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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 2002        Commission File No. 000-32547
                                                                      ----------

                       MOUNTAINBANK FINANCIAL CORPORATION
                 (Name of small business issuer in its charter)

             North Carolina                                   56-2237240
  -----------------------------------                  -------------------------
    (State or other jurisdiction of                        (I.R.S. Employer
     incorporation or organization)                       Identification No.)

             201 Wren Drive
     Hendersonville, North Carolina                               28792
  ------------------------------------------------------------------------------
  (Address of principal executive offices)                      (Zip Code)

                                 (828) 693-7376
    ----------------------------------------------------------------------
                 Issuer's telephone number, including area code

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

<TABLE>
<S>                                                   <C>
Securities registered under Section 12(g) of the Act: Common Stock, $4.00 par value per share
                                                                 (Title of class)
</TABLE>

     Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

                       Yes  X                 No ___
                           ---

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

     Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

                       Yes ___                No  X
                                                 ---

     The aggregate market value of the Registrant's voting and non-voting common
equity held by nonaffiliates computed by reference to the price at which the
common equity was last sold as of the last business day of the Registrant's most
recently completed second fiscal quarter was $65,361,624.

     On March 15, 2003, the number of outstanding shares of Registrant's common
stock was 3,220,657.

     Portions of Registrant's definitive proxy statement to be distributed in
connection with its 2003 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.

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                                     PART I

Item 1.   Description of Business.

          General. MountainBank Financial Corporation ("MFC") is a bank holding
company that was organized under North Carolina law during January 2001. It is
the parent company of MountainBank, and its primary business activity is its
investment in and managing the business of MountainBank. MountainBank is a North
Carolina-chartered bank which first began banking operations during June 1997.
Its deposits are insured by the FDIC. MFC and MountainBank each is headquartered
in Hendersonville, North Carolina, and they are engaged in a general,
community-oriented commercial and consumer banking business. Their Internet
website address is www.mountainbank.net.

          Bank Holding Company Reorganization. The directors of MountainBank
organized MFC during 2001 for the sole purpose of MFC becoming MountainBank's
parent holding company. On March 30, 2001, MFC and MountainBank completed a
share exchange in which each outstanding share of MountainBank's common stock
was exchanged for one share of MFC's common stock, MountainBank's shareholders
became the shareholders of MFC, and MountainBank became MFC's wholly-owned
subsidiary.

          Recent Developments in MFC's Business.

          .    Acquisition of TrustCo Holding, Inc. Effective on December 31,
2002, TrustCo Holding, Inc. merged into MFC. TrustCo was headquartered in
Greenville, South Carolina, and was the parent company of Trust Company of the
South, a South Carolina-chartered trust company, and Asset Management of the
South, a South Carolina corporation that is a registered investment advisor. At
the time the merger was completed, TrustCo's unaudited interim consolidated
financial statements reflected approximately $1.53 million in assets (including
assets represented by the proceeds of loans from MFC totaling $1.5 million) and
$22,500 in shareholders' equity. On the same date, Trust Company of the South
and Asset Management of the South had an aggregate of approximately $55 million
in funds under management. For the year ended December 31, 2001, TrustCo's
audited financial statements reflected a loss of $576,000.

               The transaction was structured whereby TrustCo was merged into
MFC and MFC issued to TrustCo's 29 shareholders an aggregate of 59,261 shares of
MFC common stock in exchange for TrustCo's outstanding common stock and paid an
aggregate of $200,000 for TrustCo's outstanding preferred stock.

               MFC acquired TrustCo to facilitate the expansion of its banking
market into South Carolina and to expand MFC's services to include trust and
wealth management services. South Carolina law currently will not permit
MountainBank to establish de novo branches in that state, and MFC has not
identified an existing commercial bank in South Carolina that it can, or is
willing to, acquire in order to expand its market. In conjunction with its
acquisition of TrustCo, applications are being filed to convert Trust Company of
the South into a national bank with full banking powers. Subject to approval of
those applications, and following MFC's merger with CNB Holdings, Inc., MFC
expects to merge Trust Company of the South into Community National Bank which
would then exist as a wholly-owned national bank subsidiary of MFC with offices
in Virginia and South Carolina. In the future, Community National likely will be
merged into MountainBank, and MFC expects that MountainBank will begin to
establish branch offices in South Carolina. However, applications for those
transactions have not been filed and there is no assurance that those
applications will be approved or that MFC's acquisition of TrustCo will result
in an ability to open full-service banking offices in South Carolina.

          .    Pending Acquisition of CNB Holdings, Inc. During 2002, MFC
entered into an agreement to merge with CNB Holdings, Inc. CNB is headquartered
in Pulaski, Virginia, and is the bank holding company for Community National
Bank which operates two banking offices in Pulaski. On December 31, 2002, CNB's
consolidated financial statements reflected approximately $59 million in assets,
$35 million in total loans, $51 million in deposits, and $8 million in
shareholders' equity.

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               The transaction is structured whereby CNB will be merged into
MFC, Community National Bank will become a wholly-owned subsidiary of MFC, and
CNB's shareholders will receive a combination of MFC common stock and cash
(approximately 50% each) valued at approximately $13.50 for each of their shares
of CNB common stock, with the actual number of shares of MFC common stock to be
issued for each CNB share to be based on the market value of MFC common stock
immediately prior to completion of the merger. The aggregate value of all
consideration to be paid by MFC in that transaction is expected to be
approximately $13.8 million. The transaction was approved by CNB's shareholders
on March 7, 2003. Consummation of the merger is subject to receipt of required
state and federal bank regulatory approvals. Subject to those contingencies, it
is expected that the transaction will be completed during April 2003.

          .    Sale of Preferred Trust Securities. On June 27, 2002, a newly
formed business trust subsidiary of MFC, MountainBank Capital Trust I, privately
sold $20.0 million in preferred trust securities. The proceeds from that sale,
together with the proceeds from the Trust's sale of all its common securities to
 MFC, were used to purchase an aggregate of $20.6 million in junior subordinated
debentures issued by MFC. The debentures call for interest payable quarterly at
a variable annual rate equal to the three-month LIBOR plus 3.65%, with principal
payable in full on June 30, 2032. Subject to certain limitations, MFC has fully
and unconditionally guaranteed its trust subsidiary's obligations under the
preferred trust securities. A majority of the proceeds from the transaction
are being counted as "Tier 1" capital on MFC's books and have been or will be
used by MFC to pay the outstanding balance of a term loan (approximately $5.0
million), to fund cash payments to CNB's shareholders in connection with the
merger (approximately $7.7 million), and to supplement MFC's and its banking
subsidiaries' capital and support their continued operations and growth.

          .    Sale of Series A Preferred Stock. On December 17, 2001, MFC's
shareholders approved an amendment to its Articles of Incorporation which
authorized MFC to issue up to 3,000,000 shares of preferred stock and authorized
MFC's Board to issue shares of the new preferred stock from time to time in the
future, in one or more series, and to fix and determine the relative rights and
preferences of those shares, or of each series of shares, at the time of
issuance and without the further approval of shareholders.

               Following the approval of and pursuant to that charter amendment,
MFC's Board of Directors created a series of preferred stock consisting of
450,000 shares of non-cumulative, convertible preferred stock that provides for
stated annual dividends of $1.44 per share ("Series A Preferred Stock"). The
provisions relating to the terms, conditions, preferences and limitations of
MFC's Series A Preferred Stock are contained in its Articles of Incorporation,
as amended, which are attached as an Exhibit to this Report. Through December
31, 2001, MFC had sold an aggregate of 92,667 of those shares at a price of
$24.00 per share in a private offering to a group of "accredited investors,"
including certain of MFC's directors and existing shareholders. During 2002, MFC
sold 326,576 additional shares of Series A Preferred Stock at the same price.
The proceeds from the sale of those shares were used to enhance the capital
position of MountainBank and for general corporate activities conducted by MFC.

          .    Acquisition of First Western Bank. Effective December 31, 2001,
MFC completed its acquisition of First Western Bank through the merger of First
Western into MountainBank. First Western was an insured, North
Carolina-chartered bank that first began banking operations on December 15,
1997. Its headquarters were located in Burnsville (Yancey County), North
Carolina. In addition to its main banking office, it operated two branch offices
in Spruce Pine (Mitchell County), North Carolina, and one branch office in
Weaverville (Buncombe County), North Carolina. At the time the merger was
completed, First Western's financial statements reflected approximately $98
million in assets, $81 million in total loans, $71 million in deposits, and $13
million in shareholders' equity.

               To effect the merger, each of the outstanding shares of First
Western's common stock held by its shareholders was converted into 0.50 shares
of MFC's common stock. The merger was treated as a "purchase" under generally
accepted accounting principles. In connection with the merger, four former
directors of First Western were appointed to serve as directors of MountainBank,
and two of those persons were appointed to also serve as directors of MFC.

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          .    Termination of Agreement to Acquire Cardinal Bankshares
Corporation. During 2002, MFC also entered into an agreement to merge with
Cardinal Bankshares Corporation. Cardinal is headquartered in Floyd, Virginia,
and is the holding company for Bank of Floyd, which operates five banking
offices in five southwestern Virginia communities. MFC's shareholders approved
the proposed merger at a special meeting held on February 26, 2003. However, at
Cardinal's special meeting held on the same date, Cardinal's shareholders failed
to approve the transaction. Cardinal terminated the merger agreement on March 5,
2003.

          Business Offices and Banking Market. MountainBank has 17 full-service
banking offices located in the towns of Hendersonville (two offices) and
Fletcher (Henderson County), Columbus and Tryon (Polk County), Forest City,
Rutherfordton and Lake Lure (Rutherford County), Asheville (two offices) and
Weaverville (Buncombe County), Waynesville (Haywood County), Marion (McDowell
County), Morganton (Burke County), Bakersville and Spruce Pine (Mitchell County)
and Burnsville (Yancey County), North Carolina.

          MountainBank's wholly owned subsidiary, MountainBanc Mortgage
Corporation, maintains one mortgage brokerage office in Greenwood, South
Carolina, but it also operates in North Carolina through certain of
MountainBank's banking offices in North Carolina.

          MountainBank's current primary banking market consists of Henderson,
Rutherford, McDowell, Haywood, Polk, Buncombe, Mitchell, Burke and Yancey
Counties, which are situated in the mountains and foothills of western North
Carolina.

          Services. MountainBank's operations are primarily retail oriented and
directed toward individuals and small- and medium-sized businesses located in
its banking markets. The majority of its customers are residents of or do
business in its banking markets, but it also makes loans to and has deposit
relationships with individuals and business customers in areas outside its
immediate banking market (including northwestern South Carolina). As further
described below, MountainBank also solicits deposits over the Internet through
its own website and through BankRate.com. It provides most traditional
commercial, consumer and mortgage banking services, but its principal activities
are the taking of demand and time deposits and the making of consumer,
commercial and mortgage loans. Its primary source of revenue is interest income
derived from its lending activities.

          Lending Activities. MountainBank makes a variety of types of consumer
and commercial loans to individuals and small- and medium-sized businesses for
various personal, business and agricultural purposes, including term and
installment loans, equity lines of credit, and overdraft checking credit. For
financial reporting purposes, the Bank's loan portfolio generally is divided
into (i) real estate loans, (ii) commercial and industrial loans, and (iii)
consumer loans. The Bank makes credit card services available to its customers
through a correspondent bank.

          MountainBank's real estate loan classification includes loans secured
by real estate which are made to purchase, construct or improve residential or
commercial real estate, for real estate development purposes, and for other
commercial, agricultural and consumer purposes (whether or not such purposes are
related to the Bank's real estate collateral). At December 31, 2002, loans
amounting to approximately 82.0% of MountainBank's loan portfolio were
classified as real estate loans. However, a significant number of those loans,
while secured by real estate, were made for various purposes unrelated to the
real estate collateral, which generally is reflective of efforts by management
to minimize credit risk by taking real estate as additional collateral without
regard to loan purpose. All real estate loans are secured by first or junior
liens on real property located almost exclusively in or near MountainBank's
banking markets (and substantially all of which, both commercial and
residential, is owner occupied or operated). These loans also include the
outstanding balances on revolving equity lines of credit. As further described
below, MountainBank also makes long-term residential mortgage loans, but
substantially all of those loans are sold to third parties.

          Real estate loans (other than long-term mortgage loans as further
described below) may be made at fixed or variable interest rates and, generally,
either have maturities that do not exceed five years or provide for payments
based on an amortization schedule of up to 20 years. Loans having fixed rates
and maturities of more than five years, or which are based on an amortization
schedules of more

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than five years, generally will include contractual provisions which allow
MountainBank to call the loan in full, or provide for a "balloon" payment in
full, at the end of a period which usually does not exceed five years.

          MountainBank's commercial and industrial loan classification includes
loans to individuals and small- and medium-sized businesses for working capital,
equipment purchases, and various other business and agricultural purposes, other
than any such loan which is secured by real estate. At December 31, 2002, these
loans, which generally are secured by inventory, equipment or similar assets,
but which also may be made on an unsecured basis, made up approximately 13.1% of
MountainBank's loan portfolio. However, in addition to these loans classified as
commercial and industrial loans, a significant number of MountainBank's loans
included in the real estate loan classification described above were made for
commercial purposes but are classified as real estate loans because they are
secured by first or junior liens on real estate. Commercial and industrial loans
may be made at variable or fixed rates of interest; however, it currently is
MountainBank's policy that those loans which have maturities or amortization
schedules of longer than five years normally will carry interest rates which
vary with the prime lending rate or provide for a "balloon" payment in full, at
the end of a period generally not to exceed five years.

          Less than 1% of MountainBank's total loan portfolio consists of loans
made for various agricultural purposes, including crop production or the
purchase of related equipment or farmland. Substantially all of these
agricultural loans are secured by first or junior liens on real estate.

          MountainBank's consumer loan portfolio consists primarily of loans to
individuals for various consumer purposes, as well as the outstanding balances
on non-real estate secured consumer revolving credit accounts. A majority of
MountainBank's consumer loans are secured by liens on various personal assets of
the borrowers, but they also may be made on an unsecured basis. Additionally,
MountainBank's real estate loans include loans secured by first or junior liens
on real estate that were made for consumer purposes unrelated to the real estate
collateral. Consumer loans generally are made at fixed interest rates and with
maturities or amortization schedules that generally do not exceed five years.
However, consumer-purpose loans secured by real estate (and, thus, classified as
real estate loans as described above) may be made for terms of up to 30 years
but which allow MountainBank to call the loan in full, or provide for a
"balloon" payment, at the end of a period generally not to exceed five years.

          Mortgage Loans. MountainBank offers long-term, residential mortgage
loans that are originated (either by MountainBank or its subsidiary as described
below) and funded by MountainBank and closed in its name. Most of MountainBank's
long-term mortgage loans are sold to third parties, usually within 30 days after
closing. However, MountainBank makes residential mortgage loans at adjustable
rates for terms of up to 30 years, or at fixed rates with a "balloon" payment
after a period generally not exceeding five years, which it retains for its own
loan portfolio. MountainBank also originates certain loans that are funded by
and closed in the names of third-party lenders. Loans that are intended to be
sold are underwritten based on investor or agency criteria and any other
requirements of the third party purchaser and are closed only after the Bank has
obtained a firm purchase commitment as to that loan. This arrangement permits
MountainBank to offer this product in its banking markets and enhance its
fee-based income, but, since most of these loans are housed in MountainBank's
loan portfolio for only a short period of time, it minimizes the credit and
interest rate risk associated with long-term loans, helps MountainBank manage
its capital and liquidity position, and permits the Bank to re-deploy funds
generated by the sale of loans.

          During 2001, MountainBank acquired PremierMortgage Associates, Inc., a
South Carolina-based mortgage brokerage which is being operated through a newly
formed, wholly-owned subsidiary of MountainBank, MountainBanc Mortgage
Corporation, which maintains its primary office in Greenwood, South Carolina.
Most of the loans originated by the subsidiary are funded by and closed in the
name of MountainBank (either for resale by MountainBank as described above or
for MountainBank's own portfolio), but the subsidiary also originates certain
loans that are funded by and closed in the names of unrelated lenders. The
subsidiary does not retain any loans on its own books.

          Loan Administration and Underwriting. As described above,
MountainBank's loan portfolio consists primarily of loans made for a variety of
commercial, agricultural and consumer

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purposes, and most of MountainBank's long-term residential mortgage loans are
sold to third-party investors. Because most loans made by MountainBank for its
own account are made based, to a great extent, on its assessment of borrowers'
income, cash flow, balance sheets, character, and ability to repay (as compared
to long-term residential mortgage loans in which greater emphasis is placed on
collateral), such loans may be viewed as involving greater credit risk than is
the case with long-term residential mortgage loans.

          To manage this risk, MountainBank's loan portfolio is administered
under a defined process which includes guidelines for loan underwriting
standards and risk assessment, procedures for loan approvals, loan grading,
ongoing identification and management of credit deterioration, and portfolio
reviews to assess loss exposure and to ascertain compliance with MountainBank's
credit policies and procedures. The lending and loan administration process
includes an approval prior to funding by MountainBank's Directors' Loan
Committee of all credit decisions involving an aggregate credit relationship in
excess of $1,000,000 or an aggregate unsecured credit exposure in excess of
$250,000, a review and grading by credit administration personnel of all
commercial loans in excess of $500,000 after funding for adequacy of
documentation and compliance with regulatory requirements, and a review by
credit administration personnel at least annually of any commercial credit
relationship exceeding $500,000. Additionally, MountainBank's credit
administration personnel routinely review other selected loans during the year.
Reports of the results of these outside reviews are made to the Directors' Loan
Committee and the Audit Committee.

          MountainBank's loan approval policies generally provide for various
levels of secured and unsecured lending authority for lending personnel based on
aggregate credit exposure to borrowers. Each individual loan officer may approve
loans involving an aggregate credit exposure of up to his or her individual
secured or unsecured loan authority, but not more than $500,000, without the
approval of executive management. Above that amount, loans that involve
aggregate secured exposures exceeding $500,000 may be approved by MountainBank's
executive management. Loans that involve aggregate secured exposures in excess
of $1,000,000, or aggregate unsecured exposures in excess of $250,000, require
the approval of the Directors' Loan Committee.

          At the time loans are made, and during periodic reviews, loans are
assigned a grade which indicates the level of management attention to be given
to that loan to protect MountainBank's position and to reduce loss exposure.
During the life of each loan, its grade is reviewed and validated or modified to
reflect changes in circumstances and risk. Loans are placed in a non-accrual
status if they become 90 days past due or whenever, in the opinion of
management, collection becomes doubtful. Loans are charged off when the
collection of principal and interest has become doubtful and the loans no longer
can be considered sound collectible assets (or, in the case of unsecured loans,
when they become 90 days past due).

          Allowance for Loan Losses. The Directors' Loan Committee reviews all
substandard loans over $50,000 monthly, and management meets regularly to review
asset quality trends and to discuss credit administration issues. Based on these
reviews, its current judgments about the credit quality of MountainBank's loan
portfolio, and other relevant internal and external factors, MountainBank has
established an allowance for loan losses. The adequacy of the allowance is
assessed by management and reviewed by MountainBank's Board of Directors each
quarter and, at December 31, 2002, was 1.6% of MountainBank's total loans and
approximately 387.3% of its non-performing loans.

          Deposit Activities. MountainBank's deposit services include business
and individual checking accounts, savings accounts, NOW accounts, certificates
of deposit and money market checking accounts. MountainBank monitors its
competition in order to keep the rates paid on its deposits at a competitive
level. At December 31, 2002, transaction accounts and non-interest bearing
accounts amounted to approximately 12.2% and 9.5%, respectively, of
MountainBank's total deposits, and time deposits of $100,000 or more made up
approximately 26.6% of total deposits. The majority of MountainBank's deposits
are generated from within its banking markets, but it also has deposit
relationships with individuals and business customers in areas outside its
immediate banking market (including northwestern South Carolina) and it has a
significant amount of certificates of deposit that it accepted over the Internet
through BankRate.com and through its own website (www.mountainbank.net).

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At December 31, 2002, MountainBank's Internet deposits amounted to approximately
4.5% of its total deposits and approximately 7.1% of its total certificates of
deposit.

          Investment Portfolio. At December 31, 2002, MountainBank's investment
portfolio consisted of U.S. government agency securities, substantially all of
which were adjustable rate securities.

     Statistical Information. Certain statistical information regarding MFC's
loans, deposits and business is included in the information contained elsewhere
in this Report under "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements."

          Competition. MountainBank competes for deposits in its banking market
with other commercial banks, savings banks and other thrift institutions, credit
unions, agencies issuing United States government securities and all other
organizations and institutions engaged in money market transactions. In its
lending activities, MountainBank competes with all other financial institutions
and with consumer finance companies, mortgage companies and other lenders.
Commercial banking in MountainBank's banking market and in North Carolina as a
whole is extremely competitive. North Carolina is the home of two of the largest
commercial banks in the United States, each of which has branches located in
MountainBank's banking market, and numerous other commercial banks, thrift
institutions and credit unions also have offices in its banking market.

     Interest rates, both on loans and deposits, and prices of fee-based
services are significant competitive factors among financial institutions
generally. Other important competitive factors include office location, office
hours, the quality of customer service, community reputation, continuity of
personnel and services, and, in the case of larger commercial customers,
relative lending limits and the ability to offer sophisticated cash management
and other commercial banking services. Many of MountainBank's competitors have
greater resources, broader geographic markets, more extensive branch networks,
and higher lending limits, than it does. They also can offer more products and
services and can better afford and make more effective use of media advertising,
support services and electronic technology than MountainBank can. In terms of
assets, MountainBank is not one of the larger commercial banks in North
Carolina, and there is no assurance that it will be or continue to be an
effective competitor in its banking market.

          In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial
institutions, but also with out-of-state financial institutions which may
acquire North Carolina institutions, establish or acquire branch offices in
North Carolina, or otherwise offer financial services across state lines,
thereby adding to the competitive atmosphere of the industry in general. To
counter MountainBank's competitive disadvantages, it tries to differentiate
itself from its larger competitors with its focus on relationship banking,
personalized service, direct customer contact, and its ability to make credit
and other business decisions locally. It also depends on its reputation as a
community bank in its banking market and its involvement in the communities it
serves, the experience of its senior management team, and the quality of its
associates.

          Employees. On March 15, 2003, MountainBank employed 198 full-time
employees (including its executive officers) and 27 part-time employees. MFC has
no separate employees. MountainBank and its employees are not parties to any
collective bargaining agreement, and MountainBank considers its relations with
its employees to be good.

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          Supervision and Regulation of MFC. MFC is a bank holding company
registered with the Federal Reserve Board (the"FRB") under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). It is subject to supervision and
examination by, and the regulations and reporting requirements of, the FRB.
Under the BHCA, MFC's activities are limited to banking, managing or controlling
banks, or engaging in any other activities which the FRB determines to be
closely related and a proper incident to banking or managing or controlling
banks.

          The BHCA prohibits MFC from acquiring direct or indirect control of
more than 5.0% of the outstanding voting stock, or substantially all of the
assets, of any financial institution, or merging or consolidating with another
bank holding company or savings bank holding company, without prior approval of
the FRB. Additionally, the BHCA prohibits MFC from engaging in, or acquiring
ownership or control of more than 5.0% of the outstanding voting stock of any
company engaged in, a non-banking activity unless that activity is determined by
the FRB to be closely related and a proper incident to banking. In approving an
application to engage in a non-banking activity, the FRB must consider whether
that activity can reasonably be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices.

          There are a number of obligations and restrictions imposed by law on a
bank holding company and its insured bank subsidiaries that are designed to
minimize potential loss to depositors and the FDIC insurance funds. For example,
if a bank holding company's insured bank subsidiary becomes "undercapitalized,"
the bank holding company is required to guarantee (subject to certain limits)
the subsidiary's compliance with the terms of any capital restoration plan filed
with its federal banking agency. Also, a bank holding company is required to
serve as a source of financial strength to its bank subsidiaries and to commit
resources to support those banks in circumstances where it otherwise might not
do so, absent such policy. Under the BHCA, the FRB may require a bank holding
company to terminate any activity or to relinquish control of a non-bank
subsidiary if the FRB determines that the activity or control constitutes a
serious risk to the financial soundness and stability of a bank subsidiary of
the bank holding company.

          Regulation of MountainBank. MountainBank is an insured, North
Carolina-chartered bank that is not a member of the Federal Reserve System. Its
deposits are insured by the FDIC's Bank Insurance Fund, and it is subject to
supervision and examination by, and the regulations and reporting requirements
of, the FDIC and the North Carolina Commissioner of Banks (the "Commissioner"),
which are its primary federal and state banking regulators.

          As an insured bank, MountainBank is prohibited from engaging as a
principal in an activity that is not permitted for national banks unless (i) the
FDIC determines that the activity would pose no significant risk to the deposit
insurance fund and (ii) the bank is, and continues to be, in compliance with all
applicable capital standards. Insured banks also are prohibited from directly
acquiring or retaining any equity investment of a type or in an amount not
permitted for national banks.

          The FDIC and the Commissioner have broad powers to enforce laws and
regulations that apply to MountainBank and to require corrective action of
conditions that affect its safety and soundness. Among others, these powers
include issuing cease and desist orders, imposing civil penalties, and removing
officers and directors.

          Though it is not a member of the Federal Reserve System,
MountainBank's business is influenced by prevailing economic conditions and
governmental policies, both foreign and domestic, and by the monetary and fiscal
policies of the FRB. The actions and policy directives of the FRB determine to a
significant degree the cost and the availability of funds obtained from money
market sources for lending and investing and also influence, directly and
indirectly, the rates of interest paid by commercial banks on their time and
savings deposits. The nature and impact on MountainBank of future changes in
economic conditions and monetary and fiscal policies are not predictable.

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          Gramm-Leach-Bliley Act. The federal Gramm-Leach-Bliley Act (the "GLB
Act") adopted by Congress during 1999 has dramatically changed various federal
laws governing the banking, securities and insurance industries. The GLB Act has
expanded opportunities for banks and bank holding companies to provide services
and engage in other revenue-generating activities that previously were
prohibited to them.

          With respect to bank holding companies, the GLB Act in general (i)
expands opportunities to affiliate with securities firms and insurance
companies; (ii) overrides certain state laws that would prohibit certain banking
and insurance affiliations; (iii) expands the activities in which banks and bank
holding companies may participate; (iv) requires that banks and bank holding
companies engage in some activities only through affiliates owned or managed in
accordance with certain requirements; (v) reorganizes responsibility among
various federal regulators for oversight of certain securities activities
conducted by banks and bank holding companies; and (vi) requires banks to adopt
and implement policies and procedures for the protection of the financial
privacy of their customers, including procedures that allow customers to elect
that certain financial information not be disclosed to certain persons.

          Though MFC has not elected to be treated as a "financial holding
company" under the GLB Act and the Act has not yet had a significant effect on
MFC's operations as they are presently conducted, the GLB Act has expanded
opportunities for MFC and MountainBank to provide other services and obtain
other revenues in the future. However, this expanded authority of banks and bank
holding companies also may present MFC with new challenges, as its larger
competitors are able to expand their services and products into areas that are
not feasible for smaller, community oriented financial institutions. The
economic effects of the GLB Act on the banking industry, and on competitive
conditions in the financial services industry generally, may be profound.

          Payment of Dividends. Under federal law, MountainBank, as an insured
bank, is prohibited from making any capital distributions, including paying a
cash dividend, if it is, or after making the distribution it would become,
"undercapitalized" as that term is defined in the Federal Deposit Insurance Act
(the "FDIA"). Additionally, if in the opinion of the FDIC an insured bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), the FDIC may require, after notice and hearing, that
the bank cease and desist from that practice. The federal banking agencies have
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsafe and unsound banking practice. The federal
agencies have issued policy statements which provide that insured banks
generally should only pay dividends out of current operating earnings, and under
the FDIA no dividend may be paid by an FDIC-insured bank while it is in default
on any assessment due the FDIC. The payment of dividends by MountainBank also
may be affected or limited by other factors, such as requirements that its
regulators have authority to impose on it to maintain its capital above
regulatory guidelines.

          Under North Carolina banking law, a bank may pay dividends only from
its undivided profits. If a bank's surplus is less than 50% of its paid-in
capital stock, it may not declare a cash dividend until it has transferred from
undivided profits to surplus 25% of its undivided profits or any lesser
percentage that may be required to restore its surplus to an amount equal to 50%
of its paid-in capital stock. However, no cash dividends may be paid at any time
by a bank when it is insolvent or when payment of a dividend would render it
insolvent or be contrary to its Articles of Incorporation. Additionally, there
are statutory provisions regarding the calculation of undivided profits from
which dividends may be paid.

          As a North Carolina business corporation, MFC is authorized to pay
dividends as declared by its Board of Directors, provided that no such
distribution results in its insolvency on a going concern or balance sheet
basis. However, since MFC's only source of funds with which it could pay
dividends to its shareholders is dividends it receives from MountainBank, MFC's
ability to pay dividends effectively is subject to the same limitations that
apply to MountainBank.

          Capital Adequacy. MFC and MountainBank are required to comply with the
capital adequacy standards established by the FRB in the case of MFC and by the
FDIC in the case of MountainBank. The FRB and the FDIC have promulgated
risk-based capital and leverage capital

                                        9

<PAGE>

guidelines for determining the adequacy of the capital of a bank holding company
or a bank, and all applicable capital standards must be satisfied for a bank
holding company or a bank to be considered in compliance with these capital
requirements.

           Under the risk-based capital measure, the minimum ratio ("Total
Capital Ratio") of an entity's total capital ("Total Capital") to its
risk-weighted assets (including certain off-balance-sheet items, such as standby
letters of credit) is 8.0%. At least half of Total Capital must be composed of
common equity, undivided profits, minority interests in the equity accounts of
consolidated subsidiaries, qualifying noncumulative perpetual preferred stock,
and, in the case of a bank holding company, a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder ("Tier 2 Capital") may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock, and a limited amount of loan loss reserves. On December 31,
2002 MountainBank's Total Capital Ratio, at 10.01%, and its ratio of Tier 1
Capital to risk-weighted assets ("Tier 1 Capital Ratio"), at 8.76%, were above
the minimum required levels under the FDIC's standards. On the same date, MFC's
Total Capital Ratio, at 10.84%, and its Tier 1 Capital Ratio, at 9.02%, also
were above the minimum required levels under the FRB's standards.

           Under the leverage capital measure, the minimum ratio (the "Leverage
Capital Ratio") of Tier 1 Capital to average assets, less goodwill and certain
other intangible assets, is 3.0% for entities that meet certain specified
criteria, including having the highest regulatory rating. All others generally
are required to maintain an additional cushion of 100 to 200 basis points above
the stated minimum. The FDIC's guidelines also provide that banks experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum levels without significant
reliance on intangible assets, and the FDIC has indicated that it will consider
a bank's "Tangible Leverage Ratio" (deducting all intangibles) and other indicia
of capital strength in evaluating proposals for expansion or new activities. On
December 31, 2002, MountainBank's and MFC's Leverage Capital Ratios, at 7.85%
and 8.09%, respectively, exceeded the required minimum levels.

           Failure to meet capital guidelines could subject a bank or bank
holding company to a variety of enforcement remedies, including the issuance of
a capital directive, the termination of deposit insurance by the FDIC, a
prohibition on the taking of brokered deposits and certain other restrictions on
its business, civil enforcement actions and the imposition of civil money
penalties. As described below, substantial additional restrictions can be
imposed on FDIC-insured banks that fail to meet applicable capital requirements.

           The FRB and the FDIC also consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of an entity's capital adequacy. The bank regulatory agencies'
methodology for evaluating interest rate risk requires banks with excessive
interest rate risk exposure to hold additional amounts of capital against their
exposure to losses resulting from that risk.

           Prompt Corrective Action. Current federal law establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the federal banking regulators have established
five capital categories ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized"). The regulators are required to take certain mandatory
supervisory actions, and they are authorized to take other discretionary
actions, with respect to institutions in the three undercapitalized categories.
The severity of any actions taken will depend upon the capital category in which
an institution is placed. Generally, subject to a narrow exception, current
federal law requires the banking regulators to appoint a receiver or conservator
for an institution that is critically undercapitalized.

           Under the final agency rules implementing the prompt corrective
action provisions, an institution is deemed to be "well capitalized" if it (i)
has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or
greater, and a Leverage Ratio of 5.0% or greater, and (ii) is not subject to any
written agreement, order, capital directive, or prompt corrective action
directive issued by the appropriate federal banking agency. An institution is
considered to be "adequately capitalized" if it has a Total Capital Ratio of
8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio
of 4.0% or greater. A depository institution that has a Total Capital Ratio of
less than 8.0%, a Tier 1 Capital Ratio

                                       10

<PAGE>

of less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered to be
"undercapitalized." A depository institution that has a Total Capital Ratio of
less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of
less than 3.0%, is considered to be "significantly undercapitalized," and an
institution that has a tangible equity capital to assets ratio equal to or less
than 2.0% is deemed to be "critically undercapitalized." For purposes of the
regulation, the term "tangible equity" includes core capital elements counted as
Tier 1 Capital for purposes of the risk-based capital standards, plus the amount
of outstanding cumulative perpetual preferred stock (including related surplus),
minus all intangible assets with certain exceptions. A depository institution
may be deemed to be in a capitalization category that is lower than is indicated
by its actual capital position if it receives an unsatisfactory examination
rating.

           An institution that is categorized as "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized" is required
to submit an acceptable capital restoration plan to its federal banking agency.
An "undercapitalized" institution also is generally prohibited from increasing
its average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
"undercapitalized" depository institution to take any of the actions it is
required to or may take with respect to a "significantly undercapitalized"
institution as described above if it determines that those actions are necessary
to carry out the purpose of the law. MFC could be required to guarantee
MountainBank's capital restoration plan, and it could even be required to divest
itself of MountainBank if the regulators believed that would improve the bank's
prospects.

           On December 31, 2002, MountainBank and MFC each were classified as
"well capitalized."

           FDIC Insurance Assessments. The FDIC currently uses a risk-based
assessment system that takes into account the risks attributable to different
categories and concentrations of assets and liabilities for purposes of
calculating deposit insurance assessments to be paid by insured banks. The
risk-based assessment system categorizes banks as "well capitalized,"
"adequately capitalized" or "undercapitalized." These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including banks that are
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" for prompt corrective action purposes. Banks also are assigned
by the FDIC to one of three supervisory subgroups within each capital group,
with the particular supervisory subgroup to which a bank is assigned being based
on a supervisory evaluation provided to the FDIC by the bank's primary federal
banking regulator and information which the FDIC determines to be relevant to
the bank's financial condition and the risk posed to the deposit insurance funds
(which may include, if applicable, information provided by the bank's state
supervisor). A different insurance assessment rate (ranging from zero to 31
basis points) applies to each of the nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups). A bank's assessment
rate is determined based on the capital category and supervisory subgroup to
which it is assigned.

           A bank's deposit insurance may be terminated by the FDIC upon a
finding that the bank has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.

           Available Information. MFC does not have its own separate Internet
website. However, modifications to MountainBank's Internet website
(http://www.mountainbank.net) are being planned to provide a means by which the
public may obtain copies of MFC's annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports, as
soon as reasonably practicable after they are electronically filed with or
furnished to the Securities and Exchange Commission. However, because the
modifications have not been completed, the public currently does not have access
to the MFC's reports through MountainBank's website. As an alternative, the
Commission maintains an Internet site that contains reports and other
information that MFC files electronically with the Commission. The address of
the Commission's website is http://www.sec.gov.

                                       11

<PAGE>

Item 2.    Description of Property.

           MFC owns no real property. MountainBank owns the real property
associated with its Burnsville and Weaverville, North Carolina, banking offices
and it leases the facilities housing its and MFC's headquarters, each of its
other banking offices, and its administration/operations facility. On December
31, 2002, MFC's consolidated investment in premises and banking equipment (cost
less accumulated depreciation) was approximately $9.1 million.

Item 3.    Legal Proceedings.

           At December 31, 2002, neither MFC nor MountainBank was a party to any
legal proceeding that is expected to have a material effect on its financial
condition or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders.

           During the fourth quarter of 2002, no matters were submitted to a
vote of MFC's shareholders.

                                     PART II

Item 5.    Market for Common Equity and Related Stockholder Matters

           Market for Common Stock. MFC first issued shares of its common stock
during March 2001 in exchange for the outstanding shares of MountainBank's
common stock in connection with MFC's initial incorporation as MountainBank's
parent holding company. Until September 30, 2002, MFC's common stock was traded
on the OTC Bulletin Board (under the trading symbol "MBFC"). Prior to the
organization of MFC, MountainBank's common stock also was traded on the OTC
Bulletin Board. Effective September 30, 2002, MFC's common stock began trading
on The Nasdaq SmallCap Market under the trading symbol "MBFC."

           The following table lists high and low published closing prices of
MFC's common stock for each calendar quarter since April 1, 2001, and, prior to
that, the high and low published prices for MountainBank's common stock for each
calendar quarter since January 1, 2001.

                                                               Price
                                                       ---------------------
       Year       Quarterly period                       High         Low
     --------   --------------------                   --------     --------

       2001        First quarter ................      $  20.67     $  15.33
                   Second quarter ...............         26.25        16.67
                   Third quarter ................         25.83        20.08
                   Fourth quarter ...............         20.83        16.67
       2002        First quarter ................         23.00        16.88
                   Second quarter ...............         26.00        19.75
                   Third quarter ................         26.23        23.00
                   Fourth quarter ...............         26.23        23.50

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

(1)  All prices have been restated retroactively to reflect the effect of the
     five-for-four stock split which became effective on March 30, 2001, and the
     six-for-five stock split effected in the form of a 20% stock dividend which
     became effective on March 11, 2002.

           Record Holders of Common Stock. On March 20, 2003, there were 2,113
holders of record of MFC's common stock.

           Dividends on Common Stock. MFC has not yet paid any cash dividends on
its common stock. MFC is a holding company and, currently, its only source of
revenue is dividends it receives from MountainBank. Therefore, MFC's ability to
pay dividends to its shareholders is subject to MountainBank's ability to pay
dividends to it. MountainBank's ability to pay dividends to MFC will continue to
depend on its earnings and financial condition, capital requirements, general
economic

                                       12

<PAGE>

conditions, compliance with regulatory requirements that apply to North Carolina
banks, and other factors. MFC expects that, for the foreseeable future, profits
resulting from MountainBank's operations will be retained by it as additional
capital to support its operations and growth and that any dividends paid by
MountainBank to MFC will be limited to amounts needed by MFC to pay stated
dividends on MFC's outstanding Series A Preferred Stock, to make required
payments on MFC's debt obligations (including its junior subordinated debentures
issued in connection with issuance of the preferred trust securities by MFC
Capital Trust I), and to pay any separate expenses of MFC, and that MFC will not
pay cash dividends on its common stock.

           The terms of MFC's Series A preferred stock provide that no dividend
may be declared or paid during any calendar year on MFC's common stock unless
and until there has been paid in full to the holders of the Series A preferred
stock (or set apart for purposes of payment) not less than a pro rata portion of
the stated annual dividend on the Series A preferred stock for that calendar
year (but not for prior years) through the date on which MFC proposes to pay the
cash dividend on MFC common stock.

           MFC's ability to pay dividends on MFC common stock or its preferred
stock also will be subject to its Board of Director's evaluation of separate
factors relating to MFC, including MFC's earnings and financial condition,
capital requirements, debt service requirements, and regulatory restrictions
applicable to bank holding companies. Covenants contained in the documents
relating to the issuance of MFC's outstanding junior subordinated debentures and
its trust subsidiary's preferred trust securities, and MFC's guarantee of the
subsidiary's obligations under those trust securities, provide that, if MFC is
in default under those documents, it may not pay any dividend on its capital
stock. In the future, MFC may borrow additional funds, issue other debt
instruments, issue and sell additional shares of preferred stock, or engage in
other types of financing activities, in order to increase its capital and/or to
provide funds that it can use to increase its bank subsidiaries' capital.
Covenants contained in a loan or financing agreement or other debt instruments
could restrict or condition MFC's payment of cash dividends based on various
financial considerations or factors. Additionally, if MFC creates and issues
shares of other series of preferred stock, the terms of any such stock likely
would require that stated periodic dividends be paid on the preferred stock
before any cash dividends could be paid on MFC common stock. Therefore, there is
no assurance that, for the foreseeable future, MFC will have funds available to
pay cash dividends on MFC common stock or that, even if funds are available, it
will pay dividends in any particular amount or at any particular time, or that
it will pay dividends at all.

     Issuance of Equity Securities Without Registration. On December 31, 2002,
MFC issued 59,261 shares of its common stock as part of the consideration to the
shareholders of TrustCo Holding, Inc., and in exchange for their outstanding
shares of TrustCo's common stock, in connection with MFC's acquisition of
TrustCo. Prior to consummation of that transaction, the North Carolina
Securities Administrator approved the terms and conditions of the issuance and
exchange of MFC's common stock following a hearing held pursuant to N.C. Gen.
Stat. ss. 78A-30. The shares of MFC's common stock were offered and sold to
TrustCo's shareholders without registration under the Securities Act of 1933
(the "1933 Act") pursuant to the exemption from registration provided by Section
3(a)(10) of the 1933 Act.

           During 2002, MFC issued and sold 326,576 shares of its Series A
Preferred Stock for cash in a limited offering. The total offering price of
those shares was $7.8 million. MFC paid no underwriting discounts or commissions
in connection with the sale. The shares were sold only to persons who were
"accredited investors" as defined in the Securities and Exchange Commission's
Rule 501(a). Each share of the Series A Preferred Stock is convertible into 1.2
shares of MFC's common stock (as adjusted for the six-for-five stock split
effected in the form of a 20% stock dividend which became effective on March 11,
2002) at any time at the option of the holder of that share and, under certain
circumstances, each share is convertible at the same rate at the option of MFC.
The full terms and conditions of such conversion are set forth in MFC's Articles
of Incorporation, as amended, which are incorporated by reference as an exhibit
to this Report. The shares of Series A Preferred Stock were offered and sold
without registration under the 1933 Act pursuant to the exemption from
registration provided by Section 4(2) of the 1933 Act and Rule 506 promulgated
under that Section.

                                       13

<PAGE>

Item 6.    Selected Financial Data.

           Information required by this Item is contained in the information
included in Item 7 under the caption "Selected Financial Data."

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.


Selected Financial Data

The following table sets forth certain selected financial data for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998. Dollar amount totals, except
per share data, are presented in thousands (periods prior to 2001 reflect
MountainBank's operations only). Per share data reflects all stock dividends.

<TABLE>
<CAPTION>
                                                                  December 31,
                              -------------------------------------------------------------------------------------
 Summary of Operations             2002             2001              2000             1999             1998
                              --------------    --------------   ---------------  ---------------  ----------------
<S>                           <C>               <C>              <C>              <C>              <C>
Interest income               $       46,283    $       29,906   $        15,821  $         6,752  $          3,479
Interest expense                      18,943            16,621             9,016            3,561             1,765
                              --------------    --------------   ---------------  ---------------  ----------------
         Net interest income          27,340            13,285             6,805            3,191             1,714
Provision for credit losses            5,300             3,347             1,905              827               471
Other income                           6,252             2,994             1,318              782               469
Other expense                         18,269             9,206             4,579            2,820             1,582
Income taxes                           3,865             1,216               583                0                 0
                              --------------    --------------   ---------------  ---------------  ----------------
         Net income           $        6,158    $        2,510   $         1,056  $           326  $            130
                              ==============    ==============   ===============  ===============  ================

Per Share Data

Basic earnings (loss)         $         1.82    $         1.11   $          0.52  $          0.22  $           0.10
Diluted earnings                        1.58              1.01              0.48             0.19              0.09
Book value                             13.25             11.55              9.73             7.09              5.62
Tangible book value                    11.92             11.18              9.73             7.09              5.62
Cash dividends declared                  n/a               n/a               n/a              n/a               n/a

Balance Sheet

Loans and loans held
  for sale, net               $      699,289    $      483,872   $       197,373  $        88,498  $         47,608
Investment securities                 77,477            45,388            35,869           18,755             6,171
Total assets                         841,140           561,123           259,109          127,211            58,634
Deposits                             677,269           467,507           233,338          113,886            50,360
Stockholders' equity                  52,468            37,015            18,210           10,222             6,177
Interest-earning assets              804,351           536,897           249,137          121,330            54,851
Interest-bearing liabilities         718,794           476,178           221,712          109,152            47,075

Selected Ratios

Return on average assets                0.90%             0.66%             0.57%            0.37%             0.30%
Return on average equity               13.07%            12.71%             7.14%            3.93%             2.13%
Cash dividends declared
  per common share                       n/a               n/a               n/a              n/a               n/a
Efficiency ratio                        54.4%             56.6%             56.4%            71.0%             72.4%
Net interest margin                     4.12%             3.60%             3.86%            3.81%             4.16%
</TABLE>


                                       14

<PAGE>

Management's Discussion and Analysis

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

Forward Looking Statements and Factors that May Affect Future Results. The
following discussion contains certain forward-looking statements about the
Company's financial condition and results of operations, which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's judgment only as of the date hereof. The Company undertakes
no obligation to publicly revise these forward-looking statements to reflect
events and circumstances that arise after the date hereof.

Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) projected growth rates of the company may be lower
than historical rates and lower than those projected in our business model; (2)
general economic conditions, in the markets in which the Company does business,
may deteriorate further as the general U.S. domestic economy remains stagnant;
(3) costs or difficulties related to the integration of acquisitions, or
expenses in general, are greater than expected; (4) competitive pressures
increase significantly; (5) risks inherent in making loans, including repayment
risks and risks associated with collateral values, are greater than expected;
(6) changes in the interest rate environment reduce interest margins and affect
funding sources; (7) changes in market rates and prices may adversely affect the
value of financial products; (8) any inability to generate liquidity necessary
to meet loan demand or other cash needs; (9) any inability to accurately predict
the adequacy of the loan loss allowance needs; (10) legislation or regulatory
requirements or changes adversely affect the businesses in which the company is
engaged; and (11) decisions to change the business mix of the Company.

Management's discussion and analysis is provided to assist in the understanding
and evaluation of MountainBank Financial Corporation's (the Company's) financial
condition and its results of operations. The following discussion should be read
in conjunction with the Company's financial statements and related notes.

Critical Accounting Policies. The Company's financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(GAAP). The notes to the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
contain a summary of its significant accounting policies. Management believes
the Company's policies with respect to the methodology for the determination of
the allowance for loan losses, and asset impairment judgments, such as the
recoverability of intangible assets, involve a higher degree of complexity and
require management to make difficult and subjective judgments that often require
assumptions or estimates about highly uncertain matters. Accordingly, the
Company considers the policies related to those areas as critical.

The allowance for loan losses is an estimate of the losses that may be sustained
in the Company's loan portfolio. The allowance is based on two basic principles
of accounting: (i) Statement of Financial Accounting Standards ("SFAS") 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable, and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market, and the loan
balance.

The Company's allowance for loan losses has three basic components: (i) the
formula allowance, (ii) the specific allowance, and (iii) the unallocated
allowance. Each of these components is determined based upon estimates that can
and do change when the actual events occur. The formula allowance uses an
historical loss view as an indicator of future losses and, as a result, could
differ from the loss incurred in the future. However, since this history is
updated with the most recent loss information, the errors that might otherwise
occur are mitigated. The specific allowance uses various techniques to arrive at
an estimate of loss. Historical loss information, expected cash flows and fair
market value of collateral are used to estimate these losses. The use of these
values is inherently subjective and the actual losses could be greater or less
than the estimates. The unallocated allowance captures losses that are
attributable to various economic events, industry or geographic sectors whose
impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowance.

                                       15

<PAGE>

Management's Discussion and Analysis

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

Accounting for intangible assets is as prescribed by SFAS 142, Goodwill and
Other Intangible Assets. The Company accounts for recognized intangible assets
based on their estimated useful lives. Intangible assets with finite useful
lives are amortized while intangible assets with an indefinite useful life are
not amortized. Currently, the Company's recognized intangible assets consist
primarily of purchased core deposit intangible assets, having estimated useful
lives of 10 years, which are being amortized. The useful life is the period over
which the assets are expected to contribute directly or indirectly to future
cash flows.

Estimated useful lives of intangible assets are based on an analysis of
pertinent factors, including (as applicable):

     .   the expected use of the asset;

     .   the expected useful life of another asset or a group of assets to which
         the useful life of the intangible asset may relate;

     .   any legal, regulatory, or contractual provisions that may limit the
         useful life;

     .   any legal, regulatory, or contractual provisions that enable renewal or
         extension of the asset's legal or contractual life without substantial
         cost;

     .   the effects of obsolescence, demand, competition, and other economic
         factors; and

     .   the level of maintenance expenditures required to obtain the expected
         future cash flows from the asset.

Straight-line amortization is used to expense recognized amortizable intangible
assets since a method that more closely reflects the pattern in which the
economic benefits of the intangible assets are consumed cannot reliably be
determined. Intangible assets are not written off in the period of acquisition
unless they become impaired during that period.

The Company evaluates the remaining useful life of each intangible asset that is
being amortized each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization. If the
estimate of the intangible asset's remaining useful life is changed, the
remaining carrying amount of the intangible asset shall be amortized
prospectively over that revised remaining useful life.

If an intangible asset that is being amortized is subsequently determined to
have an indefinite useful life, the asset will be tested for impairment. That
intangible asset will no longer be amortized and will be accounted for in the
same manner as intangible assets that are not subject to amortization.

Intangible assets that are not subject to amortization are reviewed for
impairment in accordance with SFAS 121 and tested annually, or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
The impairment test consists of a comparison of the fair value of the intangible
asset with its carrying amount. If the carrying amount of the intangible asset
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. After an impairment loss is recognized, the adjusted carrying
amount of the intangible asset becomes its new accounting basis. Subsequent
reversal of a previously recognized impairment loss is not allowed.

Based on the aforementioned testing, the Company has determined that its
recorded intangible assets are not impaired.

                                       16

<PAGE>

Management's Discussion and Analysis

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

Government Supervision and Regulation. General. As a registered bank holding
company, the Company is subject to the supervision of and regular inspection by,
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
MountainBank is a North Carolina chartered banking company whose deposits are
insured by the Federal Deposit Insurance Corporation's ("FDIC") Bank Insurance
Fund ("BIF"). MountainBank is subject to extensive regulation and examination by
the Office of the Commissioner of Banks of the State of North Carolina (the "NC
Commissioner") under the direction and supervision of the North Carolina Banking
Commission (the "NC Banking Commission") and by the FDIC, which insures its
deposits to the maximum extent permitted by law.

In addition to state and federal banking laws, regulations and regulatory
agencies, the Company and the Bank are subject to various other laws and
regulations and supervision and examination by other regulatory agencies, all of
which directly or indirectly affect the Company's operations, management and
ability to make distributions. The following discussion summarizes certain
aspects of those laws and regulations that affect the Company.

Gramm-Leach Bliley Financial Modernization Act of 1999. The Gramm-Leach-Bliley
Financial Modernization Act of 1999 (the "GLB Act") eliminated certain legal
barriers separating the conduct of various types of financial service
businesses, such as commercial banking, investment banking and insurance in
addition to substantially revamping the regulatory scheme within which the
Company operates. Under the GLB Act, bank holding companies meeting management,
capital and Community Reinvestment Act standards, and that have elected to
become a financial holding company, may engage in a substantially broader range
of traditionally nonbanking activities than was permissible before enactment,
including insurance underwriting and making merchant banking investments in
commercial and financial companies. The GLB Act also allows insurers and other
financial services companies to acquire banks; removes various restrictions that
currently apply to bank holding company ownership of securities firms and mutual
fund advisory companies; and establishes the overall regulatory structure
applicable to bank holding companies that also engage in insurance and
securities operations.

In addition, the GLB Act also modifies current law related to financial privacy
and community reinvestment. The privacy provisions generally will prohibit
financial institutions from disclosing nonpublic personal financial information
to nonaffiliated third parties unless the customer has the opportunity to
decline disclosure.

Restrictions on Bank Holding Companies. The Federal Reserve is authorized to
adopt regulations affecting various aspects of bank holding companies. Under the
BHCA, the Company's activities, and those of companies which it controls or in
which it holds more than five percent of the voting stock, are limited to
banking or managing or controlling banks or furnishing services to or performing
services for its subsidiaries, or any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. In making such determinations, the Federal
Reserve is required to consider whether the performance of such activities by a
bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The BHCA, as amended by the GLB Act,
generally limits the activities of a bank holding company (unless the bank
holding company has elected to become a financial holding company) to activities
that are closely related to banking and a proper incident thereto.

Generally, bank holding companies are required to obtain prior approval of the
Federal Reserve to engage in any new activity not previously approved by the
Federal Reserve or to acquire more than five percent of any class of voting
stock of any company. The BHCA also requires bank holding companies to obtain
the prior approval of the Federal Reserve before acquiring more than five
percent of any class of voting stock of any bank which is not already
majority-owned by the bank holding company.

The Company is also subject to the North Carolina Bank Holding Company Act of
1984. As required by this state legislation, the Company, by virtue of its
ownership of MountainBank, has registered as a bank holding company with the NC
Commissioner. The North Carolina Bank Holding Company Act also prohibits the
Company from acquiring or controlling certain non-bank banking institutions
which have offices in North Carolina.

                                       17

<PAGE>

Management's Discussion and Analysis

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

Interstate Banking and Branching Legislation. Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
and Branching Act"), which became effective September 29, 1995, a bank holding
company may acquire banks in states other than its home state, without regard to
the permissibility of such acquisition under state law, but subject to any state
requirement that the bank has been organized and operating for a minimum period
of time, not to exceed five years, and the requirement that the bank holding
company, prior to or following the proposed acquisition, controls no more than
10 percent of the total amount of deposits of insured depository institutions in
the United States and no more than 30 percent of such deposits in that state (or
such lesser or greater amount set by state law).

The Interstate Banking and Branching Act also authorized banks to merge across
state lines, thereby creating interstate branches. Under such legislation, each
state had the opportunity either to "opt out" of this provision, thereby
prohibiting interstate branching in such states, or to "opt in". The State of
North Carolina elected to "opt in" to such legislation. Furthermore, pursuant to
the Interstate Banking and Branching Act, a bank is now able to open new
branches in a state in which it does not already have banking operations, if the
laws of such state permit such de novo branching.

The USA PATRIOT Act. After the September 11, 2001 terrorist attacks in New York
and Washington, D.C., the United States government acted in several ways to
tighten control on activities perceived to be connected to money laundering and
terrorist funding. A series of orders were issued which identify terrorists and
terrorist organizations and require the blocking of property and assets of, as
well as prohibiting all transactions or dealings with, such terrorists,
terrorist organizations and those that assist or sponsor them. The USA Patriot
Act substantially broadens existing anti-money laundering legislation and the
extraterritorial jurisdiction of the United States, imposes new compliance and
due diligence obligations, creates new crimes and penalties, compels the
production of documents located both inside and outside the United States,
including those of foreign institutions that have a correspondent relationship
in the United States, and clarifies the safe harbor from civil liability to
customers. In addition, the United States Treasury Department issued regulations
in cooperation with the federal banking agencies, the Securities and Exchange
Commission, the Commodity Futures Trading Commission and the Department of
Justice to require customer identification and verification, expand the
money-laundering program requirement to the major financial services sectors,
including insurance and unregistered investment companies, such as hedge funds,
and facilitate and permit the sharing of information between law enforcement and
financial institutions, as well as among financial institutions themselves. The
United States Treasury Department also has created the Treasury USA PATRIOT Act
Task Force to work with other financial regulators, the regulated community, law
enforcement and consumers to continually improve the regulations.

Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act was enacted
which addresses corporate governance and securities reporting requirements.
Among its requirements are changes in auditing and accounting, executive
compensation, certifications by Chief Executive Officers and Chief Financial
Officers of certain securities filings, expanded reporting of information in
current reports filed with the Securities and Exchange Commission, more detailed
reporting information in securities disclosure documents and more timely filings
of corporate information. Nasdaq has also proposed corporate governance rules
that are intended to allow shareholders to more easily and efficiently monitor
the performance of companies and directors.

Regulation of MountainBank. MountainBank is organized as a North Carolina state
chartered bank subject to regulation, supervision and examination by the NC
Banking Commission and the FDIC. The federal and state laws and regulations are
applicable to required reserves against deposits, allowable investments, loans,
mergers, consolidations, issuance of securities, payment of dividends,
establishment of branches, limitations on credit to subsidiaries and other
aspects of the business of such subsidiaries. The federal and state banking
agencies have broad authority and discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies involving the classification of assets and the establishment of loan
loss reserves for regulatory purposes. Such actions by the regulators prohibit
member banks from engaging in unsafe or unsound banking practices. The Bank is
also subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the Federal Home Loan Bank ("FHLB") of Atlanta, which
is one of the 12 regional banks comprising the FHLB System.

                                       18

<PAGE>

Management's Discussion and Analysis

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

    Table 1. Net Interest Income and Average Balances (dollars in thousands)

<TABLE>
<CAPTION>
                                              Year Ended                      Year Ended                     Year Ended
                                           December 31, 2002               December 31, 2001             December 31, 2000
                                      ----------------------------   ----------------------------   ----------------------------
                                      Average    Interest   Yield/   Average    Interest   Yield/   Average    Interest   Yield/
                                      Balance    Inc/Exp     Cost    Balance    Inc/Exp     Cost    Balance    Inc/Exp     Cost
                                      -------    -------     ----    -------    -------     ----    -------    -------     ----
<S>                                   <C>        <C>        <C>      <C>        <C>        <C>      <C>        <C>       <C>
Interest earning assets:
   Interest bearing deposits
    with other depositories           $ 10,209   $    168    1.65%   $  5,018   $    242     4.82%  $  8,144   $    505     6.20%
   Investment securities                53,058      2,144    4.04%     38,107      2,186     5.74%    27,436      1,865     6.80%
   Bank owned life insurance             5,169        309    5.97%      2,527         86     3.40%         -          -        -
   Federal funds sold                   10,740        183    1.70%      7,801        286     3.67%     3,944        241     6.11%
   Loans                               583,917     43,479    7.45%    315,378     27,106     8.59%   136,846     13,210     9.65%
                                      --------   --------   -----    --------   --------   ------   --------   --------  -------
     Total interest earning
      assets                           663,093     46,283             368,831     29,906             176,370     15,821
                                      --------   --------            --------   --------            --------   --------
     Yield on average interest
      earning assets                                         6.98%                           8.11%                          8.97%
                                                            =====                          ======                        =======

Noninterest earning assets:
   Cash and due from banks              12,616                          4,939                          5,024
   Property and equipment                8,124                          3,071                          1,886
   Interest receivable and other           603                          3,605                          1,839
                                      --------                       --------                       --------
     Total noninterest earning
      assets                            21,343                         11,615                          8,749
                                      --------                       --------                       --------

     Total assets                     $684,436                       $380,446                       $185,119
                                      ========                       ========                       ========

Interest bearing liabilities:
   Demand deposits                    $ 59,599        785    1.32%   $ 18,433        206     1.12%  $ 11,174        152     1.36%
   Savings deposits                     88,177      1,885    2.14%     49,112      1,672     3.40%    38,241      1,750     4.58%
   Time deposits                       373,315     13,737    3.68%    234,739     13,404     5.71%   104,427      6,894     6.60%
   Obligation under capital lease          723         59    8.18%        749         56     7.48%       776         68     8.76%
   FHLB advances                        36,968      1,529    4.14%     18,823        864     4.59%         -          -        -
   Notes payable                         2,808        194    6.88%      5,502        223     4.05%         -          -        -
   Junior subordinated debentures       10,247        609    5.95%          -          -        -          -          -        -
   Fed funds purchased/
    repurchase agreements                9,696        145    1.50%      4,999        196     3.92%     2,586        152     5.88%
                                      --------   --------   -----    --------   --------   ------   --------   --------  -------
     Total interest bearing
      liabilities                      581,533     18,943             332,357     16,621             157,204      9,016
                                      --------   --------            --------   --------            --------   --------
     Cost on average interest
       bearing liabilities                                   3.26%                           5.00%                          5.74%
                                                            =====                          ======                        =======
Noninterest bearing liabilities:
   Demand deposits                      50,321                         23,241                         11,079
   Interest payable and other            5,457                          5,096                          2,036
                                      --------                       --------                       --------
     Total noninterest bearing
       liabilities                      55,778                         28,337                         13,115
                                      --------                       --------                       --------
     Total liabilities                 637,311                        360,694                        170,319
Stockholders' equity                    47,125                         19,752                         14,800
                                      --------                       --------                       --------
     Total liabilities and
     stockholders' equity             $684,436                       $380,446                       $185,119
                                      ========                       ========                       ========
Net interest income                              $ 27,340                       $ 13,285                       $  6,805
                                                 ========                       ========                       ========
Net yield on interest
  earning assets                                             4.12%                           3.60%                          3.86%
                                                            =====                          ======                        =======
</TABLE>

                                       19

<PAGE>

Management's Discussion and Analysis

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

          Table 2. Rate/Volume Variance Analysis (dollars in thousands)

<TABLE>
<CAPTION>
                                              2002 Compared to 2001                   2001 Compared to 2000
                                      -------------------------------------   -------------------------------------
                                       Interest                                 Interest
                                        Income/                                 Income/
                                       Interest             Variance            Interest             Variance
                                        Expense         Attributable To         Expense          Attributable To
                                       Variance         Rate        Volume      Variance       Rate         Volume
                                      ----------     ---------    ---------    ---------    ---------     ---------
<S>                                   <C>            <C>          <C>          <C>          <C>           <C>
Interest earning assets:
Interest bearing deposits in other
   depositories                       $     (74)     $    (324)   $     250    $    (263)   $     (69)    $    (194)
Investment securities                       (42)          (903)         861          321         (492)          813
Bank owned life insurance                   223            133           90           86            -            86
   Federal funds sold                      (103)          (212)         109           45         (190)          235
   Loans                                 16,373         (6,656)      23,029       13,896       (3,343)       17,239
                                      ---------      ---------    ---------    ---------    ---------     ---------
     Total                               16,377         (7,962)      24,339       14,085       (4,094)       18,179
                                      ---------      ---------    ---------    ---------    ---------     ---------

Interest bearing liabilities:
   Demand deposits                          579            118          461           54          (44)           98
   Savings deposits                         213         (1,109)       1,322          (78)        (578)          500
   Time deposits                            333         (7,579)       7,912        6,510       (2,089)        8,599
   Obligation under capital lease             3              5           (2)         (12)         (10)           (2)
   Federal funds purchased/
     repurchase agreements                  (51)          (235)         184           44          (98)          142
   FHLB advances                            665           (168)         833          864            -           864
   Junior subordinated debentures           609              -          609            -            -             -
   Notes payable                            (29)            80         (109)         223            -           223
                                      ---------      ---------    ---------    ---------    ---------     ---------
     Total                                2,322         (8,888)      11,210        7,605       (2,819)       10,424
                                      ---------      ---------    ---------    ---------    ---------     ---------
     Net interest income              $  14,055      $     926    $  13,129    $   6,480    $  (1,275)    $   7,755
                                      =========      =========    =========    =========    =========     =========
</TABLE>

Analysis of Financial Condition. Average earning assets increased 79.78% from
2001 to 2002. Average earning assets represented 96.88% of total average assets
at December 31, 2002 compared to 96.95% at the end of 2001. All categories of
average assets increased during 2002. Average loans increased $268.5 million or
85.15% over 2001. Table 3 illustrates the growth of various balance sheet
components.

                Table 3. Average Asset Mix (dollars in thousands)

<TABLE>
<CAPTION>
                                                        For the Year Ended        For the Year Ended
                                                         December 31, 2002         December 31, 2001
                                                     ------------------------   ---------------------
                                                        Average                   Average
                                                        Balance        %          Balance       %
                                                     -----------  -----------   -----------  --------
<S>                                                  <C>          <C>           <C>          <C>
Earning assets:
   Loans, net                                        $   583,917        85.31%  $   315,378     82.90%
   Investment securities                                  53,058         7.75%       38,107     10.02%
   Bank owned life insurance                               5,169         0.76%        2,527      0.66%
   Federal funds sold                                     10,740         1.57%        7,801      2.05%
   Interest bearing deposits with depositories            10,209         1.49%        5,018      1.32%
                                                     -----------   ----------   -----------   -------
     Total earning assets                                663,093        96.88%      368,831     96.95%
                                                     -----------   ----------   -----------   -------

Non earning assets:
   Cash and due from banks                                12,616         1.84%        4,939      1.29%
   Property and equipment                                  8,124         1.19%        3,071      0.81%
   Other assets                                              603         0.09%        3,605      0.95%
                                                     -----------   ----------   -----------   -------
     Total non earning assets                             21,343         3.12%       11,615      3.05%
                                                     -----------   ----------   -----------   -------
     Total assets                                    $   684,436   $   100.00%  $   380,446    100.00%
                                                     ===========   ==========   ===========   =======
</TABLE>

                                       20

<PAGE>

Management's Discussion and Analysis

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

During 2002, average net loans represented 85.31% of total average assets
compared to 82.90% for fiscal 2001. Loan production continued at a rapid pace
during 2002 and as a result, loan assets comprised a larger percentage of the
total asset base for the year. It is management's continued intent to grow the
Company's balance sheet by first growing its loan portfolio, rather than growing
its liability base first and investing in lower yielding assets until loans can
be produced. Management believes this to be the most cost effective strategy for
profitable growth. Management anticipates loan growth to slow considerably
during 2003 as credit standards and underwriting criteria are expected to be
tightened in light of current economic conditions. However, as the Company's
geographic market area continues to expand, access to high quality loans is
expected to continue to drive overall growth.

On December 31, 2001, the Company completed the acquisition of First Western
Bank. In addition to expanding the Company's operations in contiguous markets,
one of the primary reasons for the acquisition was that First Western maintained
excess equity on their balance sheet. As a result of the acquisition, the
Company's equity ratios were enhanced and existing Company shareholders' book
value increased. Also, as a result of completing systems and operations
integration more rapidly than management originally projected and the Company's
ability to leverage First Western's capital more quickly than was originally
projected, this acquisition has not been dilutive to the Company's earnings per
share during 2002.

Net Interest Income. The Company's primary source of income is net interest
income. It is defined as the difference between income generated by the earning
assets less expense incurred on its interest bearing liabilities. Table 1
summarizes the major components of net interest income for the years ended
December 31, 2002, 2001 and 2000. Compared with 2001, net interest income more
than doubled during 2002, increasing 105.80% or $14.1 million, principally as a
result of overall growth of the Company's balance sheet. During 2002, net
interest income increased primarily as a result of overall increases in balance
volume, coupled with an increased net interest margin. During the period, both
asset yields and liability costs declined along with the general decline
experienced in interest rates over the course of the year. Asset yields fell 113
basis points while liability costs declined 174 basis points resulting in an
increase in the Company's net interest margin of 52 basis points. The increase
in net interest margin was considered by management to be more correlated to
changes in liability mix and pricing than in asset pricing. With interest rates
at their lowest point in decades, management expects deposit rates to be
increasingly difficult to lower if interest rates decline further over the
coming months. Accordingly, while the company experienced an increase in its net
interest margin during 2002, contraction of the company's net interest margin is
anticipated with any further decline in the overall interest rate environment.
During 2002, 85.31% of the Company's average assets were invested in loan assets
as compared with 82.90% on average during 2001. Management continued the effort
to diversify the Company's funding sources which was begun in 2001. In addition
to retail deposits generated through its branch network, management continued to
add wholesale deposits and FHLB advances along with $20 million in trust
preferred securities. These wholesale sources of funding allow for greater
flexibility in managing the Company's liability structure as well as providing
additional tools for interest rate management.

                                       21

<PAGE>

Management's Discussion and Analysis

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

Provision for Credit Losses and Asset Quality. As a result of the continued
rapid growth of the Company's loan portfolio, the Company's provision for loan
losses remains one of its largest ongoing expenses. During 2002, the Company
provided $5.3 million for possible loan losses. This compares with $3.3 million
provided during 2001 and $1.9 million provided in 2000. These provisions, made
to the Company's allowance for credit losses to provide for possible future
losses are charged directly against the Company's current earnings. On at least
a quarterly basis, management and the Board of Directors evaluates the allowance
for loan losses to determine its adequacy to meet any known or anticipated
future losses based on current and projected conditions. Factors considered in
determining the adequacy of the allowance include the estimated collectability
of past due loans, the volume of new loans, composition of the loan portfolio,
industry standards and current as well as projected economic conditions.
Specific reserves for individual loans are established in addition to the basic
reserve as deemed necessary based on evaluation of individual credits.
Generally, specific reserves are allocated to individual credits following
review by the company's loan review personnel. Loans are selected for this
review process as a result of one or more events. Reviews are normally triggered
as a result of the delinquency of a credit, some change in the status of the
borrower including a change in the borrower or guarantor's financial condition
as indicated by receipt of interim financial statements or as the result of
random selection in the normal course of the company's ongoing loan review
function. Upon review, if the credit is deemed to have deteriorated to a point
that additional and ongoing attention is necessitated, the credit will be
"graded" into one of five "non-standard" categories. These categories include,
in order of increasing severity, watch, "OAEM" or "special mention",
substandard, doubtful or loss. Once reviewed and classified, each loan is
assigned a risk allocation based on the estimated risk of loss determined during
the review. Loans that are not classified are assigned to general categories,
generally based on their type of collateral, and are assigned a risk weighting
by class or category. This risk weighting is based both on the Company's
historical loss ratios and by industry standards as the Company's portfolio is
relatively young and has limited loss history.

The Company's loan portfolio is beginning to become more seasoned and historical
trends are beginning to provide more pertinent data for evaluation. However,
with continued growth and expansion into new markets, estimates of future
portfolio performance remain quite subjective. Therefore, while it is the
opinion of management and the Board of Directors that the Company's allowance
for loan losses is adequate to absorb any anticipated loan losses as of the
report date, no assurances can be made that any future losses may not be
significant and may require additional provisions. At December 31, 2002, 2001
and 2000, the Company's allowance for loan losses totaled $11.2 million, $7.1
million and $3.0 million, respectively, representing 1.58%, 1.45% and 1.50% of
gross loans. Excluding sold mortgage loans in the portfolio at December 31,
2002, the Company's allowance totaled 1.65% of total loans.

During 2002, the Company experienced increased loan losses as compared to prior
years. Total loans charged off or charged down amounted to $1.4 million. This
total was comprised of $589 thousand in consumer loans, $372 thousand in
commercial loans and $488 thousand in real estate loans. Recoveries for the year
amounted to $228 thousand, resulting in net charge-offs of $1.2 million for the
year. A sizeable portion of the above referenced consumer loan charge offs
resulted from loans acquired through the company's acquisition of First Western
Bank and its loan portfolio which was completed at year end 2001. Even with the
increase in credit losses in 2002, the Company has experienced relatively
limited credit losses to date. However, with the company's rapid growth and
larger loan portfolio as well as the continuing problems within the U.S.
domestic economy and with relatively high unemployment rates in a number of the
company's market areas, management expects future credit losses to be a closer
approximation of trends experienced within the banking industry as a whole. It
is management's intent to control and limit such losses to the extent possible
through adherence to current policies and procedures which are intended to
maintain a high level of credit quality. Table 4 describes loan charge-offs and
recoveries for the years ended December 31, 2002, 2001, 2000, 1999 and 1998
while table 5 describes the allocation of the loan loss allowance for the years
ended December 31, 2002, 2001 and 2000.

                                       22

<PAGE>

Management's Discussion and Analysis

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

            Table 4. Allowance for Loan Losses (Dollars in thousands)

<TABLE>
<CAPTION>
                                                             2002        2001        2000        1999        1998
                                                             ----        ----        ----        ----        ----
<S>                                                       <C>         <C>         <C>         <C>         <C>
Balance, January 1                                        $    7,113  $    3,007  $    1,247  $      752  $      281
Loan charge-offs:
Commercial, financial and agricultural                           372         104          60         201           -
Real estate - construction                                       157          53          45          75           -
Real estate - 1 to 4 family                                      109          15           -          44           -
Real estate - Non-farm Non-residential                           222          30           -           -           -
Installment                                                      589         284          45           2           -
Other                                                              -           -           -          10           -
                                                          ----------------------------------------------------------
Total loans charged-off                                        1,449         486         150         332           -

Recoveries of loans previously charged-off:
Commercial, financial and agricultural                            22           1           -           -           -
Real estate - construction                                         -           -           -           -           -
Real estate - 1 to 4 family                                       11           -           -           -           -
Real estate - Non-farm Non-residential                             -           -           -           -           -
Installment                                                      195          14           5           -           -
Other                                                              -           -           -           -           -
                                                          ----------------------------------------------------------
Total recoveries of loans previously charged-off                 228          15           5           -           -
                                                          ----------------------------------------------------------
Net charge-offs                                                1,221         471         145         332           -
                                                          ----------------------------------------------------------
Provision for loan losses                                      5,300       3,347       1,905         827         471
Allowance of acquired bank                                         -       1,230           -           -           -
                                                          ----------------------------------------------------------
Balance, December 31                                      $   11,192  $    7,113  $    3,007  $    1,247  $      752
                                                          ==========================================================
</TABLE>

     Table 5. Allocation of Allowance for Loan Losses (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                         At December 31,
                                          ----------------------------------------------------------------------------
                                                    2002                        2001                      2000
                                          ------------------------     ---------------------     ---------------------

                                            Amount      % of Total      Amount    % of Total       Amount   % of Total
                                          ----------    ----------     --------   ----------     ---------  ----------
<S>                                       <C>           <C>            <C>        <C>            <C>        <C>
Real Estate                               $    7,512         81.99%    $  4,628        75.85%    $   1,838       74.38%
Commercial, financial and agricultural         1,352         13.16%         898        16.66%          453       15.16%
Consumer                                         645          3.44%         779         6.31%          241       10.46%
All other loans and unallocated reserves       1,683          1.41%         808         1.18%          475           -
                                          ----------    ----------     --------   ----------     ---------  ----------
Total                                     $   11,192        100.00%    $  7,113       100.00%    $   3,007      100.00%
                                          ==========    ==========     ========   ===========    =========  ==========
</TABLE>

                                       23

<PAGE>

Management's Discussion and Analysis

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

Other Income. In addition to net interest income, the Company derives revenues
from a variety of financial products and services offered to its customer base.
The majority of noninterest income results from origination fees and released
service rights on sold mortgage loans, from service charges on deposit accounts
including charges for insufficient funds, check sales, and fees charged for
nondeposit services and from premiums generated through the sale of credit
related insurance products. Additionally, the Company may sell various assets
from time to time including loans or securities, which may produce either gains
or losses when sold. During 2002, these transactions resulted in non-recurring
gains totaling $299 thousand, as compared with $286 thousand recorded as a
result of similar transactions during 2001. Mortgage loan origination fees
increased substantially in 2002 as compared with 2001, primarily due to
continued demand for refinancings and to increased capacity in the company's
mortgage division. In addition to increases in deposit service charge fees
attributable to overall increases in the volume of accounts, the company
introduced an overdraft protection product during the fourth quarter of 2001.
This product accounted for a substantial portion of the increase in service
charges on deposit accounts experienced during 2002. Table 6 describes
non-interest income for the years ended December 31, 2002, 2001 and 2000.

          Table 6. Sources of Noninterest Income (Dollars in thousands)

<TABLE>
<CAPTION>
                                                         For the periods ended December 31,
                                                ---------------------------------------------------
                                                      2002             2001              2000
                                                ----------------  ---------------  ----------------
<S>                                             <C>               <C>              <C>
Service charges on deposit accounts             $          2,431  $           940  $            461
Fees on mortgage loans sold                                3,095            1,435               499
Gains on sale of assets                                      299              286               151
Other service charges and fees                               212              128                60
Other income                                                 215              205               147
                                                ----------------  ---------------  ----------------
                                                $          6,252  $         2,994  $          1,318
                                                ================  ===============  ================
</TABLE>

Non-interest Expense. The major components of non-interest expense for the years
ended December 31, 2002, 2001 and 2000 are as follows:

         Table 7. Sources of Noninterest Expense (Dollars in thousands)

<TABLE>
<CAPTION>
                                                        For the periods ended December 31,
                                               ---------------------------------------------------
                                                     2002             2001              2000
                                               ----------------  ---------------  ----------------
<S>                                            <C>               <C>              <C>
Salary and benefits                            $          9,674  $         4,793  $          2,417
Occupancy expenses                                        1,157              571               316
Furniture/equipment expenses                              1,466              662               349
Professional service fees                                   978              658               148
Data and credit card processing fees                      1,089              521               298
Advertising and business promotion                          450              416               222
Printing and related supplies                               391              301               108
Amortization of intangible assets                           331               18                 -
Other expenses                                            2,733            1,266               721
                                               ----------------  ---------------  ----------------
                                               $         18,269  $         9,206  $          4,579
                                               ================  ===============  ================
</TABLE>

Management calculates the Company's overhead efficiency ratio as noninterest
expense divided by adjusted total revenue (net interest income before provision
for loan losses plus noninterest income). Management places significant
importance on this ratio, as it is the primary measurement used to determine the
efficiency of the Company's overall operation. During 2002, this ratio decreased
to 54.38% as compared with 56.55% in 2001. Management believes this ratio can be
reduced further, however, reductions are expected to be more difficult over the
near term due to continued growth expectations and other possible business
combinations.

                                       24

<PAGE>

Management's Discussion and Analysis

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

Loans. Average net loans totaled $583.9 million during the year ended December
31, 2002, representing an increase of 85.1% as compared with 2001. Management
intends to continue the growth of high quality loan assets to the extent
possible as dictated by the Company's capital. With continued expansion of the
Company's geographic market area, aggressive marketing efforts and the strong
acceptance of the Company within the communities it serves, management expects
loan growth, and consequently, the Company's overall growth, to continue at a
relatively rapid rate yet somewhat slower than in prior years.

The majority of growth in the Company's loan portfolio has been centered in real
estate and commercial loans. These loans comprised approximately 95% of the
total loan portfolio at December 31, 2002. The amount of loans outstanding by
type at December 31, 2002, 2001, 2000, 1999, and 1998 and the maturity
distribution for variable and fixed rate loans as of December 31, 2002 are
presented in Tables 8 and 9, respectively.

              Table 8. Loan Portfolio Summary (Dollars in thousand)

<TABLE>
<CAPTION>
                                  December 31, 2002   December 31, 2001   December 31, 2000   December 31, 1999   December 31, 1998
                                  -----------------   -----------------   -----------------   -----------------   -----------------
                                   Amount       %      Amount       %      Amount       %     Amount        %      Amount       %
                                  ---------  ------   --------   ------   --------   ------   -------   -------   --------   ------
<S>                               <C>        <C>      <C>        <C>      <C>        <C>      <C>       <C>       <C>        <C>
Construction and development      $ 119,944   16.88%  $ 89,587    18.25%  $ 32,602    16.27%  $13,480     15.02%  $  7,141    14.75%
1-4 family residential              158,945   22.37%    99,227    20.21%    36,963    18.45%   20,480     22.82%    10,520    21.73%
Farmland                              1,846    0.26%     1,959     0.40%       385     0.19%      565      0.63%       629     1.30%
Nonfarm, nonresidential             290,811   40.93%   177,319    36.11%    78,489    39.17%   27,799     30.98%    12,794    26.42%
Multifamily residential              11,009    1.55%     4,326     0.88%       596     0.30%      455      0.51%         -        -%
                                  ---------  ------   --------   ------   --------   ------   -------   -------   --------   ------
     Total real estate              582,555   81.99%   372,418    75.85%   149,035    74.38%   62,779     69.96%    31,084    64.20%

Loans to finance agricultural
   production                           110    0.02%       403     0.08%       996     0.50%      218      0.24%         -         -
Commercial and industrial            93,360   13.14%    81,388    16.58%    29,381    14.66%   17,471     19.47%    12,057    24.90%
Consumer                             24,468    3.44%    31,005     6.31%    20,968    10.46%    9,277     10.33%     5,221    10.78%
Other                                 9,988    1.41%     5,771     1.18%         -        -         -         -         61     0.12%
                                  ---------  ------   --------   ------   --------  -------   -------   -------   --------   ------
     Total                        $ 710,481  100.00%  $490,985   100.00%  $200,380   100.00%  $89,745    100.00%  $ 48,423   100.00%
                                  =========  ======   ========   ======   ========  =======   =======   =======   ========   ======
</TABLE>

                                       25

<PAGE>

Management's Discussion and Analysis

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

    Table 9. Maturity and Repricing Schedule of Loans (Dollars in thousands)

<TABLE>
<CAPTION>
                                   Commercial    Residential                             Total
                                 Financial and       Real                      -------------------------
                                  Agricultural      Estate         Others         Amount            %
                                 -------------   -----------    ------------   ------------   ----------
<S>                              <C>             <C>            <C>            <C>            <C>
Fixed rate loans:

   Three months or less          $      21,659   $     1,656    $      1,275   $     24,590        3.46%
   Over three months to
    twelve months                       38,382         6,624           3,121         48,127        6.78%
   Over one year to
    five years                         191,937        34,172          20,632        246,741       34.73%
   Over five years                      39,969        48,658           2,609         91,236       12.84%
                                  ------------   -----------    ------------   ------------   ----------
     Total fixed rate loans      $     291,947   $    91,110    $     27,637   $    410,694       57.81%
                                  ------------   -----------    ------------   ------------   ----------

                                   Commercial    Residential                             Total
                                 Financial and       Real                      -------------------------
                                  Agricultural      Estate         Others         Amount            %
                                 -------------   -----------    ------------   ------------   ----------

Variable rate loans:

   Three months or less          $     214,124    $    66,164    $      6,282   $    286,570       40.34%
   Over three months to
    twelve months                            -          3,335             537          3,872        0.54%
   Over one year to
    five years                               -          9,345               -          9,345        1.31%
   Over five years                           -              -               -              -           -%
                                 -------------    -----------    ------------   ------------   ----------
     Total variable rate loans   $     214,124    $    78,844    $      6,819   $    299,787       42.19%
                                 -------------    -----------    ------------   ------------   ----------

Total loans:

   Three months or less          $     235,783    $    67,820    $      7,557   $    311,160       43.80%
   Over three months to
    twelve months                       38,382          9,959           3,658         51,999        7.32%
   Over one year to
    five years                         191,937         43,517          20,632        256,086       36.04%
   Over five years                      39,969         48,658           2,609         91,236       12.84%
                                 -------------    -----------    ------------   ------------   ----------
     Total loans                 $     506,071    $   169,954    $     34,456   $    710,481      100.00%
                                 =============    ===========    ============   ============   ==========
</TABLE>

Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average, the
Company's loan portfolio yielded 7.45% during 2002 as compared to an average
yield of 8.59% during 2001.

By the end of 2002, variable rate loans had increased to over 42% of total
loans.

Investment Securities. The Company uses its investment portfolio as a tool to
provide liquidity, manage interest rate risk and provide supplemental earnings.
Management began this process in anticipation of a stabilizing interest rate
environment and projected increases in rates over the next four to six quarters.
Management has continued to focus on maintaining the majority of its investment
securities in floating rate instruments to aid in mitigating interest rate risk
associated with the fixed rate component of the Company's loan portfolio, and
accordingly, has been willing to accept somewhat lower investment yields for
shorter duration within the investment portfolio.

                                       26

<PAGE>

Management's Discussion and Analysis

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

With the Company's rapid growth since its inception and with continuing growth
expected by management, the need to manage liquidity through the investment
portfolio has been acknowledged by classifying all of its investment securities
as available for sale. Accordingly, these securities may be sold from time to
time to increase liquidity or re-balance the interest rate sensitivity profile
of the Company's balance sheet as deemed necessary. Table 10 presents the
investment portfolio at December 31, 2002 by major type of investments and
maturity and repricing ranges. At December 31, 2002, the market value of the
investment portfolio was $73.7 million, representing market appreciation of $256
thousand as compared to book value at that date. At December 31, 2001 the market
value of the investment portfolio was $42.5 million.

             Table 10. Investment Securities (Dollars in thousands)

                      December 31, 2002 Available for Sale

<TABLE>
<CAPTION>
                                                 One Year      After Five
                                In One Year    Through Five      Through      After Ten                       Market
                                  or Less         Years         Ten Years       Years         Total           Value
                               ------------   -------------   ------------   -----------   -----------   --------------
<S>                            <C>            <C>             <C>            <C>           <C>           <C>
Investment securities:
U.S. Government agencies       $      3,000   $           -   $          -   $         -   $     3,000   $        3,016
U.S. Government agency
   pools (MBS)                            -              73            402        60,922        61,397           61,722
Municipals                                                -              -             -             -                -
Equity investment securities              -           7,830              -         1,248         9,078            8,993
                               ------------   -------------   ------------   -----------   -----------   --------------
       Total                   $      3,000   $       7,903   $        402   $    65,916   $    73,475   $       73,731
                               ============   =============   ============   ===========   ===========   ==============

Weighted average yields:
U.S. Government agencies               4.03%              -%             -%            -%         4.03%
U.S. Government agencies
   pools (MBS)                            -%           5.10%          7.38%         4.07%         4.09%
Municipals (tax equivalent)               -%              -%             -%            -%            -%
Equity investment securities              -%           2.19%             -%         0.94%         2.02%
                               ------------   -------------   ------------   -----------   -----------
       Consolidated                    4.03%           2.21%          7.38%         3.94%         3.78%
                               ============   =============   ============   ===========   ===========
</TABLE>

           December 31, 2001 and December 31, 2000 Available for Sale

<TABLE>
<CAPTION>
                                                                         2001                          2000
                                                              --------------------------   ----------------------------
                                                                  Book          Market        Book           Market
                                                                  Value         Value         Value          Value
                                                              ------------   -----------   -----------   --------------
<S>                                                           <C>            <C>           <C>           <C>
Investment securities:
U.S. Government agencies                                      $      7,177   $     7,162   $     9,385   $        9,344
U.S. Government agency
   pools (MBS)                                                      23,632        23,709        25,006           25,260
Municipals                                                           3,721         3,755             -                -
Equity investment securities                                         8,702         8,702           814              812
                                                              ------------   -----------   -----------   --------------
       Total                                                  $     42,360   $    42,456   $    35,205   $       35,416
                                                              ============   ===========   ===========   ==============
</TABLE>

                                       27

<PAGE>

Management's Discussion and Analysis

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

Average overnight investments totaled $20.9 million or 3.06% of average assets
for the year ended December 31, 2002. At December 31, 2001, overnight
investments totaled $12.8 million. Federal funds sold and interest bearing
deposits with banks represent the most liquid portion of the Company's invested
funds and generally the lowest yielding portion of earning assets. Management
expects to maintain overnight and other short term investments at levels
sufficient to meet liquidity demands, but at relatively low levels so as to
maximize the Company's earning potential.

Deposits. The primary goal of the Company's expansion of its geographic market
area is the ability to attract and access additional deposits. Retail deposits
gathered through the Company's branch network continues to be its principal
source of funding, although the Company does utilize wholesale funding sources.
Management considers acquisition of core deposits as one of the most fundamental
sources of increased franchise value and intends to continue to expand both the
Company's geographic markets and further penetrate its current markets.
Management believes that generation of quality loan assets can be materially
impacted by the level of service provided to the customer, but that a
significant portion of depositors are viewed as more rate sensitive than service
oriented. Therefore the Company's primary advertising and mass media marketing
efforts are geared toward attracting deposits and it remains the Company's
primary deposit gathering strategy to provide these customers with both
competitive rates and exceptional service.

Due to the popularity of the Company's primary market area as a favored
retirement destination, a higher percentage of its certificates of deposit are
concentrated in CDs over $100 thousand as compared to peer institutions. Due to
the market demographics within the Company's primary area of operations,
management generally differentiates little between jumbo CDs and smaller
denomination certificates in projecting retention rates for certificates. During
2002, certificates of deposit comprised 65.33% of the Company's average deposit
base as compared with 72.12% during 2001. One of management's stated goals for
fiscal 2003 is to increase the volume of non-CD deposits as a ratio of total
deposits. Management expects to substantially increase the actual dollar amount
of these deposits during the next year, however, depending on the funding
requirements dictated by net loan growth, a reduction in non-CD deposits to
total deposits may be nominal until total balance sheet growth moderates
further.

Average deposits for the year ended December 31, 2002 totaled $571.4 million as
compared with $325.5 million for the same period in 2001. The Company's
percentage of interest bearing deposits decreased to 91.19% from 92.86% in 2001.
Management desires to decrease this ratio further as additional emphasis is
placed on the cross-selling of demand deposit accounts and increasing the
Company's account per customer ratio. Demand deposits are generally considered
the most difficult deposit accounts to acquire, however, management remains
intent on emphasizing acquisition of demand deposits as one of the Company's
primary goals. Therefore, it is anticipated that the percentage of interest
bearing deposits will continue to trend downward slowly. Average deposits for
the periods ended December 31, 2002, 2001, and 2000 are summarized in Table 11
below.

                  Table 11. Deposit Mix (Dollars in thousands)

<TABLE>
<CAPTION>
                                          December 31, 2002        December 31, 2001          December 31, 2000
                                       -----------------------  -----------------------   -------------------------
                                         Average                  Average                    Average
                                         Balance         %        Balance         %          Balance          %
                                       -----------    --------  -----------   ---------   -------------   ---------
<S>                                    <C>            <C>       <C>           <C>         <C>             <C>
Interest bearing deposits:
   NOW Accounts                        $   59,599        10.43% $    18,433        5.66%  $    11,174          6.78%
   Money Market                            78,350        13.71%      45,651       14.02%       36,221         21.96%
   Savings                                  9,827         1.72%       3,461        1.06%        2,020          1.22%
   Certificates of deposit                373,315        65.33%     234,739       72.12%      104,427         63.32%
                                       ----------     --------  -----------   ---------   -----------     ---------
     Total interest bearing deposits      521,091        91.19%     302,284       92.86%      153,842         93.28%
Noninterest bearing deposits               50,321         8.81%      23,241        7.14%       11,079          6.72%
                                       ----------     --------  -----------   ---------   -----------     ---------
     Total deposits                    $  571,412       100.00% $   325,525      100.00%  $   164,921        100.00%
                                       ==========     ========  ===========   =========   ===========     =========
</TABLE>

                                       28

<PAGE>

Management's Discussion and Analysis

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

At December 31, 2002, certificates of deposit denominated in amounts of $100
thousand or more totaled $180.2 million as compared with $120.5 million at
December 31, 2001. This represents an increase of $59.7 million. The percentage
of total deposits represented by these certificates increased to 26.61% at
December 31, 2002 as compared with 25.78% at December 31, 2001. Table 12
provides maturity information relating to Certificates of Deposit of $100
thousand or more at December 31, 2002 and 2001.

                     Table 12. Large time deposit maturities

Analysis of time deposits of $100 thousand or more at December 31, 2002 and 2001
(Dollars in thousands):

<TABLE>
<CAPTION>
                                                                      2002              2001
                                                                 ---------------  ----------------
   <S>                                                           <C>              <C>
   Remaining maturity of three months or less                    $        67,863  $         49,645
   Remaining maturity over three through twelve months                   104,200            65,848
   Remaining maturity over twelve months                                   8,153             5,019
                                                                 ---------------  ----------------
     Total time deposits of $100 thousand or more                $       180,216  $        120,512
                                                                 ===============  ================
</TABLE>

Capital Adequacy. The Company's rapid growth from the company's inception has
required management and the Board of Directors to modify its capital plan on a
regular basis. During 2002, the Company issued an additional $7.8 million in its
Series A Convertible Preferred stock, bringing the aggregate amount of this
offering to $10.1 million. Additionally, the company completed its first
issuance of Trust Preferred securities in late June 2002 in the amount of $20
million. These capital issuances were utilized to extinguish a short term
borrowing facility and capitalize the continued growth of the Company and
MountainBank throughout the year. The remaining increase in equity resulted from
retention of earnings and exercise of stock options.

The Trust Preferred securities are accounted for as long-term debt in the
accompanying financial statements, however, for regulatory capital purposes, the
majority of this issuance is considered Tier I capital with the remainder
qualifying as Tier II capital. The remaining long-term debt reported on the
Company's balance sheet represents long-term borrowings by MountainBank from the
Federal Home Loan Bank of Atlanta. The following tables illustrate the Company's
and the Bank's respective capital position and ratios along with minimum
regulatory ratios at December 31, 2002.

Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. For the Company, risk-based capital
guidelines require minimum ratios of core (Tier 1) capital (common stockholders'
equity) to risk-weighted assets of 4.0% and total regulatory capital (core
capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to
risk-weighted assets of 8.0%. As of December 31, 2002, the Company's Tier 1
risk-weighted capital ratio and total capital ratio were 9.02% and 10.84%,
respectively.

MountainBank also has capital ratio constraints with which to comply. These
ratios are slightly different than those required at the parent company level.
At December 31, 2002, MountainBank's capital ratios were as follows: Tier I
leverage ratio, 7.85%, Tier I risk-based capital ratio, 8.76% and total
risk-based ratio, 10.01%. These capital ratios were sufficient at December 31,
2002 to classify the Company as "well capitalized" in accordance with the FDIC's
regulatory capital rules. At December 31, 2002, the Company had 3,200,364 shares
of common stock outstanding. At that date, the company had approximately 2,100
stockholders of record. The Company's and Bank's actual capital amounts and
ratios are presented in table 13.

                                       29

<PAGE>

Management's Discussion and Analysis

--------------------------------------------------------------------------------
                         Table 13. Capital Requirements (Dollars in thousands)

MountainBank Financial Corporation

<TABLE>
<CAPTION>
                                                                                  Risk-based Capital
                                                                 -------------------------------------------------------
                                           Leverage Capital            Tier I Capital               Total Capital
                                      -------------------------  ---------------------------  ---------------------------
                                         Amount   Percentage(1)     Amount     Percentage(2)   Amount       Percentage(2)
                                      ----------- -------------  -----------   -------------  ------------  -------------
<S>                                   <C>         <C>            <C>           <C>            <C>           <C>
Actual                                $   63,960           8.09% $    63,960            9.02% $     76,864          10.84%
Required                                  31,608           4.00%      28,369            4.00%       56,737           8.00%
Excess                                    32,352           4.09%      35,591            5.02%       20,127           2.84%
</TABLE>

MountainBank

<TABLE>
<CAPTION>
                                                                                  Risk-based Capital
                                                                 -------------------------------------------------------
                                           Leverage Capital            Tier I Capital               Total Capital
                                      -------------------------  ---------------------------  ---------------------------
                                        Amount    Percentage(1)    Amount      Percentage(2)     Amount     Percentage(2)
                                      ----------- -------------  -----------   -------------  ------------  -------------
<S>                                   <C>         <C>            <C>           <C>            <C>           <C>
Actual                                $    62,094        7.85%  $    62,094             8.76% $     70,986          10.01%
Required                                   31,644        4.00%       28,363             4.00%       56,725           8.00%
Excess                                     30,450        3.85%       33,731             4.76%       14,261           2.01%
</TABLE>

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

(1)  Percentage of total adjusted average assets. The FRB minimum leverage ratio
     requirement is 3 percent to 5 percent, depending on the institution's
     composite rating as determined by its regulators. The FRB has not advised
     the Company of any specific requirements applicable to it.
(2)  Percentage of risk-weighted assets.

Nonperforming and Problem Assets. Certain credit risks are inherent in making
loans, particularly commercial and consumer loans. Management's intent with
regard to maintaining a high level of credit quality is to identify, quantify
and assess these risks and to manage them effectively. The Company's internal
credit underwriting policies and procedures are designed to provide a high level
of credit quality while allowing the lending function to be responsive to the
needs of its customers. These policies and procedures include officer and
customer limits, periodic loan documentation review, on-going credit review and
follow up on exceptions to credit policies.

Nonperforming assets at December 31, 2002, 2001, 2000, 1999 and 1998 are
analyzed in Table 14.

                                       30

<PAGE>

Management's Discussion and Analysis

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

              Table 14. Nonperforming Assets (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                       December 31,
                                        ---------------------------------------------------------------------------
                                             2002           2001           2000            1999           1998
                                        -------------  --------------  -------------  -------------  --------------
<S>                                     <C>            <C>             <C>            <C>            <C>
Nonaccrual loans                        $       2,876  $        1,528  $         266  $         270  $          416
Loans past due 90 days or
   more and still accruing interest                18               -              -              -               -
Restructured loans                                  -               -              -              -               -
                                        -------------  --------------  -------------  -------------  --------------
Total nonperforming loans                       2,894           1,528            266            270             416
                                        -------------  --------------  -------------  -------------  --------------

Other real estate and repossessed
   personal property                            1,426               -              -              -               -
                                        -------------  --------------  -------------  -------------  --------------
Total nonperforming assets              $       4,320  $        1,528  $         266  $         270  $          416
                                        =============  ==============  =============  =============  ==============



Nonaccrual loans
   Interest income, original terms      $         524  $          224  $           7  $          24  $           34
                                        =============  ==============  =============  =============  ==============
   Interest income, recognized          $         442  $          181  $           1  $           2  $           23
                                        =============  ==============  =============  =============  ==============

Restructured loans
   Interest income, original terms      $           -  $            -  $           -  $           -  $            -
                                        =============  ==============  =============  =============  ==============
   Interest income, recognized          $           -  $            -  $           -  $           -  $            -
                                        =============  ==============  =============  =============  ==============

Nonperforming assets as a percentage of:
   Total assets                                     0.51%       0.27%          0.10%          0.21%           0.71%
   Total loans and other real estate                0.62%       0.32%          0.13%          0.30%           0.86%
</TABLE>

Liquidity and Interest Rate Sensitivity. Liquidity is defined as the Company's
ability to meet all short-term demands for funds on a timely basis. Such demands
include funding of loans and other asset purchases or originations, reduction or
liquidation of deposit accounts by customers and principal and interest payments
on debt of both the Bank and its parent company. Liquidity at the Bank level is
provided by cash flows from maturing investments, loan payments and maturities,
federal funds sold, and unpledged investment securities. Liquidity may also be
provided through accumulation of core deposits, increasing large denomination
certificates from both retail and wholesale sources, federal fund lines from
correspondent banks, borrowings from the Federal Home Loan Bank as well as the
Federal Reserve Bank and also the ability to generate funds through the issuance
of long-term debt and equity. At December 31, 2002, MountainBank had established
unsecured upstream lines of credit totaling $18.5 million. Combined with the
bank's available collateralized borrowing lines with the Federal Home Loan Bank,
management believes that current liquidity levels are satisfactory to meet known
and anticipated liquidity needs.

The Company strives to limit the effect of changes in interest rates on both the
Company's net interest income as well as the market value of its assets and
liabilities while maximizing net interest income under these constraints.
Interest rate risk management aims to manage the pricing and duration of assets
and liabilities so that the effects of interest rate changes do not result in
wide fluctuations of either the Company's net interest income or the market
values of assets and liabilities. Next to credit risk, interest rate risk is
considered one of the more significant risks requiring on-going monitoring and
management. Interest rate risk is defined as the effect that changes in interest
rates would have on net interest income as interest-sensitive assets and
liabilities either reprice or mature. Management attempts to correlate the
repricing of the Company's portfolios of earning assets and interest-bearing
liabilities so as to afford protection from significant erosion of net interest
margin resulting from changes in interest rates. Table 15 shows the sensitivity
of the Company's balance sheet at December 31, 2002 and is not necessarily
indicative of the position on other dates. On that date, the Company appeared to
be cumulatively asset-sensitive (earning assets subject to interest rate changes
exceeding interest-bearing liabilities subject to changes in interest rates).

                                       31

<PAGE>

Management's Discussion and Analysis

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

Matching sensitive positions alone does not ensure the Company has limited
interest rate risk. The repricing characteristics of assets are different from
the repricing characteristics of funding sources. Thus, net interest income can
be impacted by changes in interest rates even if the repricing opportunities of
assets and liabilities are matched.

           Table 15. Interest Rate Sensitivity (Dollars in thousands)

<TABLE>
<CAPTION>
                                              December 31, 2002 Asset and Liability Maturities and Repricings
                                  --------------------------------------------------------------------------------------
                                       1 - 3            4 - 12           13 - 60          Over 60
                                       Months           Months            Months           Months            Total
                                  ---------------   ---------------  ----------------  ---------------  ----------------
<S>                               <C>               <C>              <C>               <C>              <C>
Earning assets:
   Loans                          $       311,160   $        51,999  $        256,989  $        91,236  $        711,384
   Investments                              3,016                 -             7,902           66,560            77,478
   Interest bearing deposits
     with banks                            16,393                 -                 -                -            16,393
   Bank Owned Life Ins.                         -            13,328                 -                -            13,328
                                  ---------------   ---------------  ----------------  ---------------  ----------------
     Total                        $       330,569   $        65,327  $        264,891  $       157,796  $        818,583
                                  ===============   ===============  ================  ===============  ================

Interest bearing deposits:

   NOW accounts                   $        82,818   $             -  $              -  $             -  $         82,818
   Money market                            93,152                 -                 -                -            93,152
   Savings                                  6,250                 -                 -                -             6,250
   Certificates of Deposit                152,334           263,812            12,515            1,781           430,442
   Repurchase agreements/Fed
     funds purchased                       14,204                 -                 -                -            14,204
   Other                                   55,004                20               129           36,775            91,928
                                  ---------------   ---------------  ----------------  ---------------  ----------------
     Total                        $       403,762   $       263,832  $         12,644  $        38,556  $        718,794
                                  ===============   ===============  ================  ===============  ================

Interest sensitivity gap          $       (73,193)  $      (198,505) $        252,247  $       119,240  $         99,789

Cumulative interest
   sensitivity gap                $       (73,193)  $      (271,698) $        (19,451) $        99,789  $         99,789

Ratio of sensitive assets to
   sensitive liabilities                    81.87%            24.76%         2,094.99%          409.26%           113.88%

Cumulative ratio of
   sensitive assets to
   sensitive liabilities                    81.87%            59.30%            97.14%          113.88%           113.88%
</TABLE>

                         Table 16. Key Financial Ratios.

<TABLE>
<CAPTION>
                              December 31,     December 31,      December 31,
                                  2002             2001              2000
                            ----------------  ---------------  ----------------
<S>                         <C>               <C>              <C>
Return on average assets                0.90%            0.66%             0.57%
Return on average equity               13.07%           12.71%             7.14%
Equity to assets                        6.24%            6.62%             7.03%
</TABLE>

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

           Information required by this Item is contained in the information
included in Item 7 under the caption "Liquidity and Interest Rate Sensitivity."
                                       32

<PAGE>

Item 8. Financial Statements and Supplementary Data.

                          Independent Auditor's Report

Board of Directors and Stockholders
MountainBank Financial Corporation

We have audited the accompanying consolidated balance sheets of MountainBank
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MountainBank
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Larrowe & Company, plc

Galax, Virginia
February 13, 2003, except for Note 22, as to which the
   date is March 7, 2003

<PAGE>

MountainBank Financial Corporation
Consolidated Balance Sheets
December 31, 2002 and 2001 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                    2002                2001
                                                              ---------------     ----------------
<S>                                                           <C>                 <C>
Assets
Cash and due from banks                                       $        10,229     $         10,126
Interest bearing deposits with banks                                   16,393                  525
Investment securities available for sale                               64,738               34,626
Equity investment securities available for sale                         8,993                8,703
Restricted equity securities                                            3,746                2,058
Loans, net of allowance for loan losses $11,192
   in 2002 and $7,113 in 2001                                         666,432              470,647
Loans held for sale                                                    32,857               13,225
Property and equipment, net                                             9,051                7,204
Accrued income                                                          3,932                3,249
Intangible assets, net                                                  4,244                2,820
Other assets                                                           20,525                7,940
                                                              ---------------     ----------------
       Total assets                                           $       841,140     $        561,123
                                                              ===============     ================

Liabilities and Stockholders' Equity

Liabilities
   Noninterest-bearing deposits                               $        64,607     $         41,188
   Interest-bearing deposits                                          612,662              426,319
                                                              ---------------     ----------------
       Total deposits                                                 677,269              467,507

   Federal funds purchased and securities
     sold under agreements to repurchase                               14,204                5,240
   Short-term debt                                                     25,000                1,250
   Long-term debt                                                      46,210               42,633
   Guaranteed preferred beneficial interests
     in the Company's junior subordinated debentures                   20,000                    -
   Obligations under capital lease                                        718                  736
   Accrued interest payable                                             3,787                4,778
   Other liabilities                                                    1,484                1,964
                                                              ---------------     ----------------
       Total liabilities                                              788,672              524,108
                                                              ---------------     ----------------

   Commitments and contingencies                                            -                    -

Stockholders' equity
   Preferred stock, Series A, 6%, non-cumulative, non-voting
     no par value; 3,000,000 shares authorized;
     419,243 and 92,667 shares issued and outstanding
     with liquidation preferences of $10,062 and $2,224 at
     December 31, 2002 and 2001, respectively                          10,062                2,224
   Common stock, $4 par value; 10,000,000 shares
     authorized; 3,200,364 and 3,112,699 shares issued
     and outstanding in 2002 and 2001, respectively                    12,802               12,451
   Paid in capital                                                     20,038               18,584
   Retained earnings                                                    9,397                3,692
   Accumulated other comprehensive income                                 169                   64
                                                              ---------------     ----------------
       Total stockholders' equity                                      52,468               37,015
                                                              ---------------     ----------------
       Total liabilities and stockholders' equity             $       841,140     $        561,123
                                                              ===============     ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       34

<PAGE>

<TABLE>
<CAPTION>
MountainBank Financial Corporation
Consolidated Statements of Income
For the years ended December 31, 2002, 2001, and 2000 (Dollars in thousands except per share amounts)
-----------------------------------------------------------------------------------------------------

                                                             2002                 2001                  2000
                                                       ----------------      ---------------      ----------------
<S>                                                    <C>                    <C>                 <C>
Interest and dividend income
   Loans and fees on loans                             $         43,479      $        27,106      $         13,210
   Federal funds sold                                               183                  286                   241
   Investment securities, taxable                                 2,000                1,698                 1,840
   Investment securities, nontaxable                                 25                   76                     7
   Deposits with banks                                              168                  242                   505
   Dividends                                                        119                  412                    18
   Other                                                            309                   86                     -
                                                       ----------------      ---------------      ----------------
     Total interest and dividend income                          46,283               29,906                15,821
                                                       ----------------      ---------------      ----------------

Interest expense
   Deposits                                                      16,407               15,281                 8,796
   Federal funds purchased and securities
     sold under agreements to repurchase                            145                  196                   153
   Other borrowed funds                                           2,391                1,144                    67
                                                       ----------------      ---------------      ----------------
     Total interest expense                                      18,943               16,621                 9,016
                                                       ----------------      ---------------      ----------------
     Net interest income                                         27,340               13,285                 6,805

Provision for loan losses                                         5,300                3,347                 1,905
                                                       ----------------      ---------------      ----------------
     Net interest income after provision
       for loan losses                                           22,040                9,938                 4,900
                                                       ----------------      ---------------      ----------------

Noninterest income
   Service charges on deposit accounts                            2,431                  940                   461
   Mortgage origination income                                    3,095                1,435                   499
   Gain on sale of loans                                             34                  165                   151
   Net realized gain on sale of securities                          265                  121                     -
   Other service charges and fees                                   212                  128                    60
   Other income                                                     215                  205                   147
                                                       ----------------      ---------------      ----------------
     Total noninterest income                                     6,252                2,994                 1,318
                                                       ----------------      ---------------      ----------------

Noninterest expense
   Salaries and employee benefits                                 9,674                4,793                 2,417
   Occupancy                                                      1,157                  571                   316
   Equipment                                                      1,466                  662                   349
   Data processing                                                1,089                  521                   298
   Amortization of intangible assets                                331                   18                     -
   Other general and administrative                               4,552                2,641                 1,199
                                                       ----------------      ---------------      ----------------
     Total noninterest expense                                   18,269                9,206                 4,579
                                                       ----------------      ---------------      ----------------
     Income before income taxes                                  10,023                3,726                 1,639

Income tax expense                                                3,865                1,216                   583
                                                       ----------------      ---------------      ----------------
     Net income                                                   6,158                2,510                 1,056
     Preferred stock dividends declared                             453                    -                     -
                                                       ----------------      ---------------      ----------------
     Net income available to common stockholders       $          5,705      $         2,510      $          1,056
                                                       ================      ===============      ================

Basic earnings per share                               $           1.82      $          1.11      $            .52
                                                       ================      ===============      ================
Diluted earnings per share                             $           1.58      $          1.01      $            .48
                                                       ================      ===============      ================
Basic weighted average shares outstanding                     3,128,805            2,256,780             2,041,711
                                                       ================      ===============      ================
Diluted weighted average shares outstanding                   3,888,963            2,473,340             2,237,145
                                                       ================      ===============      ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       35

<PAGE>

MountainBank Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                        Accumulated
                                              Stock                                        Other
                                      ---------------------     Paid in     Retained   Comprehensive
                                      Preferred    Common       Capital     Earnings   Income (Loss)       Total
                                      ---------  ----------     --------    --------   -------------    ------------
<S>                                   <C>        <C>            <C>         <C>        <C>              <C>
Balance, December 31, 1999            $       -  $    5,770     $  4,386    $    126   $         (59)   $     10,223

   Comprehensive income
   Net income                                 -           -            -       1,056               -           1,056
   Net change in unrealized
     appreciation on
     investment securities
     available for sale,
     net of taxes of $102                     -           -            -           -             198             198
                                                                                                        ------------
   Total comprehensive income                                                                                  1,254

   Fractional shares
    purchased                                 -           -            -           -               -               -
   Shares sold                                -       1,705        5,005           -               -           6,710
   Stock options exercised                    -          13           10           -               -              23
                                      ---------  ----------     --------    --------   -------------    ------------
Balance, December 31, 2000                    -       7,488        9,401       1,182             139          18,210

   Comprehensive income
   Net income                                 -           -            -       2,510               -           2,510
   Net change in unrealized
     appreciation on
     investment securities
     available for sale,
     net of taxes of $2                       -           -            -           -               5               5
   Realized gains on securities,
     net of taxes of $(41)                    -           -            -           -             (80)            (80)
                                                                                                        ------------
   Total comprehensive income                                                                                  2,435

   Shares sold                            2,224           -            -           -               -           2,224
   Shares issued to acquire
     PremierMortgage
     Associates, Inc.                         -          80          220           -               -             300
   Shares issued to acquire
     First Western Bank                       -       2,751       11,006           -               -          13,757
   Stock options exercised                    -          57           32           -               -              89
   Stock split, effected in
     the form of a dividend                   -       2,075       (2,075)          -               -               -
                                      ---------  ----------     --------    --------   -------------    ------------
Balance, December 31, 2001                2,224      12,451       18,584       3,692              64          37,015
</TABLE>

See Notes to Consolidated Financial Statements

                                       36

<PAGE>

MountainBank Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity, continued
For the years ended December 31, 2002, 2001 and 2000 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                        Accumulated
                                              Stock                                        Other
                                      ---------------------     Paid in     Retained   Comprehensive
                                      Preferred    Common       Capital     Earnings   Income (Loss)       Total
                                      ---------  ----------     --------    --------   -------------    ------------
<S>                                   <C>        <C>            <C>         <C>        <C>              <C>
Balance, December 31, 2001            $   2,224  $   12,451     $ 18,584    $  3,692   $          64    $     37,015

   Comprehensive income
   Net income                                 -           -            -       6,158               -           6,158
   Net change in unrealized
     appreciation on
     investment securities
     available for sale,
     net of taxes of $144                     -           -            -           -             280             280
   Realized gains on securities,
     net of taxes of $(90)                    -           -            -           -            (175)           (175)
                                                                                                        ------------
   Total comprehensive income                                                                                  6,263

   Dividends declared on preferred
    shares ($1.08 per share)                  -           -            -        (453)              -            (453)
   Shares sold                            7,838           -            -           -               -           7,838
   Shares issued to acquire
     TrustCo Holdings, Inc.                   -         237        1,249           -               -           1,486
   Stock options exercised                    -         117          215           -               -             332
   Shares redeemed                            -          (2)          (8)          -               -             (10)
   Fractional shares purchased                -          (1)          (2)          -               -              (3)
                                      ---------  ----------     --------    --------   -------------    ------------
Balance, December 31, 2002            $  10,062  $   12,802     $ 20,038    $  9,397   $         169    $     52,468
                                      =========  ==========     ========    ========   =============    ============
</TABLE>

See Notes to Consolidated Financial Statements

                                       37

<PAGE>

MountainBank Financial Corporation
Consolidated Statements of Cash Flows
For the years ended December 31, 2002, 2001, and 2000 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            2002             2001              2000
                                                                      ----------------  ---------------  ----------------
<S>                                                                   <C>               <C>              <C>
Cash flows from operating activities
   Net income                                                         $          6,158  $         2,510  $          1,056
   Adjustments to reconcile net income
     to net cash provided by operations:
       Depreciation and amortization                                             1,619              502               298
       Provision for loan losses                                                 5,300            3,347             1,905
       Deferred income taxes                                                      (965)          (1,052)             (536)
       Net realized gains on securities                                           (265)            (121)                -
       Accretion of discount on securities, net of
        amortization of premiums                                                    25                5               (33)
   Changes in assets and liabilities:
     Accrued income                                                               (707)            (820)           (1,184)
     Loans held for sale                                                       (19,632)         (12,760)              412
     Other assets                                                               (4,290)            (283)              (18)
     Accrued interest payable                                                     (991)           1,623             2,014
     Other liabilities                                                            (108)            (717)              587
                                                                      ----------------  ---------------  ----------------
           Net cash provided by operating activities                           (13,856)          (7,766)            4,501
                                                                      ----------------  ---------------  ----------------

Cash flows from investing activities
   Net (increase) decrease in federal funds sold                                     -            9,220            (7,650)
   Net (increase)decrease in interest-bearing deposits with banks              (15,868)           3,143             7,593
   Purchases of investment securities                                          (79,740)         (48,054)          (24,435)
   Sales of investment securities                                               36,023           34,311                 -
   Maturities of investment securities                                          11,824           12,713             7,624
   Net increase in loans                                                      (202,582)        (195,630)         (111,192)
   Purchases of property and equipment                                          (3,039)          (1,372)             (984)
   Acquisition of First Western Bank                                                 -            2,931                 -
   Acquisition of PremierMortgage Associates, Inc.                                   -                4                 -
   Acquisition of TrustCo Holding, Inc.                                          1,460                -                 -
   Investment in BOLI                                                           (8,000)          (4,900)                -
                                                                      ----------------  ---------------  ----------------
           Net cash used in investing activities                              (259,922)        (187,634)         (129,044)
                                                                      ----------------  ---------------  ----------------

Cash flows from financing activities
   Net increase in noninterest-bearing deposits                                 23,419           14,455             8,749
   Net increase in interest-bearing deposits                                   186,343          148,302           110,703
   Net increase in federal funds purchased and
     securities sold under agreements to repurchase                              8,964            1,181             1,878
   Net (decrease) increase in notes payable                                     (6,500)           6,500                 -
   Net increase in FHLB advances                                                33,827           25,000                 -
   Net increase in junior subordinated debentures                               20,000                -                 -
   Repayment of obligations under capital lease                                    (27)             (24)              (21)
   Proceeds from the issuance of common stock, net                                 319               90             6,734
   Proceeds from the issuance of preferred stock                                 7,838            2,224                 -
   Dividends paid                                                                 (302)               -                 -
                                                                      ----------------  ---------------  ----------------
           Net cash provided by financing activities                           273,881          197,728           128,043
                                                                      ----------------  ---------------  ----------------
           Net increase in cash and cash equivalents                               103            2,328             3,500

Cash and due from banks, beginning                                              10,126            7,798             4,298
                                                                      ----------------  ---------------  ----------------
Cash and due from banks, ending                                       $         10,229  $        10,126  $          7,798
                                                                      ================  ===============  ================
Supplemental disclosures of cash flow information
   Interest paid                                                      $         19,934  $        14,998  $          7,003
                                                                      ================  ===============  ================
   Income taxes paid                                                  $          5,842  $         2,612  $            621
                                                                      ================  ===============  ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       38

<PAGE>

MountainBank Financial Corporation
Consolidated Statements of Cash Flows, continued
For the years ended December 31, 2002, 2001, and 2000 (Dollars in thousands)
--------------------------------------------------------------------------------

Schedule of non-cash investing and financing transactions:

<TABLE>
<CAPTION>
                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Acquisition of TrustCo Holdings, Inc.
   Assets acquired:
     Property and equipment, net                                $             96  $             -  $              -
     Other assets                                                             19                -                 -
     Goodwill                                                              1,755                -                 -
                                                                ----------------  ---------------  ----------------
                                                                           1,870                -                 -
                                                                ----------------  ---------------  ----------------

Liabilities assumed
   Borrowings                                                              1,497                -                 -
   Other liabilities                                                         347                -                 -
                                                                ----------------  ---------------  ----------------
                                                                           1,844                -                 -
                                                                ----------------  ---------------  ----------------
Net non-cash assets acquired                                    $             26  $             -  $              -
                                                                ================  ===============  ================

Payment for net assets acquired
   Cash paid at closing                                         $            200  $             -  $              -
   Less cash acquired at closing                                          (1,660)               -                 -
                                                                ----------------  ---------------  ----------------
                                                                          (1,460)               -                 -
   Notes issued to stockholders of acquired corporation                        -                -                 -
   Stock issued to stockholders of acquired corporation                    1,486                -                 -
                                                                ----------------  ---------------  ----------------
                                                                $             26  $             -  $              -
                                                                ================  ===============  ================

Acquisition of PremierMortgage Associates, Inc.
   Assets acquired:
     Property and equipment, net                                $              -  $             4  $              -
     Goodwill                                                                  -              292                 -
                                                                ----------------  ---------------  ----------------
                                                                               -              296                 -
                                                                ----------------  ---------------  ----------------

Liabilities assumed
   Other liabilities                                                           -                -                 -
                                                                ----------------  ---------------  ----------------
                                                                               -                -                 -
                                                                ----------------  ---------------  ----------------
Net non-cash assets acquired                                    $              -  $           296  $              -
                                                                ================  ===============  ================

Payment for net assets acquired
   Cash paid at closing                                         $              -  $             -  $              -
   Less cash acquired at closing                                               -                4                 -
                                                                ----------------  ---------------  ----------------
                                                                                               (4)                -
   Notes issued to stockholders of acquired corporation                        -                -                 -
   Stock issued to stockholders of acquired corporation                        -              300                 -
                                                                ----------------  ---------------  ----------------
                                                                $              -  $           296  $              -
                                                                ================  ===============  ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       39

<PAGE>

MountainBank Financial Corporation
Consolidated Statements of Cash Flows, continued
For the years ended December 31, 2002, 2001, and 2000 (Dollars in thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                       2002              2001            2000
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Acquisition of First Western Bank
   Assets acquired:
     Investment securities                                      $              -  $         8,487  $              -
     Loans, net of allowance for
       loan losses $1,230                                                      -           80,521                 -
     Property and equipment, net                                               -            4,007                 -
     Other assets                                                              -            1,218                 -
     Acquired loan write-up                                                    -              935                 -
     Core deposit intangible                                                   -            2,546                 -
                                                                ----------------  ---------------  ----------------
                                                                               -           97,714                 -
                                                                ----------------  ---------------  ----------------

Liabilities assumed
     Deposits                                                                  -           70,902                 -
     Federal funds purchased and
       securities sold under agreements
       to repurchase                                                           -              914                 -
     Borrowings                                                                -           12,750                 -
     Other liabilities                                                         -            2,181                 -
     Acquired deposit valuation                                                -              509                 -
     Debt valuation allowance                                                  -             (367)                -
                                                                ----------------  ---------------  ----------------
                                                                               -           86,889                 -
                                                                ----------------  ---------------  ----------------
Net non-cash assets acquired                                    $              -  $        10,825  $              -
                                                                ================  ===============  ================

Payment for net assets acquired
   Cash paid at closing                                         $              -  $             -  $              -
   Less cash acquired at closing                                               -            2,932                 -
                                                                ----------------  ---------------  ----------------
                                                                               -           (2,932)                -
   Notes issued to stockholders of acquired corporation                        -                -                 -
   Stock issued to stockholders of acquired corporation                        -           13,757                 -
                                                                ----------------  ---------------  ----------------
                                                                $              -  $        10,825  $              -
                                                                ================  ===============  ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       40

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 1. Organization and Summary of Significant Accounting Policies

Organization

MountainBank Financial Corporation (the Company) was incorporated as a North
Carolina corporation on January 10, 2001 to acquire the stock of MountainBank
(the Bank). The Bank was acquired by the Company on March 30, 2001.

MountainBank was organized and incorporated under the laws of the State of North
Carolina on June 25, 1997 and commenced operations on June 26, 1997. The Bank
currently serves nine western North Carolina counties and surrounding areas
through seventeen full service banking offices. As a state chartered bank,
MountainBank is subject to regulation by the State of North Carolina Banking
Commission and the Federal Deposit Insurance Corporation.

MountainBanc Mortgage Corporation was organized and incorporated under the laws
of the State of North Carolina on July 19, 2001. MountainBanc Mortgage
Corporation operates as a wholly-owned subsidiary of MountainBank and provides
mortgage banking services to its customers in North and South Carolina.
MountainBanc Mortgage Corporation commenced operations on October 1, 2001.

TrustCo Holding, Inc., parent company of Trust Company of the South and Asset
Management of the South, was acquired effective December 31, 2002 and merged
into the Company with Trust Company of the South and Asset Management of the
South becoming wholly-owned subsidiaries of the Company. Trust Company of the
South, a state chartered trust company, provides trust and estate planning
services to its customers in South Carolina. Asset Management of the South is a
registered investment advisor providing fee only investment services to its
customers.

The accounting and reporting policies of the Company and its subsidiaries follow
generally accepted accounting principles and general practices within the
financial services industry. All data presented in these notes to consolidated
financial statements are expressed in thousands, except where specifically
identified. Following is a summary of the more significant policies.

Principles of consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.

Business segments

The Company reports its activities as a single business segment. In determining
proper segment definition, the Company considers the materiality of a potential
segment and components of the business about which financial information is
available and regularly evaluated, relative to resource allocation and
performance assessment.

Use of estimates

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

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
valuation of foreclosed real estate, management obtains independent appraisals
for significant properties.

Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse, but influenced to an extent by the
retirement, manufacturing and agricultural segments.

                                       41

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 1. Organization and Summary of Significant Accounting Policies, continued

Use of estimates, continued

While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowance may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require additions to the allowance
based on their judgments about information available to them at the time of
their examinations. Because of these factors, it is possible that the allowance
for loan losses and valuation of foreclosed real estate may change materially in
the future.

Cash and cash equivalents

For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"cash and due from banks."

Trading securities

The Company does not hold securities for short-term resale and therefore does
not maintain a trading securities portfolio.

Securities held to maturity

Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. No securities held by the Company at
December 31, 2002 and 2001 were classified as held to maturity.

Securities available for sale

Available for sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held to maturity securities.

Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available for sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.

Declines in the fair value of individual held to maturity and available for sale
securities below cost, that are other than temporary, are reflected as
write-downs of the individual securities to fair value. Related write-downs are
included in earnings as realized losses.

Loans held for sale

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.

Loans receivable

Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs and any deferred fees
or costs on originated loans and unamortized premiums or discounts on purchased
loans.

                                       42

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 1. Organization and Summary of Significant Accounting Policies, continued

Loans receivable, continued

Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.

Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When facts and circumstances indicate the borrower has
regained the ability to meet required payments, the loan is returned to accrual
status. Past due status of loans is determined based on contractual terms.

Allowance for loan losses

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.

Property and equipment

Buildings, furniture and equipment, and leasehold improvements are carried at
cost, less accumulated depreciation and amortization computed principally by the
straight-line method over the following estimated useful lives:

                                                       Years
                                                       -----
            Buildings and improvements                  5-40
            Furniture and equipment                     3-10

For assets recorded under the terms of capital leases, the present value of
future minimum lease payments is treated as cost.

                                       43

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 1. Organization and Summary of Significant Accounting Policies, continued

Foreclosed properties

Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in operations on foreclosed real
estate.

Stock-based compensation

The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting had been applied.

Transfers of financial assets

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

Income taxes

Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.

Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.

Basic earnings per share

Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and stock dividends.

Diluted earnings per share

The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.

                                       44

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 1. Organization and Summary of Significant Accounting Policies, continued

Comprehensive income

Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investment by and
distributions to shareholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholder's equity rather than as income or expense.

Financial instruments

Derivatives that are used as part of the asset/liability management process are
linked to specific assets or liabilities and have high correlation between the
contract and the underlying item being hedged, both at inception and throughout
the hedge period. In addition, forwards and option contracts must reduce an
exposure's risk, and for hedges of anticipatory transactions, the significant
terms and characteristics of the transaction must be identified and the
transactions must be probable of occurring. All derivative financial instruments
held or issued by the Company are held or issued for purposes other than
trading.

In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.

Fair value of financial instruments

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts reported in the balance sheet for
cash and cash equivalents approximate their fair values.

Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analyses that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.

Available for sale and held to maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.

Mortgage loans held for sale: Fair values of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.

                                       45

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 1. Organization and Summary of Significant Accounting Policies, continued

Fair value of financial instruments, continued

Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.

Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.

Short-term borrowings: The carrying amounts of short-term debt approximate their
fair values.

Long-term borrowings: The fair values of the Company's long-term borrowings are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowings arrangements.

Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.

Critical accounting policies

The notes to the Company's audited consolidated financial statements contain a
summary of significant accounting policies. Management believes the policies
with respect to the methodology for the determination of the allowance for loan
losses, and asset impairment judgments, including the recoverability of
intangible assets, involve a high degree of complexity. Management must make
difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or
estimates could cause reported results to differ materially. These critical
policies and their application are periodically reviewed with the Audit
Committee and Board of Directors.

Reclassifications

Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net income
and stockholders' equity previously reported were not affected by these
reclassifications.

Note 2. Business Combinations

On December 31, 2002, the Company acquired TrustCo Holding, Inc. in exchange for
59,261 shares of MountainBank Financial Corporation common stock, valued at
$1,486, and $200 in cash for TrustCo Holdings, Inc. outstanding preferred stock.
In conjunction with the acquisition, TrustCo Holding, Inc., parent company of
Trust Company of the South and Asset Management of the South, was merged into
MountainBank Financial Corporation with the two subsidiaries becoming
subsidiaries of MountainBank Financial Corporation.

On October 1, 2001, the Company acquired PremierMortgage Associates, Inc. in
exchange for 20,000 shares of MountainBank Financial Corporation common stock in
a transaction valued at $300. In conjunction with the acquisition,
PremierMortgage Associates, Inc. was merged as a subsidiary of MountainBank and
was renamed MountainBanc Mortgage Corporation.

                                       46

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 2. Business Combinations, continued

On December 31, 2001, the Company acquired First Western Bank in exchange for
687,841 shares of MountainBank Financial Corporation common stock valued at
$13,757. In conjunction with the acquisition, First Western Bank was merged with
and into the Company's subsidiary, MountainBank.

The acquisitions were accounted for as purchase transactions, and accordingly,
the results of operations attributable to the acquired companies are included in
the consolidated financial statements only from the dates of acquisition. The
excess of purchase price over fair value of net tangible and identified
intangible assets acquired will be evaluated annually for impairment and written
down as those values become impaired. Identified intangible assets will be
amortized over their expected useful life. The acquisitions are summarized as
follows:

<TABLE>
<CAPTION>
                                                           TrustCo            First       PremierMortgage
                                                        Holding, Inc.      Western Bank   Associates, Inc.
                                                        -------------      ------------   ----------------
<S>                                                       <C>              <C>                <C>
Purchase price                                            $   1,686        $    13,757        $        300
                                                          ---------        -----------        ------------

Loans, net                                                        -             81,456                   -
Investment securities                                             -              8,487                   -
Identified intangible assets                                      -              2,546                   -
Other assets                                                  1,775              8,157                   8
Deposits                                                          -            (71,411)                  -
Other liabilities                                            (1,844)           (15,478)                  -
                                                          ---------        -----------        ------------
     Net tangible and identified intangible
       assets acquired (at fair market value)                   (69)            13,757                   8
                                                          ---------        -----------        ------------
     Excess of purchase price over net tangible and
       identified intangible assets acquired (at fair
       market value)                                      $   1,755        $         -        $        292
                                                          =========        ===========        ============
</TABLE>

Results of operations for the year ending December 31, 2002, as if the
combination with TrustCo Holdings, Inc. had occurred on January 1, 2002, are
summarized below.

<TABLE>
<CAPTION>
                                              MountainBank
                                                Financial
                                               Corporation         TrustCo                       Pro Forma
                                             & Subsidiaries    Holdings, Inc.    Adjustments     Combined
                                             --------------    --------------    -----------     --------
<S>                                           <C>                <C>               <C>          <C>
2002
----

Interest income                               $     46,283       $       -         $     -      $     46,283
Interest expense                                    18,943               -               -            18,943
                                              ------------       ---------         -------      ------------
       Net interest income                          27,340               -               -            27,340

Provision for credit loss                            5,300               -               -             5,300
Other income                                         6,252             689               -             6,941
Other expense                                       18,269           1,072               -            19,341
                                              ------------       ---------         -------      ------------
       Income (loss) before income taxes            10,023            (383)              -             9,640
Income taxes (benefit)                               3,865            (148)              -             3,717
                                              ------------       ---------         -------      ------------
       Net income (loss)                             6,158            (235)              -             5,923
       Preferred stock dividends declared              453               -               -               453
                                              ------------       ---------         -------      ------------
       Net income (loss) available
         to common shareholders               $      5,705       $    (235)        $     -      $      5,470
                                              ============       =========         =======      ============
</TABLE>

                                       47

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 2. Business Combinations, continued

Results of operations for the year ending December 31, 2001, as if the
combination with First Western Bank had occurred on January 1, 2001, are
summarized below.

<TABLE>
<CAPTION>
                                             MountainBank
                                               Financial       First
                                              Corporation     Western                   Pro Forma
                                            & Subsidiaries     Bank      Adjustments    Combined
                                            --------------   --------   -------------  ----------
<S>                                            <C>            <C>          <C>          <C>
2001
----

Interest income                                $  29,906      $  6,237     $   281      $  36,424
Interest expense                                  16,621         2,665           -         19,286
                                               ---------      --------     -------      ---------
    Net interest income                           13,285         3,572         281         17,138

Provision for credit loss                          3,347           905           -          4,252
Other income                                       2,994           771           -          3,765
Other expense                                      9,206         4,303         133         13,642
                                               ---------      --------     -------      ---------
    Income (loss) before income taxes              3,726          (865)        148          3,009

Income taxes (benefit)                             1,216          (294)         58            980
                                               ---------      --------     -------      ---------
    Net income (loss)                          $   2,510      $   (571)    $    90      $   2,029
                                               =========      ========     =======      =========
</TABLE>

Note 3. Restrictions on Cash

To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $4,190 and $1,508 for the periods including December 31, 2002 and
2001, respectively.

Note 4. Securities

Debt and equity securities have been classified in the balance sheets according
to management's intent. The carrying amounts of securities (all
available-for-sale) and their approximate fair values at December 31 follow:

<TABLE>
<CAPTION>
                                                 Amortized    Unrealized   Unrealized      Fair
2002                                               Cost          Gains       Losses        Value
----                                             ---------    ----------   ----------    ---------
<S>                                              <C>          <C>           <C>          <C>
   Available for sale

   U.S. Government agency securities             $   3,000    $      16     $      -     $   3,016
   State and municipal securities                        -            -            -             -
   Mortgage-backed securities                       61,397          343           18        61,722
   Equity securities                                 9,078            -           85         8,993
                                                 ---------    ---------     --------     ---------
                                                 $  73,475    $     359     $    103     $  73,731
                                                 =========    =========     ========     =========
</TABLE>

                                       48

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 4. Securities, continued

2001

  Available for sale

  U.S. Government agency securities  $   7,177  $      -   $     15  $   7,162
  State and municipal securities         3,721        40          6      3,755
  Mortgage-backed securities            23,632       239        162     23,709
  Equity securities                      8,703         -          -      8,703
                                     ---------  --------   --------  ---------
                                     $  43,233  $    279   $    183  $  43,329
                                     =========  ========   ========  =========

Restricted equity securities consist of investments in stock of the Federal Home
Loan Bank of Atlanta ("FHLB") and The Bankers Bank which are upstream
correspondents of the Bank. The FHLB requires financial institutions to make
equity investments in the FHLB in order to borrow from it. The Bank is required
to hold that stock so long as it borrows from the FHLB. The Bank's stock in The
Bankers Bank is restricted in the fact that the stock may only be repurchased by
that company.

Investment securities with amortized cost of approximately $30,000 and $13,000
at December 31, 2002 and 2001, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.

Gross realized gains and losses for the years ended December 31 were as follows:

<TABLE>
<CAPTION>
                                                            2002         2001         2000
                                                         ----------   ----------   ----------

<S>                                                      <C>          <C>          <C>
Realized gains, available for sale securities            $      314   $      121   $        -
Realized losses, available for sale securities                  (49)           -            -
                                                         ----------   ----------   ----------
                                                         $      265   $      121   $        -
                                                         ==========   ==========   ==========
</TABLE>

The scheduled maturities of investment securities (all available for sale) at
December 31, 2002 were as follows:

                                                     Amortized         Fair
                                                        Cost           Value
                                                    -----------     -----------

Due in one year or less                             $         -     $         -
Due after one year through five years                    10,903          10,917
Due after five years through ten years                      402             404
Due after ten years                                      53,092          53,417
Equity securities                                         9,078           8,993
                                                    -----------     -----------
                                                    $    73,475     $    73,731
                                                    ===========     ===========

                                       49

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 5. Loans Receivable

The major components of loans, including loans held for sale, in the balance
sheets at December 31 were as follows:

                                                        2002            2001
                                                    -----------     -----------

Commercial                                          $    93,360     $    81,388
Real estate:
   Construction and land development                    119,944          89,587
   Residential, 1-4 families                            158,945          99,227
   Residential, 5 or more families                       11,009           4,326
   Farmland                                               1,846           1,959
   Nonfarm, nonresidential                              290,811         177,319
Agricultural                                                110             403
Consumer                                                 25,371          32,468
Other                                                     9,988           5,607
                                                    -----------     -----------
                                                        711,384         492,284

Unearned loan origination fees, net of costs               (903)         (1,299)
                                                    -----------     -----------
                                                        710,481         490,985

Allowance for loan losses                               (11,192)         (7,113)
                                                    -----------     -----------
                                                    $   699,289     $   483,872
                                                    ===========     ===========

Note 6. Allowance for Loan Losses

An analysis of the changes in the allowance for loan losses is as follows:

                                         2002            2001           2000
                                      ----------      ----------     ----------

Balance, beginning                    $    7,113      $    3,007     $    1,247

Provision charged to expense               5,300           3,347          1,905
Recoveries of amounts charged off            228              15              5
Amounts charged off                       (1,449)           (486)          (150)
Allowance of acquired bank at date
 of acquisition                                -           1,230              -
                                      ----------      ----------     ----------
Balance, ending                       $   11,192      $    7,113     $    3,007
                                      ==========      ==========     ==========

                                       50

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 6. Allowance for Loan Losses, continued

The following is a summary of information pertaining to impaired loans at
December 31:

                                                        2002            2001
                                                     ----------      ----------

Impaired loans without a valuation allowance         $        -      $        -
Impaired loans with a valuation allowance                 1,563           1,712
                                                     ----------      ----------
         Total impaired loans                        $    1,563      $    1,712
                                                     ==========      ==========

Valuation allowance related to impaired loans        $      551      $      806
                                                     ==========      ==========

Nonaccrual loans and loans past due more than 90 days at December 31, 2002 were
approximately $2,900 and $18, respectfully. The average annual recorded
investment in impaired loans and interest recognized on impaired loans is
summarized below:

<TABLE>
<CAPTION>
                                                                   2002          2001          2000
                                                                ----------    ----------    ----------
<S>                                                             <C>           <C>           <C>
Average investment in impaired loans                            $    1,569    $      532    $       21
                                                                ==========    ==========    ==========
Interest income recognized for the year                         $      126    $      121    $        1
                                                                ==========    ==========    ==========
Interest income recognized on a cash basis for the year         $      126    $      121    $        1
                                                                ==========    ==========    ==========
</TABLE>

The Company is not committed to lend additional funds to debtors whose loans
have been modified.

Note 7. Property and Equipment

Components of property and equipment

Components of property and equipment and total accumulated depreciation at
December 31 are as follows:

                                                          2002          2001
                                                       ----------    ----------

Land, buildings and improvements                       $    5,112    $    5,071
Furniture and equipment                                     6,374         3,286
                                                       ----------    ----------
       Property and equipment, total                       11,486         8,357

Less accumulated depreciation                               2,435         1,153
                                                       ----------    ----------
       Property and equipment, net of depreciation     $    9,051    $    7,204
                                                       ==========    ==========

                                       51

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 7. Property and Equipment, continued

Capital lease

The Bank leases its original banking office under the provisions of an agreement
with the Chairman of the Company's Board of Directors which is accounted for as
a capital lease. Minimum lease payments relating to the building have been
capitalized as its cost. The lease calls for monthly payments of $7 per month
for the first five years of the term with five-year segment adjustments based on
changes in the CPI, and expires June 30, 2017. The lease also provides the Bank
an option for two consecutive five-year renewal periods at the expiration of the
original 20 year term. The banking office under capital lease at December 31,
2002 has a cost of $837, accumulated amortization of $231 and a net book value
of $606. Amortization relating to the leased property is included in
depreciation expense.

The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at December 31 are as follows:

                                                          2002          2001
                                                       ----------    ----------

Total minimum lease payments                           $    1,317    $    1,246
Amount representing interest                                 (599)         (510)
                                                       ----------    ----------
Obligation under capital lease                         $      718    $      736
                                                       ==========    ==========

Operating leases

The Bank leases fourteen branch facilities under agreements accounted for as
operating leases. These leases will expire between March 2003 and August 2008.

The Bank also leases a branch and its operations center under agreements
accounted for as operating leases with the Chairman of the Company's Board of
Directors. These leases will expire December 31, 2003 and April 30, 2011,
respectively. The monthly lease payments are $5 and $3.

Rental expense under operating leases was $499, $307 and $168 for 2002, 2001 and
2000, respectively. Future minimum commitments under noncancellable leases are
as follows:

                                                           Operating    Capital
                                                             Leases     Leases
                                                           ---------  ---------

                                    2003                   $     604  $      99
                                    2004                         516         90
                                    2005                         510         90
                                    2006                         413         90
                                    2007                         226         90
                                 Thereafter                      243        858
                                                           ---------  ---------
                                                           $   2,512  $   1,317
                                                           =========  =========

                                       52

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 8. Deposits

The aggregate amount of time deposits in denominations of $100 or more at
December 31, 2002 and 2001 was $180,216 and $120,512, respectively.

At December 31, 2002, the scheduled maturities of time deposits are as follows:

                                          2003              $   416,288
                                    2004 through 2005            12,372
                                    2006 through 2008             1,782
                                                            -----------
                                                            $   430,442
                                                            ===========

Note 9. Short-term Debt

Short-term debt consists of overnight borrowings from the Federal Home Loan
Bank, fed funds purchased, and securities sold under agreements to repurchase,
which generally mature within one to four days from the transaction date.
Additional information is summarized below:

                                                            2002        2001
                                                         ----------  ----------

Outstanding balance at December 31                       $   39,204  $    6,490
                                                         ==========  ==========
Year-end weighted average rate                                 1.24%       1.93%
                                                         ==========  ==========
Daily average outstanding during the period              $    9,765  $    5,374
                                                         ==========  ==========
Average rate for the period                                    1.49%       3.65%
                                                         ==========  ==========
Maximum outstanding at any month-end during the period   $   39,204  $   10,840
                                                         ==========  ==========

The Company has established various credit facilities to provide additional
liquidity if and as needed. These consist of unsecured lines of credit in the
aggregate amount of $18,500 and secured lines of credit of approximately
$62,500.

Note 10. Long-term Debt

Components of long-term debt at December 31 are as follows:

                                                         2002           2001
                                                      ----------     ----------

Federal Home Loan Bank advances                       $   46,500     $   36,500
Other borrowings                                               -          6,500
Debt valuation allowance resulting from merger              (290)          (367)
                                                      ----------     ----------
                                                      $   46,210     $   42,633
                                                      ==========     ==========

The advances from the Federal Home Loan Bank of Atlanta consist of three
separate notes of $11,500, $25,000 and $10,000 that bear interest at fixed rates
of 4.25%, 4.53% and 1.15%, respectively. The notes mature October 3, 2011, April
18, 2011 and December 24, 2007, respectively. These notes are collateralized by
commercial real estate and 1-4 family mortgage loans in the amount of $331,017.

Note 11. Guaranteed Preferred Beneficial Interests in the Company's Junior
         Subordinated Debentures

MountainBank Capital Trust I, a statutory business trust (the "Trust"), was
created by the Company on June 28, 2002, at which time the Trust issued $20,000
in aggregate liquidation amount of $1 par value preferred capital trust
securities which mature June 30, 2032. Distributions are payable on the
securities at a floating rate equal to the 3-month London Interbank Offered Rate
("LIBOR") plus 3.65%, capped at 12%, and the securities may be prepaid at par by
the Trust at any time after June 30, 2007. The principal assets of the Trust are
$20.6 million of the Company's junior subordinated debentures which mature on
June 30, 2032, and bear interest at a floating rate equal to the 3-month LIBOR
plus 3.65%, capped at 12%, and which are callable by the Company after June 30,
2007. All $619 thousand in aggregate liquidation of the Trust's common
securities are held by the Company.

The Trust's preferred securities and common securities may be included in the
Company's Tier I capital for regulatory capital adequacy purposes to the extent
that they do not exceed 33.3% of the Company's total Tier I capital excluding
these securities. Amounts in excess of this ratio will not be considered Tier I
capital but may be included in the calculation of the Company's total risk-based
capital ratio. The Company's obligations with respect to the issuance of the
Trust's preferred securities and common securities constitute a full and
unconditional guarantee by the Company of the Trust's obligations with respect
to the preferred securities and common securities. Subject to certain exceptions
and limitations, the Company may elect from time to time to defer interest
payments on its junior subordinated debentures, which would result in a deferral
of distribution payments on the Trust's preferred trust securities and common
securities.

                                       53

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 12. Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
                                                    December 31, 2002           December 31, 2001
                                                 ------------------------    ------------------------
                                                  Carrying        Fair        Carrying        Fair
                                                   Amount         Value        Amount         Value
                                                 ----------    ----------    ----------    ----------
<S>                                              <C>           <C>           <C>           <C>
Financial assets
   Cash and cash equivalents                     $   10,229    $   10,229    $   10,126    $   10,126
   Interest-bearing deposits                         16,393        16,393           525           525
   Securities, available-for-sale                    73,731        73,731        43,329        43,329
   Restricted equity securities                       3,746         3,746         2,058         2,058
   Loans, net of allowance for loan losses          699,289       708,692       483,872       492,331

Financial liabilities
   Deposits                                         677,269       680,285       467,507       464,777
   Short-term debt                                   39,204        39,204         6,490         6,490
   Long-term debt                                    46,928        47,657        43,369        45,868
   Junior subordinated debentures                    20,000        20,000             -             -

Off-balance-sheets assets (liabilities)
   Commitments to extend credit and
     standby letters of credit                            -             -             -             -
</TABLE>

Note 13. Earnings per Share

The following table details the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                                             2002             2001            2000
                                                         ------------     -----------     -----------
<S>                                                      <C>              <C>             <C>
Net income available to common stockholders              $      5,705     $     2,510     $     1,056
                                                         ============     ===========     ===========
Net income                                               $      6,158     $     2,510     $     1,056
                                                         ============     ===========     ===========

Weighted average common shares outstanding                  3,128,805       2,256,780       2,041,711
Effect of dilutive securities, options                        760,158         216,560         195,434
                                                         ------------     -----------     -----------
Weighted average common shares outstanding, diluted         3,888,963       2,473,340       2,237,145
                                                         ============     ===========     ===========

Basic earnings per share                                 $       1.82     $      1.11     $       .52
                                                         ============     ===========     ===========
Diluted earnings per share                               $       1.58     $      1.01     $       .48
                                                         ============     ===========     ===========
</TABLE>

Note 14. Stock Options

The Company maintains a qualified incentive stock option plan which reserves up
to 224,502 common shares for the benefit of certain of the Company's employees.
Options granted under this plan are exercisable at no less than fair market
value of the Company's common stock at the date of grant, vest according to the
terms of each particular grant and expire in no more than ten years.

The Company also maintains a non-qualified stock option plan which reserves up
to 224,502 common shares for purchase by directors. Options granted under this
plan are exercisable at no less than fair market value of the Company's common
stock at the date of grant, vest according to the terms of each particular grant
and expire in no more than ten years.

Options have been adjusted to reflect stock splits and dividends.

                                       54

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 14. Stock Options, continued

Activity under Company plans during the periods ended December 31 is summarized
below:

<TABLE>
<CAPTION>
                                                   Qualified Plan              Non-Qualified Plan
                                             --------------------------    --------------------------
                                              Available                     Available
                                              For Grant       Granted       For Grant       Granted
                                             -----------    -----------    -----------    -----------
<S>                                          <C>            <C>            <C>            <C>
Balance, December 31, 1999                             -         85,651              -         73,693

   Amendment to plan                              63,268              -         63,268              -
   Granted                                       (51,864)        51,864        (63,268)        63,268
   Exercised                                           -         (2,201)             -              -
   Forfeited                                       4,260         (4,260)             -              -
   Stock split                                     3,916         32,764              -         34,240
                                             -----------    -----------    -----------    -----------
Balance, December 31, 2000                        19,580        163,818              -        171,201

   Options converted at acquisition                    -         47,333              -         68,750
   Granted                                             -              -              -              -
   Exercised                                           -         (1,967)             -        (12,170)
   Forfeited                                       4,595         (4,595)             -              -
   Stock split                                     4,835         40,918              -         45,560
                                             -----------    -----------    -----------    -----------
Balance, December 31, 2001                        29,010        245,507              -        273,341

   Granted                                       (10,000)        10,000              -              -
   Exercised                                           -        (18,711)             -        (10,460)
   Forfeited                                      25,179        (25,179)         8,320         (8,320)
                                             -----------    -----------    -----------    -----------
Balance, December 31, 2002                        44,189        211,617          8,320        254,561
                                             ===========    ===========    ===========    ===========
</TABLE>

                                       55

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 14. Stock Options, continued

Additional information related to options is detailed below:

<TABLE>
<CAPTION>
                                                                    2002           2001          2000
                                                                ------------    ----------    ----------
<S>                                                             <C>             <C>           <C>
Outstanding options:
   Weighted average exercise price, beginning of the year       $      11.17    $     8.78    $     6.49
   Weighted average exercise price, end of the year             $      11.28    $    11.17    $     8.78
   Range of exercise prices:
     From                                                       $       5.09    $     5.09    $     5.09
     To                                                         $      25.00    $    18.33    $    13.33
   Weighted averaged remaining contractual life in months                               75           100

Exercisable options outstanding at December 31:
   Number                                                            367,470       349,687       213,964
   Weighted average exercise price                              $      10.69    $    10.18    $     5.97

Weighted average exercise price of options:
   Granted during the year                                      $      25.00    $        -    $    13.33
   Exercised during the year                                    $      11.37    $     5.28    $     5.93
   Forfeited during the year                                    $      15.53    $    12.30    $     8.98
   Expired during the year                                      $          -    $        -    $        -

Grant-date fair value:
   Options granted during the year                              $         78    $        -    $      919

Significant assumptions used in determining
   fair value of options granted:
   Risk-free interest rate                                              3.75%            -          5.25%
   Expected life in years                                                 10             -            10
   Expected dividends                                                      -             -             -
   Expected volatility                                                  0.16%            -          0.85%

Results of operations:
   Compensation cost recognized in income for all
     stock-based compensation awards                            $          -    $        -    $        -
                                                                ============    ==========    ==========
   Pro forma net income, based on SFAS No. 123                  $      5,654    $    2,510    $      450
                                                                ============    ==========    ==========
   Pro forma basic earnings per common share,
     based on SFAS No. 123                                      $       1.81    $     1.11    $     0.22
                                                                ============    ==========    ==========
   Pro forma diluted earnings per common share,
     based on SFAS No. 123                                      $       1.45    $     1.01    $     0.20
                                                                ============    ==========    ==========
</TABLE>

Note 15. Benefit Plans

Defined contribution plans

The Company maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees at least 21
years of age who have completed three months of service. Participants may
contribute a percentage of compensation, subject to a maximum allowed under the
Code. In addition, the Company may make additional contributions at the
discretion of the Board of Directors. The Company contribution was approximately
$74, $33, and $25 for 2002, 2001 and 2000, respectively.

                                       56

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 15. Benefit Plans, continued

Cafeteria plan

The Company adopted a cafeteria plan which provides its employees with a choice
between compensation and certain qualified benefit plans including medical
reimbursement, group accident and health insurance, dependent care assistance,
and group term life insurance. The Company's only expense relating to this plan
relates to administration costs.

Note 16. Income Taxes

Current and deferred income tax components

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                              2002         2001       2000
                                                          -----------  -----------  ---------
<S>                                                      <C>           <C>          <C>
Current                                                   $     4,830  $     2,268  $   1,119
Deferred                                                         (965)      (1,052)      (490)
Deferred tax asset valuation allowance change                       -            -        (46)
                                                          -----------  -----------  ---------
                                                          $     3,865  $     1,216  $     583
                                                          ===========  ===========  =========
</TABLE>

Rate reconciliation

A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income follows:

<TABLE>
<CAPTION>
                                                              2002        2001        2000
                                                          -----------  -----------  ---------
<S>                                                      <C>           <C>          <C>
Tax at statutory federal rate                             $     3,408  $     1,267  $     557
State income tax, net of federal benefit                          498          196         81
Tax exempt income                                                (192)        (138)        (6)
Other                                                             151         (109)        (3)
Deferred tax asset valuation allowance change                       -            -        (46)
                                                          -----------  -----------  ---------
                                                          $     3,865  $     1,216  $     583
                                                          ===========  ===========  =========
</TABLE>

                                       57

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 16. Income Taxes, continued

Deferred income tax analysis

The significant components of net deferred tax assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                       2002      2001
                                                                   ----------  ---------
<S>                                                               <C>          <C>
Deferred tax assets
   Allowance for loan losses                                       $    4,071  $   2,476
   Pre-opening expenses                                                     -         32
   Net operating losses of acquired company                                 -        260
   Accrued expenses                                                       118         26
   Other                                                                    -          8
                                                                   ----------  ---------
       Deferred tax asset                                               4,189      2,802
                                                                   ----------  ---------

Deferred tax liabilities
   Net unrealized appreciation on securities
     available for sale                                                   (87)       (33)
   Other securities basis adjustment                                     (330)      (414)
   Purchase accounting adjustments                                       (406)      (336)
   First Home Loan Bank stock dividends                                   (50)       (51)
   Depreciation                                                          (546)       (80)
   Accretion of bond discount                                               -        (33)
   Other                                                                   (4)         -
                                                                   ----------  ---------
       Deferred tax liabilities                                        (1,423)      (947)
                                                                   ----------  ---------
       Net deferred tax asset                                      $    2,766  $   1,855
                                                                   ==========  =========
</TABLE>

Note 17. Commitments and Contingencies

Litigation

In the normal course of business the Company is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the financial
statements.

Financial instruments with off-balance-sheet risk

The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the balance sheets.

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as for on-balance-sheet instruments. A summary of
commitments (approximately) at December 31 is as follows:

<TABLE>
<CAPTION>
                                                                      2002        2001
                                                                   ----------  ---------
<S>                                                                <C>         <C>
Commitments to extend credit                                       $   96,723  $  74,678
Standby letters of credit                                                 590      5,294
                                                                   ----------  ---------
                                                                   $   97,313  $  79,972
                                                                   ==========  =========
</TABLE>

                                       58

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 17. Commitments and Contingencies, continued

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, residential real estate and
income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Company deems
necessary.

Concentrations of credit risk

     Substantially all of the Company's loans, commitments to extend credit, and
standby letters of credit have been granted to customers in the Company's market
area and such customers are generally depositors of the Bank. The concentrations
of credit by type of loan are set forth in the Loans Receivable note. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. The Company generally does not extend credit to any single
borrower or group of related borrowers in excess of approximately $4,500.
Although the Company has a reasonably diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
economic conditions in and around its market area. A significant amount of the
real estate loans set forth in the Loans Receivable note are secured by
commercial real estate. In addition, the Bank has a loan concentration relating
to customers who are in the business of land development and loans secured by
commercial real estate. Total loans to this industrial group amounted to
approximately $374,500 at December 31, 2002 and $242,500 at December 31, 2001.

The Company from time to time has cash and cash equivalents on deposit with
financial institutions which exceed federally-insured limits.

Other commitments

The Company has entered into employment agreements with certain of its key
officers covering duties, salary, benefits, provisions for termination and
Company obligations in the event of merger or acquisition.

Note 18. Regulatory Restrictions

Dividends

The Company's dividend payments are made from dividends received from the Bank.
The Bank, as a North Carolina chartered bank, may pay dividends only out of its
undivided profits as determined pursuant to North Carolina General Statutes
Section 53-87. However, regulatory authorities may limit payment of dividends by
any bank when it is determined that such a limitation is in the public interest
and is necessary to ensure financial soundness of the Bank.

                                       59

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 18. Regulatory Restrictions, continued

Intercompany transactions

The Bank's legal lending limit on loans to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $6,500 at December 31, 2002.
No 23A transactions were deemed to exist between the Company and the Bank at
December 31, 2002.

Capital requirements

The Bank is subject to various regulatory capital requirements administered by
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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification 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 Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2002, that the Bank meets all capital
adequacy requirements to which it is subject.

As of December 31, 2002, the Bank met the criteria to be considered 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 I risk-based, and Tier I leverage ratios as set forth in the following
table.

                                       60

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 18. Regulatory Restrictions, continued

Capital requirements, continued

The Company and Bank's actual capital amounts and ratios are also presented in
the table.

<TABLE>
<CAPTION>
                                                                                                    Minimum
                                                                         Minimum                  To Be Well
                                                                        Required               Capitalized Under
                                                                       For Capital             Prompt Corrective
                                               Actual               Adequacy Purposes          Action Provisions
                                        ----------------------     ---------------------     ---------------------
                                         Amount         Ratio       Amount        Ratio       Amount        Ratio
                                        ---------     --------     ---------    --------     ---------     -------
<S>                                   <C>             <C>         <C>           <C>          <C>           <C>
December 31, 2002
   Total Capital
     (to Risk-Weighted Assets)
       Consolidated                   $  76,864         10.84%     $   56,737      8.00%           n/a        n/a
       MountainBank                   $  70,986         10.01%     $   56,725      8.00%     $  70,906     10.00%
   Tier I Capital
     (to Risk-Weighted Assets)
       Consolidated                   $  63,960          9.02%     $   28,369      4.00%           n/a        n/a
       MountainBank                   $  62,094          8.76%     $   28,363      4.00%     $  42,544      6.00%
   Tier I Capital
     (to Average Assets)
       Consolidated                   $  63,960          8.09%     $   31,608      4.00%           n/a        n/a
       MountainBank                   $  62,094          7.85%     $   31,644      4.00%     $  39,555      5.00%

December 31, 2001
   Total Capital
     (to Risk-Weighted Assets)
       Consolidated                   $  40,570          8.01%     $   40,542      8.00%           n/a        n/a
       MountainBank                   $  44,842          8.87%     $   40,443      8.00%     $  50,554     10.00%
   Tier I Capital
     (to Risk-Weighted Assets)
       Consolidated                   $  34,230          6.75%     $   20,271      4.00%           n/a        n/a
       MountainBank                   $  38,507          7.62%     $   20,222      4.00%     $  30,332      6.00%
   Tier I Capital
     (to Average Assets)
       Consolidated                   $  34,230          7.49%     $   18,269      4.00%           n/a        n/a
       MountainBank                   $  38,507          8.43%     $   18,269      4.00%     $  22,836      5.00%
</TABLE>

                                       61

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 19. Transactions with Related Parties

Loans

The Company has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.

Aggregate loan transactions with related parties were as follows:

                                                            2002        2001
                                                         ----------  ---------

Balance, beginning                                       $    7,484  $   3,339

New loans                                                    21,580      6,386
Repayments                                                   (9,881)    (4,884)
Relationship changes                                         (1,600)     2,643
                                                         ----------  ---------
Balance, ending                                          $   17,583  $   7,484
                                                         ==========  =========

At December 31, 2002, the ending balance included $8,500 to an individual
director and the director's related interests.

Building lease

The Company has entered into certain lease agreements with the Chairman of the
Company's Board of Directors for the rental of bank buildings and office space
for bank operations. (See also the Property and Equipment note).

                                       62

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 20. Parent Company Financial Information

                                 Balance Sheets
                           December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                     2002              2001
                                                                ---------------  ----------------
<S>                                                             <C>              <C>
Assets
   Cash due from banks                                          $           546  $          2,231
   Investment in affiliates                                              70,712            41,292
   Other assets                                                           1,561               164
                                                                ---------------  ----------------
       Total assets                                             $        72,819  $         43,687
                                                                ===============  ================

Liabilities
   Junior subordinated debentures                               $        20,000  $              -
   Long-term debt                                                             -             6,500
   Interest payable                                                           -                69
   Other liabilities                                                        351               103
                                                                ---------------  ----------------
       Total liabilities                                                 20,351             6,672
                                                                ---------------  ----------------

Stockholders' equity
   Preferred stock                                                       10,062             2,224
   Common stock                                                          12,802            12,451
   Surplus                                                               20,038            18,584
   Retained earnings                                                      9,397             3,692
   Accumulated other comprehensive income                                   169                64
                                                                ---------------  ----------------
       Total stockholders' equity                                        52,468            37,015
                                                                ---------------  ----------------
       Total liabilities and stockholders' equity               $        72,819  $         43,687
                                                                ===============  ================
</TABLE>

                              Statements of Income
                 For the years ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                     2002              2001
                                                                ---------------  ----------------
<S>                                                             <C>              <C>
Income
   Dividends from affiliate bank                                $           350  $              -
   Other income                                                               4                 -
                                                                ---------------  ----------------
                                                                            354                 -
                                                                ---------------  ----------------
Expenses
   Professional fees                                                        303               113
   Interest                                                                 802               223
   Other expenses                                                           146               156
                                                                ---------------  ----------------
       Total expenses                                                     1,251               492
                                                                ---------------  ----------------
       Loss before tax benefit and equity in
         undistributed income of affiliate                                 (897)             (492)

Income tax benefit                                                         (416)             (161)
                                                                ---------------  ----------------
       Loss before equity in
         undistributed income of affiliate                                 (481)             (331)

Equity in undistributed income of affiliate                               6,639             2,841
                                                                ---------------  ----------------
       Net income                                               $         6,158  $          2,510
                                                                ===============  ================
</TABLE>

                                       63

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements

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

Note 20. Parent Company Financial Information, continued

                            Statements of Cash Flows
                 For the years ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                    2002          2001
                                                                 ----------    ----------
<S>                                                              <C>           <C>
Cash flows from operating activities
   Net income                                                    $    6,158    $    2,510
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Equity in undistributed income of affiliates                  (6,639)       (2,841)
       Net change in other assets                                    (1,397)         (164)
       Net change in interest payable                                   (69)           69
       Net change in other liabilities                                   96           103
                                                                 ----------    ----------
         Net cash used by operating activities                       (1,851)         (323)
                                                                 ----------    ----------

Cash flows from investing activities
   Investment in affiliate                                          (21,189)       (6,249)
                                                                 ----------    ----------
         Net cash used by investing activities                      (21,189)       (6,249)
                                                                 ----------    ----------

Cash flows from financing activities
   Net change in long-term debt                                      (6,500)        6,500
   Junior subordinated debentures                                    20,000             -
   Preferred stock issued                                             7,838         2,224
   Common stock issued                                                  319            79
   Dividends paid                                                      (302)            -
                                                                 ----------    ----------
         Net cash provided by financing activities                   21,355         8,803
                                                                 ----------    ----------
         Net (decrease) increase in cash and cash equivalents        (1,685)        2,231

Cash and due from banks, beginning                                    2,231             -
                                                                 ----------    ----------
Cash and due from banks, ending                                  $      546    $    2,231
                                                                 ==========    ==========
</TABLE>

                                       64

<PAGE>

MountainBank Financial Corporation
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

Note 21. Quarterly Data

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                   --------------------------------------------------------------------------------------
                                                      2002                                        2001
                                   ------------------------------------------- ------------------------------------------
                                    Fourth      Third     Second      First     Fourth      Third     Second      First
                                    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
<S>                                <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest and dividend income       $  13,096  $  11,785  $  10,863  $  10,539  $   7,868  $   8,969  $   7,125  $   5,944
Interest expense                      (5,006)    (5,204)    (4,440)    (4,293)    (4,013)    (4,947)    (4,182)    (3,479)
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net interest income                    8,090      6,581      6,423      6,246      3,855      4,022      2,943      2,465

Provision for loan losses             (1,900)    (1,150)      (950)    (1,300)    (1,150)      (705)      (865)      (627)
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Net interest income, after
   provision for loan losses           6,190      5,431      5,473      4,946      2,705      3,317      2,078      1,838

Noninterest income                     1,815      1,587      1,450      1,400      1,339        784        504        367
Noninterest expenses                  (5,829)    (4,550)    (4,208)    (3,682)    (3,254)    (2,382)    (2,080)    (1,490)
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Income before income taxes             2,176      2,468      2,715      2,664        790      1,719        502        715

Provision for income taxes              (751)      (941)    (1,048)    (1,125)      (167)      (629)      (210)      (210)
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
   Net income                          1,425      1,527      1,667      1,539        623      1,090        292        505
   Preferred stock
     dividends declared                 (151)      (151)      (151)         -          -          -          -          -
                                   ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
   Net income available
     to common stockholders        $   1,274  $   1,376  $   1,516  $   1,539  $     623  $   1,090  $     292  $     505
                                   =========  =========  =========  =========  =========  =========  =========  =========

Earnings per common share:
   Basic                           $    0.40  $    0.44  $    0.49  $    0.49  $    0.27  $    0.48  $    0.13  $    0.23
                                   =========  =========  =========  =========  =========  =========  =========  =========
   Diluted                         $    0.35  $    0.39  $    0.43  $    0.41  $    0.24  $    0.45  $    0.12  $    0.20
                                   =========  =========  =========  =========  =========  =========  =========  =========
</TABLE>

Note 22.  Subsequent Events

During 2002, the Company entered into an agreement to merge with CNB Holdings,
Inc. CNB is headquartered in Pulaski, Virginia, and is the bank holding company
for Community National Bank, which operates two banking offices in Pulaski. The
transaction is structured whereby CNB will be merged into the Company, Community
National Bank will become a wholly-owned subsidiary of the Company, and CNB's
shareholders will receive a combination of the Company's common stock and cash
(approximately 50% each) valued at approximately $13.50 for each of their shares
of CNB common stock, with the actual number of shares of the Company's common
stock to be issued for each CNB share to be based on the market value of the
Company's common stock immediately prior to completion of the merger. The
transaction was approved by CNB's shareholders on March 7, 2003. Consummation of
the merger is subject to receipt of required state and federal bank regulatory
approvals. Subject to those contingencies, it is expected that the transaction
will be completed during the second quarter of 2003.

During 2002, the Company also entered into an agreement to merge with Cardinal
Bankshares Corporation. Cardinal is headquartered in Floyd, Virginia, and is the
holding company for Bank of Floyd, which operates five banking offices in five
southwestern Virginia communities. The Company's shareholders approved the
proposed merger at a special meeting held on February 26, 2003. However, at
Cardinal's special meeting held on the same date, Cardinal's shareholders failed
to approve the transaction. Cardinal terminated the merger agreement on March 5,
2003.

Note 23.  New Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, that superseded Accounting Principles Board (APB) Opinion No. 17. Under
SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are to be reviewed at least annually for impairment. SFAS
142 also changes the amortization methodology in intangible assets that are
deemed to have finite lives, and adds to required disclosures regarding goodwill
and intangible assets. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 142 on January 1, 2002 by the Company
did not have a material impact on the consolidated financial statements, and is
not anticipated to have a material impact in the future. Under guidance in SFAS
142 management expects to conduct an annual analysis concerning potential
impairment of the goodwill existing on the Company's balance sheet. Any goodwill
determined to be impaired at that time will be written off at the time of the
analysis. The net carrying amount of goodwill at December 31, 2002 on the
Company's balance sheet was $1,956. The other intangible assets on the Company's
books at that date were core deposit intangible assets associated with the
acquisition of First Western Bank. These CDI intangibles amounted to $2,288 at
December 31, 2002 and were amortized $258.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, that superseded SFAS No. 121 and APB Opinion No.
30. SFAS 144 provides guidance on differentiating between assets held and used,
held for sale, and held for disposal other than by sale, and the required
valuation of such assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 on January 1, 2002 did not have
a material impact on the consolidated financial statements, and is not
anticipated to have a material impact in the future.

In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Statements No. 4
(Reporting Gains and Losses from Extinguishment of Debt), No. 44 (Accounting for
Intangible Assets of Motor Carriers), and No. 64 (Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements), Amendment of SFAS No. 13 (Accounting for
Leases), and Technical Corrections. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. SFAS 145 is
effective for transactions occurring after May 15, 2002. The adoption of SFAS
145 on May 15, 2002 by the Company did not have a material impact on the
consolidated financial statements, and is not anticipated to have a material
impact in the future.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to being recognized at the date an entity commits to an exit plan under
EITF 94-3. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with earlier application
encouraged.

                                       65

<PAGE>

Item 9.  Changes in and Disagreements with Accountants.

         Not applicable.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

         Incorporated herein by reference from MFC's definitive Proxy Statement
to be filed with the Commission in connection with MFC's 2003 annual meeting of
shareholders (under the captions "Section 16(a) Beneficial Ownership Reporting
Compliance," "Proposal 1: Election of Directors" and "Executive Officers").

Item 11. Executive Compensation.

         Incorporated herein by reference from MFC's definitive Proxy Statement
to be filed with the Commission in connection with MFC's 2003 annual meeting of
shareholders (under the captions "Director Compensation" and "Executive
Compensation").

Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters.

         Beneficial Ownership of Equity Securities. Information regarding the
beneficial ownership of MFC's equity securities is incorporated herein by
reference from MFC's definitive Proxy Statement to be filed with the Commission
in connection with MFC's 2003 annual meeting of shareholders (under the caption
"Beneficial Ownership of Securities").

         Securities Authorized for Issuance Under Equity Compensation Plans. The
following table contains summary information as of December 31, 2002, regarding
all compensation plans and individual compensation arrangements under which
shares of MFC's common stock have been authorized for issuance.

<TABLE>
<CAPTION>
                                              EQUITY COMPENSATION PLAN INFORMATION
------------------------------------------------------------------------------------------------------------------------------
                                                  (a)                   (b)                             (c)
                                           Number of shares                                 Number of shares remaining
                                           to be issued upon      Weighted-average     available for future issuance under
                                              exercise of        exercise price of     equity compensation plans (excluding
  Plan category                           outstanding options   outstanding options       shares reflected in column (a))
  -------------                           -------------------   -------------------    ------------------------------------
<S>                                       <C>                   <C>                    <C>
Equity compensation plans
  Approved by security holders .........       466,178(1)               $10.69                           402,509(1)

Equity compensation plans not
  Approved by security holders .........            -0-                   N/A                                 -0-
                                          -------------         -------------------             ------------------
          Total ........................       466,178(1)              $10.69                            402,509(1)
                                          =============         ===================             ==================
</TABLE>

(1)  Includes outstanding options to purchase an aggregate of 113,980 shares
     at a weighted average exercise price of $17.17 which are held by former
     employees and directors of First Western Bank. Those options previously had
     been approved by First Western Bank's shareholders and were converted into
     options to purchase shares of MFC's common stock when First Western Bank
     was acquired by MFC on December 31, 2001.

                                       66

<PAGE>

Item 13. Certain Relationships and Related Transactions.

         Incorporated herein by reference from MFC's definitive Proxy Statement
to be filed with the Commission in connection with MFC's 2003 annual meeting of
shareholders (under the caption "Transactions with Management").

Item 14. Controls and Procedures.

         During the 90-day period prior to the filing date of this report, MFC's
Chief Executive Officer and Chief Financial Officer evaluated the effectiveness
of the design and operation of MFC's disclosure controls and procedures (as
defined in Rule 13a-14 of the Securities Exchange Act of 1934). Based upon and
as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that MFC's disclosure controls and procedures were
effective, in all material respects, to ensure that information required to be
disclosed in reports that MFC files and submits under the Act is recorded,
processed, summarized and reported as and when required.

     There have been no significant changes in MFC's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date that the above evaluation was carried out.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

         (a) Exhibits. The following exhibits are filed herewith or incorporated
herein by reference as part of this Report.

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

   2.1            Agreement and Plan of Reorganization and Merger dated June 20,
                  2002, as amended, between MFC and CNB Holdings, Inc.
                  (incorporated by reference from Exhibits to Amendment No. 2 to
                  MFC's Registration Statement on Form S-4 filed on January 30,
                  2003, Reg. No. 333-100491)

   3.1            MFC's Articles of Incorporation, as amended (incorporated by
                  reference from Exhibits to MFC's 2001 Annual Report on Form
                  10-KSB)

   3.2            MFC's By-laws (incorporated by reference from Exhibits to
                  MFC's Current Report on Form 8-K/A dated March 30, 2001)

   4.1            Indenture by and between MFC and Wells Fargo Bank, National
                  Association, as Trustee, effective as of June 27, 2002
                  (incorporation by reference from Exhibits to MFCs Quarterly
                  Report on Form 10-QSB for the quarter period ended June 30,
                  2002)

   4.2            Trust Preferred Securities Guarantee Agreement by and between
                  MFC and Wells Fargo Bank, National Association, effective as
                  of June 27, 2002 2002 (incorporation by reference from
                  Exhibits to MFCs Quarterly Report on Form 10-QSB for the
                  quarter ended June 30, 2002)

   10.1           Employment Agreement dated June 26, 1997, between MountainBank
                  and J. W. Davis (incorporated by reference from Exhibits to
                  MFC's Registration Statement on Form S-4 filed on October 12,
                  2001, Reg. No. 333-71516)

   10.2           Addendum and Amendment to Employment Contract dated October 1,
                  1998, between MountainBank and J.W. Davis (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.3           1997 Employee Stock Option Plan, as amended (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.4           Form of Employee Stock Option Agreement for 1998 and 1999
                  grants (incorporated by reference from Exhibits to MFC's
                  Registration Statement on Form S-4 filed on October 12, 2001,
                  Reg. No. 333-71516)

                                       67

<PAGE>

   10.5           Form of Employee Stock Option Agreement for 2000 grants
                  (incorporated by reference from Exhibits to MFC's Registration
                  Statement on Form S-4 filed on October 12, 2001, Reg. No.
                  333-71516)

   10.6           1997 Director Stock Option Plan, as amended (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.7           Form of Director Stock Option Agreement (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.8           Lease Agreement pertaining to MFC's Main Office (incorporated
                  by reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.9           Lease Agreements pertaining to MFC's administration/operations
                  facility (incorporated by reference from Exhibits to MFC's
                  Registration Statement on Form S-4 filed on October 12, 2001,
                  Reg. No. 333-71516)

   10.10          First Western Bank 1998 Nonstatutory Stock Option Plan
                  (incorporated by reference from Exhibits to MFC's 2001 Annual
                  Report on Form 10-KSB)

   10.11          First Western Bank 1999 Nonstatutory Stock Option Plan
                  (incorporated by reference from Exhibits to MFC's 2001 Annual
                  Report on Form 10-KSB)

   10.12          Option Modification Agreements relating to stock options of
                  William A. Banks (incorporated by reference from Exhibits to
                  MFC's 2001 Annual Report on Form 10-KSB)

   10.13          Option Modification Agreements relating to stock options of
                  Van F. Phillips (incorporated by reference from Exhibits to
                  MFC's 2001 Annual Report on Form 10-KSB)

   11             Statement regarding computation of per share earnings
                  (incorporated by reference to Footnote 13 of MFC's
                  Consolidated Financial Statements included in Item 8 of this
                  Report).

   21             List of MFC's subsidiaries

   23             Consent of Larrowe & Company, PLLC, to incorporation of its
                  report on MFC's financial statements

   99             MFC's definitive proxy statement to be distributed in
                  connection with its 2003 annual meeting of shareholders (being
                  filed separately)

                        Schedules. All schedules are omitted as the required
information is either inapplicable or is presented in MFC's consolidated
financial statements or the Notes thereto which are included in this Report.


                  (b) Reports on Form 8-K. During the last quarter of the period
covered by this Report on Form 10-K, no Current Reports on Form 8-K were filed
by MFC.

                                       68

<PAGE>

                                   SIGNATURES

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

                                   MOUNTAINBANK FINANCIAL CORPORATION

Date: March 28, 2003          By: /s/ J. W. Davis
                                  ----------------------------------------------
                                           J. W. Davis
                                           President and Chief Executive Officer

         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, this Report has been signed below by the following persons on behalf of
the MFC and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
          Signature                                  Title                          Date
------------------------------------        --------------------------          --------------
<S>                                         <C>                                 <C>
       /s/ J. W. Davis                      President, Chief Executive          March 28, 2003
------------------------------------        Officer and Director
           J. W. Davis                      (principal executive officer)

       /s/ Gregory L. Gibson                Executive Vice President and        March 28, 2003
------------------------------------        Chief Financial Officer
           Gregory L. Gibson                (principal financial and
                                            accounting officer)

       /s/ Boyd L. Hyder                    Chairman                            March 28, 2003
------------------------------------
           Boyd L. Hyder

       /s/ William A. Banks                 Director                            March 28, 2003
------------------------------------
           William A. Banks

       /s/ William H. Burton III            Director                            March 28, 2003
------------------------------------
           William H. Burton III

       /s/ Kenneth C. Feagin                Director                            March 28, 2003
------------------------------------
           Kenneth C. Feagin

       /s/ Danny L. Ford                    Director                            March 28, 2003
------------------------------------
           Danny L. Ford

       /s/ J. Edward Jones                  Director                            March 28, 2003
------------------------------------
           J. Edward Jones
</TABLE>

                                       69

<PAGE>

<TABLE>
<S>                                           <C>                       <C>
       /s/ Ronald R. Lamb                     Director                  March 28, 2003
--------------------------------------
           Ronald R. Lamb

       /s/ H. Steve McManus                   Director                  March 28, 2003
--------------------------------------
           H. Steve McManus

       /s/ Van F. Phillips                    Director                  March 28, 2003
--------------------------------------
           Van F. Phillips

       /s/ Catherine H. Schroader             Director                  March 28, 2003
--------------------------------------
           Catherine H. Schroader

       /s/ Maurice A. Scott                   Director                  March 28, 2003
--------------------------------------
           Maurice A. Scott
</TABLE>

                                       70

<PAGE>

                                  CERTIFICATION

   I, J. W. Davis, certify that:

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

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date:  March 27, 2003                      /s/ J. W. Davis
                                           -------------------------------
                                           J. W. Davis
                                           President and Chief Executive Officer

                                       71

<PAGE>


                                  CERTIFICATION

   I, Gregory L. Gibson, certify that:

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

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

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

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

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

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

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

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

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

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

6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date:  March 27, 2003                             /s/ Gregory L. Gibson
                                                  ------------------------------
                                                  Gregory L. Gibson
                                                  Executive Vice President
                                                     and Chief Financial Officer

                                       72

<PAGE>

                                  CERTIFICATION
                      (Pursuant to 18 U.S.C. Section 1350)

         The undersigned hereby certifies that (i) the foregoing Annual Report
on Form 10-K filed by MountainBank Financial Corporation (the "Registrant") for
the year ended December 31, 2002, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the
information contained in that Report fairly presents, in all material respects,
the financial condition and results of operations of the Registrant.

Date:  March 27, 2003                      /s/ J. W. Davis
                                           -------------------------------------
                                           J. W. Davis
                                           President and Chief Executive Officer


Date:  March 27, 2003                      /s/ Gregory L. Gibson
                                           -------------------------------------
                                           Gregory L. Gibson
                                           Executive Vice President
                                             and Chief Financial Officer

                                       73

<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                                  Description
---------         --------------------------------------------------------------

   2.1            Agreement and Plan of Reorganization and Merger dated June 20,
                  2002, as amended, between MFC and CNB Holdings, Inc.
                  (incorporated by reference from Exhibits to Amendment No. 2 to
                  MFCs Registration Statement on Form S-4 filed on January 30,
                  2003, Reg. No. 333-100491)

   3.1            MFC's Articles of Incorporation, as amended (incorporated by
                  reference from Exhibits to MFC's 2001 Annual Report on Form
                  10-KSB)

   3.2            MFC's By-laws (incorporated by reference from Exhibits to
                  MFC's Current Report on Form 8-K/A dated March 30, 2001)

   4.1            Indenture by and between MFC and Wells Fargo Bank, National
                  Association, as Trustee, effective as of June 27, 2002
                  (incorporated by reference from Exhibits to MFCs Quarterly
                  Report on Form 10-QSB for the quarter ended June 30, 2002)

   4.2            Trust Preferred Securities Guarantee Agreement by and between
                  MFC and Wells Fargo Bank, National Association, effective as
                  of June 27, 2002 2002 (incorporated by reference from Exhibits
                  to MFCs Quarterly Report on Form 10-QSB for the quarter ended
                  June 30, 2002)

   10.1           Employment Agreement dated June 26, 1997, between MountainBank
                  and J. W. Davis (incorporated by reference from Exhibits to
                  MFC's Registration Statement on Form S-4 filed on October 12,
                  2001, Reg. No. 333-71516)

   10.2           Addendum and Amendment to Employment Contract dated October 1,
                  1998, between MountainBank and J.W. Davis (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.3           1997 Employee Stock Option Plan, as amended (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.4           Form of Employee Stock Option Agreement for 1998 and 1999
                  grants (incorporated by reference from Exhibits to MFC's
                  Registration Statement on Form S-4 filed on October 12, 2001,
                  Reg. No. 333-71516)

   10.5           Form of Employee Stock Option Agreement for 2000 grants
                  (incorporated by reference from Exhibits to MFC's Registration
                  Statement on Form S-4 filed on October 12, 2001, Reg. No.
                  333-71516)

   10.6           1997 Director Stock Option Plan, as amended (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.7           Form of Director Stock Option Agreement (incorporated by
                  reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

                                       74

<PAGE>

   10.8           Lease Agreement pertaining to MFC's Main Office (incorporated
                  by reference from Exhibits to MFC's Registration Statement on
                  Form S-4 filed on October 12, 2001, Reg. No. 333-71516)

   10.9           Lease Agreements pertaining to MFC's administration/operations
                  facility (incorporated by reference from Exhibits to MFC's
                  Registration Statement on Form S-4 filed on October 12, 2001,
                  Reg. No. 333-71516)

   10.10          First Western Bank 1998 Nonstatutory Stock Option Plan
                  (incorporated by reference from Exhibits to MFC's 2001 Annual
                  Report on Form 10-KSB)

   10.11          First Western Bank 1999 Nonstatutory Stock Option Plan
                  (incorporated by reference from Exhibits to MFC's 2001 Annual
                  Report on Form 10-KSB)

   10.12          Option Modification Agreements relating to stock options of
                  William A. Banks (incorporated by reference from Exhibits to
                  MFC's 2001 Annual Report on Form 10-KSB)

   10.13          Option Modification Agreements relating to stock options of
                  Van F. Phillips (incorporated by reference from Exhibits to
                  MFC's 2001 Annual Report on Form 10-KSB)

   11             Statement regarding computation of per share earnings
                  (incorporated by reference to Footnote 13 of MFC's
                  Consolidated Financial Statements included in Item 8 of this
                  Report).

   21             List of MFC's subsidiaries

   23             Consent of Larrowe & Company, PLLC, to incorporation of its
                  report on MFC's financial statements

   99             MFC's definitive proxy statement to be distributed in
                  connection with its 2003 annual meeting of shareholders (being
                  filed separately)

                                       75