# FORM 10-KSBSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                                      OF THE SECURITIES EXCHANGE ACT OF 1934
                                    For the fiscal year ended December 31, 2001
                                                        OR
                               [     ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                                      OF THE SECURITIES EXCHANGE ACT OF 1934
                                For the transition period from _______ to ________
                                         Commission file number 333-63685CLARKSTON FINANCIAL CORPORATION
                              (Exact name of registrant as specified in its charter)

|MICHIGAN  
(State of other jurisdiction of
incorporation or organization) | 38-3412321
(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------- | -----------------------------------------------

15 South Main Street, Clarkston, Michigan 48346
                                (Address of principal executive offices) (Zip Code)
                        Registrant's telephone number, including area code: (248) 625-8585
                     Securities registered pursuant to Section 12(b) of the Exchange Act: None
                    Securities registered pursuant to Section 12(g) of the Exchange Act: None.

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Check whether the issuer:
(1) filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 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. YesX   No ____

Check here if there is no
disclosure by delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form and no disclosure will be contained, to the best of
Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]

The registrants
revenues for 2001 were $5.3 million. The aggregate market value of the voting
and non-voting common equity held by non-affiliates of the Registrant, based on
a per share price of $9.00 as of March 25, 2002, was $6,489,900 (common stock,
no par value). As of March 25, 2002, there were outstanding 1,026,012 shares of
the Companys common stock (no par value).

Portions of the
Companys Proxy Statement for the Annual Meeting of Shareholders to be held
May 7, 2002 are incorporated by reference into Part II and Part III of this
Report.



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# PART I

## ITEM 1:        Business

## The Company

Clarkston
Financial Corporation was incorporated on May 18, 1998 under Michigan law and is
a bank holding company owning all of the outstanding common stock of Clarkston
State Bank. Clarkston State Bank is organized as a Michigan chartered bank with
depository accounts insured by the Federal Deposit Insurance Corporation (the
FDIC). Clarkston State Banks initial primary service area is
Independence Township, which includes the City of Clarkston, and the adjacent
township of Waterford, both of which are located in North Oakland County,
Michigan. Clarkston State Bank provides a full range of commercial and consumer
banking services for small to medium size businesses as well as individuals.
Clarkston State Banks lending strategy is to focus on commercial and
consumer lending. Clarkston State Bank offers a broad array of deposit products
and may also provide customers with trust services through third-party service
providers.

We
completed an underwritten initial public offering in November 1998. We issued
950,000 shares of common stock in the initial public offering, resulting in net
proceeds to us of $8.8 million. On December 18, 1998, we transferred $8,496,860
to the Bank to capitalize the Bank. The Bank opened for business on January 4,
1999.

As
of December 31, 2001, we had total assets of $83.9 million, total deposits of
$74.2 million, approximately 6,124 deposit accounts and shareholders
equity of $8.7 million.

Our
main office is located at 15 South Main Street, Clarkston, Michigan 48346, and
its telephone number is (248) 625-8585. Unless the context clearly indicates
otherwise, financial information and other references to us include Clarkston
State Bank.

## Products and
Services

Commercial
Loans. Commercial loans are made primarily to small
and mid-sized businesses. These loans are and will be both secured and unsecured
and are made available for general operating purposes, acquisition of fixed
assets including real estate, purchases of equipment and machinery, financing of
inventory and accounts receivable, as well as any other purposes considered
appropriate. We generally look to a borrowers business operations as the
principal source of repayment, but will also receive, when appropriate,
mortgages on real estate, security interests in inventory, accounts receivable
and other personal property and/or personal guarantees.

Although
we take a progressive and competitive approach to lending, it stresses high
quality in its loans. Because of our local nature, management believes that
quality control should be achievable while still providing prompt and personal
service. In addition, a loan committee of the Board of Directors of Clarkston
State Bank also reviews larger loans for prior approval when the loan request
exceeds the established limits for the senior officers.

Commercial
real estate lending involves more risk than residential lending, because loan
balances are greater and repayment is dependent upon the borrowers
operation. We attempt to minimize risk associated with these transactions by
generally limiting its exposure to owner operated properties of well-known
customers or new customers with an established profitable history. In many
cases, risk is further reduced by (i) limiting the amount of credit to any one
borrower to an amount less than our legal lending limit; and (ii) avoiding
certain types of commercial real estate financings.



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Residential
Real Estate Loans. From time to time we originate residential
mortgage loans which are generally short-term with maturates of five years or
less. Our general policy, which is subject to review by management as a result
of changing market and economic conditions. On the mortgage we make directly, we
maintain the servicing rights. Requests for long-term fixed rate mortgages are
generally referred to an unrelated mortgage company for processing and sale. We
also offer equity loans.

Personal
Loans and Credit. We make personal loans and lines of credit
available to consumers for various purposes, such as the purchase of
automobiles, boats and other recreational vehicles, home improvements and
personal investments. We expect to retain substantially all of such loans.

Consumer
loans generally have shorter terms and higher interest rates than residential
mortgage loans and usually involve more credit risk than mortgage loans because
of the type and nature of the collateral. While we do not use a formal credit
scoring system, we underwrite our loans carefully, with a strong emphasis on the
amount of the down payment, credit quality, employment stability and monthly
income. These loans are expected generally to be repaid on a monthly repayment
schedule with the source of repayment tied to the borrowers periodic
income. In addition, consumer lending collections are dependent on the
borrowers continuing financial stability, and are thus likely to be
adversely affected by job loss, illness and personal bankruptcy. In many cases,
repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance because of
depreciation of the underlying collateral. We believe that the generally higher
yields earned on consumer loans help compensate for the increased credit risk
associated with such loans and that consumer loans are important to its efforts
to serve the credit needs of the communities and customers that it serves.

Loan
Policy. As a routine part of our business, we make loans to
individuals and businesses located within our market area. We have adopted a
Loan Policy that contains general lending guidelines and is subject to review
and revision by the Board of Directors from time to time. We seek to make sound
loans, while recognizing that lending money involves a degree of business risk.

Regulatory
and supervisory loan-to-value limits are established by Section 304 of the
Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA). Our internal limitations follow those limits and in
certain cases are more restrictive than those required by the regulators.

Deposit
Services. We offer a broad range of deposit services, including
interest bearing and non-interest bearing checking accounts, savings accounts
and time deposits of various types. Transaction accounts and time certificates
are tailored to the principal market area at rates competitive with those
offered in the area. All deposit accounts are insured by the FDIC up to the
maximum amount permitted by law. We solicit these accounts from individuals,
businesses, associations, financial institutions and government authorities.

Other
Services. We may establish relationships with correspondent banks
and other independent financial institutions to provide other services requested
by its customers, including loan participations where the requested loan amounts
exceed our policies or legal lending limits. We may consider providing
additional services in the future, such as personal computer based at-home
banking. Management believes that our personalized service approach benefits
from customer visits. Management will continue to evaluate the desirability of
adding electronic and at-home banking services. Should we choose to do so, we
could provide one or more of these services at a future date using a third-party
service provider. We started to offer telephone banking service in April 2000.

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## Competition

There
are many thrift institution, credit union and bank offices located within our
primary market area of North Oakland County, Michigan. We face competition from
thrift institutions, credit unions, and other banks as well as finance
companies, insurance companies, mortgage companies, securities brokerage firms,
money market funds and other providers of financial services. Most of our
competitors have been in business a number of years, have established customer
bases, are larger and have higher lending limits than we do. We compete for
loans principally through its ability to communicate effectively with its
customers and understand and meet their needs. Management believes that its
personal service philosophy enhances its ability to compete favorably in
attracting individuals and small businesses. We actively solicit retail
customers and will compete for deposits by offering customers personal
attention, professional service, ATM capability, and competitive interest rates.

## Environmental
Matters

We
do not believe that existing environmental regulations will have any material
effect upon our capital expenditures, earnings, and competitive position.

## Employees

As
of December 31, 2001, we had 19 full-time and 13 part-time employees. We have
assembled a staff of experienced, dedicated professionals whose goal is to
provide outstanding service. None of our employees are represented by collective
bargaining agents.

## Selected
Statistical Data

Selected
Statistical Data for Clarkston Financial Corporation is presented for 2001, 2000
and 1999 in Managements Discussion and Analysis of Financial Condition and
Results of Operations. Clarkston State Bank commenced operations on January 4,
1999, and therefore the Guide 3 Statistical Disclosure by Bank Holding companies
would not be meaningful for 1998 and is not included.

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# SUPERVISION
AND REGULATION

The
following is a summary of certain statutes and regulations affecting Clarkston
Financial Corporation and Clarkston State Bank. This summary is qualified in its
entirety by such statutes and regulations. A change in applicable laws or
regulations may have a material effect on Clarkston Financial Corporation,
Clarkston State Bank, and the business of Clarkston Financial Corporation and
Clarkston State Bank.

## General

Financial
institutions and their holding companies are extensively regulated under federal
and state law. Consequently, our growth and earnings performance can be affected
not only by management decisions and general economic conditions, but also by
the statutes administered by, and the regulations and policies of, various
governmental regulatory authorities. Those authorities include, but are not
limited to, the Board of Governors of the Federal Reserve System (the
Federal Reserve Board), the FDIC, the Commissioner of the Michigan
Office of Financial and Insurance Services, Department of Financial Institutions
(Commissioner), the Internal Revenue Service, and state taxing
authorities. The effect of such statutes, regulations and policies can be
significant, and cannot be predicted with a high degree of certainty.

Federal
and state laws and regulations generally applicable to financial institutions
and their holding companies regulate, among other things, the scope of business,
investments, reserves against deposits, capital levels relative to operations,
lending activities and practices, the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation applicable to us and our bank establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDICs deposit insurance funds, the
depositors of the Bank, and the public, rather than our shareholders.

Federal
law and regulations establish supervisory standards applicable to the lending
activities of our bank, including internal controls, credit underwriting, loan
documentation and loan-to-value ratios for loans secured by real property.

## Recent
Legislation

The
enactment of the Gramm-Leach-Bliley Act of 1999 represents a pivotal point in
the history of the financial services industry. The act modifies many of the
principal federal laws which regulate financial institutions and sweeps away
large parts of a regulatory framework that had its origins in the Depression Era
of the 1930s.

Effective
March 11, 2000, new opportunities became available for banking organizations,
other depository institutions, insurance companies and securities firms to enter
into combinations that permit a single financial services organization to offer
customers a more complete array of financial products and services.
Specifically, the Gramm-Leach-Bliley Act provides two new vehicles through which
a banking organization can engage in a variety of activities which, prior to the
act, they were not allowed to engage in. First, a bank holding company meeting
certain requirements may elect to become a financial holding company. Financial
holding companies are generally authorized to engage in all financial
activities and, under certain circumstances, to make equity investments in
other companies (i.e., merchant banking). In order to be eligible to elect to
become a financial holding company, a bank holding company and all of its
depositary financial institutions must: (1) be well capitalized; (2)
be well managed; and (3) have a rating of satisfactory
or better in their most recent Community Reinvestment Act examination. Both the
bank holding company and all of its depositary financial institutions must also
continue to satisfy these requirements after the bank holding company elects to
become a financial holding company or else the financial holding company will be
subject to various restrictions. The Federal Reserve Board will be the umbrella
regulator of financial holding companies, but functional regulation of a
financial holding companys separately regulated subsidiaries will be
conducted by their primary functional regulator.

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Second,
the Gramm-Leach-Bliley Act also provides that a national bank (and a state bank,
so long as otherwise allowable under its states law), which satisfies
certain requirements, may own a new type of subsidiary called a financial
subsidiary. The act authorizes financial subsidiaries to engage in many (but not
all) of the activities that financial holding companies are authorized to engage
in. In order to be eligible to own a financial subsidiary, a bank must satisfy
the three requirements noted above, plus several additional requirements.

The
Gramm-Leach-Bliley Act also imposes several rules that are designed to protect
the privacy of the customers of financial institutions. For example, the act
requires financial institutions to annually adopt and disseminate a privacy
policy and prohibits financial institutions from disclosing certain customer
information to non-affiliated third parties for certain uses. All
financial institutions, regardless of whether they elect to utilize financial
holding companies or financial subsidiaries, are subject to the acts
privacy provisions. We are also subject to certain state laws that deal with the
use and distribution of non-public personal information. In addition to its
privacy provisions, the Gramm-Leach-Bliley Act also contains various other
provisions that apply to banking organizations, regardless of whether they elect
to utilize financial holding companies or financial subsidiaries.

We
believe that the Gramm-Leach-Bliley Act could significantly increase competition
in our business and are evaluating the desirability of electing to become a
financial holding company. We have elected financial holding company status.

## Clarkston
Financial Corporation

General.
Clarkston Financial Corporation is a bank holding company and, as such, is
registered with, and subject to regulation by, the Federal Reserve Board under
the Bank Holding Company Act, as amended (the BHCA). Under the BHCA,
the Company is subject to periodic examination by the Federal Reserve Board, and
is required to file with the Federal Reserve Board periodic reports of its
operations and such additional information as the Federal Reserve Board may
require.

In
accordance with Federal Reserve Board policy, Clarkston Financial Corporation is
expected to act as a source of financial strength to Clarkston State Bank and to
commit resources to support Clarkston State Bank in circumstances where
Clarkston Financial Corporation might not do so absent such policy. In addition,
if the Commissioner deems our capital to be impaired, the Commissioner may
require us to restore our capital by a special assessment upon us as Clarkston
State Banks sole shareholder. If we were to fail to pay any such
assessment, the directors of the Clarkston State Bank would be required, under
Michigan law, to sell our shares of Clarkston State Banks stock owned by
us to the highest bidder at either a public or private auction and use the
proceeds of the sale to restore the Clarkston State Banks capital.

Investments
and Activities. In general, any direct or indirect acquisition by
us of any voting shares of any bank which would result in our direct or indirect
ownership or control of more than 5% of any class of voting shares of such bank,
and any merger or consolidation between us and another bank company, will
require the prior written approval of the Federal Reserve Board under the BHCA.
In acting on such applications, the Federal Reserve Board must consider various
statutory factors, including among others, the effect of the proposed
transaction on competition in relevant geographic and product markets, and each
partys financial condition, managerial resources, and record of
performance under the Community Reinvestment Act. Effective September 29, 1995,
bank holding companies may acquire banks located in any state in the United
States without regard to geographic restrictions or reciprocity requirements
imposed by state law, but subject to certain conditions, including limitations
on the aggregate amount of deposits that may be held by the acquiring company
and all of its insured depository institution affiliates.

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The
merger or consolidation of an existing bank subsidiary of ours with another
bank, or the acquisition by such a subsidiary of assets of another bank, or the
assumption of liability by such a subsidiary to pay any deposits in another
bank, will require the prior written approval of the responsible Federal
depository institution regulatory agency under the Bank Merger Act, based upon a
consideration of statutory factors similar to those outlined above with respect
to the BHCA. In addition, in certain such cases an application to, and the prior
approval of, the Federal Reserve Board under the BHCA and/or the Commissioner
under the Michigan Banking Code, may be required.

With
certain limited exceptions, the BHCA prohibits any bank company from engaging,
either directly or indirectly through a subsidiary, in any activity other than
managing or controlling banks unless the proposed non-banking activity is one
that the Federal Reserve Board has determined to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Under current Federal Reserve Board regulations, such permissible non-banking
activities include such things as mortgage banking, equipment leasing,
securities brokerage, and consumer and commercial finance company operations. As
a result of recent amendments to the BHCA, well-capitalized and well-managed
bank holding companies may engage de novo in certain types of non-banking
activities without prior notice to, or approval of, the Federal Reserve Board,
provided that written notice of the new activity is given to the Federal Reserve
Board within 10 business days after the activity is commenced. If a bank company
wishes to engage in a non-banking activity by acquiring a going concern, prior
notice and/or prior approval will be required, depending upon the activities in
which the company to be acquired is engaged, the size of the company to be
acquired and the financial and managerial condition of the acquiring bank
company.

In
evaluating a proposal to engage (either de novo or through the
acquisition of a going concern) in a non-banking activity, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the bank company, and the relative public benefits and
adverse effects which may be expected to result from the performance of the
activity by an affiliate of the bank company. The Federal Reserve Board may
apply different standards to activities proposed to be commenced de novo
and activities commenced by acquisition, in whole or in part, of a going
concern.

Capital
Requirements. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank company may, among other things,
be denied approval to acquire or establish additional banks or non-bank
businesses.

The
Federal Reserve Boards capital guidelines establish the following minimum
regulatory capital requirements for bank holding companies: (i) a leverage
capital requirement expressed as a percentage of total assets, and (ii) a
risk-based requirement expressed as a percentage of total risk-weighted assets.
The leverage capital requirement consists of a minimum ratio of Tier 1 capital
(which consists principally of shareholders equity) to total assets of 3%
for the most highly rated companies, with minimum requirements of 4% to 5% for
all others. The risk-based requirement consists of a minimum ratio of total
capital to total risk-weighted assets of 8%, of which at least one-half must be
Tier 1 capital.

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The
risk-based and leverage standards presently used by the Federal Reserve Board
are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. For example, Federal Reserve Board regulations provide that
additional capital may be required to take adequate account of, among other
things, interest rate risk and the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions (i.e.,
Tier 1 capital less all intangible assets), well above the minimum levels. The
Federal Reserve Board has not advised us of any specific minimum Tier 1
Capital leverage ratio applicable to us.

Dividends.
Clarkston Financial Corporation is a corporation separate and distinct from
Clarkston State Bank. Most of our revenues will be received by it in the form of
dividends, if any, paid by Clarkston State Bank. Thus, our ability to pay
dividends to its shareholders will indirectly be limited by statutory
restrictions on its ability to pay dividends. See Supervision and
Regulation - the Bank - Dividends. Further, the Federal Reserve Board has
issued a policy statement on the payment of cash dividends by bank holding
companies. In the policy statement, the Federal Reserve Board expressed its view
that a bank company experiencing earnings weaknesses should not pay cash
dividends exceeding its net income or which can only be funded in ways that
weakened the bank companys financial health, such as by borrowing.
Additionally, the Federal Reserve Board possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies. Similar enforcement powers over
Clarkston State Bank are possessed by the FDIC. The prompt corrective
action provisions of federal law and regulation authorizes the Federal
Reserve Board to restrict the payment of dividends by us for an insured bank
which fails to meet specified capital levels.

In
addition to the restrictions on dividends imposed by the Federal Reserve Board,
the Michigan Business Corporation Act provides that dividends may be legally
declared or paid only if after the distribution a corporation, such as us, can
pay its debts as they come due in the usual course of business and its total
assets equal or exceed the sum of its liabilities plus the amount that would be
needed to satisfy the preferential rights upon dissolution of any holders of
preferred stock whose preferential rights are superior to those receiving the
distribution. We are not authorized to issue preferred stock and have no current
plans to seek to authorize any preferred stock.

## Clarkston
State Bank

General.
Clarkston State Bank is a Michigan banking corporation and its deposit accounts
are insured by the Bank Insurance Fund (the BIF) of the FDIC. As a
BIF-insured Michigan chartered bank, Clarkston State Bank is subject to the
examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Michigan banks, and the FDIC, as
administrator of the BIF. These agencies and the federal and state laws
applicable to Clarkston State Bank and its operations, extensively regulate
various aspects of the banking business including, among other things,
permissible types and amounts of loans, investments and other activities,
capital adequacy, branching, interest rates on loans and on deposits, the
maintenance of non-interest bearing reserves on deposit accounts, and the safety
and soundness of banking practices.

Deposit
Insurance. As an FDIC-insured institution, Clarkston State Bank
is required to pay deposit insurance premium assessments to the FDIC. The FDIC
has adopted a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums, based upon their respective levels of capital and results of
supervisory evaluation. Institutions classified as well-capitalized (as defined
by the FDIC) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (as defined by the FDIC) and
considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.

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The
Federal Deposit Insurance Act (FDIA) requires the FDIC to establish
assessment rates at levels which will maintain the Deposit Insurance Fund at a
mandated reserve ratio of not less than 1.25% of estimated insured deposits.
Accordingly, the FDIC established the schedule of BIF insurance assessments for
the first semi-annual assessment period of 1998, ranging from 0% of deposits for
institutions in the lowest risk category to .27% of deposits for institutions in
the highest risk category.

The
FDIC may terminate the deposit insurance of any insured depository institution
if the FDIC determines, after a hearing, that the institution or its directors
have engaged or are engaging in unsafe or unsound practices, or have violated
any applicable law, regulation, order, or any condition imposed in writing by,
or written agreement with, the FDIC, or if the institution is in an unsafe or
unsound condition to continue operations. The FDIC may also suspend deposit
insurance temporarily during the hearing process for a permanent termination of
insurance if the institution has no tangible capital.

Commissioner
Assessments. Michigan banks are required to pay supervisory fees
to the Commissioner to fund the operations of the Commissioner. The amount of
supervisory fees paid by a bank is based upon the banks total assets, as
reported to the Commissioner.

FICO
Assessments. Pursuant to federal legislation enacted September
30, 1996, Clarkston State Bank, as a member of the BIF, is subject to
assessments to cover the payments on outstanding obligations of the Financing
Corporation (FICO). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
predecessor to the FDICs Savings Association Insurance Fund (the
SAIF) which insures the deposits of thrift institutions. Until
January 1, 2000, the FICO assessments made against BIF members may not exceed
20% of the amount of FICO assessments made against SAIF members. Currently, SAIF
members pay FICO assessments at a rate equal to approximately 0.063% of deposits
while BIF members pay FICO assessments at a rate equal to approximately 0.013%
of deposits. Between January 1, 2000 and the maturity of the outstanding FICO
obligations in 2019, BIF members and SAIF members will share the cost of the
interest on the FICO bonds on a pro rata basis. It is estimated that FICO
assessments during this period will be less than 0.025% of deposits

Capital
Requirements. The FDIC has established the following minimum
capital standards for state-chartered, FDIC-insured non-member banks, such as
the Bank: a leverage requirement consisting of a minimum ratio of Tier 1 capital
to total assets of 3% for the most highly-rated banks with minimum requirements
of 4% to 5% for all others, and a risk-based capital requirement consisting of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. Tier 1 capital consists principally of
shareholders equity. These capital requirements are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, FDIC
regulations provide that higher capital may be required to take adequate account
of, among other things, interest rate risk and the risks posed by concentrations
of credit, nontraditional activities or securities trading activities. As a
condition to regulatory approval of the Banks formation, the Bank was
required to have an initial capitalization sufficient to provide a ratio of Tier
1 capital to total estimated assets of at least 8% at the end of the third year
of operation.

Federal
law provides the federal banking regulators with broad power to take prompt
corrective action to resolve the problems of undercapitalized institutions. The
extent of the regulators powers depends on whether the institution in
question is well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, or
critically undercapitalized. Federal regulations define these
capital categories as follows:

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|                               | Total
Risk-BasedCapital Ratio | Tier 1
Risk-BasedCapital Ratio | Leverage Ratio                                          
|------------------------------ | ----------------------------- | ------------------------------ | --------------------------------------------------------
|                               |                               |                                |                                                         
|Well capitalized               | 10% or above                  | 6% or above                    | 5% or above                                             
|Adequately capitalized         | 8% or above                   | 4% or above                    | 4% or above                                             
|Undercapitalized               | Less than 8%                  | Less than 4%                   | Less than 4%                                            
|Significantly undercapitalized | Less than 6%                  | Less than 3%                   | Less than 3%                                            
|Critically undercapitalized    | --                            | --                             | A ratio of tangible
equity to total assets
of 2% or less

Depending
upon the capital category to which an institution is assigned, the
regulators corrective powers include: requiring the submission of a
capital restoration plan; placing limits on asset growth and restrictions on
activities; requiring the institution to issue additional capital stock
(including additional voting stock) or to be acquired; restricting transactions
with affiliates; restricting the interest rate the institution may pay on
deposits; ordering a new election of directors of the institution; requiring
that senior executive officers or directors be dismissed; prohibiting the
institution from accepting deposits from correspondent banks; requiring the
institution to divest certain subsidiaries; prohibiting the payment of principal
or interest on subordinated debt; and ultimately, appointing a receiver for the
institution.

In
general, a depository institution may be reclassified to a lower category than
is indicated by its capital levels if the appropriate federal depository
institution regulatory agency determines the institution to be otherwise in an
unsafe or unsound condition or to be engaged in an unsafe or unsound practice.
This could include a failure by the institution, following receipt of a
less-than-satisfactory rating on its most recent examination report, to correct
the deficiency.

Dividends.
Under Michigan law, our bank is restricted as to the maximum amount of dividends
it may pay on its common stock. Our bank may not pay dividends except out of net
profits after deducting its losses and bad debts. A Michigan state bank may not
declare or pay a dividend unless the bank will have a surplus amounting to at
least 20% of its capital after the payment of the dividend. If our bank has a
surplus less than the amount of its capital, it may not declare or pay any
dividend until an amount equal to at least 10% of net profits for the preceding
one-half year (in the case of quarterly or semi-annual dividends) or full-year
(in the case of annual dividends) has been transferred to surplus. A Michigan
state bank may, with the approval of the Commissioner, by vote of shareholders
owning 2/3 of the stock eligible to vote increase its capital stock by a
declaration of a stock dividend, provided that after the increase the
banks surplus equals at least 20% of its capital stock, as increased. Our
bank may not declare or pay any dividend until the cumulative dividends on
preferred stock (should any such stock be issued and outstanding) have been paid
in full. Our banks Articles of Incorporation do not authorize the issuance
of preferred stock and there are no current plans to seek such authorization.

Federal
law generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its company if the depository institution would thereafter be undercapitalized.
The FDIC may prevent an insured bank from paying dividends if the bank is in
default of payment of any assessment due to the FDIC. In addition, the FDIC may
prohibit the payment of dividends by the bank, if such payment is determined, by
reason of the financial condition of the bank, to be an unsafe and unsound
banking practice.

10

---

Insider
Transactions. Our bank is subject to certain restrictions imposed
by the Federal Reserve Act on any extensions of credit to us or our
subsidiaries, on investments in our stock or securities of our subsidiaries and
the acceptance of our stock or securities of our subsidiaries as collateral for
loans. Certain limitations and reporting requirements are also placed on
extensions of credit by our bank to its directors and officers, to our directors
and officers and our subsidiaries, to our principal shareholders, and to
related interests of such directors, officers and principal
shareholders. In addition, federal law and regulations may affect the terms upon
which any person becoming a director or officer of our company or one of our
subsidiaries or a principal shareholder of the Company may obtain credit from
banks with which our bank maintains a correspondent relationship.

Safety
and Soundness Standards. The federal banking agencies have
adopted guidelines to promote the safety and soundness of federally insured
depository institutions. These guidelines establish standards for internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, fees
and benefits, asset quality and earnings. In general, the guidelines prescribe
the goals to be achieved in each area, and each institution will be responsible
for establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in the guidelines, the
institutions primary federal regulator may require the institution to
submit a plan for achieving and maintaining compliance. The preamble to the
guidelines states that the agencies expect to require a compliance plan from an
institution whose failure to meet one or more of the standards is of such
severity that it could threaten the safe and sound operation of the institution.
Failure to submit an acceptable compliance plan , or failure to adhere to a
compliance plan that has been accepted by the appropriate regulator, would
constitute grounds for further enforcement action.

State
Bank Activities. Under federal law and FDIC regulations,
FDIC-insured state banks are prohibited, subject to certain exceptions, from
making or retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law, as implemented by FDIC
regulations, also prohibits FDIC-insured state banks and their subsidiaries,
subject to certain exceptions, from engaging as principal in any activity that
is not permitted for a national bank or its subsidiary, respectively, unless the
bank meets, and continues to meet, its minimum regulatory capital requirements
and the FDIC determines the activity would not pose a significant risk to the
deposit insurance fund of which the bank is a member. Impermissible investments
and activities must be divested or discontinued within certain time frames set
by the FDIC in accordance with federal law. These restrictions are not currently
expected to have a material impact on the operations of our bank.

Consumer
Protection Laws. Our business includes making a variety of types
of loans to individuals. In making these loans, we are subject to State usury
and regulatory laws and to various federal statutes, such as the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the
Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, and
the regulations promulgated thereunder, which prohibit discrimination, specify
disclosures to be made to borrowers regarding credit and settlement costs, and
regulate the mortgage loan servicing activities of our bank, including the
maintenance and operation of escrow accounts and the transfer of mortgage loan
servicing. In receiving deposits, our bank is subject to extensive regulation
under State and federal law and regulations, including the Truth in Savings Act,
the Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds
Transfer Act, and the Federal Deposit Insurance Act. Violation of these laws
could result in the imposition of significant damages and fines upon our bank
and its directors and officers.

Branching
Authority. Michigan banks, such as our bank, have the authority
under Michigan law to establish branches anywhere in the State of Michigan,
subject to receipt of all required regulatory approvals (including the approval
of the Commissioner and the FDIC).

11

---

Effective
June 1, 1997 (or earlier if expressly authorized by applicable state law), the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
IBBEA) allows banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions, including certain
limitations on the aggregate amount of deposits that may be held by the
surviving bank and all of its insured depository institution affiliates. The
establishment of de novo interstate branches or the acquisition of
individual branches of a bank in another state (rather than the acquisition of
an out-of-state bank in its entirety) is allowed by IBBEA only if specifically
authorized by state law. The legislation allowed individual states to
opt-out of interstate branching authority by enacting appropriate
legislation prior to June 1, 1997.

Michigan
did not opt out of IBBEA, and now permits both U.S. and non-U.S. banks to
establish branch offices in Michigan. The Michigan Banking Code permits, in
appropriate circumstances and with the approval of the Commissioner, (i) the
acquisition of all or substantially all of the assets of a Michigan-chartered
bank by an FDIC-insured bank, savings bank, or savings and loan association
located in another state, (ii) the acquisition by a Michigan-chartered bank of
all or substantially all of the assets of an FDIC-insured bank, savings bank or
savings and loan association located in another state, (iii) the consolidation
of one or more Michigan-chartered banks and FDIC-insured banks, savings banks or
savings and loan associations located in other states having laws permitting
such consolidation, with the resulting organization chartered by Michigan, (iv)
the establishment by a foreign bank, which has not previously designated any
other state as its home state under the International Banking Act of 1978, of
branches located in Michigan, and (v) the establishment or acquisition of
branches in Michigan by FDIC-insured banks located in other states, the District
of Columbia or U.S. territories or protectorates having laws permitting
Michigan-chartered banks to establish branches in such jurisdiction. Further,
the Michigan Banking Code permits, upon written notice to the Commissioner, (i)
the acquisition by a Michigan-chartered bank of one or more branches (not
comprising all or substantially all of the assets) of an FDIC-insured bank,
savings bank or savings and loan association located in another state, the
District of Columbia, or a U.S. territory or protectorate, (ii) the
establishment by Michigan-chartered banks of branches located in other states,
the District of Columbia, or U.S. territories or protectorates, and (iii) the
consolidation of one or more Michigan-chartered banks and FDIC-insured banks,
savings banks or savings and loan associations located in other states, with the
resulting organization chartered by one of such other states.

## ITEM 2:        Description of Property.

The
bank is leasing a building located at 15 South Main Street in downtown
Clarkston, Michigan for use as the banks main office and our headquarters.
This building consists of approximately 3,890 square feet. The building was
formerly a branch of a large regional bank and has been a bank branch since
1911. The building has a night deposit box, safe deposit boxes and a complete
security system, and has an ATM machine. We believe that this space will be
adequate for its present needs. In order to conserve the banks capital,
eight directors agreed to purchase the building in September, 1998 specifically
for the purpose of leasing the property to our bank. The building is leased on
an arms-length basis from an entity owned by eight of our and our banks
directors. See Item 12 Certain Relationships and Related
Transactions. The lease for our banks office has an initial term of
five years and the Bank has three renewal options of five years each. The
monthly lease payments are $5,000 per month for the first two years and
thereafter $5,250 per month. In addition, the bank is required to make payments
for taxes, insurance and other operating expenses.

Our
bank leases space for our branch office in Farmer Jacks grocery store at
6555 Sashabaw Road, Clarkston, Michigan, at a rental rate of $2,750 per month
under a lease which runs until July 2002.

12

---

On
June 15, 2001, the bank opened its Waterford branch office on M-59 adjacent to
the Oakland Pontiac Airport. On July 30, 2001, we opened our fourth full service
banking office located at 7763 Ortonville Road in Independence Township. On
November 19, 2001, we began operating an office in the Farmer Jack Supermarket
on the corner of Dixie Highway and White Lake Road in Independence Township.

We believe our facilities are well-maintained and adequately insured.

13

---

## ITEM 3:        Legal Proceedings.

As the date hereof, there were no pending material legal proceedings.

## ITEM 4:        Submission of Matters to a Vote of Security Holders.

No
matters were submitted during the fourth quarter of 2001 to a vote of our
stockholders.

14

---

# PART II

## ITEM 5:        Market
for Common Equity and Related Stockholder Matters.

Our
common stock has traded in the over-the-counter market since the completion of
our initial public offering in November 1998. High and low bid prices, as
reported on the OTC Bulletin Board are as follows for the periods indicated:

|                                                                                                                                                                                                                           |  | High                     | Low                    
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | -----------------------
|2001
First Quarter.........................................
Second Quarter.....................................
Third Quarter........................................
Fourth Quarter...................................... |  | $8.25
$9.97
$10.05
$9.49 | $6.00
$7.50
$8.54
$8.54
|                                                                                                                                                                                                                           |  |                          |                        
|2000
First Quarter.........................................
Second Quarter.....................................
Third Quarter........................................
Fourth Quarter...................................... |  | $5.00
$5.00
$5.91
$7.00  | $4.32
$4.20
$4.43
$5.45

These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The prices have been
adjusted to reflect a 10% share dividend paid in November 2000. On March 15,
2002, there were approximately 250 owners of record and approximately 866
beneficial owners of our common stock.

No
cash dividends have been declared to date on our common stock. We expect that
all earnings, if any, will be retained to finance our growth and that no cash
dividends will be paid for the foreseeable future. If and when dividends are
declared, we will be dependent upon dividends paid to us by the bank for funds
to pay dividends on the common stock.

## ITEM 6:        Management's Discussion and Analysis of Financial Condition and Results of Operations.

The
information set forth in Appendix A, under the caption Managements
Discussion and Analysis of Financial Condition and Results of Operations
of our definitive Proxy Statement dated April 3, 2002, is hereby
incorporated by reference and is filed as Exhibit 13 to this Form 10-KSB Annual
Report.

## ITEM 7:        Financial Statements.

The
information set forth in Appendix A, under the caption Consolidated
Financial Statements, of our definitive Proxy Statement dated April 3,
2002, is hereby incorporated by reference and is filed as Exhibit 13 to this
Form 10-KSB Annual Report.

## ITEM 8:        Changes in and Disagreements With Accountants and Financial Disclosure.

There
have been no disagreements with our independent public accountants.

15

---

# PART III

## ITEM 9:        Directors, Executive Officers, Promotors and Control Persons; Compliance with Section 16(a) of the Exchange Act.

The
information set forth under the caption Information About Directors
of our definitive Proxy Statement dated April 3, 2002, and the information
within that section is hereby incorporated by reference. There are no family
relationships between or among the directors and executive officers. There are
no arrangements or understandings between or among the executive officers
pursuant to which any of them was named an officer.

Our
common stock is not registered under the Securities Exchange Act of 1934, and
therefore our officers and directors are not required to and do not file
beneficial ownership reports pursuant to Section 16(a) of the Securities
Exchange Act of 1934.

## ITEM 10:        Executive Compensation.

Information
relating to compensation of our executive officers and directors is contained
under the captions Compensation of Directors and Executive
Compensation, in our definitive Proxy Statement dated April 3, 2002, and
the information within those sections is incorporated herein by reference.

## ITEM 11:        Security Ownership of Certain Beneficial Owners and Management.

Information relating to
security ownership of certain beneficial owners and management is contained
under the captions Security Ownership of Management, Voting
Securities and Principal Holders Thereof and Information About
Directors in our definitive Proxy Statement dated April 3, 2002, and
the information within those sections is incorporated herein by reference.

## ITEM 12:        Certain Relationships and Related Transactions.

Information
relating to certain relationships and related transactions is contained under
the caption Transactions Involving Management in our definitive
Proxy Statement dated April 3, 2002, and the information within that
section is incorporated herein by reference.

16

---

## ITEM 13:        Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.

|(a) | Financial Statements.                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                           
|    | 1.                                                                                                                        
|    |                                                                                                                           
|    | 2.                                                                                                                        
|    |                                                                                                                           
|    | 3.                                                                                                                        
|    |                                                                                                                           
|(b) | Reports on Form 8-K
During the last quarter of the period covered by this report, we filed no Current
Reports on Form 8-K.

17

---

# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, dated March 28, 2002.

| | CLARKSTON FINANCIAL CORPORATION/s/ David T. Harrison
David T. Harrison
Chief Executive Officer and President
(Principal Executive Officer and Principal Financial
Officer)/s/ Grant Smith

Grant Smith
(Principal Accounting Officer)
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on March 28, 2002, by the following persons on behalf of the
Registrant and in the capacities indicated. Each director of the Registrant,
whose signature appears below, hereby appoints David T. Harrison and Grant
Smith, and each of them severally, as his attorney-in-fact, to sign in his name
and on his behalf, as a director of the Registrant, and to file with the
Commission any and all Amendments to this Report on Form 10-KSB.

|Signature                                                                           |               
|----------------------------------------------------------------------------------- | --------------
|                                                                                    |               
|/s/ David T. Harrison
David T. Harrison, Principal Executive Officer and a Director | March 28, 2002
|                                                                                    |               
|/s/ Edwin L. Adler

Edwin L. Adler, Chairman of the Board and a Director            | March 28, 2002
|                                                                                    |               
|Louis D. Beer, Director                                                             | March 28, 2002
|                                                                                    |               
|/s/ Charles L. Fortinberry

Charles L. Fortinberry, Director                        | March 28, 2002
|                                                                                    |               
|/s/ William J. Clark

William J. Clark, Director                                    | March 28, 2002
|                                                                                    |               
|/s/ Bruce H. McIntyre

Bruce H. McIntyre, Secretary and a Director                  | March 28, 2002
|                                                                                    |               
|Robert A. Olsen, Director                                                           | March 28, 2002
|                                                                                    |               
|/s/ John H. Welker


John H. Welker, Director                                       | March 28, 2002

18

---

# EXHIBIT INDEX

|     | Exhibit Number and Description                                                                                                                                                                                                                                                                                        | Sequentially
NumberedPage
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------
|     |                                                                                                                                                                                                                                                                                                                       |                          
|3.1  | Articles  of   Incorporation  of  Clarkston   Financial   Corporation,
incorporated by reference to Exhibit 3.1 to the Clarkston Financial
Corporation Registration Statement on Form SB-2 (Registration No. 333-63685).                                                                                              |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|3.2  | Bylaws of Clarkston Financial Corporation, incorporated by reference
to Exhibit 3.2 to the Clarkston Financial Corporation Registration Statement
on Form SB-2 (Registration No. 333-63685).                                                                                                                          |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|4    | Specimen  stock  certificate  of  Clarkston   Financial   Corporation,
incorporated by reference to Exhibit 4 to the Clarkston Financial Corporation
Registration Statement on Form SB-2 (Registration No. 333-63685).                                                                                                |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|10.1 | Clarkston Financial Corporation Stock Compensation Plan,  incorporated
by reference to Exhibit 10.1 to the Clarkston Financial Corporation
Registration Statement on Form SB-2 (Registration No. 333-63685).                                                                                                          |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|10.2 | Clarkston  Financial  Corporation 1998 Founding Directors Stock Option
Plan, incorporated by reference to Exhibit 10.2 to the Clarkston Financial
Corporation Registration Statement on Form SB-2 (Registration No. 333-63685).                                                                                       |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|10.3 | Lease Agreement dated September 10, 1998, for the facility located at 15 South
Main Street, Clarkston, Michigan, 48346, incorporated by reference to Exhibit
10.3 to the Clarkston Financial Corporation Registration Statement on Form SB-2
(Registration No. 333-63685).                                            |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|10.4 | Data  Processing  Agreement  between  Jack  Henry and  Associates,  Inc.  And  Clarkston  State Bank dated
October, 1998, incorporated by reference to Exhibit 10.4 to the Clarkston
Financial Corporation Registration Statement on form SB-2 (Registration No.
333-63685).                                          |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|10.5 | Lease between  Clarkston State Bank and Foodtown,  Inc.,  incorporated
by reference to Exhibit 10 to the Clarkston Financial Corporation Quarterly
Report on Form 10-QSB for the quarter ended June 30, 1999.                                                                                                         |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|13   | Appendix A of the Proxy Statement to shareholders for the May 9, 2002,
shareholders meeting. This exhibit, except for those portions expressly
incorporated by reference in this filing, is furnished for the information of
the Securities and Exchange Commission and is not deemed filed as
part of this filing. |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|21   | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                        |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|23   | Consent of Plante & Moran, LLP, independent public accountants                                                                                                                                                                                                                                                        |                          
|     |                                                                                                                                                                                                                                                                                                                       |                          
|24   | Power of Attorney  (included on the  signature  page on page 16 of the
Annual Report on Form 10-KSB)                                                                                                                                                                                                                  |                          

19

---

## Exhibit 13

# APPENDIX A

|Management's Discussion and Analysis of Financial Condition and Results of Operations...........
Independent Auditors Report..........................................................................................................
Consolidated Financial Statements...................................................................................................
        Consolidated Balance Sheet......................................................................................................
        Consolidated Statement of Operations....................................................................................
        Consolidated Statement of Changes in Stockholders' Equity...................................................
        Consolidated Statement of Cash Flows....................................................................................
        Notes to Consolidated Financial Statements............................................................................ | A-2
A-12
A-13
A-13
A-14
A-15
A-16
A-17
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------

A-1

---

# MANAGEMENTS DISCUSSION AND ANALYSISOF THE

COMPANYS FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Managements
discussion and analysis of the financial condition and results of operations
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could differ materially from those
projected in such forward-looking statements.

The
following section presents additional information to assess the financial
condition and results of operations of the Corporation and Bank. This section
should be read in conjunction with the consolidated financial statements and the
supplemental financial data contained elsewhere in this Appendix.

## Overview

Clarkston
Financial Corporation (the Company) is a Michigan corporation, which
was incorporated on May 18, 1998. The Company is the bank holding company for
the Clarkston State Bank (the Bank). The Bank commenced operations
on January 4, 1999. The Bank is a Michigan chartered bank with depository
accounts insured by the Federal Deposit Insurance Corporation. The Bank provides
a full range of commercial and consumer banking services, primarily to consumers
and businesses in North Oakland County, Michigan.

The
Companys plan of operation has been to establish a traditional community
bank and a management team that understands and is devoted to serving this
market. This plan further focused on managing the assets of the Bank in a
prudent and responsible manner providing prompt customer attention and quality
customer service. Management believes it has been successful in establishing
such a culture and will continue to emphasize this growth plan in the future.

During
the past year, the Bank expanded its operation significantly. On June 15, 2001
the Bank opened its for Waterford branch office on M-59 adjacent to the Oakland
Pontiac Airport. On July 30, 2001 the Bank opened its fourth full service
banking office north of I-75 in Independence Township and on November 19, 2001
we began operating an office in the Farmer Jack Supermarket on the corner of
Dixie Highway and White Lake Road in Independence Township. These new banking
offices will provide the platforms from which your company will grow in the
future.

## Off Balance
Sheet Transactions

Other
than unfunded loan commitments there are no off balance sheet commitments. The
Bank does not syndicate loans, has sold no loan participations under an
agreement to repurchase and is not obligated to assume any liability not noted
in its balance sheet. The Company is not a borrower and as such there are no
loan agreement covenants or conditions that will restrict its growth or ability
to manage its affairs. The Bank has arranged for liquidity lines of credit with
two lenders, one commercial bank and the Federal Reserve Bank of Chicago, but
has never used either of these lines and has no plans to do so in the future.

A-2

---

## Financial
Condition

Summary.Total assets of the Company increased to $83.2 million at December 31, 2001,
from $60.2 million at December 31, 2000. This increase in assets is primarily
attributable to the Bank continuing to attract new customers through its
expanding operations. 2001 was the Companys third full year of operations
and the number of deposit and loan relationships increased to approximately
6,124 at December 31, 2001 from 3,888 accounts at December 31, 2000. Management
attributes the strong growth in deposits to quality customer service and the
desire of customers to deal with a local bank. The Company anticipates that the
Banks assets will continue to increase during 2003 and beyond perhaps at a
slower rate than has been the case during the first three years of operation.

Cash
and Cash Equivalents. Cash and cash equivalents, which include federal funds
sold and short term investments, increased $2.0 million, or 58% to $5.4 million
at December 31, 2001, from $3.4 million at December 31, 2000. This increase was
in part the result of an increase in deposits that were not transferred to
investments or loans in the last two weeks of the year. Moreover, it is also
difficult to adequately anticipate our customers need for funds at year-end and
as a result our cash and cash equivalent accounts are larger at this time of the
year.

Securities.The Bank reclassified all non-municipal investments from Held to Maturity to
Available for Sale during the year. This change was due in part to unprecedented
volatility in interest rates during the year and the need to maintain maximum
flexibility in this asset category in the future. This change had no effect on
the quality of the securities held or the credit worthiness of the issuer.
Securities held by the Bank at December 31, 2001, totaled $42.5 million dollars
compared to $30.3 million at December 31, 2000. The increase is the result of
the investment of customer deposits received since December 31, 2000. All
securities held in the Available for Sale category may be sold to meet the
Banks liquidity needs. The primary objective of the Companys
investment activity is to provide for the safety of the principal invested.
Secondary considerations include earnings, liquidity and overall exposure to
changes in interest rates. It has been the policy and practice of the Bank to
accept no credit risk in the investment portfolio in compliance with the
Companys primary investment objective. Excluding investments in U.S.
Treasury and U.S. Government Agency Securities, there were no investments in
securities of any one issuer, which exceeded 10% of shareholders equity.

Securities Available for Sale Portfolio (in thousands)

`Year Ended December 31          
                                                                     2001          2000          1999

U.S. Treasury and U.S. Government Agencies..................       $36,278        $  836        $1,313
Municipal bonds.............................................             -           975         1,198
Corporate...................................................           676         7,177         6,805
   Total....................................................       $36,954        $8,988        $9,316`

A-3

---

The Loan  Portfolio.  The majority of loans are made to  businesses  in the form of  commercial  loans and
real  estate  mortgages.  The growth in the  commercial  loan  portfolio  from year to year is consistent  with our
business plan.

Loan Portfolio Composition (in thousands)

`Year Ended December 31
                                                 2001                       2000                        1999
                                        -----------------------    -----------------------    -----------------------
                                          Amount          %          Amount          %          Amount          %
                                        -----------    --------    -----------    --------    -----------    --------
Commercial......................         $25,299         73%        $16,100         63%        $ 5,936         53%
Residential Real Estate.........           5,441         16           3,955         15           2,529         22
Consumer........................           3,715         11           5,707         22           2,798         25
                                         -------        ---         -------        ---         -------        ---
   Total Loans..................          34,455        100%         25,762        100%         11,263        100%
                                         -------                    -------                    -------

Less:
Allowance for Loan Losses.......            (419)                      (379)                      (140)
                                         -------                    -------                    -------
Total Loans Receivable, Net.....         $34,036                    $25,383                    $11,123
                                         =======                    =======                    =======`

Maturities and Sensitivities of Loans to Changes in Interest Rates (in thousands of dollars)

The following
table shows the amount of total loans outstanding as of December 31, 2001 which,
based on remaining scheduled repayments of principal, are due in the periods
indicated.

`Maturing
                                           -------------------------------------------------------------------------
                                                                   After one but
                                             Within one Year     Within Five Years     After five years      Total
                                             ---------------     -----------------     ----------------      -----
Commercial.............................           $11,422              $12,619              $1,258         $25,299
Residential Real Estate................                 0                5,218                 223           5,441
Consumer...............................             1,877                1,632                 206           3,715
   Totals..............................            13,299               19,469               1,687          34,455
Allowance for Loan Losses..............              (419)                                                    (419)
                                                  -------              -------              ------         -------
Total Loans Receivable, Net............           $12,880              $19,469              $1,687         $34,036
                                                  =======              =======              ======         =======`

A-4

---

Below is a schedule of the loan  amounts  maturing or  repricing  and are  classified  according  to their
sensitivity to changes in interest rates.

`Interest Sensitivity
                                                          -----------------------------------------------
                                                                    (in thousands of dollars)
                                                            Fixed Rate       Variable Rate        Total
                                                            ----------       -------------        -----

Due within 3 months................................           $ 1,197           $ 3,131          $ 4,328
Due after 3 months within 1 year...................               897             8,074            8,971
Due after one but within five years................            14,674             4,795           19,469
Due after five years...............................             1,687                 0            1,687
                                                              -------           -------          -------
   Total...........................................           $18,455           $16,000          $34,455
Allowance for Loan Losses..........................                                                  419
                                                                                                 -------
Total Loans Receivable, Net........................                                              $34,036`

Nonperforming  Assets.  There was one  non-performing  loan as of December 31, 2001.  Management  believes
that this loan will be repaid but not according to the original terms of the loan  agreement.  Based on this belief
management is confident  that the allowance for loan losses is adequate  protection  for the loan  portfolio.  Loan
performance is reviewed  regularly by external loan review  specialists,  loan officers,  and senior  management to
assure that  policies  are being  followed and loan quality  standards of the Bank are being  maintained.  Whenever
reasonable  doubt exists  concerning  the  collectibility  of interest or  principal  on a loan,  that loan will be
placed in nonaccrual  status.  Any interest  previously accrued but not collected at that time will be reversed and
charged  against  current  earnings.  As of December 31, 2001,  there was one loan on which  interest was not being
accrued.  Management is not aware of any  recommendations  by regulatory  agencies,  which, if  implemented,  would
have a material impact on the Corporation's liquidity, capital or operations.

## Loan Loss
Experience (in thousands)

The following is a
summary of loan balances at the end of the period and their daily average
balances, changes in the allowance for possible loan losses arising from loans
charged off and recoveries on loans previously charged off, and additions to the
allowance that have been expensed.

`December 31,      December 31,      December 31,
                                                                       2001              2000              1999
                                                                       ----              ----              ----

Loans:
   Average daily balance of loans for the year................       $29,261           $18,040           $ 4,707
   Amount of loans outstanding at end of period...............        34,455            25,762            11,263

Allowances for loan losses:
   Balance at beginning of year...............................           379               140                 0
   Additions to allowances charged to operations..............            90               243               142
   Net charge-offs............................................           (50)               (4)               (2)
                                                                     -------           -------
      Balance at end of year..................................       $   419           $   379           $   140
                                                                     =======           =======           =======

Ratios:
   Net charge-offs to loans outstanding at year-end...........           .15%              .02%              .02%
   Allowance for loan losses to loans outstanding at year end.          1.21%             1.47%             1.24%`

A-5

---

## Allocation of
the Allowance for Loan Losses

The allowance for loan losses as of December 31, 2001, was $419,000  representing  approximately  1.21% of
gross loans  outstanding and at December 31, 2000, was $379,000,  which  represented  approximately  1.47% of gross
loans  outstanding  at that time.  The Bank has not  experienced  any material  credit losses in the three years of
operations  ended  December 31, 2001.  The allowance for loan losses is maintained at a level  management  feels is
adequate to absorb losses inherent in the loan portfolio.  Management  prepares an evaluation,  which is based on a
continuous  review of the  Bank's  lending  philosophy,  the loan  portfolio,  delinquency  rates,  the  Bank's and
industry's historic loan loss experience,  known and inherent risks included in the loan portfolio,  composition of
loans,  growth of the  portfolio  and  current  economic  conditions.  The  allowance  for loan  losses is analyzed
quarterly by management.  In so doing,  management assigns a portion of the gross allowance to each category within
the entire  portfolio by loan type and to specific  credits that have been  identified as potential  problem loans.
During this review management also reviews past loss experience and the  collectibility  of past losses.  The local
economy and particular concentrations are considered, as well as a number of other factors.

Allowance for Loan Losses (in thousands)

`Year Ended December 31
                                     ---------------------------------------------------------------------------------
                                                 2001                       2000                        1999
                                     ---------------------------------------------------------------------------------
                                                     % of each                    % of each                % of each
                                                     category                     category                  category
                                       Allowance     to total      Allowance      to total     Allowance    to total
                                        Amount        loans         Amount         loans        Amount       loans
                                        ------        -----         ------         -----        ------       -----

Commercial......................         $306         .88%           $237          .92%          $ 74         .66%
Real estate mortgages...........           67         .20              58          .22             32         .28
Consumer........................           46         .13              84          .33             34         .30
Unallocated.....................            0           0               0            0              0           0
                                         ----        ----            ----         ----           ----        ----
   Total                                 $419        1.21%           $379         1.47%          $140        1.24%
                                         ====        =====           ====         =====          ====        =====`

The above  allocations  are not intended to imply  limitations on the usage of the  allowance.  The entire
allowance is available for any future loans without regard to loan type.

Deposits.  Deposits are gathered from the  communities the Bank serves.  Deposits  increased $22.8 million
or 44.3% to $74.2 million at December 31, 2001,  compared to $51.4  million at December 31, 2000.  This increase is
due to an increase in the number of Bank  customers,  expansion of the Bank's market  through  additional  branches
being opened and more substantial relationships being developed with existing customers.

Average Daily Deposits (in thousands)

The following table sets forth the average deposit balances and the weighted average rates paid thereon.

`Average for the Year         Average for the Year         Average for the Year
                                      --------------------         --------------------         --------------------

                                              2001                         2000                         1999
                                              ----                         ----                         ----
                                     Amount     Average Rate      Amount     Average Rate      Amount     Average Rate
                                     ------     ------------      ------     ------------      ------     ------------

Noninterest bearing demand....      $ 9,531             0%       $ 5,150             0%       $ 1,320             0%
MMDA/Savings..................       10,725          2.73%        10,371          4.04%         5,940          3.16%
Time..........................       38,860          5.91%        19,910          6.24%         4,513          5.43%
                                    -------          -----       -------          -----       -------          -----
   Total Deposits.............      $59,116          4.38%       $35,431          4.69%       $11,773          3.67%`

A-6

---

Maturity Distribution of Time Deposits of $100,000 or More (in thousands)

The following
table summarizes time deposits in amounts greater than $100,000 by time
remaining until maturity as of December 31, 2001, 2000, and 1999:

`Year Ended December 31
                                                  ------------------------------------------------------
                                                      2001                 2000                  1999
                                                      ----                 ----                  ----

Three months or less.....................           $ 3,797              $ 8,617                $1,153
Over 3 months through 1 year.............             8,860               19,633                 2,484
Over 1 year..............................             7,326                5,631                   202
                                                    -------              -------                ------
                                                    $19,983              $33,881                $3,839
                                                    =======              =======                ======`

The Bank  operates  in a very  competitive  environment.  Management  monitors  rates  at other  financial
institutions in the area to ascertain that its rates are competitive  with the market.  Management also attempts to
offer a wide  variety of  products  to meet the needs of its  customers.  The Bank  offers  business  and  consumer
checking  accounts,  regular and money market savings accounts,  and certificates of deposit having many options in
their terms.

Premises and  Equipment.  Bank  premises and  equipment  was $794,000 at December 31, 2001 and $282,000 at
December 31, 2000.

Accumulated  Deficit.  As of December 31, 2001 the Company had an  accumulated  surplus of $88,000  before
the mark to market  adjustment  made for  securities  held in the Available for Sale  category.  This surplus is in
contrast to an accumulated deficit of $335,000 at December 31, 2000.

## Results of Operations

Summary of Results.  The Company  earned a net profit of $423,500 in 2001,  which was the Company's  third
full year of operations.  This profit figure isn't truly  comparable  with 2000 since the Company paid income taxes
for the first time in 2001.

Performance Ratios (in thousands, except per share data).

`Year Ended December 31
                                                               ------------------------------------------
                                                                  2001            2000            1999
                                                                  ----            ----            ----

Net Profit (loss)                                               $  423          $  418          $ (604)
   Weighted average number of shares outstanding                 1,026           1,026           1,037
   Basic Profit (loss) per share                                $  .41          $  .41          $ (.58)

Earning (Loss) ratios:
   Return on average assets................................        .62%           1.01%          (3.03%)
   Return on average equity................................       4.85%           5.36%          (7.60%)
   Average equity to average assets........................      12.71%          18.10%          39.90%
   Dividend payout ratio...................................          0               0               0`

A-7

---

Net Interest  Income.  The  following  schedule  presents the average  daily  balances,  interest  income,
interest expense and average rates earned and paid for the Corporation's  major categories of assets,  liabilities,
and shareholders' equity for the periods indicated:

`2001                          2000                           1999
                                 --------------------------     --------------------------     --------------------------
                                 Average             Yield/     Average             Yield/     Average             Yield/
                                 Balance   Interest  Cost       Balance   Interest  Cost       Balance   Interest  Cost

Assets:
   Short term investment            3,538       153    4.32%       2,017       126   6.25%        3,028       168   5.23%
Securities:
   Taxable                         31,747     1,975    6.22%      21,823     1,525   7.00%       10,297       575   5.58%
   Tax-exempt                       1,637        94    5.74%         290        21   7.15%          633        37   5.85%
   Loans                           29,676     2,511    8.46%      18,040     1,635   9.17%        4,707       401   8.52%
   Total earning assets/total      66,918     4,733    7.07%      42,170     3,307   7.84%       18,665     1,181   6.26%
   interest income
   Cash and due from banks          1,342                          1,083                            601
   Unrealized Gain (Loss)            (49)                           (14)                           (22)
   All other assets                   950                            780                            563
   Allowance for loan loss          (415)                          (208)                           (80)
                                   ------     -----    -----      ------     -----   -----       ------     -----   -----
      Total assets                 68,746     4,733    6.88%      43,811     3,307   7.55%       19,950     1,181   5.92%
Liabilities and Stockholders'
Equity
Interest bearing deposits:
   MMDA, Savings/NOW
   accounts                        12,719       343    2.70%      10,371       419   4.04%        5,940       187   3.15%
   Time                            38,860     2,295    5.91%      19,910     1,242   6.24%        4,513       245   5.43%
   Fed Funds Purchased                  0
   Other borrowed Money                 0
   Total interest bearing
   liabilities/interest expense    51,579     2,638    5.11%      30,281     1,661   5.49%       10,453       432   4.13%
   Noninterest bearing deposits     7,536                          5,150                          1,320
      All other liabilities           894                            430                            257
Stockholders' Equity:
   Unrealized Holding Gain
   (Loss)                             214                              0                           (34)
   Common Stock, Surplus,
   Retained Earnings                8,523                          7,950                          7,954
   Total liabilities and stock-
   holders' equity                 68,746     2,638    3.84%      43,811     1,661   3.79%       19,950       432   2.17%
   Interest spread                            2,095                          1,646                            749
   Net interest income - FTE                  2,095                          1,646                            749
   Net Interest Margin as a
   Percentage of Average
   Earnings Assets - FTE           66,918     2,095    3.13%      42,170     1,646   3.90%       18,846       749  3.97%`

A-8

---

Rate / Volume  Analysis of Net Interest  Income.  The  following  schedule  presents the dollar  amount of
changes in interest  income and expense for major  components of earning assets and  interest-bearing  liabilities,
distinguishing between changes related to outstanding balances and changes due to interest rates.

`2001 Compared to 2000                    2000 Compared to 1999
                                         -------------------------------         ----------------------------------
                                      Change    Change    Change              Change     Change     Change
                                      Due to    Due to    Due to    Total     Due to     Due to     Due to     Total
                                       Rate     Volume      Mix     Change     Rate      Volume       Mix      Change
                                       ----     ------      ---     ------     ----      ------       ---      ------
                                                                      (in thousands)
Federal funds sold                      ($46)     $115     ($42)       $27       $31      ($53)      ($20)      ($42)
Investment securities--taxable          (170)      695      (75)       450       146        643        161        950
Investment securities--tax-exempt         (4)       96      (19)        73         8       (20)        (4)       (16)
Loans, net of unearned income           (128)    1,067      (63)       876        31      1,136         67      1,234
                                       ------   ------   ------      -----      ----      -----     ------      -----
Total interest income                   (348)    1,973     (199)     1,426       216      1,706        204      2,126
                                       ------   ------   ------      -----      ----      -----     ------      -----
Interest bearing deposits               (115)    1,169      (77)       977       142        819        268      1,229
Funds borrowed                             0         0        0          0         0          0          0          0
                                       ------   ------   ------     ------      ----      -----     ------      -----
Total interest expense                  (115)    1,169      (77)       977       142        819        268      1,229
                                       ------   ------   ------     ------      ----      -----     ------      -----
Net interest income                    ($233)   $  804    ($122)      $449      $ 74       $887     ($ 64)       $897
                                       ======   ======   ======     ======      ====      =====     ======      =====`

Composition of Average Earning Assets and Interest Bearing Liabilities

`Year Ended            Year Ended            Year Ended
                                                       December 31, 2001    December 31, 2000     December 31, 1999
                                                       -----------------    -----------------     -----------------
As a percentage of average earning assets
   Loans..........................................    $29,676      44.3%   $18,040      42.8%    $ 4,707      25.2%
   Other earning assets...........................     37,242      55.7%    24,130      57.2%     13,958      74.8%
                                                      --------   -------   --------    -------   --------    -------
      Average earning assets......................    $66,918     100.0%   $42,170     100.0%    $18,665     100.0%
                                                      =======              =======               =======

As a percent of average interest bearing liabilities
   Savings and DDA accounts.......................     12,719      24.7%    10,371      34.2%      5,940      56.8%
   Time deposits..................................     38,860      75.3%    19,910      65.8%      4,513      43.2%
   Other borrowings...............................          0         0%         0         0%          0         0%
                                                      -------     ------   -------     ------    -------     ------
      Average interest bearing liabilities........    $51,579     100.0%   $30,281     100.0%    $10,453     100.0%
                                                      =======              =======               =======

Earning asset ratio...............................                 97.3%                96.3%                 93.6%`

Provision  for Loan Loss.  The  provision  for loan losses for the year ended  December  31, 2001 and 2000
was $90,000 and $243,000,  respectively.  The decrease in provision from 2000 to 2001 was the result of better than
expected credit  performance in the total loan portfolio.  Management  considered it prudent during the first years
of  operations  (2000 and 1999) to provide for losses at a level which is  consistent  with  levels  maintained  by
banks with similar loan  portfolios.  Management will continue to monitor its loan loss  performance and adjust its
loan loss reserve to more closely align itself to its own history of losses.

Non-Interest  Income.  Non-Interest income for the year ended December 31, 2001 and 2000 were $304,000 and
$234,000, respectively, consisting primarily of service fees on loan and deposit accounts.

Non-Interest Expense.  Non-interest expense for the year ended December 31, 2001, was $1.9 million,  which
is compared with $1.4 million for the year ended December 31, 2000. The main component of  non-interest  expense is
salaries and  benefits,  which  totaled  $846,000 and $658,000 for 2001 and 2000  respectively.  Other  significant
components of non-interest  expense consisted of occupancy and equipment  expenses,  data processing fees, supplies
and marketing expenses.

A-9

---

# Liquidity
and Capital Resources

The Company  obtained  its initial  equity  capital in an initial  public  offering of its common stock in
November  1998.  The  Company's  plan of  operation  for the  year of 2002  doesn't  contemplate  the need to raise
additional  capital.  Management  believes  that its current  capital and  liquidity  will provide the Company with
adequate  capital to support  its  expected  level of deposit and loan  growth and to  otherwise  meet its cash and
capital  requirements for the next year. One of the growth  strategies your Company intends to pursue,  which could
have an effect on its equity and or require additional capital, is growth through  acquisition.  Such opportunities
are difficult to plan and as such we aren't able to state with absolute  assurance that additional  equity won't be
needed.

Capital Resources at December 31, 2001 (in thousands)

`Tier 1
                                                          Leverage         Tier 1        Total Risk-Based
                                                           Ratio        Capital Ratio      Capital Ratio
                                                           -----        -------------      -------------

Minimum regulatory requirement for
   Capital adequacy.................................         4.0%            4.0%                 8.0%
Well capitalized regulatory level...................         5.0%            6.0%                10.0%
Consolidated........................................       10.48%          18.98%               19.91%
Bank................................................       10.48%          18.98%               19.91%`

`Total
                                                           Tier 1            Tier 1            Risk-Based
                                                          Leverage           Capital             Capital
                                                          --------           -------             -------
                                                                      (in thousands of dollars)
Capital balances at December 31, 2001
   Required regulatory capital.....................        $3,282            $1,811               $3,622
   Capital in excess of regulatory minimums........         5,313             6,784                5,392
                                                           ------            ------               ------
Actual capital balances............................        $8,595            $8,595               $9,014
                                                           ======            ======               ======`

The Company's  sources of liquidity  include loan payments by borrowers,  maturity and sales of securities
available  for sale,  growth of deposits  and deposit  equivalents,  federal  funds sold and the issuance of common
stock.  Liquidity management involves the ability to meet cash flow requirements of the Company's customers.  These
customers may be either borrowers with credit needs or depositors wanting to withdraw funds.

Asset Liability Management and Market Risk Analysis

Asset  liability  management  aids the Company in maintaining  liquidity  while managing a balance between
interest  earning assets and interest  bearing  liabilities.  Management of interest rate  sensitivity  attempts to
avoid  widely  varying net  interest  margins and to achieve  consistent  net interest  income  through  periods of
changing interest rates. Management monitors the Company's exposure to interest rate changes using a GAP analysis.

A-10

---

Asset / Liability GAP Position for the Year Ended December 31, 2001 (in thousands)

`1 to 3         4 to 12        1 to 5        Over 5
                                                     ------         -------        ------        ------
                                                     Months         Months          Years         Years       Total
                                                     ------         ------          -----         -----       -----

Interest-Earning Assets
   Federal Funds sold.........................        $3,975           $   0          $   0         $  0     $3,975
   Investment securities......................        10,485           5,760          7,230       19,035     42,510
   Loans - by maturity........................         3,645           9,654         19,469        1,687     34,455
                                                       -----           -----         ------        -----     ------

   Total interest-earning assets..............        18,105          15,414         26,699       20,722     80,940

Interest Bearing Liabilities
   DDA and Money Market.......................         3,879           8,305          7,340            0     19,524
   Savings accounts...........................         3,757           1,935              0            0      5,692
   Certificates of deposit....................         8,787          12,129         18,798            0     39,714
                                                       -----          ------         ------        -----     ------

   Total interest-bearing Liabilities.........        16,423          22,369         26,138            0     64,930

   Rate sensitivity gap and ratios:
       Gap for period.........................         1,682          (6,955)           561       20,722     16,010
       Cumulative gap.........................         1,682          (5,273)        (4,712)      16,010     16,010
   Percentage of cumulative gap
      To total assets.........................         2.00%          (6.28%)        (5.61%)      19.08%     19.08%`

Other variables
besides interest rate changes may have an impact on the financial condition of
the Bank including, but not limited to, growth of the Company, structure of the
balance sheet, and economic and competitive factors.

# Forward
Looking Statements

This  report  contains  certain  forward-looking  statements  within the  meaning  of  Section  27A of the
Securities  Act of 1933,  as amended,  and Section 21E of the  Securities  Exchange  Act of 1934,  as amended.  The
Company intends such  forward-looking  statements to be covered by the safe harbor  provisions for  forward-looking
statements  contained in the Private  Securities  Reform Act of 1995,  and is including this statement for purposes
of these safe harbor provisions.  Forward-looking  statements,  which are based on certain assumptions and describe
future  plans,  strategies  and  expectations  of the  Company,  are  generally  identifiable  by use of the  words
"believe," "expect," "intend,"  "anticipate,"  "estimate," "project" or similar expressions.  The Company's ability
to predict  results or the actual  effect of future  plans or  strategies  is  inherently  limited  and  uncertain.
Factors which could have a material  adverse affect on the  operations and future  prospects of the Company and the
subsidiaries  include, but aren't limited to, changes in: interest rates, general economic conditions,  legislative
/  regulatory  changes,  monetary  and fiscal  policies  of the U.S.  Government,  including  policies  of the U.S.
Treasury and the Federal  Reserve Board,  the quality or composition of the loan or investment  portfolios,  demand
for loan  products,  deposit flows,  competition,  demand for financial  services in the Company's  market area and
accounting  principles,  policies and guidelines.  These risks and uncertainties should be considered in evaluating
forward-looking  statements  and  undue  reliance  should  not be placed on such  statements.  Further  information
concerning the Company and its business,  including  additional  factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and Exchange Commission.

A-11

---

Independent Auditor's Report

To the Board of Directors and Stockholders
Clarkston Financial Corporation and Subsidiary

We have audited the
accompanying consolidated balance sheet of Clarkston Financial Corporation and
subsidiary as of December 31, 2001 and 2000 and the related consolidated
statements of operations, changes in stockholders equity, and cash flows
for each year in the three-year period ended December 31, 2001. These
consolidated financial statements are the responsibility of the
Corporation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 audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of Clarkston Financial
Corporation and subsidiary as of December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each year in
the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

|                                        |  |  | 
|--------------------------------------- |  |  | 
|Auburn Hills, Michigan
January 30, 2002 |  |  | 

A-12

---

Clarkston Financial Corporation and Subsidiary

---

## Consolidated Balance Sheet
(000s omitted)

|
|

See Notes to Consolidated Financial Statements.

A-13

---

Clarkston Financial Corporation and Subsidiary

---

## Consolidated Statement of Operations
(000s omitted, except per share data)

|
|

See Notes to Consolidated Financial Statements.

A-14

---

Clarkston Financial Corporation and Subsidiary

---

## Consolidated Statement of Changes in Stockholders' Equity
(000s omitted, except per share data)

|                                                                                                   
|---------------------------------------------------------------------------------------------------
|Book value per share is $8.45, $8.07, and $7.64 at December 31, 2001, 2000, and 1999, respectively.

See Notes to Consolidated Financial Statements.

A-15

---

Clarkston Financial Corporation and Subsidiary

---

## Consolidated Statement of Cash Flows
(000s omitted)

|
|

See Notes to Consolidated Financial Statements.

A-16

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 1 - Summary of Significant Accounting Policies

| | Basis of Presentation and Consolidation - The consolidated financial statements
include the accounts of Clarkston Financial Corporation (the
Corporation) and its wholly owned subsidiary, Clarkston State Bank
(the Bank). All significant intercompany transactions are eliminated
in consolidation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use of Estimates - The accounting and reporting policies of the Corporation and
its subsidiary conform to generally accepted accounting principles. Management
is required to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from these estimates and assumptions. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nature of Operations - Clarkston State Bank provides full-service commercial
banking and consumer banking and provides other financial products and services
through five branch offices to Michigan communities in Oakland County.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant Group Concentrations of Credit Risk - Most of the Corporations
activities are with customers located within Michigan. Note 2 discusses the
types of securities in which the Corporation invests. Note 3 discusses the types
of lending in which the Corporation engages. The Corporation does not have any
significant concentrations to any one industry or customer.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash and Cash Equivalents - For the purpose of the consolidated statement of cash
flows, cash and cash equivalents include cash and balances due from banks and
federal funds sold, all of which mature within 90 days.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Securities - Debt securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at
amortized cost. Securities not classified as held to maturity or trading,
including equity securities with readily determinable fair values, are
classified as available for sale and recorded at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-17

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 1 -
Summary of Significant Accounting Policies (Continued)

| | Loans
- The Corporation grants mortgage, commercial, and consumer loans to customers.
Loans are reported at their outstanding unpaid principal balances adjusted for
charge offs, the allowance for loan losses, and any deferred fees or costs on
originated loans. Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest method.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accrual of interest on loans is discontinued at the time the loan is 90
days delinquent unless the credit is well-secured and in process of
collection. In all cases, loans are placed on nonaccrual or charged off at an
earlier date if collection of principal or interest is considered doubtful.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is
accounted for on the cash basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 uncollectibility 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 on 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 Corporation 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 profitability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-18

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 1 -
Summary of Significant Accounting Policies (Continued)

| | 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 length of the delay, the
reasons of 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 homogeneous loans are collectively evaluated for impairment.
Accordingly, the Corporation does not separately identify individual consumer
and residential loans for impairment disclosures.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Credit-related
Financial Instruments - In the ordinary course of business, the Corporation
has entered into commitments to extend credit, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded when they are
funded.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Adoption
of FAS 133 - On January 1, 2001, the Corporation adopted Statement of
Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative
Instruments and Hedging Activities. FAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The accounting
for derivatives had no effect on the financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Banking
Premises and Equipment - Land is carried at cost. Buildings and equipment
are stated at cost, less accumulated depreciation and amortization.
Depreciation, computed on the straight-line method, is charged to operations
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the terms of their respective leases or the estimated useful
lives of the improvements, whichever is shorter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Intangible
Assets - Intangible assets approximating $105,000, net of accumulated
amortization of $77,000, consist entirely of deposit intangibles acquired in a
branch acquisition completed during 1999. Amortization is calculated on a
straight-line basis over the estimated asset life of eight years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-19

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 1 -
Summary of Significant Accounting Policies (Continued)

| | Income
Taxes - Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the various
temporary differences between the book and tax bases of the various balance
sheet assets and liabilities and gives current recognition to changes in tax
rates and laws.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
Compensation Plans - The Corporation has chosen to measure compensation cost
for director and employee stock compensation plans using the intrinsic
value-based method of accounting, whereby compensation cost is the excess, if
any, of the quoted market price of the stock at the grant date (or other
measurement date) over the amount an option holder must pay to acquire the
stock. Stock options issued under the Corporations stock option plan have
no intrinsic value at the grant date, and no compensation cost is recognized is
for them. The fair value-based method of accounting for stock compensation plans
measures compensation cost at the grant date based on the value of the award and
is recognized over the service period, which is usually the vesting period. The
Corporation has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value-based method of accounting has
been applied. The pro forma disclosures include the effects of all awards
granted since the Corporations inception (see Note 11).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Earnings
per Share-Basic earnings per share represents income available to
common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Corporation relate solely to outstanding stock options, and are determined using
the treasury stock method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Book
Value per Share - Book value per share represents total stockholders
equity divided by the total number of shares outstanding at the end of each
period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Comprehensive Income - Accounting principles generally require that
recognized revenue, expenses, gains, and losses be included in net income.
Certain changes in assets and liabilities, however, such as unrealized gains and
losses on available-for-sale securities, are reported as a direct adjustment to
the equity section of the balance sheet. Such items, along with net income, are
considered components of comprehensive income. At December 31, 2001 and
2000, accumulated other comprehensive income consists solely of unrealized gains
(losses) on available-for-sale securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-20

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 1 -
Summary of Significant Accounting Policies (Continued)

| | Recent Accounting Pronouncements - In July 2001, the FASB issued Statement No. 141,  Business  Combinations  (FAS 141). FAS 141 is effective for  transactions  initiated after
June 30, 2001. The statement eliminated the pooling of interest method to account for business
combinations, and therefore, the purchase method of accounting is the sole option.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concurrently
with the issuance of FAS 141, the FASB issued Statement No. 142, Goodwill and
Other Intangible Assets. This statement changes the accounting for
goodwill and other intangible assets effective for fiscal years beginning after
December 15, 2001. The primary provision of the statement is that unless an
intangible asset can be separately identified, the asset is considered goodwill.
This provision is critical as the accounting for separately identifiable
intangible assets has a different accounting treatment than goodwill. Generally,
intangible assets that meet certain criteria are recognized and amortized over
their estimated useful lives. Goodwill and intangible assets with indefinite
lives will not be amortized. Instead, such assets will be tested for impairment
at least annually. The initial implementation of FASB Statement No. 142 will
have an immaterial impact on the Corporation since it does not have any
intangible assets with indefinite lives.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Note 2 -
Securities

| | The
amortized cost and estimated market value of securities are as follows at
December 31, 2001 and 2000 (000s omitted):
| | ------------------------------------------------------------------------------------------------------------------------

|
|

A-21

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 2 -
Securities (Continued)

|
|

| | The
amortized cost and estimated market value of held-to-maturity securities at
December 31, 2001, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties
(000s omitted):
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

A-22

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 2 -
Securities (Continued)

| | Securities
having a carrying value of $6,887,000 and $6,772,000 (market value of $6,946,000
and $6,726,000) were pledged at December 31, 2001 and 2000, respectively,
to secure public deposits, repurchase agreements, and for other purposes
required by law.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Proceeds
from the sale of available-for-sale securities were $25,375,000, $8,675,000, and
$6,742,000 in 2001, 2000, and 1999, respectively. Gross gains of $140,000,
$1,000, and $0 and gross losses of $0, $10,000, and $48,000 were recognized on
those sales in 2001, 2000, and 1999, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year, the bank sold approximately $4,257,000 of held-to-maturity securities,
due to concerns about the issuers creditworthiness. Proceeds from the sale
of held-to-maturity securities were $4,344,000 in 2001. Gross gains of $87,000
were recognized on those sales in 2001. There were no sales of held-to-maturity
securities in 2000.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Note 3 - Loans

| | Major
categories of loans included in the portfolio at December 31, 2001 and 2000
are as follows (000s omitted):
| | ----------------------------------------------------------------------------------------------------------------

|
|

| | Certain
directors of the Corporation and the Bank, including their associates, were loan
customers of the subsidiary bank. Such loans were made in the ordinary course of
business and do not involve more than a normal risk of collectibility. The
outstanding loan balance for these persons at December 31, 2001 and 2000
totaled $1,604,000 and $1,308,000, respectively. During 2001, $857,000 of new
loans were made and repayments totaled $561,000. The total unused commitments
for these loans totaled $490,000 at December 31, 2001.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-23

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 3 - Loans
(Continued)

| | Loan
maturities and rate sensitivity of the loan portfolio at December 31, 2001
are as follows (000s omitted):
| | --------------------------------------------------------------------------------------------------------------

|
|

## Note 4 -
Allowance for Possible Loan Losses

| | A
summary of the activity in the allowance for possible loan losses (ALL) is as
follows (000s omitted):
| | -------------------------------------------------------------------------------------------------------

|
|

| | The
Bank considers all nonaccrual and reduced-rate loans (with the exception of
residential mortgages and consumer loans) to be impaired. There are
approximately $100,000 of impaired loans outstanding as of December 31,
2001. There was no required specific allowance for the impaired loans.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-24

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 5 - Bank
Premises and Equipment

| | The
following is a summary of Bank premises and equipment for the years ended
December 31, 2001 and 2000 (000s omitted):
| | ------------------------------------------------------------------------------------------------------------------------

|
|

| | Depreciation
expense for the years ended December 31, 2001, 2000, and 1999 amounted to
$86,000, $94,000, and $82,000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------

## Note 6 -
Deposits

| | The
following is a summary of interest-bearing deposit accounts at December 31,
2001 and 2000 (000s omitted):
| | -------------------------------------------------------------------------------------------------------------

|
|

A-25

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 6 -
Deposits (Continued)

| | The
remaining maturities of certificates of deposit outstanding at December 31,
2001 are as follows (000s omitted):
| | -------------------------------------------------------------------------------------------------------------------

|
|

## Note 7 -
Income Taxes

| | The
Corporation and the Bank file a consolidated income tax return. The following is
a summary of the provision for income taxes for the years ended December 31,
2001, 2000, and 1999.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Allocation of income taxes between current and deferred portions is as follows (000s
omitted):
| | ----------------------------------------------------------------------------------------------

|
|

A-26

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 7 -
Income Taxes (Continued)

| | The
difference between reported federal income tax expense and the amount computed
by applying statutory tax rates to income before income taxes is as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| | The
temporary differences that comprise deferred tax assets and liabilities at
December 31, 2001 and 2000 are as follows (000s omitted):
| | ----------------------------------------------------------------------------------------------------------------------------------------

|
|

A-27

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 8 -
Off-balance-sheet Activities

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

| | The
Corporations exposure to credit loss is represented by the contractual
amount of these commitments. The Corporation follows the same credit policies in
making commitments as it does for on-balance-sheet instruments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Bank had loan commitments and standby letters of credit totaling $16,125,000 and
$14,040,000 at December 31, 2001 and 2000, respectively, on which loans of
$11,467,000 and $7,568,000, respectively, were outstanding at year end and
included in the Banks consolidated balance sheet.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Commercial
and standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those
letters of credit are primarily used to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The Corporation generally holds collateral supporting those
commitments if deemed necessary.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-28

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 8 -
Off-balance-sheet Activities (Continued)

| | Collateral
Requirements - To reduce credit risk related to the use of credit-related
financial instruments, the Corporation generally obtains collateral. The amount
and nature of the collateral obtained is based on the Corporations credit
evaluation of the customer. Collateral held varies but may include cash,
securities, accounts receivable, inventory, property, plant, and equipment, and
real estate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Note 9 -
Related Parties

| | Operating
Lease - The Bank entered into a lease for its main operating facility under
a noncancelable lease expiring on October 1, 2003. The facility was leased from
an entity owned by certain members of the Board of Directors of the Corporation
and the Bank. The lease payment obligation was $5,000 per month through December
1, 2000 and is $5,250 per month thereafter. The Bank is responsible for all
taxes, utilities, and maintenance costs for the facility.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
annual future minimum lease payments required under the noncancelable operating
lease are $63,000 in 2002 and $47,250 in 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------

## Note 10 -
Restriction on Dividends or Dividends from Banking Subsidiary

| | Unless
prior regulatory approval is obtained, banking regulations limit the amount of
dividends that the Corporations banking subsidiary can declare to current
year net profits, as defined in the Federal Reserve Act, and retained net
profits from prior years. There were no dividends declared or paid by the Bank
to the holding company during 2001, 2000, or 1999.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Note 11 -
Stock-based Compensation

| | The
Corporation has two stock-based compensation plans. Under the employees
Stock Compensation Plan (Employee Plan), the Corporation may grant
options to key employees for up to 26,125 shares of common stock. Under the 1998
Founding Directors Stock Option Plan (Director Plan), the
Corporation may grant options for up to 78,375 shares of common stock. Under
both plans, there is a minimum vesting period of between one to three years
before the options may be exercised, and all options expire 10 years after the
date of their grant. Certain options (contingent options) under both plans vest
on an accelerated basis upon the achievement of various future financial and
operational goals. All such options vest 9.5 years after the date of grant
regardless of achievement of future goals. Under both plans, the exercise price
of each option equals the market price of the Corporations common stock on
the date of grant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-29

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 11 -
Stock-based Compensation (Continued)

| | The
following table summarizes stock option transactions for both plans and the
related average exercise prices for the years ended December 31, 2001,
2000, and 1999:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| | The
following table shows summary information about fixed stock options outstanding
at December 31, 2001:
| | ---------------------------------------------------------------------------------------------------------

|
|

| | The
Corporation has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, but applies the
intrinsic value method to account for its plan. The Corporation has estimated
fair value of the options granted in 2000 at $2.34 per share, using a
minimum value concept. The value was calculated using an assumed
interest rate of 6.5 percent and estimated life of 5.0 years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-30

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 11 -
Stock-based Compensation (Continued)

| | If
the Corporation had elected to recognize compensation costs for the plans based
on the fair value of awards at the grant date, net income (loss) per share on a
pro forma basis would have been as follows (000s omitted, except per share
data):
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

## Note 12 -
Common Stock

| | In
October 2000, the Corporation declared an 11-for-10 stock split. The Corporation
issued the additional shares of common stock to its stockholders for the purpose
of effecting a reduction in the unit price of the shares and obtaining a wider
distribution and improved marketability of the shares. The additional shares
issued were not intended to be a distribution of earnings. All applicable per
share amounts for periods presented have been retroactively adjusted to reflect
the transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

## Note 13 -
Financial Instruments

| | Fair
Values of Financial Instruments - The fair value of a financial instrument
is the current amount that would be exchanged between willing parties, other
than in a forced liquidation. Fair value is best determined based on quoted
market prices. However, in many instances, there are no quoted market prices for
the Corporations various financial instruments. 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. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of the Corporation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-31

---

## Note 13 -
Financial Instruments (Continued)

|
|

| | The
terms and short-term nature of certain assets and liabilities result in their
carrying amount approximating fair value. These include cash and due from banks,
interest-bearing deposits in banks, federal funds sold, and securities purchased
under resale agreements, customers acceptance liabilities, short-term
borrowings, and bank acceptance outstanding. The following methods and
assumptions were used by the Bank to estimate the fair values of the remaining
classes of financial instruments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Securities
are valued 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
variable rate loans that reprice frequently, fair values are based on carrying
amounts, as adjusted for estimated credit losses. The fair values for other
loans are estimated using discounted cash flow analyses and employ interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values of demand deposits, savings accounts, and money market deposits are,
by definition, equal to the amount payable on demand. The fair values of fixed
rate time deposits are estimated by discounting cash flows using interest rates
currently being offered on certificates with similar maturities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of loan commitments and standby letters of credit, valued on the
basis of fees currently charged for commitments for similar loan terms to new
borrowers with similar credit profiles, is not considered material.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-32

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 14 -
Minimum Regulatory Capital Requirements

| | The
Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporations and the
Banks financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts, and ratios (set forth in
the following table) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined) and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 2001
and 2000, that the Corporation and the Bank met all capital adequacy
requirements to which they are subject.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the Bank is considered a de novo or start-up bank, the minimum total capital
ratio for 2001 is 8 percent. As of December 31, 2001, the most recent
notification from the FDIC categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, an institution must maintain minimum total risk-based, Tier I
risked-based, and Tier I leverage ratios as set forth in the following tables.
There are no conditions or events since that notification that management
believes have changed the Banks capital category. The Corporations
and the Banks actual capital amounts and ratios as of December 31, 2001
and 2000 are also presented in the table.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-33

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 14 -
Minimum Regulatory Capital Requirements (Continued)

|
|

## Note 15 - Parent-only
Condensed Financial Information

| | The
condensed financial information that follows presents the financial condition of
Clarkston Financial Corporation (the Parent Company), along with the
results of its operations and its cash flows. The Parent Company has recorded
its investments in its subsidiary at cost plus its share of the undistributed
earnings of its subsidiary since inception. The Parent Company recognizes
dividends from its subsidiary as revenue and undistributed earnings of its
subsidiary as other income. The Parent Company financial information should be
read in conjunction with the Corporations consolidated financial
statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A-34

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 15 -
Parent-only Condensed Financial Information (Continued)

| | The condensed balance sheet as of December 31, 2001 and 2000 (with 000s omitted) is as follows:
| | -----------------------------------------------------------------------------------------------

|
|

| | The
condensed statement of operations for the years ended December 31, 2001, 2000,
and 1999 (000s omitted) is as follows:
| | -------------------------------------------------------------------------------------------------------------------------

|
|

A-35

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 15 -
Parent-only Condensed Financial Information (Continued)

| | The
condensed statement of cash flows for the years ended December 31, 2001, 2000,
and 1999 (000s omitted) is as follows:
| | -------------------------------------------------------------------------------------------------------------------------

|
|

A-36

---

Clarkston Financial Corporation and Subsidiary

---

## Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999

## Note 16 -
Earnings per Share

| | Earnings
per share data is the amount of earnings for the period available to each share
of common stock outstanding during the reporting period. Potential dilutive
securities that have an antidilutive effect have been excluded from the
computation. The calculation of earnings per share for the years ended
December 31, 2001, 2000, and 1999 is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

A-37

---

# SHAREHOLDER
INFORMATION

## Notice of
Annual Meeting

The
Companys Annual Meeting of Shareholders will be held at 10:00 a.m. on May
7, 2002, at Deer Lake Racquet Club, 6167 White Lake Road, Clarkston, Michigan
48346.

## Transfer Agent
and Registrar

Continental
Stock Transfer & Trust Company serves as the transfer agent and registrar of
the Companys Common Stock. Their address is 2 Broadway, 19th
Floor, New York, New York 10004 (telephone 212-509-4000)

## Market Makers

The Company had three market makers at December 31, 2001: Hilliard
Lyons, Fahnstock, Howe Barnes.

## Executive
Officers and Directors

| | Executive Officers:
| | -------------------
| |                    
| | Directors:         
| |                    

::ODMA\PCDOCS\GRR\684577\3

A-38

---

## Exhibit 21

SUBSIDIARIES OF REGISTRANT

Clarkston State Bank - 100% owned
        Incorporated as a Michigan Banking Corporation
        15 South Main Street
        Clarkston, Michigan 48346



---

## Exhibit 23

# INDEPENDENT
AUDITORS CONSENT

Board of Directors
Clarkston Financial Corporation

We consent to the
incorporation by reference in the registration statements on Form S-8 (File No.
333-70297 and File No. 333-70299) of our report dated January 30, 2002, on our
audit of the consolidated financial statements for the years ended December 31,
2001, 2000, and 1999 which report is included in this Annual report on form
10-KSB.

|March 29, 2002
Auburn Hills, Michigan | /s/ PLANTE & MORAN, LLP | 
|------------------------------------- | ----------------------- | 

::ODMA\PCDOCS\GRR\659371\2