-term rate
of return on assets was 8% as of December 31, 1997 and 1996.

================================================================================
12. 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 $39,100 and
$37,000  were made to the plan during 1997 and 1996,  respectively.  At December
31, 1997 and 1996, the ESOP held approximately 8% and 9%,  respectively,  of the
total outstanding shares of the Company's stock.

================================================================================
13. COMMITMENTS AND CONTINGENCIES

In the normal course of business,  there are various outstanding 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, 1997 and 1996, the Bank had  outstanding  commitments to fund loans
approximating  $30,837,000  and  $24,576,000,  respectively. 

The Bank also has outstanding standby letters of credit at December 31, 1997 and
1996, in the amount of $1,108,000 and $905,000,  respectively.  Such commitments
and  standby  letters of credit are  subject to the Bank's  normal  underwriting
standards.  Many  of the  commitments  are  expected  to  expire  without  being
completely drawn upon; the total commitment amounts do not necessarily represent
future cash  requirements.

                                       23

<PAGE>
================================================================================
COMMITMENTS AND CONTINGENCIES (cont)

At December 31,  1997,  the Bank was  committed  for
future minimum annual payments under  noncancelable  long-term lease  agreements
for the rental of office space as in the chart below (in thousands):

          1998     1999     2000     2001     2002    Total
          --------------------------------------------------
          $223     157      120      52       25      $577

Rent expense for the years ended  December  31, 1997 and 1996,  was $188,000 and
$234,000,  respectively.  Rent  expense  includes the  amortization  of the rent
concessions.

================================================================================
14. 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 of cash and
cash  equivalents,  accrued  interest  receivable  and  payable  and  repurchase
agreements  was  estimated  to equal the  carrying  value due to the  short-term
nature of these financial instruments.

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

Loans - The fair value of loans  receivable  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
Bank'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.

Note Payable - The fair value of the note payable was  estimated  based on rates
currently  available to the Bank for borrowings with similar terms and remaining
maturities.

Commitments to Fund Loans and Standby  Letters of Credit - Due to the short-term
nature and/or the variable rate structure of these  off-balance sheet items, the
fair value was estimated to approximate the carrying value.

The fair value estimates presented are based on pertinent  information available
as of December 31, 1997 and 1996. However,  considerable judgment is required to
interpret market data to develop the estimates of fair value.  Accordingly,  the
estimates  presented  are not  necessarily  indicative  of the amounts  that the
Company  could  realize in a current  market  transaction.  The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
================================================================================
<TABLE>
<CAPTION>
                                                                                    (in thousands):
----------------------------------------------------------------------------------------------------
                                        DECEMBER 31, 1997                DECEMBER 31, 1996
                                  CARRYING VALUE     FAIR VALUE     CARRYING VALUE     FAIR VALUE
<S>                              <C>                <C>            <C>                <C>

ASSETS
 Cash and cash equivalents           $ 23,342         $ 23,342         $ 21,992        $ 21,992
 Interest-bearing deposits              3,000            3,000            3,000           3,000
 Investment securities                101,106          101,106           94,824          94,824
 Loans                                116,476          116,312          108,611         108,775
 Accrued interest receivable            1,745            1,745            1,651           1,651

LIABILITIES
 Deposits                             208,196          208,121          206,084         206,228
 Repurchase agreements                 19,496           19,496           10,466          10,466
 Note payable                           1,000            1,000            1,000             940
 Accrued interest payable                 580              580              478             478
====================================================================================================
</TABLE>
                                       24

<PAGE>
================================================================================
15. RELATED PARTY TRANSACTIONS

In the  normal  course  of  banking  business,  loans are made to  officers  and
directors.  At December  31, 1997 and 1996,  these loans  totaled  $727,000  and
$778,000, respectively. New loans to related parties originated during 1997 were
$103,000 and payments are being received on time.

================================================================================
16. PARENT COMPANY FINANCIAL INFORMATION

The summarized financial statements of IBW Financial Corporation (parent company
only) as of December  31, 1997 and 1996,  and for the years ended  December  31,
1997 and 1996, follow (in thousands):

================================================================================
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                        1997          1996
<S>                                                                 <C>           <C>
    Assets
      Deposits with subsidiary                                        $   584       $   129
      Securities available-for-sale                                       144           125
      Other assets                                                         36            18
      Investment in subsidiary -- at equity                            20,437        18,059
                                                                      -------       -------
        Total Assets                                                  $21,201       $18,331
                                                                      =======       =======
    Liabilities and equity
      Liabilities:
       Borrowings                                                     $ 1,000       $ 1,000
       Other                                                               24            13
                                                                      -------       -------
        Total Liabilities                                               1,024         1,013
    Shareholders' Equity
      Preferred stock                                                     500            --
      Common stock                                                        668           637
      Capital surplus                                                   5,051         4,329
      Retained earnings                                                13,183        12,005
      Unrealized gain on available-for-sale securities -- net of
       taxes of $393 in 1998 and $179 in 1996                             775           347
                                                                      -------       -------
        Total Shareholders' Equity                                     20,177        17,318
                                                                      -------       -------
    Total Liabilities and Shareholders' Equity                        $21,201       $18,331
                                                                      =======       =======
   STATEMENTS OF INCOME
    Dividends from subsidiary and other income                        $   647       $   584
    Expenses                                                               53            36
                                                                      -------       -------
    Income before undistributed net earnings of subsidiary                594           548
    Equity in undistributed net earnings of subsidiary                    982           765
                                                                      -------       -------
    Net income                                                        $ 1,576       $ 1,313
                                                                      =======       =======
   STATEMENTS OF CASH FLOWS 
     Cash Flow from Operating Activities:
      Net income                                                      $ 1,576       $ 1,313
      Adjustments to reconcile net income to net
       cash provided by operating activities:
       Equity in undistributed net earnings of subsidiary                (982)         (765)
       Other                                                              (14)          (27)
                                                                      -------       -------
      Net cash provided by operating activities                           580           521
                                                                      -------       -------
    Cash Flows for Investing Activities:
      Purchase of securities                                               --          (125)
      Investment in subsidiary                                           (980)           --
                                                                      -------       -------
       Net cash used in investing activities                             (980)         (125)
                                                                      -------       -------
    Cash Flows from Financing Activities:
      Payment of dividends                                               (398)         (383)
      Sale of stock                                                     1,253            --
                                                                      -------       -------
       Net cash used in financing activities                              855          (383)
                                                                      -------       -------
    Increase in Deposits with Subsidiary                                  455            13
    Deposits with Subsidiary, Beginning of the Year                       129           116
                                                                      -------       -------
    Deposits with Subsidiary, End of the Year                         $   584       $   129
                                                                      =======       =======
</TABLE>
================================================================================

                                       25
<PAGE>
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 are in
thousands,  except with respect to per share data.

Forward-looking  statements - This discussion, as well as other portions of this
report, 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.  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.

HOLDING COMPANY BUSINESS

The  Company  became  a  unitary  bank  holding  company,  and its  wholly-owned
subsidiary Industrial Bank, National  Association,  converted from a District of
Columbia  chartered bank to a national  banking  association as of July 1, 1995.
The  business of the Bank and the Company is providing  banking  services to the
Washington,  DC metropolitan  area. The Bank does business through seven offices
in the District of Columbia and two offices in Prince George's County, Maryland.

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.  Noninterest income, such as
customer  deposit  account  service  charges,  late  charges  on loans and other
sources of income also impact the Company's operations.  The Company's principal
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. 

RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996

Overview - Net income was $1,576  for 1997,  compared  with  $1,313 in 1996,  an
increase of 20%.  Earnings per share  increased  18% in 1997 to $2.44,  compared
with $2.06 in 1996.  The increase of $263,  or 20%, in net income was  primarily
attributable  to an  increase  in net  interest  income of $886,  an increase in
noninterest  income of $714 and a reduction of in the provision for income taxes
of $57, offset by an increase in noninterest  expenses of $709 and a increase in
the  provision  for loan losses of $685.  Return on average  assets was .64% for
1997,  up from  .57% for  1996.  Return on  average  equity  was 8.74% for 1997,
compared with 8.06% for 1996.

================================================================================
TABLE 1. FINANCIAL OVERVIEW

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

--------------------------------------------------------------------------------
                                        1997       1996              1995
     Return on average assets           .64%       .57%               .74%
     Return on average equity          8.74%      8.06%             10.75%
     Dividend payout                  24.59%     29.13%             23.44%
     Average shareholders'
        equity to average assets       7.37%      7.06%              6.81%
--------------------------------------------------------------------------------

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-bearingliabilities,
interest  rate  fluctuations,  and asset  quality.  Information  concerning  the
Company's interest-earning assets,  interest-bearing  liabilities,  net interest
income,  interest  rate  spreads,  and net yield on  interest-earning  assets is
presented  in Table 2.  Changes in the  Company's  interest  income and interest
expense  resulting  from  changes  in  interest  rates  and  in  the  volume  of
interest-earning assets and interest-bearing  liabilities are presented in Table
3.

                                       26
<PAGE>
================================================================================
TABLE 2. AVERAGE BALANCE AND NET INTEREST INCOME ANALYSIS(1)
                                                         YEAR ENDED DECEMBER 31,
                                                        (dollars in thousands):
<TABLE>
<CAPTION>
                                                1997                              1996
                                  --------------------------------- ---------------------------------
                                                            AMOUNT                            AMOUNT
                                    AVERAGE     AVERAGE    PAID OR    AVERAGE     AVERAGE    PAID OR
                                    BALANCE       RATE      EARNED    BALANCE       RATE      EARNED
<S>                               <C>         <C>         <C>       <C>         <C>         <C>
ASSETS
 Loans, net                        $111,856        9.33%   $10,434   $ 99,879        9.41%   $ 9,401
 Taxable securities                  88,897        6.31%     5,605     86,305        6.06%     5,232
 Non-taxable securities(2)           15,919        8.22%     1,309     12,747        8.31%     1,059
 Federal funds sold                   6,575        5.66%       372     11,279        5.51%       622
 Interest-bearing deposits held       3,000        6.10%       183      1,661        6.44%       107
                                   --------      ------    -------   --------      ------    -------
 Total interest-earning assets      226,247        7.91%    17,903    211,871        7.75%    16,421
 Cash and due from banks             11,108                            10,841
 Bank premises and equip-
   ment, net                          2,515                             2,424
 Other assets                         4,669                             5,423
                                   --------                          --------
 Total assets                      $244,539                          $230,559
                                   ========                          ========
LIABILITIES AND SHAREHOLDERS' EQUITY
 Interest-bearing demand de-
   posits                          $ 28,326        1.99%       563   $ 30,718        2.10%       644
 Savings deposits                    66,724        2.75%     1,836     72,856        2.87%     2,087
 Time deposits                       61,041        4.42%     2,697     55,548        4.44%     2,468
                                   --------      ------    -------   --------      ------    -------
 Total interest-bearing depos-
   its                              156,091        3.26%     5,096    159,122        3.27%     5,199
 Borrowed funds                       1,000        5.30%        53      1,000        5.30%        53
 Repurchase agreements               16,820        4.56%       767      3,376        4.53%       153
                                   --------      ------    -------   --------      ------    -------
 Total interest-bearing liabili-
   ties                             173,911        3.40%     5,916    163,498        3.31%     5,405
 Noninterest-bearing deposits        50,362                            48,930
 Other liabilities                    2,235                             1,841
 Shareholders' equity                18,031                            16,290
                                   --------                          --------
 Total liabilities and
   shareholders' equity            $244,539                          $230,559
                                   ========                          ========
NET INTEREST INCOME AND
 NET YIELD ON INTEREST EARNING ASSETS
 Net interest income                                       $11,987                           $11,016
                                                           =======                           =======
 Interest rate spread                              4.51%                             4.44%
 Net yield on average interest-
   earning assets                                  5.30%                             5.20%
 Average interest-earning as-
   sets to average interest-
   bearing liabilities                           130.09%                           129.59%
</TABLE>
<PAGE>
                                                 1995
                                  ----------------------------------
                                                            AMOUNT
                                    AVERAGE     AVERAGE     PAID OR
                                    BALANCE       RATE      EARNED
ASSETS
 Loans, net                        $ 90,630        9.90%   $ 8,975
 Taxable securities                  92,147        5.82%     5,363
 Non-taxable securities(2)            3,934        4.55%       179
 Federal funds sold                  11,435        5.82%       665
 Interest-bearing deposits held          95        4.21%         4
                                   --------      ------    -------
 Total interest-earning assets      198,241        7.66%    15,186
 Cash and due from banks             10,882
 Bank premises and equip-
   ment, net                          2,334
 Other assets                         5,619
                                   --------
 Total assets                      $217,076
                                   ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
 Interest-bearing demand de-
   posits                          $ 31,313        2.70%       845
 Savings deposits                    75,839        3.20%     2,428
 Time deposits                       46,363        3.94%     1,829
                                   --------      ------    -------
 Total interest-bearing depos-
   its                              153,515        3.32%     5,102
 Borrowed funds                         500        5.40%        27
 Repurchase agreements                    0        0.00          0
                                   --------      ------    -------
 Total interest-bearing liabili-
   ties                             154,015        3.33%     5,129
                                                           -------
 Noninterest-bearing deposits        46,722
 Other liabilities                    1,557
 Shareholders' equity                14,782
                                   --------
 Total liabilities and
   shareholders' equity            $217,076
                                   ========
NET INTEREST INCOME AND
 NET YIELD ON INTEREST EARNING
ASSETS
 Net interest income                                       $10,057
                                                           =======
 Interest rate spread                              4.33%
 Net yield on average interest-
   earning assets                                  5.07%
 Average interest-earning as-
   sets to average interest-
   bearing liabilities                           128.72%
--------------------------------------------------------------------------------
(1)  Yields on securities  have been computed based upon the historical  cost of
     such securities. Nonaccruing loans are included in average balances.
(2)  Yields on non-taxable  securities are presented on a  tax-equivalent  basis
     using a 34% tax rate.  Interest  income and net interest income reported in
     the  Company's  consolidated  statements of income were $17,458 and $11,542
     for 1997,  $16,061 and  $10,656 for 1996,  and $15,125 and $9,996 for 1995.
================================================================================

                                       27
<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,
                                      ----------------------------------   -------------------------------------
                                                1997 VS. 1996                          1996 VS. 1995
                                          INCREASE (DECREASE) DUE TO            INCREASE (DECREASE) DUE TO
                                      ----------------------------------   -------------------------------------
                                        VOLUME        RATE       TOTAL        VOLUME         RATE        TOTAL
<S>                                   <C>          <C>         <C>         <C>            <C>          <C>
Loans                                   $1,124      $  (91)     $1,033        $ 916         $ (490)     $  426
Taxable securities                         154         219         373         (339)           208        (131)
Non-taxable securities                     264         (14)        250          401            479         880
Federal funds sold                        (259)          9        (250)          (9)           (34)        (43)
Interest-bearing deposits                   86         (10)         76           66             37         103
                                         -----         ---       -----        -----            ---       -----
Total interest income                    1,369         113       1,482        1,035            200       1,235
Deposits
Interest-bearing demand deposits           (50)        (31)        (81)         (16)          (185)       (201)
Savings deposits                          (174)        (77)       (251)         (98)          (243)       (341)
Time deposits                              241         (12)        229          361            278         639
                                        ------      ------      ------        -------       ------      ------
Total interest-bearing deposits             17        (120)       (103)         247           (150)         97
Borrowings                                 632         (18)        614          210            (31)        179
                                        ------      ------      ------        -------       ------      ------
Total interest-bearing liabilities         649        (138)        511          457           (181)        276
                                        ------      ------      ------        -------       ------      ------
Net interest income                     $  720      $  251      $  971        $ 578         $  381      $  959
                                        ======      ======      ======        =======       ======      ======
</TABLE>
On a tax  equivalent  basis,  net interest  income for 1997 increased $971 or 9%
over 1996.  The increase was  primarily  attributable  to an increase in average
interest-earning  assets,  an increase  in the net  interest  spread,  partially
offset  by  an  increase  in  average  interest-bearing   liabilities. 

Average   interest-earning   assets   increased  by  $14,376  or  7%,  comprised
principally of growth in the loan and non-taxable securities portfolios. Average
loans  increased  $11,977 or 12%,  comprised  primarily  of an  increase  in the
commercial real estate loan portfolio. The $3,172 or 25% increase in non-taxable
securities  resulted from  continuing  management of the investment  portfolio's
after-tax yield.

The  interest  rate spread  increased 7 basis points or  approximately  2%, from
4.44% in 1996 to 4.51% in 1997.  The  increase  is a result of a 16 basis  point
increase in the average rate earned on interest-earning  assets versus a 9 basis
point increase in the cost of interest-bearing  liabilities. The increase in the
average  rate  earned on assets is  primarily  attributable  to a 25 basis point
increase in yield on taxable  securities  partially  offset by a decrease in the
tax equivalent  yield on  non-taxable  securities and a reduction in the average
rate on loans. The average rate earned on non-taxable  securities decreased from
8.31% for 1996 to 8.22% for 1997. This decrease is primarily attributable to the
Company  decreasing the weighted average maturity of the non-taxable  securities
portfolio.  The increase in the yield of the taxable securities portfolio is due
primarily  to an increase in the yield and average  balances of  mortgage-backed
securities.  The yield and average balances on  mortgage-backed  securities were
6.36% and $59,147, and 6.09% and $42,653 for 1997 and 1996, respectively.

Interest-bearing  liabilities  increased $10,413 or 6%, comprised of an increase
in  time   deposits  and   borrowings,   partially   offset  by  a  decrease  in
interest-bearing  demand and savings  deposits.  Time  deposits  and  borrowings
(comprised of repurchase  agreements  and the interim  capital  assistance  note
payable)  increased 10% and 307%,  respectively.  The increase in borrowings was
attributable  to  the  Company  accessing  a  new  funding  source,   repurchase
agreements,  in 1996,  and 1997 being the first  full year in which the  Company
utilized repurchase agreements as a source of funding.

Provision  for Loan Losses - The Company  maintains an allowance for loan losses
to  absorb   losses  on  existing   loans  and   commitments   that  may  become
uncollectible.  The provision for loan losses  increased $685 from $510 for 1996
to  $1,195  for  1997.  The  increase  in  the  provision  for  loan  losses  is
attributable to the large level of potential problem loans and the growth of the
loan portfolio,  specifically commercial real estate loans. Additionally, during
1997, $2,265 of problem loans were sold, requiring a subsequent $405 charge off

                                       28
<PAGE>
================================================================================
TABLE 3. (CONT).

associated with the sale of these loans.  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
for loan losses are uncertain.  Therefore, future provisions for loan losses may
decrease from the levels deemed appropriate for 1997. There can be no assurance,
however,  that  future  provisions  for  loan  losses  will  be  lower,  or that
additional large provisions will not be necessary. See the Asset Quality section
for additional information related to the Company's allowance for loan losses.

Noninterest Income - Noninterest income increased $714 or 27% to $3,334 for 1997
from $2,620 for 1996.  The primary  components  of  noninterest  income is other
income,  service  charges on deposit and checking  accounts and gains on sale of
securities.  Other  income  increased  $307 or 125%  and  primarily  represented
surcharges on nondepositors  utilizing the Bank's ATM services.  Service charges
on deposit accounts  increased $274 or 12% and is primarily  attributable to the
increased assessment of fees on deposit accounts. Additionally, gain on the sale
of  securities  increased  $133 or 122% due in part to the lower  interest  rate
environment and management's investment strategy.

Noninterest  Expense - Noninterest  expense for 1997 was $11,645, an increase of
$709 or 6% over 1996.  Salaries and employee benefits  increased $431 or 7%. The
increase in salaries and employee  benefits is primarily  attributable to normal
growth, the staffing of a new branch and a full year of salaries associated with
management's  continued efforts in staffing the lending  operations and building
infrastructure  to support  increased  participation  in the secondary  mortgage
market  that was  implemented  in 1996.  Occupancy,  data  processing  and other
expenses  increased 7%, 6% and 4%  respectively  and represents  increased costs
associated  with staffing and normal growth.  Furniture and equipment  increased
$63 or 11% and also  represents  increased cost associated in the new branch and
additional equipment expenses related to a new data processing servicer.

Provision for Income Taxes - The  provision for income taxes for 1997  decreased
$57, or 11%,  from 1996,  due  primarily to an 18% decrease in the effective tax
rate.  The  effective tax rate was 23% for 1997,  compared to 28% for 1996.  The
decrease in the effective tax rate was primarily attributable to the increase in
tax-exempt  income.

ASSET/LIABILITY MANAGEMENT

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

                                       29

<PAGE>
================================================================================
TABLE 4. RATE SENSITIVITY ANALYSIS 

                                                         (dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                        3 MONTHS      4 TO 12    TOTAL WITHIN   1 TO 5      OVER
                                         OR LESS       MONTHS     12 MONTHS      YEARS     5 YEARS      TOTAL
<S>                                    <C>             <C>         <C>        <C>         <C>           <C>
EARNINGS ASSETS
   Loans(1)(2)                           $ 22,647     $ 11,307    $ 33,954    $ 58,126     $ 25,714     $117,794
   Investment  securities(3)                9,582       24,788      34,370      52,723       14,013      101,106
   Federal funds sold                      11,500          --       11,500                       --       11,500
   Interest-bearing deposits in other
      banks                                    --        1,000       1,000       2,000           --        3,000
                                          -------      --------    -------    --------     --------     ---------
   Total earning assets                  $ 43,729     $ 37,095    $ 80,824    $112,849     $ 39,727     $233,400
                                         ========      ========   ========    ========     =========    ========
   Percent of total earning  assets         18.74%       15.89%      34.63%      48.35%       17.02%      100.00%
   Interest-bearing  liabilities 
   Time certificates of deposit of $100M
      or more(4)                         $  4,612     $ 10,972    $ 15,584    $  1,223           --     $ 16,807
   Savings,  NOW, money market deposits
       and other time deposits             17,178       19,840      37,018      72,123           --      109,141
   Time certificates of deposit less 
       than $ 100M                         10,006       15,273      25,279       2,976          157       28,412
   Borrowed funds                          20,496          --       20,496          --           --       20,496 
                                         --------     --------    --------    ---------    ---------    ---------
   Total interest-bearing liabilities    $ 52,292     $ 46,085    $ 98,377    $ 76,322     $    157     $174,856
                                         ========     ========    ========    =========    =========    =========
   Interest-sensitivity gap                (8,563)      (8,990)    (17,553)     36,527       39,570       58,544
   Cumulative  interest-sensitivity gap    (8,563)     (17,553)    (17,553)     18,974       58,544       58,544
   Ratio of earning  assets to  interest-
        bearing  liabilities  (gap ratio)   83.62%       80.49%      82.16%     147.86%     25303.8%      133.48%
   Cumulative ratio of earning assets
        to  interest-bearing  liabilities
        (cumulative gap ratio)              83.62%       82.16%     82.16%      110.86%       133.48%    133.48%
   Cumulative interest-sensitivity gap  
        as a percent of total assets        (3.42)%      (7.00)%     (7.00)%      7.57%         23.35%    23.35%
                                          ========     ========    ========   =========     ==========  =========
</TABLE>

--------------------------------------------------------------------------------
(1)  Non-accrual  loans are  excluded  from  loan  totals. 
(2)  Loans  have  been  included  based on  their  contractual  maturities.
(3)  Mortgage-backed  securities  have been  included  based on their  estimated
     remaining maturities,  utilizing the most recent quarter paydown experience
     and prorated outward. Fourth quarter 1997 paydown experience was $3,590.
(4)  Excludes a noninterest-bearing time deposit of $914.
================================================================================

Table 4 presents an analysis of the Company's  interest-sensitivity gap position
at December 31, 1997. Asset  prepayments and liability decay rates are estimated
based on the Company's  experience.  Due to the relatively  stable nature of the
Company's  interest-bearing  nonmaturity deposits, these deposits were allocated
as follows: 100% of money market accounts to the 3 months or less category,  and
6%  per  quarter  for  all  other  nonmaturity  deposits.  Approximately  76% of
nonmaturity  deposits  (other than money market  deposits)  are allocated in the
over 12 months category.  Time deposits are allocated based on their contractual
maturities.  As  summarized in Table 4, the Company's  one-year  cumulative  gap
ratio is 82%. This position reflects a  liability-sensitive  position where more
liabilities  than  assets  reprice  during  the  one-year  period. 

Generally a  liability-sensitive  position  would result in an adverse impact on
net interest  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  interest-bearing  liabilities.
Accordingly,  certain  assets and  liabilities  indicated as repricing  within a
stated  period may in fact  reprice at  different  times at  different  volumes.
Further,  in the  event of  change  in  interest  rates,  prepayment  and  early
withdrawal  levels  would likely  deviate  significantly  from those  assumed in
calculating Table 4.

                                       30
<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, 1997, 1996 and
1995.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                               (dollars in thousands):
----------------------------------------------------------------------------------------------------------------------
                                         1997        PERCENT         1996        PERCENT         1995        PERCENT
<S>                                  <C>           <C>           <C>           <C>           <C>           <C>
ASSETS
 Loans, net                           $116,476         46.46%     $108,611         46.06%     $  92,817        41.70%
 Investment securities                 101,106         40.33%       94,824         40.22%        87,198        39.18%
 Federal funds sold                     11,500          4.58%        8,300          3.52%        20,800         9.35%
 Interest-bearing deposits in
   other banks and commercial
   paper                                 3,000          1.20%        3,000          1.27%         3,072         1.38%
                                      --------        ------      --------        ------      ---------       ------
 Total earnings assets                 232,082         92.57%      214,735         91.07%       203,887        91.61%
 Cash and due from banks                11,842          4.72%       13,692          5.81%        11,014         4.95%
 Bank premises and equipment             2,672          1.07%        2,452          1.04%         2,358         1.06%
 Other assets                            4,106          1.64%        4,909          2.08%         5,302         2.38%
                                      --------        ------      --------        ------      ---------       ------
 Total assets                         $250,702        100.00%     $235,788        100.00%     $ 222,561       100.00%
                                      ========        ======      ========        ======      =========       ======
LIABILITIES AND SHARE-
 HOLDERS' EQUITY
 Demand deposits                      $ 52,922         21.11%     $ 50,840         21.56%     $  46,341        20.82%
 Savings, NOW and MMDA                  92,462         36.89%      109,020         46.24%       117,273        52.69%
 Time deposits $100,000 or more         16,807          6.70%       14,246          6.04%        12,295         5.52%
 Other time deposits                    46,005         18.35%       31,978         13.56%        27,790        12.49%
                                      --------        ------      --------        ------      ---------       ------
 Total deposits                        208,196         83.05%      206,084         87.40%       203,699        91.52%
 Borrowed funds                         20,496          8.17%       11,466          4.86%         1,000         0.45%
 Accrued expenses and other li-
   abilities                             1,833           .73%          920          0.40%         1,307         0.59%
                                      --------        ------      --------        ------      ---------       ------
 Total liabilities                     230,525         91.95%      218,470         92.66%       206,006        92.56%
 Shareholders' equity                   20,177          8.05%       17,318          7.34%        16,555         7.44%
 Total liabilities and 
  shareholders' equity                $250,702        100.00%     $235,788        100.00%     $ 222,561       100.00%
                                      ========        ======      ========        ======      =========       ======
 ---------------------------------------------------------------------------------------------------------------------
</TABLE>

Overview - Total assets increased $14,914 from December 31, 1996 to December 31,
1997,  mainly due to an increase in loans and securities,  increasing $7,865 and
$6,282  respectively and totaling $14,147 or 95% of the increase in assets.  The
increase  in assets was  primarily  funded by  increased  borrowings  of $9,030,
shareholders' equity of $2,859 and deposits of $2,112.

Loans - Net loans outstanding at December 31, 1997 were $116,476, an increase of
$7,865,  or 7%, from year end 1996.  The  composition  of the loan  portfolio is
summarized in Table 6. The increase in loans consisted  primarily of an increase
in  commercial  real estate loans of $14,057  offset  primarily by a decrease of
$5,087 in commercial loans.

================================================================================
TABLE 6. LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
                                                                                                                     DECEMBER 31,  
                                                                                                             (dollars in thousands):
------------------------------------------------------------------------------------------------------------------------------------
                       1997      PERCENT      1996      PERCENT      1995    PERCENT      1994      PERCENT      1993      PERCENT  
<S>                 <C>        <C>         <C>        <C>         <C>          <C>       <C>        <C>         <C>        <C>      
Commercial           $ 23,145      19.51%   $ 28,232      25.61%   $19,128     20.31%   $20,166       21.30%   $14,393       20.86% 
Residential 1 to                                                                                                                    
 4 family              52,077      43.89%     52,876      47.96%    49,123     52.16%    48,710       51.46%    29,316       42.48% 
Commercial real                                                                                                                     
 estate                38,499      32.45%     24,442      22.17%    22,225     23.60%    22,380       23.64%    22,092       32.01% 
Installment loans       4,925       4.15%      4,692       4.26%     3,700      3.93%     3,409        3.60%     3,210        4.65% 
                     --------     ------    --------     ------    -------    ------    -------      ------    -------      ------  
Total                $118,646     100.00%   $110,242     100.00%   $94,176    100.00%   $94,665      100.00%   $69,011      100.00% 
                     ========     ======    ========     ======    =======    ======    =======      ======    =======      ======  
                                                                                        
</TABLE>

                                       31
<PAGE>
================================================================================
TABLE 7. MATURITY OF LOAN PORTFOLIO FIXED RATE AND VARIABLE RATE  (1)

Securities - The carrying value of the Company's  securities portfolio increased
$6,282 or 7% from  $94,824 at December  31,  1996,  to $101,106 at December  31,
1997.   The  increase  in  the   investment   portfolio   was   principally   in
mortgage-backed securities increasing $5,414 and representing 86% of the growth.
Other securities  increased $868 due largely to an investment of $744 in Federal
Home Loan Bank of Atlanta.  The yield on taxable securities increased from 6.06%
for 1996 to 6.31% for 1997. The tax equivalent yield for non-taxable  securities
decreased from 8.31% for 1996 to 8.22% for 1997. The mortgage-backed  securities
portfolio had a weighted  average  remaining  maturity of 2.29 years at December
31,  1997,  compared to 2.73 years at December 31, 1996  (utilizing  Bloomberg's
street consensus).  The collateral underlying all the mortgage-backed securities
is  guaranteed  by one  of  the  "quasi-governmental"  agencies,  and  therefore
maintain 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.  At December 31, 1997,
based on stress tests  performed by  management,  a 300 basis point increase and
decrease in interest  rates would  result in an  approximate  decrease of 8% and
less than 1%  increase,  respectively,  in the present  carrying  value of these
securities.  There are no issuers of securities,  whose securities,  held by the
Company,  have a book  value in  excess  of 10% of the  Company's  shareholders'
equity.  The Company's  securities  portfolio is also presented in Note 2 to the
consolidated financial statements.

                                                            AT DECEMBER 31, 1997
                                                         (dollars in thousands):
--------------------------------------------------------------------------------
                                   After One Year                            
                       One Year      Through         After                   
                       or Less      Five Years     Five Years       Total    
     Fixed rate      $  16,771      $  56,624      $  25,635      $  99,030  
     Variable rate      17,184          1,501             79         18,764  
                        ------          -----         ------         ------  
     Total           $  33,955      $  58,125      $  25,714      $ 117,794  
================================================================================
TABLE 8. INVESTMENT PORTFOLIO MATURITY SCHEDULES(1)

Table 8 summarizes  the maturity and average yield of the  Company's  investment
portfolio.
                                                            AT DECEMBER 31, 1997
                                                         (dollars in thousands):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   WITHIN                 AFTER ONE BUT            AFTER FIVE BUT 
                                                  ONE YEAR               WITHIN FIVE YEARS         WITHIN TEN YEARS
----------------------------------------------------------------------------------------------------------------------
                                              AMOUNT      YIELD         AMOUNT     YIELD         AMOUNT    YIELD   

<S>                                        <C>            <C>           <C>         <C>           <C>       <C> 
U.S.Treasury                               $  17,009      6.19%         $2,005      5.74%          -         -     
U.S.Government agencies                        3,001      6.02%          8,498      6.02%          -         -
State and political subdivisions                  -         -                -         -           -         -
Other                                             -         -            1,096      6.77%          -         - 
Mortgage-backed securities                        -         -                -        -            -         - 
                                             -------     -------        --------   ------      
Total                                      $  20,010      6.16%        $11,599      6.04%          -         -  
                                           =========     =======        ========   ======
</TABLE>

<TABLE>
<CAPTION>
                                                     AFTER                      MORTGAGE                   
                                                   TEN YEARS                     BACKED               TOTAL
----------------------------------------------------------------------------------------------------------------------
                                              AMOUNT      YIELD         AMOUNT     YIELD         AMOUNT    YIELD   

<S>                                        <C>            <C>            <C>        <C>       <C>           <C>   
U.S.Treasury                                     -         -                -         -        $19,014      6.14%
U.S.Government agencies                          -         -                -         -         11,499      6.02%
State and political subdivisions              12,726      8.48%             -         -         12,726      8.48%
Other                                                      -                -         -          1,096      6.40%
Mortgage-backed securities                        -        -             56,771     6.93%       56,771      6.93%
                                             -------     -------        --------   ------      -------     -------
Total                                      $  12,726      8.48%         $56,771     6.93%     $101,106      6.50% 
                                           =========     =======        ========   ======      =======     ========
</TABLE>

(1)  Yeilds on  non-taxable  securities  have been computed on a tax  equivalent
     basis using a 34% tax rate.
================================================================================

                                       32
<PAGE>
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.

                                                         YEAR ENDED DECEMBER 31,
                                                         (dollars in thousands):
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     1997            1996           1995           1994           1993
<S>                                             <C>             <C>             <C>            <C>            <C>
Total outstanding loans at year end               $ 118,646       $ 110,242       $ 94,176      $  94,665       $ 69,011
Average amount of loans outstanding                 113,511         100,950         90,630         72,886         68,370
Allowance for loan losses at beginning of
 year                                                 1,266           1,177          1,751          2,168          1,500
Loans charged off:
 Commercial                                             451             637            766          1,040            759
 Real estate mortgage                                   256              52             40             28             25
 Installment loans to individuals                       182              69             14             17             76
                                                  ---------       ---------       --------      ---------       --------
 Total charge-offs                                      889             758            820          1,085            860
Recoveries of loans previously charged-off:
 Commercial                                              81             286            202            172            597
 Real estate mortgage                                     0              25              0              2              0
 Installment loans to individuals                        49              26             19             14             31
                                                  ---------       ---------       --------      ---------       --------
Total recoveries                                        130             337            221            188            628
Net charge-offs                                         759             421            599            897            232
Additions to allowance charged to opera-
 tions                                                1,195             510             25            480            900
                                                  =========       =========       ========      =========       ========
Allowance for loan losses at end of year          $   1,702       $   1,266       $  1,177      $   1,751       $  2,168
Ratios of net charge-offs during year to av-
 erage outstanding loans during year                   0.67%           0.42%          0.66%          1.23%          0.34%
Ratio of allowance for possible loan losses
 at year end to total loans                            1.43%           1.15%          1.25%          1.85%          3.14%
</TABLE>
================================================================================

TABLE 10. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    (dollars in thousands):
--------------------------------------------------------------------------------------------------------------------------------
                      1997     PERCENT      1996     PERCENT      1995     PERCENT      1994     PERCENT      1993     PERCENT
<S>                <C>       <C>         <C>       <C>         <C>       <C>         <C>       <C>         <C>       <C>
Commercial          $1,378       80.96%   $1,075       84.91%   $  875       72.96%   $1,403       80.13%   $1,466       67.62%
Real estate mort-
 gage                  117        6.88%       89        7.03%       71        6.36%      125        7.14%      124        5.72%
Consumer               182       10.69%       92        7.27%        0           0%       63        3.60%      104        4.80%
Unallocated             25        1.47%       10        0.79%      231       20.68%      160        9.14%      474       21.86%
                    ------      ------    ------      ------    ------      ------    ------      ------    ------      ------
Total               $1,702      100.00%   $1,266      100.00%   $1,177      100.00%   $1,751      100.00%   $2,168      100.00%
                    ======      ======    ======      ======    ======      ======    ======      ======    ======      ======
</TABLE>
The  allowance  for loan losses was $1,702 at December 31, 1997,  as compared to
$1,266 at December 31, 1996. The ratio of the allowance for loan losses to total
loans at  December  31,  1997 and 1996 was 1.43%  and  1.15%,  respectively.  At
December 31, 1997,  non-performing  assets to total assets was .85%  compared to
1.94% at December 31, 1996. Net charge-offs increased $338 to $759 for 1997 from
$421 for 1996.  The provision for loan losses  increased to $1,195 for 1997 from
$510 for 1996,  reflecting  the  growth  in loans  and the large  level of loans
($7,931 or 6.68% of total loans) with potential credit  problems.  Additionally,
the unallocated  portion of the allowance  increased to $25 from $10 at year-end
1996.

The level of the  allowance  for loan losses is  determined by management on the
basis of various assumptions and judgements.  These include levels and trends of
past due and non-accrual loans,  trends in volume and changes in terms,  effects
of policy  changes,  experience  and depth of management,  anticipated  economic
conditions in the Washington,  DC metropolitan  area,  concentrations of credit,
the  composition  of the loan  portfolio,  prior loan loss  experience,  and the
ongoing and periodic reviews of the loan portfolio by the Company's internal and
external  loan review  function.  For impaired  loans,  the Company  establishes
reserves in accordance  with SFAS 114 and SFAS 118, and for  non-impaired  loans
uses an allocation  approach  which relies on historical  loan loss  experience,
adjusted to reflect current conditions and trends.
                                           
Although management believes that it uses the best information available to make
such  determinations  that the allowance for loan losses is adequate at December
31,1997,  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

                                       33
<PAGE>
TABLE 10. (CONT.)

making the initial  determinations.  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  determinations  as to the future 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>
                                                                                               December 31,
                                        -------------------------------------------------------------------
                                            1997          1996          1995          1994          1993
                                        -----------   -----------   -----------   -----------   -----------
                                                                                     (dollars in thousands)
<S>                                     <C>           <C>           <C>           <C>           <C>
Non-accrual loans(1) ................     $   852       $ 2,006       $ 1,086       $ 1,809       $ 1,788
Loans past due 90 days or more and
 still accruing .....................         753         1,267           569           605           866
Foreclosed properties(2) ............         522         1,310           950         1,270         1,370
                                          -------       -------       -------       -------       -------
Total ...............................     $ 2,127       $ 4,583       $ 2,605       $ 3,684       $ 4,024
                                          =======       =======       =======       =======       =======
Non-performing assets to gross loans
 and foreclosed properties at period
 end ................................        1.78%         4.11%         2.74%         3.84%         5.72%
Non-performing assets to total assets
 at period end ......................         .85%         1.94%         1.17%         1.60%         2.10%
</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 1997
    for  non-accrual  loans at December  31, 1997 had the loans been  current in
    accordance  with  their  original  terms  was  $223,062.  See  Note 1 to the
    consolidated financial statements.

(2) Foreclosed  properties  include  properties  that  have  been  substantively
    repossessed  (for years  prior to 1995) or  acquired  in complete or partial
    satisfaction of debt. The properties, which are held for resale, are carried
    at the  lower  of fair  value  (net of estimated  selling  expenses)  or the
    principal balance of the related loans.

(3) The Bank  charges  loans  against  the  allowance  for loan  losses  when it
    determines   that   principal  and  interest  or  portions   thereof  become
    uncollectible.  This is  determined  through an analysis of each  individual
    credit,  including  the financial  condition  and repayment  capacity of the
    borrower, and of the sufficiency of the collateral, if any.
================================================================================

Non-performing  assets at year-end 1997 were $2,127, a decrease of $2,456 or 54%
from  year-end  1996.  The  decrease  was  primarily  attributed  to  management
disposing of  nonperforming  assets  through the sale of $2,265 in problem loans
and subsequently  charging off $405 in loan losses associated with sale of these
loans. Non-accrual loans totaled $852 for year end 1997 and consisted of $285 in
real estate loans,  $547 in commercial loans and $20 in installment  loans. This
represented a decrease of $1,154 or 58% from  year-end  1996. As of December 31,
1997,  loans  past  due 90 days or more  and  still  accruing  totaled  $753 and
consisted of $545 in real estate  loans,  $165 in commercial  loans,  and $43 in
installment  loans to  individuals.  This compares to $749 in real estate loans,
$445 in commercial  loans,  and $73 in  installment  loans at December 31, 1996.
This  represented an aggregate  decrease of $514 from year-end 1996.  Loans past
due 90 days or more and still  accruing  consisted  primarily of two real estate
loans of $545 that have  ballooned  and were not renewed as of year-end 1997 due
to an absence of current financial information.  Foreclosed properties decreased
$788 in 1997 to  $522,  consisting  of six  properties  with  two  having  a net
carrying value of $144 and $138 respectively,  while the other properties have a
net carrying value below $100.
                                                   
At December  31,  1997,  there were $7,931 of loans not  reflected  in the table
above, where known information about

                                       34
<PAGE>
TABLE 11. (CONT.)

possible credit problems of borrowers caused management to have 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
sixteen loans,  totaling $4,328,  fully  collateralized by real estate,  four of
which represent  $2,870 of the total.  The remaining $3,603 consists of fourteen
commercial  loans,  none in excess of  $1,235,  secured  primarily  by  accounts
receivable and various business equipment.
                                                        
Deposits, Other Sources of Funds and Liquidity - Deposits are generally the most
important  source of the  Company's  funds  for  lending,  investing,  and other
business purposes.  Deposit inflows and outflows are significantly influenced by
general interest rates, market conditions, and competitive factors.

Total deposits increased by $2,112 or 1%, from December 31, 1996 to December 31,
1997.
                                                     
Other sources of funds include borrowings, repayment and maturities of loans and
securities,  proceeds from the sale of securities,  funds from  operations,  and
cash and cash  equivalents.  During 1997,  the Company  began  raising  funds by
selling securities under agreements to repurchase. These fixed coupon over-night
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, 1997,  $19,496 of repurchase  agreements with an
average rate of 4.26% were outstanding.

================================================================================
TABLE 12. TIME DEPOSIT MATURITY SCHEDULE

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

                                                            AT DECEMBER 31, 1997
                                                         (dollars in thousands):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                     3 MONTHS OR LESS   4 TO 6 MONTHS   7 TO 12 MONTHS   OVER 12 MONTHS     TOTAL
<S>                                 <C>                <C>             <C>              <C>              <C>
Time certificates deposit of
 $100M or more                            $ 4,612          $ 3,586          $ 7,386          $1,223       $16,807
Time certificates of deposit less
 than $100M                                10,006            8,177            7,096           3,133        28,412
                                          -------          -------          -------          ------       -------
Total(1)                                  $14,618          $11,763          $14,482          $4,356       $45,219
                                          =======          =======          =======          ======       =======
</TABLE>
================================================================================
(1)  Excludes $10,654 in money market  demand  deposits,  $5,919  in  individual
     retirement  account  deposits,  $914  in open  time  deposit,  and  $106 in
     Christmas Club deposits.
================================================================================

In connection with the series of transactions with the RTC, the Company borrowed
$1,000 from the RTC.  These funds were  contributed  to the capital of the Bank.
For  additional  information  regarding  this  borrowing  refer to Note 7 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, 1997 and 1996 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.

Shareholders' Equity and Capital - Shareholders' equity increased $2,859, or 17%
from $17,318 at December 31, 1996 to $20,177 at December 31, 1997.  The increase
is attributable to retained  earnings of $1,178, an increase in capital stock of
$31,  an  increase of capital  surplus of $722,  preferred  stock of $500 and an
increase of $428 in the unrealized gain on available for sale securities, net of
tax. The increase in the capital stock and surplus accounts, and the issuance of
preferred stock occurred when the company sold 31,200 shares of common stock and
20,000 shares of its Series A Non-Voting Preferred Stock, in a private placement
transaction, to the Federal National Mortgage Association (Fannie Mae). See Note
8 to the  consolidated  financials  for  additional  information  regarding this
transaction.  At December 31, 1997,  approximately $2,108 of the Bank's retained
earnings was available to pay dividends to the Company without prior  regulatory
approval.

Set forth below is certain financial  information  relating to the Company's and
Bank's  dividend  history for the past five fiscal years (as adjusted to reflect
the  5-for-1  stock  split in the form of a stock  dividend  paid in July 1994.)
Information for periods prior to July 1, 1995 reflect Bank information.
                                                        
                                                         YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                        1997         1996         1995         1994         1993
<S>                                  <C>          <C>          <C>          <C>          <C>
Net income per share                  $ 2.44       $ 2.06       $ 2.56       $ 1.99       $ 3.12
Dividends paid per share              $  .60       $  .60       $  .60       $  .60       $  .50
Ratio of dividends to net income       24.59%       29.13%       23.44%       30.15%       16.03%
</TABLE>

                                       35
<PAGE>

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.

The Company and the Bank are subject to certain regulatory capital requirements.
Management believes, as of December 31, 1997, that the Company and the Bank meet
all the capital adequacy  requirements to which they are subject. As of December
31, 1997,  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 9 to the  consolidated  financial
statements   for   additional   information   related  to   regulatory   capital
requirements.

The  consolidated  financial  statements and related data presented  herein have
been prepared in accordance with generally accepted accounting  principles which
require the measurement of financial position and results of operations in terms
of historical dollars 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.

Year 2000 Issue - Many  computer  programs now in use have not been  designed to
properly recognize years after 1999. If not corrected, these programs could fail
or create  erroneous  results.  This year 2000 issue affects the entire  banking
industry  because of its  reliance on  computers  and other  equipment  that use
computer chips,  and may have significant  effects on the banking  customers and
regulators.  In  recognition of the potential  adverse  effects of the year 2000
issue,  management of the Company created a task force and established a plan to
prevent or mitigate adverse effect of the year 2000 issue on the Company and its
customers.  The Company's primary supplier of data processing  services also has
adopted a year 2000 plan and  timetable.  Management  believes  that the cost of
resolving year 2000 issues relating to the Company's computer programs and those
used by its  suppliers  of  significant  data  processing  services  will not be
material to the Company's business, operations, liquidity, capital resources, or
financial  condition,  based on information  developed to date and communication
from data  processing  suppliers.  The  Company's  year 2000  plan  requires  an
assessment of year 2000 effects on its commercial  lending and other  customers.
The effects on individual, corporate and government customers of the Company and
on governmental authorities that regulate the Company and its subsidiaries,  and
any resulting consequences to the Company, cannot yet be determined. The Company
has  committed  management  resources  deemed  necessary  to identify and timely
resolve all significant year 2000 issues.

                                       36