Exhibit 13



                              [Insert company logo]











                               2002 Annual Report







<PAGE>





                                   OUR MISSION






                               [Insert bank logo]








              "Our mission is to be the premier bank in our markets
                that exceeds the expectations of our customers,
                employees, stockholders and the community and to
              provide quality, competitive financial products and
                 services with a team of friendly, well-trained
                                professionals."




<PAGE>



Dear Fellow Shareholders:



On  behalf  of  our  board  of  directors,  we are  pleased  to  report  another
outstanding  year for  your  company,  continuing  the  trend  of solid  results
achieved  since we began  banking  operations  in March 2000.  We are excited to
report that 2002 was our first  profitable  calendar year and included our fifth
consecutive quarter of profitability.

Net income for the year  ending  December  31,  2002 was  $595,129,  or $.46 per
diluted  share,  compared to a net loss of $203,248 for the same period in 2001.
Net income for the fourth quarter ending December 31, 2002 was $241,503, or $.18
per diluted share, compared to $9,219 for the same period last year.

Total assets  increased by 69.1% to $139.2 million at December 31, 2002 compared
with $82.3 million at December 31, 2001. Loans grew to a year-end total of $93.1
million,  an increase  of 45.7% over total  loans at December  31, 2001 of $63.9
million.  Deposits  were $119.7  million at December 31, 2002  compared to $70.9
million at December 31, 2001, or an increase of 68.8%.

Our  customer  base  continues  to grow at a record  pace  throughout  our three
banking  offices.  As we grow,  our asset  quality has  remained  strong with no
nonperforming  loans.  We also added  several key  lending  officers to our team
during  2002 who  have  many  years of  experience  in the  Spartanburg  banking
community which we expect will enhance our performance during 2003.

During 2002, we completed our strategic  alliance with Colonial Trust Company to
offer trust and investment management services to our customers. Our coordinated
efforts allow us to provide all the services of a large bank trust department or
professional  portfolio  manager  with a high  level of  personal  service.  Our
ability to deliver these high quality  services  locally has given us a distinct
advantage over our competitors.

As we approach the  completion of our third year of banking  operations in March
2003, we are  optimistic  about the prospects for the future of our company.  We
continue to evaluate  opportunities  for growth and  expansion as we execute our
strategic plan.

We would like to thank our outstanding board of directors, employees and you for
the support which has been  instrumental to our  achievements.  We invite you to
continue to call on us for all of your banking needs.


                               [Insert photograph]




/s/ Jerry L. Calvert                                    /s/ Norman F. Pulliam
                           [Insert company logo]
Jerry L. Calvert                                              Norman F. Pulliam
President and CEO                                             Chairman




<PAGE>


                         FIRST NATIONAL BANCSHARES, INC.
                              FINANCIAL HIGHLIGHTS


The  information  presented  below  should  be  read  in  conjunction  with  the
consolidated   financial   statements,   the  notes  thereto  and  "Management's
Discussion  and  Analysis of  Financial  Condition  and  Results of  Operations"
contained elsewhere in this report.

<TABLE>
<CAPTION>
                                                                   --------------------- --------------------- -------------------
                                                                           2002                  2001               % Change
                                                                   --------------------- --------------------- -------------------

<S>                                                                       <C>                   <C>                         <C>
Loans                                                                     $  93,106,483         $  63,868,951               45.8%
Deposits                                                                  $ 119,718,680         $  70,918,406               68.8%
Total Assets                                                              $ 139,223,904         $  82,294,257               69.2%
Shareholders' Equity                                                      $  11,544,126         $  10,757,580                7.3%

Loan Loss Allowance                                                       $   1,163,977         $     800,303               45.4%
Loan Loss Allowance to Total Loans                                                1.25%                 1.25%                   -
Loan to Deposit Ratio                                                            77.78%                90.06%             (13.6%)

Equity/Assets                                                                     8.29%                13.07%             (36.6%)
Book Value per Share                                                      $        9.62         $        8.96                7.4%
Closing Stock Price at Yearend                                            $       15.00         $       10.80               38.9%
Price/Book Value                                                                   156%                  120%               30.0%
Weighted Average Shares Outstanding
     Basic                                                                    1,200,520             1,200,000                   -
     Diluted                                                                  1,303,313                   N/A                 N/A

Net Income (Loss) for the Year                                            $     595,129         $   (203,248)                 N/A
Net Income (Loss) per Share for the Year
     Basic                                                                $        0.50         $      (0.17)                 N/A
     Diluted                                                              $        0.46                   N/A                 N/A

Net Interest Income for the Year                                          $   3,535,724         $   2,179,308               62.2%
Noninterest Income for the Year                                           $     842,316         $     347,856              142.1%
Net Interest Margin for Year                                                      3.49%                 3.29%               6.08%

Total Risk-Based Capital Ratio                                                   13.01%                17.45%             (25.4%)
Tier 1 Risk-Based Capital Ratio                                                  11.78%                16.23%             (27.4%)
Tier 1 Capital Leverage Ratio                                                     8.74%                13.21%             (33.8%)

Average Equity                                                            $  11,156,246         $  10,868,877                2.6%
Return on Equity                                                                  5.33%               (1.87%)                 N/A
Average Assets                                                            $ 107,119,387         $  72,588,571               47.8%
Return on Assets                                                                  0.56%               (0.28%)                 N/A
</TABLE>





                                       2
<PAGE>

                         FIRST NATIONAL BANCSHARES, INC.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


DISCUSSION OF FORWARD-LOOKING STATEMENTS

     This Report contains statements which constitute forward-looking statements
within  the  meaning  of  Section  27A of the  Securities  Act of  1933  and the
Securities  Exchange Act of 1934. These statements are based on many assumptions
and estimates and are not guarantees of future  performance.  Our actual results
may differ materially from those projected in any forward-looking statements, as
they will  depend on many  factors  about which we are  unsure,  including  many
factors which are beyond our control. The words "may," "would," "could," "will,"
"expect," "anticipate,"  "believe," "intend," "plan," and "estimate," as well as
similar  expressions,  are meant to identify  such  forward-looking  statements.
Potential risks and uncertainties include, but are not limited to:

     o   significant  increases  in  competitive  pressure  in the  banking  and
         financial services industries;

     o   changes in the interest rate environment which could reduce anticipated
         or actual margins;

     o   changes  in  political  conditions  or the  legislative  or  regulatory
         environment;

     o   general  economic  conditions,  either  nationally  or  regionally  and
         especially  in primary  service  area,  becoming  less  favorable  than
         expected  resulting in, among other things,  a deterioration  in credit
         quality;

     o   changes occurring in business conditions and inflation;

     o   changes in technology;

     o   changes in monetary and tax policies;

     o   the level of allowance for loan loss;

     o   the rate of delinquencies and amounts of charge-offs;

     o   the rates of loan growth;

     o   adverse  changes in asset  quality and  resulting  credit  risk-related
         losses and expenses;

     o   changes in the securities markets; and

     o   other risks and uncertainties detailed from time to time in our filings
         with the Securities and Exchange Commission.

GENERAL

     First  National  Bancshares,  Inc. was organized on July 14, 1999,  and our
initial principal  activities were related to our  organization,  conducting our
initial public offering,  and pursuing  regulatory  approvals from the Office of
the Comptroller of the Currency, the FDIC, and the Federal Reserve Board to open
our wholly-owned  subsidiary,  First National Bank of Spartanburg.  We completed
our  initial  public  offering  on  February  10,  2000 and  received  all final
regulatory  approvals  in the first  quarter of 2000 after which the bank opened
for business on March 27, 2000 at a temporary banking location.  Our bank opened
its Westside  office on July 14, 2000,  its permanent main office at 215 N. Pine
Street on February 5, 2001 and its Boiling Springs office on August 24, 2001.



                                       3
<PAGE>


CRITICAL ACCOUNTING POLICY

     We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements.  Our significant  accounting policies are described
in the footnotes to the consolidated  financial  statements at December 31, 2002
as filed on our annual report on Form 10-KSB and included in the annual report.

     Certain accounting policies involve  significant  judgments and assumptions
by us which have a material  impact on the carrying  value of certain assets and
liabilities.  We consider these  accounting  policies to be critical  accounting
policies.  The  judgments  and  assumptions  we  use  are  based  on  historical
experience  and other  factors,  which we  believe  to be  reasonable  under the
circumstances.  Because of the nature of the judgments and  assumptions we make,
actual results could differ from these  judgments and estimates which could have
a material  impact on the carrying  values of our assets and liabilities and our
results of operations.

     We believe the  allowance for loan losses is a critical  accounting  policy
that  requires  the  most  significant  judgments  and  estimates  used  in  the
preparation of our consolidated financial statements. We have developed policies
and procedures for  evaluating the overall  quality of our credit  portfolio and
the timely  identification  of potential credit problems.  The loan portfolio is
periodically  reviewed to evaluate the outstanding loans and to measure both the
performance  of the portfolio and the adequacy of the allowance for loan losses.
We have  established  an allowance for loan losses  through a provision for loan
losses  charged to expense on our statement of  operations.  Refer to "Provision
and  Allowance  for  Loan  Losses"  and  Note  1 to the  consolidated  financial
statements for a detailed  description or our estimation process and methodology
related to the allowance for loan losses.

NATIONAL AND ECONOMIC EVENTS

     Nationally,  we entered 2002 in a recession.  During the year,  the Federal
Reserve  moved the Federal  Funds rate down to 1.25% in  November  2002 after an
aggressive  program of rate cutting in 2001. As a result,  the financial markets
are  operating  now  under   historically  low  interest  rates.  These  unusual
conditions  for  short-term  interest  rates  have  had  a  positive  effect  on
reductions in our average cost of funds.

     It is evident from recent economic data that the U.S. economy  continues to
be affected  significantly  by the terrorist  attacks of September 11, 2001. The
uncertainty  surrounding  the attacks has affected  consumer  confidence and the
financial  activities of retail and business customers.  Since these events, the
nation has increased  deployment of the military in response to these  terrorist
activities.  We continue to believe that the markets we serve generally  perform
better than national markets, even in times of recession.

INCOME STATEMENT REVIEW

Net Interest Income
     Net interest income,  the largest  component of our income,  was $3,535,724
for the period ended  December  31, 2002  compared to  $2,179,308  in 2001 or an
increase of 62.2%,  primarily as a result of the increase in our earning  assets
during 2002.

     The level of net  interest  income is  determined  by  balances  of earning
assets and successfully  managing the net interest  margin.  Changes in interest
rates  paid on  assets  and  liabilities,  the rate of  growth  of the asset and
liability  base,  the  ratio  of  interest-earning  assets  to  interest-bearing
liabilities and management of the balance sheet's  interest rate sensitivity all
factor into changes in net interest income.

     Interest  income for 2002 of  $6,010,857  consisted of $5,196,237 on loans,
$629,457 in investments and $185,163 on federal funds sold and  interest-bearing
bank  balances.  Interest  income  for  the  year  2001 of  $5,064,917  included
$4,178,305 on loans; $556,555 on investments and $330,057 on federal funds sold.

     Interest  expense was $2,475,133 for the period ended December 31, 2002 and
included $65,688 related to FHLB advances. The remainder of interest expense for
the period of $2,409,445 was related to deposit  accounts.  Interest  expense on
deposit accounts was $2,885,609 for the period ended December 31, 2001.

     The  following  table sets forth,  for the years ended  December  31, 2002,
2001,  and 2000,  information  related to our average  balance sheet and average
yields on assets and average  costs of  liabilities.  We derived these yields by
dividing income or expense by the average balance of the corresponding assets or
liabilities.  We derived average balances from the daily balances throughout the
periods indicated.



                                       4
<PAGE>



<TABLE>
<CAPTION>
                                              Average Balances, Income and Expenses, and Rates (in $000's)
                                                               Year Ended December 31,

                                              2002                               2001                                2000

                                 Average    Income/    Yield/       Average      Income/     Yield/     Average    Income/    Yield/
                                 Balance    Expense     Rate        Balance      Expense      Rate      Balance    Expense     Rate
                                 -------   ---------    ----        -------     ---------     ----      -------   ---------    ----

<S>                              <C>        <C>         <C>         <C>          <C>             <C>       <C>        <C>       <C>
Federal funds sold and other     $ 9,821    $  185      1.88%       $            $  330       4.61%     $ 8,968    $  595      6.63%
                                                                         7,162
Investment securities             12,573       630      5.01%            9,156      557       6.08%       5,689       363      6.38%

Loans                             78,926     5,196      6.58%           49,999    4,178       8.36%      13,568     1,374     10.13%
                                 -------    ------      -----       ----------   ------       -----     -------    ------     ------

     Total earning assets        101,320     6,011      5.93%           66,317    5,065       7.64%      28,225     2,332      8.26%
                                 =======    ======      =====       ==========   ======       =====     =======    ======     ------

NOW accounts                      13,180       199      1.51%            4,537      110       2.42%       1,092        39      3.57%

Savings & money market            12,098       161      1.33%           10,757                3.66%       3,023       171      5.66%
                                                                                    394
Time deposits                     58,496     2,049      3.50%           39,935    2,382       5.96%      13,124       936      7.13%

FHLB Advances                      2,777        66      2.38%                -        -           -           -         -          -
                                 =======    ======      =====       ==========   ======       =====     =======    ======     ------
     Total interest-bearing
     liabilities                 $86,551    $2,475      2.86%       $   55,229   $2,886       5.22%     $17,239   $ 1,146      6.65%
                                 =======    ======      =====       ==========   ======       =====     =======    ======     ------

Net interest spread                                     3.07%                                 2.42%                            1.61%
Net interest income/margin                  $3,536      3.49%                    $2,179       3.29%               $ 1,186      4.20%

</TABLE>

     Our net interest  spread was 3.07% for the year ended  December 31, 2002 as
compared to 2.42% for the year ended December 31, 2001. The net interest  spread
is the difference between the yield we earn on our  interest-earning  assets and
the rate we pay on our interest-bearing liabilities.

     Our consolidated net interest margin for the period ended December 31, 2002
was 3.49% as compared to 3.29% for the year ended  December  31,  2001.  The net
interest  margin is calculated as net interest  income  divided by  year-to-date
average earning assets.  During 2002,  earning assets averaged $101.3 million as
compared to $66.3 million in 2001.

     The  increase in our net interest  spread and our net  interest  margin was
principally  due to the  slower  decline in  average  yields on  earning  assets
relative to the  repricing  of our  average  interest-bearing  liabilities.  The
relative increase in our average loans as a percentage of average earning assets
from 2001 to 2002 and the  increase  in our core  deposits  during 2002 to 78.7%
from  72.4%  of total  deposits  also  contributed  to the  increase  in our net
interest margin.

     In pricing  deposits,  we consider our liquidity  needs,  the direction and
levels of interest rates and local market  conditions.  During our initial years
of operation, higher rates were paid initially to attract deposits. During 2002,
we began to utilize other sources of funds,  particularly  FHLB  borrowings,  to
fund the demand to originate loans.

Rate/Volume Analysis
     Net  interest  income can be  analyzed  in terms of the impact of  changing
rates and changing  volume.  The following table sets forth the effect which the
varying  levels of  earning  assets  and  interest-bearing  liabilities  and the
applicable  rates  have had on changes in net  interest  income for the  periods
presented.



                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                            Year Ended                                   Year Ended
                                                         December 31, 2002                            December 31, 2001
                                                       (Dollars in Thousands)                      Dollars in Thousands)

                                                  Volume         Rate          Net         Volume         Rate         Net
                                                                              Change                                  Change
        EARNING ASSETS
<S>                                               <C>            <C>          <C>          <C>            <C>         <C>
        Federal funds sold                        $     50       $  (195)     $  (145)     $   (83)       $ (182)     $  (265)
        Investment securities                           171          (98)         73           211           (17)         194
        Loans                                     $   1,904         (886)     $ 1,018        3,045        $ (241)     $ 2,804
                                                  ---------      --------     -------      -------        -------     -------
             Total earning assets                 $   2,125      $(1,179)     $   946      $ 3,173        $ (440)     $ 2,733

        INTEREST-BEARING LIABILITIES
        Deposits                                  $     822      $(1,299)     $  (477)     $ 2,027        $ (287)     $ 1,740
        FHLB Advances                                    66            -           66            -             -            -
           Total interest-bearing liabilities     $     888      $(1,299)     $  (411)     $ 2,027        $ (287)     $ 1,740

        Net interest income                        $  1,237      $   120      $ 1,357      $ 1,146        $ (153)     $   993
                                                  =========      ========     =======      =======        =======     =======
</TABLE>

Provision for Loan Losses
     Included in the net income  (loss) for each of the periods  ended  December
31, 2002 and 2001 is a non-cash expense of $417,980 and $335,576,  respectively,
related to the provision for loan losses.  The loan loss reserve was  $1,163,977
and  $800,303 as of  December  31, 2002 and 2001 or 1.25% of gross loans in both
years.  The loan portfolio is periodically  reviewed to evaluate the outstanding
loans and to measure both the  performance  of the portfolio and the adequacy of
the allowance for loan losses.  Management's  judgment as to the adequacy of the
allowance is based upon a number of  assumptions  about  future  events which it
believes to be reasonable,  but which may or may not be accurate. Because of the
inherent  uncertainty of assumptions made during the evaluation  process,  there
can be no  assurance  that loan  losses in future  periods  will not  exceed the
allowance for loan losses or that additional  allocations  will not be required.
For the years ended  December 31, 2002 and 2001, we reported net  charge-offs of
$54,306 and $6,166, respectively.

Noninterest Income and Expenses
     Noninterest  income  in  2002  was  $842,316,  an  increase  of  142%  over
noninterest  income of $347,856 in 2001.  This  increase  was  primarily  due to
increases  in service  charges  on deposit  accounts  and  additional  loan fees
received on the  origination  of mortgage  loans,  primarily due to  significant
mortgage  refinancing  activity.  The majority of the  increased fee income from
service  charges on deposit  accounts  has been  earned  from the new  Automatic
Overdraft Privilege service. The service provides virtually automatic protection
to qualified retail customers  against overdraft of their checking account up to
certain limits and has been available to customers since April 15, 2002.

     Noninterest  expense was  $3,364,931  for 2002 as compared to $2,418,836 in
2001, an increase of 39.1%. The majority of the increased  expenditures reflects
the cost of additional  personnel hired to support our growth and the opening of
our new main office in February of 2001 and our Boiling Springs office in August
of 2001.

     The most significant item included in noninterest  expenses is salaries and
employee benefits which totaled  $1,738,679 in 2002 as compared to $1,303,762 in
2001 or an increase of 33.4%.  Occupancy  and  equipment  expense  increased  to
$489,625 in 2002 from $359,479 in 2001 or an increase of 36.2%, primarily due to
expenses incurred for a full year in 2002 on new facilities opened in 2001. Only
eleven and four months of expenses were incurred in 2001 associated with the new
main office facility and the Boiling Springs office, respectively.

     Public  relations  expense  increased  by  10.5%  to  $229,982  for 2002 as
compared to $208,026 in 2001,  primarily  due to increased  community  relations
expenditures and expansion of print and television media advertising as a result
of the  increasing  customer base.  Professional  fees increased from $88,973 in
2001 to $157,180  in 2002,  primarily  due to fees paid for  general  consulting
services related to the development and execution of our strategic plan.

     Included  in the line item "other  expenses"  which  increased  $132,016 or
61.5%  between  2002 and 2001  are  charges  for  insurance  premiums;  postage,
printing  and  stationery  expense;  and various  customer-related  expenses.  A
majority  of these items are related  directly to the normal  operations  of our
bank and are related to the increase in assets,  the higher level of transaction
volume and the higher number of customer accounts in 2002.

     Although we recognize the importance of controlling noninterest expenses to
improve  profitability,   we  are  also  committed  to  retaining  our  team  of
well-trained  officers and staff,  maintaining a technically superior operations
function and pursuing a professional marketing program.



                                       6
<PAGE>

BALANCE SHEET REVIEW

General
     At December 31, 2002, we had total assets of $139,223,904 or an increase of
69.2% over total assets of $82,294,257 at December 31, 2001.  Assets at December
31,  2002  and 2001  consisted  of cash and due  from  banks of  $8,097,022  and
$381,844,   respectively;   federal  funds  sold  of  $6,688,000  and  $929,000,
respectively;  securities  available for sale of  $20,559,645  and  $12,407,758,
respectively;   premises  and  equipment,  net  of  $4,499,646  and  $4,560,144,
respectively;  loans,  net of unearned  income,  of $93,106,483 and $63,868,951,
respectively and other assets of $1,609,362 and $946,863,  respectively. We plan
to decrease the level of federal funds sold in order to fund loan growth.

     Our  liabilities  at  December  31,  2002 and 2001  were  $127,679,778  and
$71,536,677,   respectively  and  consisted  of  deposits  of  $119,718,680  and
$70,918,406,  respectively  and other  liabilities  of  $961,098  and  $618,271,
respectively.  Liabilities at December 31, 2002 also included $7,000,000 in FHLB
advances. No FHLB advances were outstanding at December 31, 2001.  Shareholders'
equity at December 31, 2002 was $11,544,126 as compared to shareholders'  equity
at December 31, 2001 of $10,757,580.

Investments
     At December 31,  2002,  the  investment  securities  portfolio  represented
approximately  16.2%  of our  earning  assets  at  $20,559,645  as  compared  to
$12,407,758 or 16.0% of earning assets at December 31, 2001. We were invested in
U.S.  Government  agency  securities,  mortgage-backed  securities and municipal
securities   with  a  fair  value  of  $20,559,645  and  an  amortized  cost  of
$20,223,890, for an unrealized gain of $335,755.

     Contractual  maturities  and yields on our  investments  (all available for
sale)  at  December  31,  2002 are  shown in the  following  table  (dollars  in
thousands).  Expected maturities may differ from contractual  maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment  penalties.  Yields on municipal  securities  are  presented on a tax
equivalent basis.

<TABLE>
<CAPTION>
                                       After one            After five
                                      but within            but within              Over ten
                                      five years    Yield   ten years     Yield      years       Yield       Total      Yield
                                      ----------    -----   ---------     -----      -----       -----       -----      -----
<S>                                   <C>           <C>      <C>          <C>        <C>         <C>          <C>        <C>
     U.S. Government agencies         $    2,050    3.18%    $ 1,994      4.68%      $    -           -       $ 4,044    3.92%
     Mortgage-backed securities            2,132    4.02%      7,252      5.17%       6,331       5.25%        15,715    5.04%
     Municipal securities                      -       -           -         -          801       6.24%           801    6.24%
                                      ----------    -----    -------      -----      ------       -----       -------    -----
          Total                       $    4,182    3.61%    $ 9,246      5.06%      $7,132       5.36 %      $20,560    4.86%
</TABLE>

     At December 31, 2002,  short-term  overnight  investments  in federal funds
sold and  interest-bearing  bank balances comprised 9.9% of total earning assets
at  $12,515,723  as  compared to  $929,000  or 1.2% of total  earning  assets at
December 31, 2001. As the bank continues to grow, it is expected that there will
be continue to be a shift from overnight  investments  into the loan  portfolio,
primarily, and into the investment securities portfolio, secondarily.

Loans
     Since loans typically provide higher interest yields than do other types of
interest earning assets, it is our intent to channel a substantial percentage of
our earning  assets into the loan  portfolio.  Average loans for the years ended
December 31, 2002 and 2001 were $78.9 million and $50.0  million,  respectively.
Total loans  outstanding  at December  31,  2002 and 2001 were  $93,106,483  and
$63,868,951, respectively, before the allowance for loan losses.

     The following  table  summarizes  the  composition of the loan portfolio at
December 31:
<TABLE>
<CAPTION>
                                                               2002                                 2001
                                                               ----                                 ----
                                                     Amount            % of Total           Amount          % of Total
                                                     ------            ----------           ------          ----------

<S>                                                  <C>                      <C>        <C>                    <C>
   Commercial and industrial                         $  15,867,000            17.04%     $   10,095,665         15.81%
   Commercial secured by real estate                    53,658,692            57.63%         38,344,136         60.04%
   Real estate--residential mortgages                   19,174,497            20.59%         11,832,317         18.53%
   Installment and other consumer loans                  4,591,509             4.93%          3,713,501          5.81%
   Unearned income                                        (185,215)           (.19)%           (116,668)        (.19%)
                                                     -------------     -------------     --------------     ----------
         Total loans, net of unearned income            93,106,483           100.00%         63,868,951       100.00%

   Less--allowance for loan losses                     (1,163,977)                             (800,303)
                                                     -------------     -------------     --------------     ----------

         Total loans, net                            $  91,942,506                       $   63,068,648
                                                     =============                     =================
</TABLE>
                                       7
<PAGE>

     The principal component of our loan portfolio at year-end 2002 and 2001 was
loans secured by real estate mortgages.  Due to the short time the portfolio has
existed, the current mix of loans may not be indicative of the ongoing portfolio
mix. Management will attempt to maintain a relatively diversified loan portfolio
to help reduce the risk inherent in concentration of collateral.

Provision and Allowance for Loan Losses
     The  allowance  represents  an amount  which we believe will be adequate to
absorb  probable  losses on existing  loans that may become  uncollectible.  Our
judgment in determining the adequacy of the allowance is based on evaluations of
the  collectibility  of loans,  including  consideration  of factors such as the
balance  of  impaired  loans;  the  quality,  mix and size of our  overall  loan
portfolio;  economic conditions that may affect the borrower's ability to repay;
the amount and quality of collateral  securing the loans;  our  historical  loan
loss experience and a review of specific  problem loans. We adjust the amount of
the allowance periodically based on changing circumstances as a component of the
provision for loan losses. We charge recognized losses against the allowance and
add subsequent recoveries back to the allowance.

     We do not allocate the allowance for loan losses to specific  categories of
loans but evaluate  the adequacy on an overall  portfolio  basis  utilizing  our
credit  grading  system which we apply to each loan. We combine our estimates of
the  reserves  needed  for each  component  of the  portfolio,  including  loans
analyzed  on a pool basis and loans  analyzed  individually.  The  allowance  is
divided into two portions: (1) an amount for specific allocations on significant
individual credits and (2) a general reserve amount.

     We analyze  individual  loans within the portfolio and make  allocations to
the  allowance  based on each  individual  loan's  specific  factors  and  other
circumstances  that  affect  the  collectibility  of  the  credit.  Significant,
individual credits classified as doubtful or substandard/special  mention within
our  credit  grading  system  require  both  individual  analysis  and  specific
allocation. Loans in the substandard category are characterized by deterioration
in  quality  exhibited  by  any  number  of  well-defined  weaknesses  requiring
corrective action such as declining or negative earnings trends and declining or
inadequate liquidity. Loans in the doubtful category exhibit the same weaknesses
found in the  substandard  loan;  however,  the weaknesses are more  pronounced.
However,  these loans are not yet rated as loss because certain events may occur
which could salvage the debt such as injection of capital, alternative financing
or liquidation of assets.

     We calculate our general reserve based on a percentage  allocation for each
of the  categories  of the  following  unclassified  loan  types:  real  estate,
commercial,  consumer  and  mortgage.  We apply  general  loss  factors  to each
category and may adjust these percentages as appropriate given  consideration of
local  economic  conditions,  exposure  concentration  that  may  exist  in  the
portfolio,  changes in trends of past due loans,  problem loans and  charge-offs
and anticipated loan growth.  The general estimate is then added to the specific
allocations made to determine the amount of the total allowance for loan losses.

     Due to our limited  operating  history,  the  provision for loan losses has
been made primarily as a result of management's  assessment of general loan loss
risk. Our evaluation is inherently  subjective as it requires estimates that are
susceptible to significant  change.  In addition,  various  regulatory  agencies
review our allowance for loan losses  through their periodic  examinations,  and
they may require us to record  additions to the  allowance for loan losses based
on  their  judgment  about  information  available  to them at the time of their
examinations.  Our losses will undoubtedly vary from our estimates, and there is
a possibility  that  charge-offs in future periods will exceed the allowance for
loan losses as estimated at any point in time.

     At December 31, 2002 and 2001, the allowance for loan losses was $1,163,977
and  $800,303,  respectively,  or 1.25% of  outstanding  loans,  net of unearned
income, of $93,106,483 and $63,868,951,  respectively.  The following table sets
forth the  changes in the  allowance  for loan  losses  during  the years  ended
December  31,  2002 and 2001.  There were no loans  charged  off during the year
ended December 31, 2000.

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

<S>                                                             <C>                <C>
   Balance, beginning of period                                 $   800,303        $   470,893
   Provision charged to operations                                  417,980            335,576
   Loans charged off
              Commercial, financial and agricultural                (33,809)                 -
              Real estate - construction                             (8,310)                 -
              Installment loans to individuals                       (12,187)           (6,166)

                                                                ------------       -----------
                   Total charge-offs                                 (54,306)           (6,166)
   Recoveries on loans previously charged off                              -                 -
                                                                ------------       -----------

   Balance, end of period                                       $  1,163,977       $   800,303
                                                                ============       ===========
</TABLE>


                                       8
<PAGE>


     At December 31, 2002, we had no loans on nonaccrual status. We had one loan
totaling $48,000 on nonaccrual status at December 31, 2001. Generally, a loan is
placed on nonaccrual  status when it becomes 90 days past due as to principal or
interest,  or when management believes,  after considering economic and business
conditions and collection  efforts,  that the borrower's  financial condition is
such that  collection  of the loan is doubtful.  A payment of interest on a loan
that is classified as nonaccrual is recognized as income when received.

     There  were no other  loans past due in excess of 90 days at  December  31,
2002 or 2001.  There  were no  foreclosed  loans or other real  estate  owned at
December 31, 2002 or 2001.

Maturities and Sensitivity of Loans to Changes in Interest Rates
     The  information  in the  following  table  is  based  on  the  contractual
maturities of individual loans,  including loans which may be subject to renewal
at their  contractual  maturity.  Renewal of such loans is subject to review and
credit  approval,  as well as modification of terms upon their maturity.  Actual
repayments of loans may differ from maturities reflected below because borrowers
have the right to prepay obligations with or without prepayment penalties.

     The following table summarizes the loan maturity distribution, by type, and
related  interest  rate   characteristics  at  December  31,  2002  (dollars  in
thousands):

<TABLE>
<CAPTION>
                                                                        After one but
                                                          One Year       Within five        After
                                                          or less           Years        five years        Total
                                                          -------           -----        ----------        -----

<S>                                                          <C>             <C>                <C>          <C>
              Commercial                                  $  31,760      $  16,631       $  1,903         $ 50,294
              Real estate - construction                      4,700          1,263              -            5,963
              Real estate - mortgage                         17,343         14,448            411           32,202
              Consumer and other                              1,223          3,555             55            4,833
                                                          ---------      ---------          -----         --------

              Total loans                                 $  55,026      $  35,897       $  2,369         $ 93,292
                                                          ---------      ---------          -----         --------
              Unearned income, net                                                                        $   (185)
                                                                                                          --------
              Total loans, net of unearned income                                                         $ 93,106
                                                                                                          ========
              Loans maturing after one year with:
              Fixed interest rates                                                                        $ 11,954
              Floating interest rates                                                                     $ 26,312
                                                                                                          --------
</TABLE>

Deposits and Other Interest-Bearing Liabilities
     Our  primary  source of funds for loans and  investments  is our  deposits.
Average total deposits for the years ended December 31, 2002 and 2001 were $92.6
million and $59.9 million,  respectively,  and average interest-bearing deposits
were $83.8 million and $55.2 million, respectively.

     National and local market  trends over the past several  years suggest that
consumers  have moved an increasing  percentage of  discretionary  savings funds
into  investments  such as annuities  and stock and fixed income  mutual  funds.
Management  believes that conditions in 2002 and 2001 were favorable for deposit
growth and that factors such as the low returns on investments  and mutual funds
may have increased traditional deposit inflows during these periods.

     The following is a table of deposits by category at December 31 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                     2002                              2001
                                                     ----                              ----
                                          Amount          Percentage        Amount          Percentage

<S>                                      <C>                  <C>          <C>                    <C>
Demand deposit accounts                  $  15,429            12.88%       $    6,558             9.25%
NOW accounts                                18,224            15.22%            7,120            10.04%
Money market accounts                       11,696             9.77%           11,108            15.66%
Savings accounts                             1,493             1.25%              807             1.14%
Time deposits less than $100,000            47,405             39.6%           25,728            36.28%
Time deposits of $100,000 or more           25,472            21.28%           19,597            27.63%
                                         ---------           -------        ---------           -------
Total deposits                           $ 119,719           100.00%       $   70,918           100.00%
                                         ---------           -------        ---------           -------
</TABLE>


                                       9
<PAGE>


     Core deposits,  which exclude time deposits of $100,000 or more,  provide a
relatively  stable  funding  source  for our loan  portfolio  and other  earning
assets.  Our core  deposits were $94.2 million and $51.3 million at December 31,
2002 and 2001,  respectively.  Our loan-to-deposit  ratio was 77.8% and 90.1% at
year-end 2002 and 2001, respectively.

     The  maturity  distribution  of our time  deposits  of  $100,000 or more at
December 31, 2002 and 2001 is as follows:

                                            2002                  2001
                                            ----                  ----
                                   (Dollars in thousands) (Dollars in thousands)

Three months or less                  $        5,693          $        7,977
Over three through six months                  4,645                   8,634
Over six through twelve months                 9,863                   1,863
Over one year                                  5,271                   1,123
                                      --------------          --------------

  Total                               $       25,472          $       19,597
                                      ==============          ==============

Short-term Borrowings
     As of December 31, 2002, we had no outstanding  balances  under  short-term
borrowings.  We did have short-term lines of credit with correspondent  banks to
purchase unsecured federal funds totaling  $5,000,000.  The interest rate on any
borrowings  under these lines  would be the  prevailing  market rate for federal
funds purchased.

FHLB Advances
     We also have the  ability to borrow up to 15% of our total  assets from the
Federal Home Loan Bank of Atlanta as of December 31, 2002. Borrowings under this
arrangement  can be made with various  terms and  repayment  schedules  and with
fixed or variable rates of interest.  The borrowings  under this arrangement are
available by pledging  collateral and may require additional  purchases of stock
in the FHLB.  Qualifying  securities  available  for sale with a market value of
$8,347,000 were pledged as collateral for advances  outstanding of $7 million at
December 31, 2002. There were no FHLB advances outstanding during the year ended
or at December 31, 2001.

     The weighted-average interest rate on FHLB advances outstanding at December
31, 2002 was 1.72%.  At December  31,  2002,  advances  totaling $5 million were
subject to call  features at the option of the FHLB with call dates ranging from
January 2003 to July 2012.  Call  provisions  are more likely to be exercised by
the FHLB when rates rise.  Scheduled  maturities of FHLB advances  subsequent to
December 31, 2002 are $2,000,000 in 2003 and $5,000,000 in 2012.

CAPITAL RESOURCES

     Total shareholders' equity amounted to $11,544,126 at December 31, 2002 and
$10,757,580 at December 31, 2001.  The increase  between 2001 and 2002 primarily
resulted  from the net  income  incurred  during  2002 and the  increase  in the
unrealized gain or securities available for sale during 2002.

     The following  table shows the return on average assets (net income divided
by average  total  assets),  return on average  equity  (net  income  divided by
average  equity),  and equity to assets ratio (average equity divided by average
total assets) for 2002 and 2001.


                                             2002         2001
                                             ----         ----

            Return on average assets         0.56%       -0.28%

            Return on average equity         5.33%       -1.87%

            Equity to assets ratio          10.39%       14.97%

     Since our  inception,  we have not paid cash dividends on our common stock.
Our ability to pay cash  dividends is dependent on receiving cash in the form of
dividends  from our bank.  However,  certain  restrictions  exist  regarding the
ability of our bank to transfer funds to us in the form of cash  dividends.  All
dividends are subject to prior approval of the Office of the  Comptroller of the
Currency and are payable only from the undivided profits of our bank.

     The Federal Reserve Board and bank regulatory agencies require bank holding
companies  and financial  institutions  to maintain  capital at adequate  levels
based on a percentage of assets and off-balance  sheet  exposures,  adjusted for
risk  weights  ranging  from 0% to 100%.  The Federal  Reserve  guidelines  also
contain an exemption from the capital  requirements  for bank holding



                                       10
<PAGE>

companies  with less than $150 million in  consolidated  assets.  Because we had
less than $150 million in assets,  the company is not currently subject to these
guidelines. However, the bank falls under these rules as set per bank regulatory
agencies.

     Under the  capital  adequacy  guidelines,  capital is  classified  into two
tiers.  These  guidelines  require an institution to maintain a certain level of
Tier 1 and Tier 2 capital to  risk-weighted  assets.  Tier 1 capital consists of
common stockholders' equity, excluding the unrealized gain or loss on securities
available for sale, minus certain  intangible  assets. In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight factor of 0% to 100% based on the risks believed
inherent in the type of asset.  Tier 2 capital  consists of Tier 1 capital  plus
the general reserve for loan losses subject to certain limitations.  The bank is
also  required to  maintain  capital at a minimum  level based on total  average
assets, which is known as the Tier 1 leverage ratio.

     We are both subject to various regulatory capital requirements administered
by the  federal  banking  agencies.  Under  these  capital  guidelines,  we must
maintain a minimum total risk-based capital of 8%, with at least 4% being Tier 1
capital.  In addition,  we must  maintain a minimum Tier 1 leverage  ratio of at
least 4%. To be considered "well-capitalized", we must maintain total risk-based
capital of at least 10%, Tier 1 capital of at least 6%, and a leverage  ratio of
at least 5%.

     The following table sets forth the company's and the bank's various capital
ratios at December  31, 2002 and 2001.  At December  31, 2002 and 2001,  we both
were in compliance with each of the applicable  regulatory capital  requirements
and were considered to be "well capitalized" at the bank level.

                                     2002                        2001
                                     ----                        ----

                                  The           The           The          The
                                company        bank         company       bank
                                -------        ----         -------       ----


Total risk-based capital        13.01%        11.93%        17.45%        15.89%

Tier 1 risk-based capital       11.78%        10.70%        16.23%        14.68%

Leverage capital                 8.74%         7.95%        13.21%        11.95%

     Despite  anticipated asset growth, we expect our capital ratios to continue
to be adequate for the next six to twelve months.  However, no assurances can be
given in this  regard,  as rapid  growth,  deterioration  in loan  quality,  and
losses, or a combination of these factors,  could change our capital position in
a  relatively  short  period of time.  As of December  31,  2002,  there were no
significant firm commitments outstanding for capital expenditures.

EFFECT OF INFLATION AND CHANGING PRICES

     The effect of relative  purchasing power over time due to inflation has not
been taken into effect in our financial statements.  Rather, the statements have
been prepared on an historical cost basis in accordance with generally  accepted
accounting principles.

     Unlike most industrial  companies,  the assets and liabilities of financial
institutions  such as our  company  and bank are  primarily  monetary in nature.
Therefore,  the effect of changes in interest rates will have a more significant
impact on our performance  than will the effect of changing prices and inflation
in general.  In addition,  interest rates may generally  increase as the rate of
inflation  increases,  although  not  necessarily  in  the  same  magnitude.  As
discussed  previously,  we seek to  mange  the  relationships  between  interest
sensitive  assets  and  liabilities  in  order  to  protect  against  wide  rate
fluctuations, including those resulting from inflation.

OFF-BALANCE SHEET RISK

     Through the operations of our bank, we have made contractual commitments to
extend credit with off-balance sheet risk in the ordinary course of our business
activities  to meet the  financing  needs of customers.  These  commitments  are
legally binding  agreements to lend money at predetermined  interest rates for a
specified  period of time and  generally  have fixed  expiration  dates or other
termination  clauses.  We use the same credit and collateral  policies in making
these commitments as we do for on-balance sheet instruments.

     We evaluate each customer's  creditworthiness  on a case-by-case  basis and
obtain collateral, if necessary, based on our credit evaluation of the borrower.
In addition to commitments to extend  credit,  we also issue standby  letters of
credit which are assurances to a third party that they will not suffer a loss if
our customer fails to meet its  contractual  obligation to the third party.  The
credit risk involved in the underwriting of letters of credit is essentially the
same as that involved in extending loan facilities to customers.



                                       11
<PAGE>

     At December 31, 2002, we had issued  commitments  to extend credit of $25.1
million through various types of commercial and consumer  lending  arrangements,
of which the majority  are at variable  rates of  interest.  Standby  letters of
credit totaled $61,000 at December 31, 2002. Past experience indicates that many
of these  commitments to extend credit will expire unused.  However,  we believe
that we have adequate sources of liquidity to fund commitments that may be drawn
upon by borrowers.

     Except as  disclosed in this  report,  we are not  involved in  off-balance
sheet  contractual  relationships,  unconsolidated  related  entities  that have
off-balance  sheet  arrangements or transactions  that could result in liquidity
needs or other commitments or significantly impact earnings.

LIQUIDITY & INTEREST RATE SENSITIVITY

     Liquidity  management  involves monitoring our sources and uses of funds in
order to meet our day-to-day cash flow  requirements  while maximizing  profits.
Liquidity  represents  the  ability of a company to convert  assets into cash or
cash  equivalents  without  significant  loss and to raise  additional  funds by
increasing  liabilities.  Liquidity  management is made more complicated because
different  balance sheet components are subject to varying degrees of management
control.  For example,  the timing of maturities of the investment  portfolio is
fairly  predictable  and  subject  to a high  degree of  control at the time the
investment decisions are made. However, net deposit inflows and outflows are far
less predictable and are not subject to nearly the same degree of control.

     At December 31, 2002 and 2001,  our liquid  assets,  consisting of cash and
due from banks,  interest-bearing bank balances and federal funds sold, amounted
to $20,612,745  and  $1,310,844,  representing  14.8% and 1.59% of total assets,
respectively.  Investment  securities  at December 31, 2002 and 2001 amounted to
$20,559,645  and  $12,407,758,  representing  14.76% and 15.08% of total assets,
respectively;  these  securities  provide a secondary  source of liquidity since
they can be converted into cash in a timely manner.  Our ability to maintain and
expand our deposit base and  borrowing  capabilities  also serves as a source of
liquidity.

     We plan to meet our future cash needs through the  liquidation of temporary
investments,  maturities of loans and investment  securities,  and generation of
deposits.  In addition,  the bank  maintains  federal funds  purchased  lines of
credit with correspondent banks in the amount of $5,000,000.  The bank is also a
member of the  Federal  Home Loan Bank of  Atlanta  from which  application  for
borrowings can be made for leverage purposes, if so desired. Management believes
that its existing  stable base of core deposits along with  continued  growth in
this deposit base will enable us to  successfully  meet our long term  liquidity
needs.

     Asset/liability  management  is the process by which we monitor and control
the mix and maturities of our assets and liabilities.  The essential purposes of
asset/liability  management are to ensure adequate  liquidity and to maintain an
appropriate  balance  between  interest  sensitive  assets  and  liabilities  to
minimize potentially adverse impacts on earnings from changes in market interest
rates. The bank's  asset/liability  management  committee  ("ALCO") monitors and
considers  methods of managing exposure to interest rate risk. The ALCO consists
of members of the board of directors and senior management of the bank and meets
quarterly.  The ALCO is charged with the responsibility to maintain the level of
interest  rate   sensitivity  of  the  bank's  interest   sensitive  assets  and
liabilities within Board-approved limits.

     The  following  table  presents  our rate  sensitivity  at each of the time
intervals  indicated as of December 31, 2002. The table may not be indicative of
our rate sensitivity position at other points in time. In addition,  the table's
maturity distribution may differ from the contractual  maturities of the earning
assets and  interest  bearing  liabilities  presented  due to  consideration  of
prepayment   speeds  under  various   interest  rate  change  scenarios  in  the
application of the interest rate sensitivity methods described above.



                                       12
<PAGE>

<TABLE>
<CAPTION>
                                       Within      After three but       fter one but           After
                                        three       Within twelve        Within five            Five
                                       months          Months               Years               Years          Total
                                       ------          ------               -----               -----          -----
                                                                  (Dollars in Thousands)
<S>                                   <C>             <C>                <C>                  <C>             <C>
Interest-earning assets:
  Federal funds sold and other        $  12,516       $      -           $      -             $      -        $  12,516
  Investment securities                   3,876          1,443              2,916               12,325           20,560
                                         51,539          6,548             33,025                2,179           93,291
                                      ---------       --------           --------              -------        ---------

Total earning assets                  $  67,931       $  7,991           $ 35,941             $ 14,504        $ 126,367

Interest-bearing liabilities:
  Money market and NOW                $   3,213       $      -           $ 14,996             $      -        $  18,209
  Regular savings                         5,660              -              8,489                    -           14,149
  Time deposits                          16,397         37,237             19,243                    -           72,877

  Other borrowings                            -          7,000                  -                    -            7,000
                                      ---------       --------           --------              -------        ---------

Total interest-bearing liabilities    $  25,270       $ 44,237           $ 42,728             $      -        $ 112,235

Period gap                            $  42,661       $(36,246)          $ (6,787)            $ 14,504        $  14,132
Cumulative gap                        $  42,661       $  6,415           $   (372)            $ 14,132        $  14,132

Ratio of cumulative gap to
       total earning assets               33.76%          5.08%              (.29)%              11.18%
</TABLE>

ACCOUNTING, REPORTING AND REGULATORY MATTERS

Recently Issued Accounting Standards
     In April 2002, The FASB issued SFAS No. 145,  Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements.  This statement also rescinds SFAS No. 44, Accounting
for Intangible  Assets of Motor Carriers and amends SFAS No. 13,  Accounting for
Leases. This new statement requires gains and losses from extinguishment of debt
to be classified as an extraordinary  item only if they meet the criteria of APB
Opinion No. 30,  Reporting  the Results of  Operations-Reporting  the Effects of
Disposal of a Segment of Business,  and Extraordinary,  Unusual and Infrequently
Occurring Events and Transactions,  which will distinguish transactions that are
part of an  entity's  recurring  operations  from  those  that  are  unusual  or
infrequent  or that meet the criteria  for  classification  as an  extraordinary
item.  The  adoption  of the  provisions  of SFAS No.  145 had no  impact on our
financial position or results of operations.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal  Activities,  which  addresses  financial  accounting  and
reporting for costs  associated  with exit or disposal  activities and nullifies
Emerging  Issues Task Force  (EITF) Issue No. 94-3,  Liability  Recognition  for
Certain  Employee  Termination  Benefits  and  Other  Costs to Exit an  Activity
(including Certain Costs Incurred in a Restructuring). This Statement applies to
costs  associated  with specific exit  activities and requires a liability for a
cost associated with an exit or disposal  activity to be recognized and measured
initially at its fair value in the period in which the liability is incurred.  A
liability for a cost  associated  with an exit or disposal  activity is incurred
when the  definition of a liability is met. The provisions of this statement are
effective for exit or disposal  activities that are initiated after December 31,
2002.  We adopted the  provisions  of this  statement on January 1, 2003 with no
impact on our financial position or results of operations.



                                       13
<PAGE>



     In October  2002,  the FASB  issued SFAS No.  147,  Accounting  for Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9, which brings all business combinations involving financial
institutions,  except mutual financial institutions,  into the scope of SFAS No.
141,  Business  Combinations.  This statement  requires that all acquisitions of
financial  institutions  that  meet  the  definition  of a  business,  including
acquisitions  of part of a financial  institution  that meet the definition of a
business,  must be accounted for in accordance with SFAS No. 141 and the related
intangibles  accounted for in accordance with SFAS No. 142. SFAS No. 147 removes
such  acquisitions  from the  scope  of SFAS  No.  72,  Accounting  for  Certain
Acquisitions  of Banking or Thrift  Institutions.  SFAS No. 147 also amends SFAS
No. 144 to include in its scope long-term customer  relationship  intangibles of
financial  institutions.  SFAS No. 147 was  effective  upon  issuance and had no
impact on our financial statements.

     In December 2002,  the FASB issued SFAS No. 148 Accounting for  Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123.
This  Statement  amends FASB  Statement  No.  123,  Accounting  for  Stock-Based
Compensation,  to provide  alternative  methods of  transition  for a  voluntary
change to the fair value based method of  accounting  for  stock-based  employee
compensation.  In addition, this statement amends the disclosure requirements of
Statement  123 to require  prominent  disclosures  in both  annual  and  interim
financial  statements  about the method of accounting for  stock-based  employee
compensation and the effect of the method used on reported  results.  We adopted
this  standard  effective  December  31,  2002  and has  included  the  required
disclosures  in the  footnotes to the  financials.  We have not elected the fair
value  treatment of stock-based  compensation  and the adoption of this standard
had no impact on its financial position.

     Other accounting standards that have been issued or proposed by the FASB or
other standards-setting  bodies that do not require adoption until a future date
are not  expected  to  have a  material  impact  on our  consolidated  financial
statements upon adoption.

Regulatory Matters
     In October 2001, the USA Patriot Act of 2001 was enacted in response to the
terrorist  attacks in New York,  Pennsylvania and Washington D.C. which occurred
on  September  11,  2001.  The Patriot Act is intended to  strengthen  U.S.  law
enforcement's and the intelligence  communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial  institutions  of all kinds is  significant  and wide ranging.  The
Patriot Act contains sweeping anti-money  laundering and financial  transparency
laws and imposes various  regulations,  including standards for verifying client
identification  at  account  opening,  and rules to  promote  cooperation  among
financial  institutions,  regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.

MARKET RISK

     Market risk is the risk of loss from adverse  changes in market  prices and
rates which principally  arises from interest rate risk inherent in our lending,
investing,  deposit  gathering and borrowing  activities.  Other types of market
risks,  such as foreign currency exchange rate risk and commodity price risk, do
not normally  arise in the normal  course of our business.  Management  actively
monitors and manages its interest rate risk exposure.

     The  principal  interest  rate risk  monitoring  technique we employ is the
measurement of our interest sensitivity "gap," which is the positive or negative
dollar  difference  between assets and liabilities  that are subject to interest
rate repricing  within a given period of time.  Interest rate sensitivity can be
managed   by   repricing    assets   or    liabilities,    selling    securities
available-for-sale,  replacing an asset or  liability at maturity,  or adjusting
the interest rate during the life of an asset or liability.  Managing the amount
of assets and  liabilities  repricing in this same time interval  helps to hedge
the risk and  minimize  the impact on net  interest  income of rising or falling
interest  rates.  We generally  would  benefit from  increasing  market rates of
interest  when we have an  asset-sensitive  gap  position  and  generally  would
benefit   from    decreasing    market   rates   of   interest   when   we   are
liability-sensitive.

     Due to the fact that  approximately  60% of our loans  were  variable  rate
loans at December 31, 2002, we are currently  asset  sensitive over the one-year
time frame. However, our gap analysis is not a precise indicator of our interest
sensitivity position.  The analysis presents only a static view of the timing of
maturities and repricing  opportunities,  without taking into consideration that
changes in interest rates do not affect all assets and liabilities  equally. For
example,  rates  paid on a  substantial  portion  of core  deposits  may  change
contractually  within a relatively  short time frame, but those rates are viewed
by management as significantly less  interest-sensitive  than market-based rates
such as those paid on non-core deposits.  Net interest income may be impacted by
other  significant  factors  in a given  interest  rate  environment,  including
changes  in  the  volume  and  mix  of  earning   assets  and   interest-bearing
liabilities.



                                       14
<PAGE>

                          Independent Auditors' Report


To the Board of Directors and Shareholders of
First National Bancshares, Inc.
Spartanburg, South Carolina


We have audited the  accompanying  consolidated  balance sheet of First National
Bancshares,  Inc.  and  subsidiary  as of  December  31,  2002  and the  related
consolidated  statements of operations,  shareholders'  equity and comprehensive
income,  and cash flows for the year then ended.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit. The  consolidated  financial  statements of First
National  Bancshares,  Inc. and  subsidiary  as of December 31, 2001 and for the
years ended  December 31, 2001 and 2000,  were audited by other  auditors  whose
report  dated  January  23,  2002  expressed  an  unqualified  opinion  on those
statements.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of First  National
Bancshares,  Inc. and  subsidiary as of December 31, 2002,  the results of their
operations  and their  cash  flows for the year then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

/s/ Elliott Davis, LLC
Elliott Davis, LLC


Greenville, South Carolina
January 31, 2003





                                       15
<PAGE>


<TABLE>
<CAPTION>
                 FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 2002 and 2001


                                                                                 2002                 2001
                                                                                 ----                 ----
                                            Assets

<S>                                                                         <C>                   <C>
Cash and due from banks                                                     $    8,097,022        $      381,844
Interest-bearing bank balances                                                   5,827,723                     -
Federal funds sold                                                               6,688,000               929,000
Securities available for sale                                                   20,559,645            12,407,758
Loans, net of allowance for loan losses of $1,163,977                           91,942,506            63,068,648
           and $800,303, respectively
Premises and equipment, net                                                      4,499,646             4,560,144
Other                                                                            1,609,362               946,863
                                                                            --------------        --------------

         Total assets                                                       $  139,223,904        $   82,294,257
                                                                            ==============        ==============

   Liabilities and Shareholders' Equity
   ------------------------------------

Liabilities:
   Deposits
        Noninterest-bearing                                                 $   15,428,255        $    6,500,856
        Interest-bearing                                                       104,290,425            64,417,550
                                                                            --------------        --------------

              Total deposits                                                   119,718,680            70,918,406
                                                                            --------------        --------------

   FHLB advances                                                                 7,000,000                     -
   Accrued expenses and other liabilities                                          961,098               618,271
                                                                            --------------        --------------
           Total liabilities                                                   127,679,778            71,536,677
                                                                            --------------        --------------

Commitments and contingencies--Note 15 and 16

Shareholders' equity:
   Preferred stock, par value $.01 per share, 10,000,000
     shares authorized, no shares issued or outstanding                                  -                     -
   Common stock, par value $.01 per share, 10,000,000
     shares authorized 1,201,400 and 1,200,000 shares
     issued and outstanding, respectively                                           12,014                12,000
   Additional paid-in capital                                                   11,806,683            11,791,311
   Retained earnings (deficit)                                                    (486,197)           (1,081,326)
   Accumulated other comprehensive income                                          211,626                35,595
                                                                            --------------        --------------

         Total shareholders' equity                                             11,544,126            10,757,580
                                                                            --------------        --------------

         Total liabilities and shareholders' equity                         $  139,223,904        $   82,294,257
                                                                            ==============        ==============

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.



                                       16
<PAGE>



<TABLE>
<CAPTION>
                 FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                      Consolidated Statements of Operations

              For the Years Ended December 31, 2002, 2001 and 2000

                                                                                   2002                2001                 2000
                                                                                   ----                ----                 ----
<S>                                                                           <C>                  <C>                <C>
Interest income:
   Loans                                                                      $   5,196,237        $   4,178,305      $   1,373,801
   Investment securities                                                            629,457              556,555            362,698
   Federal funds sold and other                                                     185,163              330,057            595,291
                                                                              -------------        -------------      -------------
         Total interest income                                                    6,010,857            5,064,917          2,331,790
                                                                              -------------        --------------     -------------

Interest expense:
   Line of credit                                                                         -                      -            6,481
   FHLB advances                                                                     65,688                      -                -
   Deposits                                                                       2,409,445              2,885,609        1,146,143
                                                                              -------------         --------------     ------------
         Total interest expense                                                   2,475,133              2,885,609        1,152,624
                                                                              -------------         --------------     ------------

Net interest income                                                               3,535,724              2,179,308        1,179,166

Provision for loan losses                                                           417,980                335,576          470,893
                                                                              -------------         --------------     ------------

Net interest income after provision for loan losses                               3,117,744              1,843,732          708,273
                                                                              -------------         --------------     ------------

Noninterest income
  Mortgage loan fees from correspondent bank                                        163,949                139,515            5,366
  Service charges and fees on deposit accounts                                      669,576                157,408           20,717
  Other                                                                               8,791                 50,933            9,585
                                                                              -------------         --------------     ------------
           Total noninterest income                                                 842,316                347,856           35,668

Noninterest expense:
   Salaries and employee benefits                                                 1,738,679              1,303,762          768,574
   Professional fees                                                                157,180                 88,973           70,300
   Data processing                                                                  293,849                154,357           51,595
   Public relations                                                                 229,982                208,026          110,072
   Occupancy and equipment                                                          489,625                359,479          212,476
   Telephone and supplies                                                           109,007                 89,646           53,953
   Other                                                                            346,609                214,593          142,103
                                                                              -------------         --------------     ------------
         Total noninterest expense                                                3,364,931              2,418,836        1,409,073
                                                                              -------------         --------------     ------------

Net income (loss) before income taxes                                               595,129               (227,248)        (665,132)

Provision for income taxes                                                                -                (24,000)               -
                                                                              -------------         --------------     ------------

         Net income (loss)                                                    $     595,129         $     (203,248)    $   (665,132)
                                                                              =============         ==============     ============

 Net income (loss) per share
               Basic                                                                    .50                   (.17)            (.55)
               Diluted                                                                  .46                    N/A              N/A
Weighted average shares outstanding
              Basic                                                               1,200,520              1,200,000        1,200,000
              Diluted                                                             1,303,313                    N/A              N/A
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.



                                       17
<PAGE>

<TABLE>
<CAPTION>
                 FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

              Consolidated Statements of Changes in Shareholders'
                        Equity and Comprehensive Income

              For the Years Ended December 31, 2002, 2001 and 2000


                                                                      Additional       Retained
                                               Common Stock             Paid-In        Earnings     Accumulated

                                                                                                    Other           Total

                                                                                                    Comprehensive   Shareholders'
                                       -----------------------------
                                           Shares         Amount        Capital       (Deficit)         Income         Equity
                                           ------         ------        -------        -------          ------         ------

<S>                                          <C>          <C>           <C>            <C>             <C>           <C>
Balance, December 31, 1999                       10       $      -      $       100    $  (212,946)    $       -     $   (212,846)
Redemption of stock from
   organizer                                    (10)             -             (100)             -             -
                                                                                                                             (100)
Proceeds from sale of stock, net
   of offering costs of $196,689          1,200,000         12,000       11,791,311              -             -       11,803,311
Comprehensive income:
   Net loss                                       -              -                -       (665,132)            -         (665,132)
   Change in net unrealized gains
     on securities available for sale             -              -                -              -        49,151           49,151
                                                                                                                     ------------
         Total comprehensive
           income                                 -              -                -              -             -         (615,981)
                                         ----------       --------      -----------    -----------     ---------     ------------

Balance, December 31, 2000                1,200,000       $ 12,000      $11,791,311    $  (878,078)    $  49,151     $ 10,974,384
                                         ==========       ========      ===========    ===========     =========     ============

Comprehensive income:
   Net loss                                       -              -                -       (203,248)            -         (203,248)
   Change in net unrealized gains
    on securities available for sale,
    net of tax of $18,338                         -              -                -              -       (13,556)         (13,556)
                                                                                                                     ------------
         Total comprehensive
           income                                 -              -                -              -             -         (216,804)
                                         ----------       --------      -----------    -----------     ---------     ------------

Balance, December 31, 2001                1,200,000       $ 12,000      $11,791,311    $(1,081,326)    $  35,595     $ 10,757,580
                                         ==========       ========      ===========    ===========     =========     ------------

Proceeds from exercise of
    employee stock options                    1,400             14           15,372              -                         15,386

Comprehensive income:
   Net income                                                                              595,129                        595,129
   Change in net unrealized gains
      on securities available for
      sale, net of tax of  $103,251                                                                      176,031          176,031
                                                                                                                     ------------
         Total comprehensive
           income                                 -              -                -              -             -          771,160
                                         ----------       --------      -----------    -----------     ---------     ------------
Balance, December 31, 2002                1,201,400       $ 12,014      $11,806,683    $  (486,197)    $ 211,626     $ 11,544,126
                                         ==========       ========      ===========    ===========     =========     ------------
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       18
<PAGE>


<TABLE>
<CAPTION>
                 FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

              For the Years Ended December 31, 2002, 2001 and 2000

                                                                                  2002                 2001                 2000
                                                                                  ----                 ----                 ----
<S>                                                                           <C>                  <C>                  <C>
Cash flows from operating activities:
   Net income (loss)                                                          $   595,129          $  (203,248)         $  (665,132)
   Adjustments to reconcile net income (loss) to net cash
 provided by operating activities:
    Provision for loan losses                                                     417,980              335,576              470,893
      Provision for deferred income tax benefits                                 (222,755)              (24,000)                  -
     Depreciation                                                                 233,449               181,247              83,674
     Premium amortization (discount accretion), net                                28,987               (29,514)           (153,431)
     Changes in deferred and accrued amounts:
       Prepaid expenses and other assets                                         (190,244)              (58,758)           (330,355)
       Accrued expenses and other liabilities                                     239,576              (157,055)            749,735
                                                                              -----------          ------------         -----------

         Net cash provided by operating activities                              1,102,122                44,248             155,384
                                                                              -----------          ------------         -----------


Cash flows from investing activities:
    Purchases of investment securities                                                  -                     -         (34,269,732)
    Proceeds from maturity of investment securities                                     -                     -          45,594,000
    Proceeds from maturity/prepayment of securities
       available for sale                                                       6,556,407             6,349,006              44,965
    Proceeds from sale of foreclosed property                                      43,995                      -                  -
    Proceeds from sale of securities available for sale                           917,938                      -                  -
    Purchases of securities available for sale                                (15,375,937)           (10,699,998)        (7,991,755)
    Loan originations, net of principal collections                           (29,335,833)           (26,204,963)       (37,670,154)
    Net purchases of premises and equipment                                      (172,951)            (1,597,189)        (3,186,156)
    Purchase of FHLB and other stock                                             (249,500)               (96,700)          (333,800)
                                                                              -----------          ------------
         Net cash used by investing activities                                (37,615,881)          (32,249,844)        (37,812,632)
                                                                              -----------          ------------         -----------

Cash flows from financing activities:
   Proceeds from sale of stock, net of stock offering costs                             -                     -             519,261
   Proceeds from exercise of employee stock options                                15,386                     -                   -
   Increase in FHLB advances                                                    7,000,000                     -                   -
   Redemption of stock of organizer                                                     -                     -                (100)
   Increase (decrease) on line of credit                                                -                     -            (390,000)
   Net increase in deposits                                                    48,800,274            24,531,935          46,386,471
                                                                              -----------          ------------         -----------
         Net cash provided by financing activities                             55,815,660            24,531,935          46,515,632
                                                                              -----------          ------------         -----------

         Net increase/(decrease) in cash and cash equivalents                  19,301,901            (7,673,661)          8,858,384

Cash and cash equivalents at beginning of period                                1,310,844             8,984,505             126,121
                                                                              -----------          ------------         -----------

Cash and cash equivalents, end of period                                      $20,612,745          $  1,310,844         $ 8,984,505
                                                                              ===========          ============         ===========

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.




                                       19
<PAGE>



                 FIRST NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2002 and 2001




Note 1 - Summary of Significant Accounting Policies and Activities
         ---------------------------------------------------------
             Business  Activity and  Organization - First  National  Bancshares,
             ------------------------------------
         Inc. (the  "Company") was  incorporated on July 14, 1999 under the laws
         of the state of South  Carolina  for the purpose of operating as a bank
         holding  company  pursuant to the federal Bank  Holding  Company Act of
         1956,  as amended,  and to purchase  100% of the capital stock of First
         National Bank of Spartanburg (the "Bank").  The Bank was organized as a
         national  bank under the laws of the United  States with the purpose of
         becoming  a new  bank  to  be  located  in  Spartanburg  County,  South
         Carolina.  The  Bank  provides  full  commercial  banking  services  to
         customers and is subject to regulation by the Federal Deposit Insurance
         Corporation and the Office of the Comptroller of the Currency.

             The Company  offered its common  stock for sale to the public under
         an initial  public  offering  which began on  November  10,  1999.  The
         offering  raised   approximately   $11,800,000,   net  of  underwriting
         discounts and commissions and offering  expenses,  and was completed on
         February 10, 2000. The directors and executive  officers of the Company
         purchased  484,100 shares of common stock at $10 per share, for a total
         of $4,841,000.  Upon purchase of these shares, the Company issued stock
         warrants to the  organizers to purchase  313,333 shares of common stock
         for $10 per share. The remaining 715,900 shares were sold in the public
         offering.  The Company used $11 million of the  proceeds to  capitalize
         the Bank.  During the first quarter of 2000,  the Company  obtained all
         regulatory  approvals  to operate  and opened the Bank for  business on
         March 27, 2000.

         Principles of  Consolidation - The  consolidated  financial  statements
         ----------------------------
         include  the  accounts of the  Company  and the Bank.  All  significant
         intercompany   balances  and  transactions   have  been  eliminated  in
         consolidation.  The  accounting  and reporting  policies of the Company
         conform to U.S. generally accepted accounting principles and to general
         practices in the banking  industry.  The Company uses the accrual basis
         of accounting.

         Concentrations  of Credit Risk - The Company,  through the Bank,  makes
         ------------------------------
         loans to  individuals  and small- to mid-sized  businesses  for various
         personal and commercial purposes primarily in Spartanburg County, South
         Carolina.  The  Company  has  a  diversified  loan  portfolio  and  the
         Company's  loan  portfolio is not  dependent  on any specific  economic
         segment. The Company regularly monitors its credit concentrations based
         on loan purpose,  industry and customer  base. As of December 31, 2002,
         there  were no  material  concentrations  of  credit  risk  within  the
         Company's loan portfolio.

         Use of Estimates - The financial  statements are prepared in conformity
         ----------------
         with U.S.  generally  accepted  accounting  principles  ("GAAP")  which
         requires management to make estimates and assumptions.  These estimates
         and assumptions  affect the reported  amounts of assets and liabilities
         at the date of the financial statements.  In addition,  they affect the
         reported  amounts of income and expense  during the  reporting  period.
         Actual results could differ from these estimates.



                                       20
<PAGE>



         Investment   Securities  -  Management   determines   the   appropriate
         -----------------------
         classification  of  investment  securities at the time of purchase into
         one of three  categories as follows:  (1) Investments Held to Maturity:
         securities  which the  Company has the  positive  intent and ability to
         hold to maturity,  which are reported at  amortized  cost;  (2) Trading
         Securities:  securities  that are bought and held  principally  for the
         purpose of selling them in the near future,  which are reported at fair
         value with unrealized  gains and losses  included in earnings;  and (3)
         Investments  Available  for  Sale:  securities  that may be sold  under
         certain  conditions,  which are reported at fair value, with unrealized
         gains and losses  excluded  from  earnings  and  reported as a separate
         component of shareholders'  equity as accumulated  other  comprehensive
         income.  The  amortization  of premiums  and  accretion of discounts on
         investment  securities are recorded as adjustments to interest  income.
         Gains or losses on sales of investment  securities are based on the net
         proceeds and the adjusted carrying amount of the securities sold, using
         the specific  identification  method.  Unrealized losses on securities,
         reflecting a decline in value or impairment judged by the Company to be
         other than  temporary,  are  charged to  earnings  in the  consolidated
         statements of operations.

         Loans and Interest  Income - Loans of the Bank are carried at principal
         --------------------------
         amounts,  reduced by an allowance for loan losses.  The Bank recognizes
         interest income daily based on the principal amount  outstanding  using
         the simple  interest  method.  The  accrual of  interest  is  generally
         discontinued  on loans of the Bank which  become 90 days past due as to
         principal or interest or when management  believes,  after  considering
         economic and  business  conditions  and  collection  efforts,  that the
         borrower's  financial  condition is such that collection of interest is
         doubtful. Management may elect to continue accrual of interest when the
         estimated net realizable value of collateral is sufficient to cover the
         principal  balances and accrued interest and the loan is in the process
         of  collection.  Amounts  received on  nonaccrual  loans  generally are
         applied  against  principal  prior to the  recognition  of any interest
         income.  Generally,  loans are  restored  to  accrual  status  when the
         obligation is brought  current,  has  performed in accordance  with the
         contractual  terms for a  reasonable  period  of time and the  ultimate
         collectibility  of the total  contractual  principal and interest is no
         longer in doubt.

         Impairment  of Loans - Loans are  considered  to be impaired  when,  in
         --------------------
         management's  judgment,  the collection of all amounts of principal and
         interest  is not  probable  in  accordance  with the  terms of the loan
         agreement.  The Company  accounts for impaired loans in accordance with
         the terms of Statement of Financial  Accounting  Standards ("SFAS") No.
         114,  "Accounting by Creditors for Impairment of a Loan," as amended by
         SFAS No. 118 in the areas of  disclosure  requirements  and  methods of
         recognizing  income.  SFAS 114 requires that impaired loans be recorded
         at fair value,  which is  determined  based upon the  present  value of
         expected cash flows discounted at the loan's  effective  interest rate,
         the  market  price  of the  loan,  if  available,  or the  value of the
         underlying collateral.  All cash receipts on impaired loans are applied
         to principal until such time as the principal is brought current. After
         principal  has been  satisfied,  future  cash  receipts  are applied to
         interest income, to the extent that any interest has been foregone.  As
         a  practical  matter,  the Bank  determines  which  loans are  impaired
         through a loan review process.

         Allowance   for  Loan  Losses  -  The  allowance  for  loan  losses  is
         -----------------------------
         established  through a provision for loan losses  charged to operations
         and reflects an amount that, in  management's  opinion,  is adequate to
         absorb  inherent  losses in the  existing  portfolio.  Additions to the
         allowance are based on  management's  evaluation of the loan  portfolio
         under current economic conditions,  past loan loss experience, and such
         other factors which, in management's  judgment,  deserve recognition in
         estimating loan losses.



                                       21
<PAGE>

         Loans are charged  off when,  in the  opinion of  management,  they are
         deemed to be  uncollectible.  Recognized losses are charged against the
         allowance  and  subsequent  recoveries  are  added  to  the  allowance.
         Management  believes that the allowance is adequate.  While  management
         uses  the  best  information  available  to  make  evaluations,  future
         adjustments  to the allowance  may be necessary if economic  conditions
         differ   substantially   from  the  assumptions   used  in  making  the
         evaluations.  The  allowance  for loan  losses is subject  to  periodic
         evaluation  by  various  regulatory  authorities  and may be subject to
         adjustments  based upon  information  that is  available to them at the
         time of their examination.

         Loan Fees - Loan origination fees and direct costs of loan originations
         ---------
         are deferred and  recognized  as an adjustment of yield by the interest
         method based on the contractual terms of the loan. Loan commitment fees
         are deferred and  recognized as an adjustment of yield over the related
         loan's life, or if the commitment  expires  unexercised,  recognized in
         income upon expiration.

         Premises  and  Equipment - Land  is  carried   at  cost.  Premises  and
         ------------------------
         equipment  are  stated  at  cost  less  accumulated   depreciation  and
         amortization, computed principally by the straight line method over the
         estimated  useful lives of the assets as follows:  building,  40 years;
         furniture and fixtures, 10 years; and computer hardware and software, 3
         to 5 years.  Amortization  of leasehold  improvements is recorded using
         the  straight-line  method over the lesser of the estimated useful life
         of the asset or the term of the operating lease.  Additions to premises
         and equipment and major replacements and betterments are added at cost.
         Maintenance,  repairs and minor  replacements are included in operating
         expense. When assets are retired or otherwise disposed of, the cost and
         accumulated  depreciation are removed from the accounts and any gain or
         loss is reflected in income.

         Deferred  Stock  Offering  Costs - Deferred  stock  offering costs were
         --------------------------------
         incurred by the Company in connection with the offering and issuance of
         its stock. The deferred stock offering costs of approximately  $200,000
         were deducted from the Company's  additional  paid-in capital after the
         stock offering was completed on February 10, 2000.

         Income Taxes - Income taxes are accounted  for in accordance  with SFAS
         ------------
         No. 109,  "Accounting for Income Taxes".  Under the asset and liability
         method of SFAS 109,  deferred tax assets and liabilities are recognized
         for the future tax consequences attributable to differences between the
         financial statement carrying amounts of existing assets and liabilities
         and their respective tax bases. Deferred tax assets and liabilities are
         measured using the enacted rates expected to apply to taxable income in
         the years in which  those  temporary  differences  are  expected  to be
         recovered or settled. Under SFAS 109, the effect on deferred tax assets
         and liabilities of a change in tax rates is recognized in income in the
         period that  includes the  enactment  date.  Valuation  allowances  are
         established  to reduce  deferred tax assets if it is  determined  to be
         "more  likely  than  not"  that all or some  portion  of the  potential
         deferred tax asset will not be realized.





                                       22
<PAGE>



         Reclassifications  - Certain prior year amounts have been  reclassified
         -----------------
         to conform with the current presentation.  These reclassifications have
         no effect on previously reported  shareholders' equity or net income as
         previously reported.

         Stock Compensation Plans - Statement of Financial  Accounting Standards
         ------------------------
         (SFAS) No. 123, "Accounting for Stock-Based  Compensation,"  encourages
         all  entities  to adopt a fair value  based  method of  accounting  for
         employee  stock  compensation  plans,   whereby  compensation  cost  is
         measured  at the  grant  date  based on the  value of the  award and is
         recognized  over the  service  period,  which is  usually  the  vesting
         period.  However,  it also  allows  an entity to  continue  to  measure
         compensation  cost for those  plans  using the  intrinsic  value  based
         method of accounting  prescribed by Accounting Principles Board Opinion
         No.  25,   "Accounting   for  Stock  Issued  to   Employees,"   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 employee must pay to acquire the stock.

         All  stock  options  granted  under  stock  compensation  plans  had an
         exercise price equal to the market value of the underlying common stock
         on the  date  of  grant.  Therefore,  no  stock-based  compensation  is
         reflected in net income (loss). Stock options and warrants issued under
         the  Company's  stock  option  plan  and  warrant  agreements  have  no
         intrinsic  value at the  grant  date,  and  under  Opinion  No.  25, no
         compensation  cost is recognized  for them.  The Company has elected to
         continue with the  accounting  methodology  in Opinion No. 25 and, as a
         result,  has provided pro forma  disclosures  of net income  (loss) and
         income  (loss) per share in the following  table,  as if the fair value
         based method of accounting had been applied. See Note 13 for additional
         information regarding the Company's stock-based compensation plans.

<TABLE>
<CAPTION>
         (dollars, except per share, in thousands)            2002           2001          2000
                                                              ----           ----          ----

<S>                                                          <C>             <C>           <C>
           Net income (loss) - as reported                   $ 595           $(203)        $(665)
           Net income (loss) - pro forma                     $ 331           $(435)        $(876)

           Basic income (loss) per share
              As reported                                    $ .50           $(.17)        $(.55)
               Pro forma                                     $ .28           $(.36)        $(.17)

           Fully diluted income (loss) per share
               As reported                                   $ .46             N/A           N/A
               Pro forma                                     $ .25             N/A           N/A
</TABLE>

         The weighted  average fair value per share of options  granted in 2002,
         2001 and 2000 amounted to $1.60, $1.91 and $3.15 respectively. The fair
         value of each option grant was estimated on the date of grant using the
         Black-Scholes option pricing model with the following  assumptions used
         for  grants:  expected  volatility  of  6.0%  for all  years  presented
         risk-free  interest rate of 1.50%,  2.70% and 5.50% for 2002,  2001 and
         2000 respectively,  and expected lives of the options of seven years in
         all  years  presented.  There  were  no  cash  dividends  in any  years
         presented.

         Net  Income  (Loss)  Per  Share - Basic  net  income  (loss)  per share
         -------------------------------
         represents  income  available  to common  stockholders  divided  by the
         weighted-average number of common





                                       23
<PAGE>

         shares  outstanding  during the period.  Diluted net income  (loss) 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 Company
         relate solely to  outstanding  stock options and stock warrants and are
         determined using the treasury stock method.

         For the year ended December 31, 2002, the effect of dilutive securities
         (options  and  warrants)  resulted  in an  incremental  102,793  shares
         outstanding.  For the years ended  December  31,  2001 and 2000,  stock
         options  outstanding were  anti-dilutive  due to the net loss sustained
         during  each  of  these  periods.   However,  the  effect  of  dilutive
         securities  for these  periods  would have  resulted in an  incremental
         25,000 shares outstanding.

         Comprehensive  Income - Accounting  principles  generally  require that
         ---------------------
         recognized  revenue,  expenses,  gains and  losses be  included  in net
         income.  Although  certain changes in assets and  liabilities,  such as
         unrealized  gains and  losses  on  available-for-sale  securities,  are
         reported as a separate  component of the equity  section of the balance
         sheet,   such  items,   along  with  net  income,   are  components  of
         comprehensive income.

         Recently  Issued  Accounting  Standards - In April 2002,  the Financial
         ---------------------------------------
         Accounting  Standards  Board (FASB) issued SFAS No. 145,  Rescission of
         FASB Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13,
         and  Technical  Corrections.   This  statement  rescinds  SFAS  No.  4,
         Reporting  Gains and Losses from  Extinguishments  of Debt and SFAS No.
         64, Extinguishments of Debt Made to Satisfy Sinking-Fund  Requirements.
         This  statement  also rescinds SFAS No. 44,  Accounting  for Intangible
         Assets of Motor Carriers and amends SFAS No. 13, Accounting for Leases.
         This new statement  requires  gains and losses from  extinguishment  of
         debt to be  classified as an  extraordinary  item only if they meet the
         criteria   of  APB   Opinion   No.  30,   Reporting   the   Results  of
         Operations-Reporting  the Effects of Disposal of a Segment of Business,
         and  Extraordinary,  Unusual  and  Infrequently  Occurring  Events  and
         Transactions,  which will distinguish  transactions that are part of an
         entity's recurring operations from those that are unusual or infrequent
         or that meet the criteria for classification as an extraordinary  item.
         The  adoption  of the  provisions  of SFAS No. 145 had no impact on the
         Company's financial position or results of operations.

         In June  2002,  the FASB  issued  SFAS No.  146,  Accounting  for Costs
         Associated with Exit or Disposal Activities,  which addresses financial
         accounting  and  reporting for costs  associated  with exit or disposal
         activities  and nullifies  Emerging  Issues Task Force (EITF) Issue No.
         94-3,  Liability  Recognition for Certain Employee Termination Benefits
         and Other Costs to Exit an Activity  (including  Certain Costs Incurred
         in a  Restructuring).  This Statement  applies to costs associated with
         specific exit activities and requires a liability for a cost associated
         with  an  exit or  disposal  activity  to be  recognized  and  measured
         initially  at its fair  value in the period in which the  liability  is
         incurred.  A liability for a cost  associated  with an exit or disposal
         activity is incurred  when the  definition  of a liability  is met. The
         provisions  of this  statement  are  effective  for  exit  or  disposal
         activities  that are initiated  after December 31, 2002. The provisions
         of this  statement  were adopted by the Company on January 1, 2003 with
         no impact on financial position or results of operations.




                                       24
<PAGE>



         In October 2002,  the FASB issued SFAS No. 147,  Accounting for Certain
         Financial Institutions - an amendment of FASB Statements No. 72 and 144
         and FASB  Interpretation No. 9, which brings all business  combinations
         involving financial institutions, except mutual financial institutions,
         into the scope of SFAS No. 141, Business  Combinations.  This statement
         requires that all acquisitions of financial  institutions that meet the
         definition of a business, including acquisitions of part of a financial
         institution  that meet the definition of a business,  must be accounted
         for in  accordance  with  SFAS  No.  141  and the  related  intangibles
         accounted  for in  accordance  with SFAS No. 142.  SFAS No. 147 removes
         such acquisitions from the scope of SFAS No. 72, Accounting for Certain
         Acquisitions  of  Banking  or Thrift  Institutions.  SFAS No.  147 also
         amends  SFAS  No.  144 to  include  in  its  scope  long-term  customer
         relationship  intangibles of financial  institutions.  SFAS No. 147 was
         effective  upon issuance and had no impact on the  Company's  financial
         statements.

         In  December  2002,  the  FASB  issued  SFAS  No.  148  Accounting  for
         Stock-Based  Compensation--Transition  and Disclosure--an  amendment of
         FASB Statement No. 123. This  Statement  amends FASB Statement No. 123,
         Accounting for Stock-Based Compensation, to provide alternative methods
         of transition for a voluntary  change to the fair value based method of
         accounting for stock-based  employee  compensation.  In addition,  this
         statement  amends the disclosure  requirements  of Statement No. 123 to
         require  prominent  disclosures  in both annual and  interim  financial
         statements  about the method of  accounting  for  stock-based  employee
         compensation and the effect of the method used on reported results. The
         Company  adopted  this  standard  effective  December  31, 2002 and has
         included the required  disclosures in the footnotes to the  financials.
         The Company has not elected  the fair value  treatment  of  stock-based
         compensation  and the  adoption of this  standard  had no impact on its
         financial position.

         Other  accounting  standards  that have been  issued or proposed by the
         FASB or other  standards-setting  bodies that do not  require  adoption
         until a future date are not  expected to have a material  impact on the
         consolidated financial statements upon adoption.

Note 2 - Statement of Cash Flows
--------------------------------

         In accordance  with the  provisions of SFAS No. 95,  "Statement of Cash
         Flows," the Company  considers  cash and cash  equivalents  to be those
         amounts  included  in the  balance  sheet  captions  "Cash and due from
         banks",  "Interest-bearing  bank  balances"  and "Federal  funds sold."
         These accounts totaled  $20,612,745 and $1,310,844 at December 31, 2002
         and 2001, respectively.

         The  following  summarizes  supplemental  cash  flow data for the years
         ended December 31:

<TABLE>
<CAPTION>
                                                              2002              2001             2000
                                                              --------------------------------------------
<S>                                                           <C>               <C>              <C>
           Interest paid                                      $2,706,233        $3,128,989       $456,403
           Cash paid for income taxes                         $   50,000        $        -       $      -
           Change in fair value of securities available
           for sale, net of income tax                        $  176,031       $   (13,556)      $ 49,151
</TABLE>

         Noncash  investing  activities  during the year ended December 31, 2001
         also  included  $177,652  of  premises  additions  included  in accrued
         expenses.



                                       25
<PAGE>


Note 3 - Restrictions on Cash and due from Banks
         ---------------------------------------

         The Bank is required  to maintain  average  reserve  balances  with the
         Federal Reserve Bank based upon a percentage of deposits. The amount of
         the  required  reserve  balance at December  31, 2002 was  $25,000.  No
         reserve balances were required at December 31, 2001.


Note 4 - Securities
         ----------

         The amortized cost, fair value and gross  unrealized  holding gains and
         losses of securities  available for sale at December 31, 2002 and 2001,
         consisted of the following:

<TABLE>
<CAPTION>
                                                                             2002
                                             ---------------------------------------------------------------------
                                                                    Gross            Gross
                                                Amortized        Unrealized        Unrealized          Fair
                                                   Cost             Gains            Losses            Value
<S>                                                <C>               <C>              <C>              <C>
              Debt securities
                available for sale:
                U.S. Agency
                  obligations                     $ 4,032,412        $  14,749        $  (3,510)      $ 4,043,651
                Mortgage-backed                    15,394,771          322,083           (1,988)       15,714,866
                 Municipal                            796,707            9,558           (5,137)          801,128
                                                  -----------        ---------        ---------       -----------

                                                  $20,223,890        $ 346,390        $ (10,635)      $20,559,645
                                                  ===========        =========        ==========      ===========

</TABLE>

<TABLE>
<CAPTION>
                                                                             2001
                                             ----------------------------------------------------------------------
                                                                    Gross            Gross
                                                Amortized        Unrealized        Unrealized           Fair
                                                   Cost             Gains            Losses            Value
<S>                                               <C>                <C>              <C>              <C>
              Debt securities
                available for sale:
                 U.S. Agency
                  obligations                     $ 4,512,970        $ 13,588         $(16,065)        $ 4,510,493
                Mortgage-backed                     7,840,855          77,841          (21,431)          7,897,265
                                                  -----------        ---------        ---------        -----------

                                                  $12,353,825        $ 91,429         $(37,496)        $12,407,758
                                                  ===========        ========         ========         ===========
</TABLE>

         At December  31,  2002 and 2001,  securities  with a carrying  value of
         approximately $11,749,000 and $7,061,000 respectively,  were pledged to
         secure public deposits and for other purposes  required or permitted by
         law.

         The amortized  cost and estimated  fair value of investment  securities
         available for sale at December 31, 2002, by contractual  maturity,  are
         shown in the  following  table.  Expected  maturities  may differ  from
         contractual  maturities  because  issuers may have the right to call or
         repay obligations with or without prepayment  penalties.  Fair value of
         securities was determined using quoted market prices.



                                       26
<PAGE>
<TABLE>
<CAPTION>
                                                                      Amortized               Fair
                                                                         Cost                 Value
                                                                         ----                 -----

<S>                                                               <C>                   <C>
             Due after one year, through five years               $  2,044,796          $  2,050,463
             Due after five years, through ten years                 2,473,130             2,488,259
             Due after ten years, through fifteen years                311,193               306,057
                                                                  ------------          ------------
                                                                     4,829,119             4,844,779
             Mortgage-backed securities                             15,394,771            15,714,866
                                                                  ------------          ------------

                                                                  $ 20,223,890          $ 20,559,645
                                                                  ============          ============
</TABLE>

Note 5 - Investments Required by Law
         ---------------------------

         The Bank,  as a member of the  Federal  Reserve  Bank  ("FRB")  and the
         Federal Home Loan Bank of Atlanta ("FHLB"),  is required to own capital
         stock in these organizations. The Bank's equity investments required by
         law are included in the  accompanying  consolidated  balance  sheets in
         "Other  assets".  The  amount  of stock  owned  is based on the  Bank's
         capital levels in the case of the FRB and totaled  $330,000 at December
         31, 2002 and 2001.  The amount of FHLB stock owned is determined  based
         on the Bank's  balances of residential  mortgages and advances from the
         FHLB and totaled  $350,000  and $100,500 at December 31, 2002 and 2001,
         respectively.  No ready market exists for these stocks and they have no
         quoted   market  value.   However,   redemption  of  these  stocks  has
         historically been at par value.  Accordingly,  the carrying amounts are
         deemed to be a reasonable estimate of fair value.

Note 6 - Loans
         -----

         A summary of loans by classification at December 31 is as follows:

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

<S>                                                                      <C>               <C>
              Commercial and industrial                                  $ 15,867,000      $ 10,095,665
              Commercial secured by real estate                            53,658,692        38,344,136
              Real estate--residential mortgages                           19,174,497        11,832,317
              Installment and other consumer loans                          4,591,509         3,713,501
              Unearned income                                                (185,215)         (116,668)
                                                                         ------------      ------------
                               Total loans, net of unearned income       $ 93,106,483      $ 63,868,951

              Less--allowance for loan losses                              (1,163,977)         (800,303)
                                                                         ------------      ------------
                    Total loans, net                                     $ 91,942,506      $ 63,068,648
                                                                         ============      ============
</TABLE>

         Approximately  $55,270,000  of the loans were  variable  interest  rate
         loans at December 31, 2002. The remaining  portfolio was fixed interest
         rate loans.

         There  were no loans on  nonaccrual  at  December  31,  2002.  One loan
         totaling  $48,000 was on  non-accrual  at December 31,  2001.  Foregone
         interest income on the nonaccrual loan was approximately  $4,000 during
         2001.




                                       27
<PAGE>




         There were no loans past due in excess of 90 days at December  31, 2002
         or 2001.  There were no foreclosed  loans or other real estate owned at
         December 31, 2002 or 2001. There were no impaired loans at December 31,
         2002 or 2001.

         Changes in the allowance  for loan losses for the years ended  December
         31 were as follows:

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

<S>                                                                             <C>                  <C>
                    Balance, beginning of period                                $   800,303          $ 470,893
                    Provision charged to operations                                 417,980            335,576
                    Loans charged off                                               (54,306)            (6,166)
                    Recoveries on loans previously charged off                            -                  -
                                                                                -----------          ---------

                    Balance, end of period                                      $ 1,163,977          $ 800,303
                                                                                ===========          =========
</TABLE>

         Directors,  executive  officers  and  associates  of such  persons  are
         customers of and have transactions with the Bank in the ordinary course
         of business.  Included in such  transactions are outstanding  loans and
         commitments,  all of which are made under substantially the same credit
         terms, including interest rates and collateral,  as those prevailing at
         the time for comparable  transactions with unrelated persons and do not
         involve more than the normal risk of collectibility.

         The   aggregate   dollar   amount  of  these   outstanding   loans  was
         approximately  $5.56 million and $4.47 million at December 31, 2002 and
         2001, respectively.  During 2002, new loans and advances on these lines
         of credit  totaled  approximately  $2.31  million and payments on these
         loans and lines totaled  approximately  $1.22 million.  At December 31,
         2002,  there were  commitments to extend  additional  credit to related
         parties in the amount of approximately $1.57 million.

         Under current Federal Reserve  regulations,  the Bank is limited to the
         amount  it may  loan to the  Company.  Loans  made by the  Bank may not
         exceed 10% and loans to all affiliates may not exceed 20% of the Bank's
         capital, surplus and undivided profits, after adding back the allowance
         for loan losses.  There were no loans outstanding  between the Bank and
         the Company at December 31, 2002 or 2001.

Note 7 - Premises and Equipment
         ----------------------

         A summary of premises and equipment at December 31 is as follows:

                                                      2002              2001
                                                      ----              ----

              Land                                  $  975,854       $  962,018
              Building and improvements              2,823,664        2,774,123
              Furniture, fixtures and equipment      1,154,210        1,044,636
                                                    ----------       ----------
                                                     4,953,728        4,780,777
              Accumulated depreciation                 454,082          220,633
                                                    ----------       ----------

                                                    $4,499,646       $4,560,144
                                                    ==========       ==========



                                       28
<PAGE>




         Depreciation  expense charged to operations totaled $233,449,  $181,247
         and $83,674 in 2002, 2001, and 2000 respectively.

         The Bank entered into a long-term land lease during 2000,  which has an
         initial   term  of  20  years  and  various   renewal   options   under
         substantially  the same terms with certain rate  escalations.  The Bank
         leased  temporary  facilities  during its  organizational  and  initial
         operational  phase  which  expired  in  2001  upon  completion  of  the
         Company's new main office facility.  Rent expense charged to operations
         totaled  $48,000,  $48,000 and $46,100 for the years ended December 31,
         2002, 2001 and 2000, respectively.

         The annual minimum rental  commitments under the terms of the Company's
         noncancellable lease at December 31, 2002 are as follows:

              2003                               $          48,000
              2004                                          48,000
              2005                                          50,917
              2006                                          50,917
              2007                                          50,917
              Thereafter                                   767,249
                                                  ----------------

                    Total                        $       1,016,000
                                                  ================

Note 8 - Deposits
         --------

         The aggregate  amount of time deposits with a minimum  denomination  of
         $100,000 is  approximately  $25,472,000 and $19,597,000 at December 31,
         2002 and 2001.

         The  scheduled  maturities  of  time  deposits  at  December  31 are as
         follows:



                                                     2002            2001
                                                     ----            ----

              One year or less                   $ 53,634,000    $ 44,085,263
              From one year to three years         18,074,000       1,168,100
              After three years                     1,169,000          71,915
                                                 ------------    ------------

                    Total                        $ 72,877,000    $ 45,325,278
                                                 ============    ============


Note 9 - Lines of Credit
         ---------------

           At December 31, 2002, the Bank had short-term lines of credit with
           correspondent banks to purchase unsecured federal funds totaling
           $5,000,000. The interest rate on any borrowings under these lines
           would be the prevailing market rate for federal funds purchased.





                                       29
<PAGE>



Note 10 - FHLB Advances
          -------------

          The Bank has the ability to borrow up to 15% of its total  assets from
          the FHLB as of December 31, 2002.  Borrowings  under this  arrangement
          can be made with various terms and repayment  schedules and with fixed
          or variable rates of interest.  The borrowings  under this arrangement
          are  available  by  pledging  collateral  and may  require  additional
          purchases of stock in the FHLB.  Qualifying  securities  available for
          sale with a market value of $8,347,000  were pledged as collateral for
          advances outstanding of $7,000,000 at December 31, 2002.

          At December 31, 2002, fixed rate FHLB advances outstanding ranged from
          $1,000,000 to $5,000,000  with initial  maturities of one to ten years
          and rates of 1.32% to 2.98%.  The  weighted-average  interest  rate on
          FHLB advances  outstanding at December 31, 2002 was 1.72%. At December
          31, 2002,  advances  totaling $5 million were subject to call features
          at the option of the FHLB with call dates ranging from January 2003 to
          July 2012. Call provisions are more likely to be exercised by the FHLB
          when rates rise.  Scheduled  maturities of FHLB advances subsequent to
          December 31, 2002 are $2,000,000 in 2003 and $5,000,000 in 2012.


Note 11 - Income Taxes
          ------------

          The following is a summary of the items,  which caused recorded income
          taxes to differ from taxes  computed  using the statutory tax rate for
          the periods ending December 31:

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

<S>                                                        <C>                   <C>                   <C>
           Income tax expense at federal statutory         $  202,344            $  (77,264)           $ (226,145)
              rate
           Change in valuation allowance                     (341,591)               47,353               214,809
           State income tax, net of federal effect             11,959                     -                     -
           Other, net                                         127,288                 5,911                11,336
                                                           ----------            ----------            ----------

           Income tax benefit                              $        -            $  (24,000)           $        -
                                                           ==========            ==========            ==========
</TABLE>

          The provision for income taxes for the year ended December 31, 2002 is
          as follows:

                                                                     2002
                      Current:
                         Federal                                  $ 204,635
                         State                                       18,120
                                                                  ---------
                                                                  $ 222,755
                      Deferred:
                          Federal                                 $ (222,755)
                                                                  ----------
                                                                  $ (222,755)
                      Provision for income taxes                  $        -
                                                                  ==========

          The  Company  had no  currently  taxable  income for the years  ending
          December 31, 2001 and 2000.




                                       30
<PAGE>




          The components of the deferred tax assets and  liabilities at December
          31 are as follows:

<TABLE>
<CAPTION>
                                                                                2002                  2001
                                                                                ----                  ----
<S>                                                                          <C>                   <C>
              Deferred tax liability:
                 Net deferred loan costs                                     $  29,782             $  22,916
                 Prepaid expenses deducted currently for tax                    21,675                22,286
                 Tax depreciation in excess of book                             51,000                     -
                Unrealized gain on securities available
                  for sale                                                     124,129                18,338
                                                                             ---------             ---------
                    Total deferred tax liability                               226,586                63,540

              Deferred tax asset:
                Allowance for loan losses                                      288,244               272,103
                Net operating loss carryforward                                      -                50,558
                Deferred organizational and start-up costs                      60,968                88,132
                                                                             ---------             ---------

                Deferred tax asset before valuation
                  allowance                                                    349,212               410,793

                Valuation allowance                                                  -              (341,591)
                                                                             ---------             ---------

                    Net deferred tax asset                                   $ 122,626             $   5,662
                                                                             =========             =========
</TABLE>

          The net  deferred  tax  asset is  included  in "Other  assets"  in the
          accompanying consolidated balance sheets.

          The  Company  has  not  recorded  a  valuation  allowance  for the net
          deferred tax asset as the  realization  of this asset is determined to
          be more  likely  than not based on the  Company's  ability to generate
          future   taxable   income  during  the  periods  in  which   temporary
          differences become deductible.

          A portion of the change in the net deferred  tax asset  relates to the
          change  in  the  tax  effect  of the  unrealized  gain  on  securities
          available for sale of $105,791. The remainder of the change in the net
          deferred tax asset is due to the current  period  deferred tax benefit
          of $222,755.

Note 12 - Regulatory Capital Requirements and Dividend Restrictions
          ---------------------------------------------------------

          The  Company  (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 material
          effect on the financial statements.  Under capital adequacy guidelines
          and the regulatory framework for prompt corrective action, the Company
          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  Company's  and  the  Bank's   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.


         The Company and the Bank are required to maintain  minimum  amounts and
         ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage
         capital  (as  defined  in the  regulations)  as set  forth in the table
         following.  Management  believes,  as of  December  31,  2002  that the
         Company and the Bank meet all capital  adequacy  requirements  to which


                                       31
<PAGE>

          they are subject.  At December 31, 2002,  the Bank is  categorized  as
          "well   capitalized"   under  the  regulatory   framework  for  prompt
          corrective  action.  There are no current  conditions  or events  that
          management believes would change the Company's or the Bank's category.

          The  following  table  presents the  Company's  and the Bank's  actual
          capital  amounts and ratios at  December  31, 2002 and 2001 as well as
          the minimum calculated amounts for each regulatory-defined category.

<TABLE>
<CAPTION>
                                                                                                       Minimum to be
                                                                                                    Categorized as Well
                                                                                                     Capitalized Under
                                                                            For Capital              Prompt Corrective
                                                    Actual               Adequacy Purposes           Action Provisions
                                            -----------------------    -----------------------    ------------------------
                                               Amount      Ratio          Amount      Ratio          Amount       Ratio
                                               ------      -----          ------      -----          ------       -----
  As of December 31, 2002
     The Company
     -----------
<S>                                          <C>           <C>          <C>            <C>           <C>           <C>
     Total capital to risk-weighted assets   $12,351,000   13.01%       $7,594,960     8.00%           N/A         N/A
     Tier 1 capital to risk-weighted assets  $11,187,000   11.78%       $3,797,480     4.00%           N/A         N/A
     Tier 1 capital to average assets        $11,187,000    8.74%       $5,112,520     4.00%           N/A         N/A


     The Bank
     --------
     Total capital to risk-weighted assets   $11,327,000   11.93%       $7,594,960     8.00%        $ 9,493,700   10.00%
     Tier 1 capital to risk-weighted assets  $10,163,000   10.70%       $3,797,480     4.00%        $ 5,696,200    6.00%
        Tier 1 capital to average assets     $10,163,000    7.95%       $5,112,520     4.00%        $ 6,390,650    5.00%

  As of December 31, 2001
     The Company
     -----------
     Total capital to risk-weighted assets   $11,498,288   17.45%       $5,272,160     8.00%           N/A         N/A
     Tier 1 capital to risk-weighted assets  $10,697,985   16.23%       $2,626,808     4.00%           N/A         N/A
     Tier 1 capital to average assets        $10,697,985   13.21%       $3,238,240     4.00%           N/A         N/A

     The Bank
     --------
     Total capital to risk-weighted assets   $10,474,764   15.89%       $5,272,160     8.00%        $ 6,590,200   10.00%
     Tier 1 capital to risk-weighted assets  $ 9,674,461   14.68%       $2,636,080     4.00%        $ 3,954,120    6.00%
     Tier 1 capital to average assets        $ 9,674,461   11.95%       $3,238,240     4.00%        $ 4,047,800    5.00%
</TABLE>


          The ability of the Company to pay cash  dividends  is  dependent  upon
          receiving  cash in the form of dividends  from the Bank. The dividends
          that  may be paid by the  Bank to the  Company  are  subject  to legal
          limitations and regulatory capital  requirements.  The approval of the
          Comptroller  of the Currency is required if the total of all dividends
          declared by a national  bank in any  calendar  year exceeds the Bank's
          net  profits (as defined by the  Comptroller)  for that year  combined
          with its retained net profits (as defined by the  Comptroller) for the
          two  preceding  calendar  years.  As of  December  31,  2002,  no cash
          dividends have been declared or paid by the Bank.




                                       32
<PAGE>



Note 13 - Stock Compensation Plans
          ------------------------

          Effective  March 6,  2000,  the  Company  adopted  the First  National
          Bancshares,  Inc. 2000 Stock  Incentive  Plan (the "Plan").  Under the
          Plan,  options are periodically  granted to employees and directors by
          the Personnel Committee at a price not less than the fair market value
          of the shares at the date of grant.  Options  granted are  exercisable
          for a  period  of  ten  years  from  the  date  of  grant  and  become
          exercisable at a rate of 20% each year on the first five anniversaries
          of the  date of  grant.  The Plan  authorizes  the  granting  of stock
          options up to a maximum of 180,000 shares of common stock. At December
          31, 2002,  73,600 option shares were available to be granted under the
          Plan.


          Upon consummation of the initial public offering,  the organizers were
          issued stock  warrants to purchase  313,333 shares of common stock for
          $10 per share.  These  warrants  vest  ratably over a five year period
          beginning  February 10, 2000,  and will be  exercisable in whole or in
          part during the ten year period following that date.


          The  following  is a summary of the  activity  under the plans for the
          years ended December 31:

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

                                                                                       Weighted
                                                 Weighted Average                       Average                         Weighted
                                                  Exercise Price                     Exercise Price                      Average
                                                                                                                     Exercise Price
                                    Shares           Per Share          Shares         Per Share          Shares       Per Share
                                    ------           ---------          ------         ---------          ------       ---------
<S>                                 <C>              <C>                <C>            <C>                <C>            <C>
   Outstanding, beginning of        420,833          $  10.07           409,833        $  10.00                -      $        -
        period

   Granted                            5,500             13.09            11,000           10.72          409,833           10.00

   Forfeited                         (6,600)            10.55                 -               -                -               -

   Exercised                         (1,400)            10.14                 -               -                -               -
                                    -------          --------            ------        --------          -------      ----------
   Outstanding, December 31         418,333          $  10.05           420,833        $  10.05          409,833      $    10.07
                                    =======          ========           =======        ========          =======      ==========

   Exercisable, December 31         164,433          $  10.00           81,967         $  10.00                -               -
                                    =======          ========           =======        ========          =======      ==========
</TABLE>

          The  following  table  summarizes   information  about  stock  options
          outstanding under the stock-based option plans at December 31, 2002:

<TABLE>
<CAPTION>
                                               Options Outstanding                       Options Exercisable
                                  ----------------------------------------------    -------------------------------
                                                     Weighted
                                                     Average         Weighted                         Weighted
                                     Number         Remaining       Exercise            Number        Average
              Range of              Options       Contractual       Average            Options        Exercise
            Exercise Prices       Outstanding        Life       Exercise Price       Exercisable       Price
            ---------------       -----------        ----       --------------       -----------       -----

           <S>                      <C>             <C>                 <C>               <C>         <C>
           $10.00                     407,333       7.25 years          $10.00            162,933     $  10.00
           $10.50 - $10.80              5,500       9.00 years          $10.75              1,500     $  10.76
           $13.05 - $13.50              5,500       9.65 years          $13.09                  -            -
                                      -------      -----------          ------            -------     --------
           $10.00 - $13.50            418,333      7.30  years          $10.05            164,433     $  10.00
                                      =======      ===========          ======            =======     ========
</TABLE>

                                       33
<PAGE>

Note 14 - Employee Benefit Plan
          ---------------------

          The  Company  maintains  an  employee  benefit  plan for all  eligible
          employees of the Company and the Bank under the provisions of Internal
          Revenue Code Section  401(k).  The First National  Retirement  Savings
          Plan (the "Plan") allows for employee  contributions  and, upon annual
          approval  of the  Board  of  Directors,  the  Company  matches  25% of
          employee  contributions  up to a  maximum  of six  percent  of  annual
          compensation.  A total of  $12,000,  $9,914 and $7,232 was  charged to
          operations in 2002,  2001,  and 2000  respectively,  for the Company's
          matching  contribution.  Employees  are  immediately  vested  in their
          contributions  to the Plan and  become  fully  vested in the  employer
          matching contribution after five years of service.


Note 15 - Commitments and Contingencies
          -----------------------------

          The  Company  has  entered  into  an  employment  agreement  with  its
          President  and Chief  Executive  Officer  that  includes  an  annually
          renewable  three-year   compensation  term,  annual  bonus,  incentive
          program,  stock option plan and a one-year non-compete  agreement upon
          termination.

          In the  normal  course  of  business,  the  Company  and the  Bank are
          periodically  subject to various  pending or  threatened  lawsuits  in
          which  claims for monetary  damages may be  asserted.  At December 31,
          2002,  the Company and the Bank were not involved with any  litigation
          matters.

Note 16 - Financial Instruments with Off-Balance Sheet Risk
          -------------------------------------------------

          The Company is party to financial  instruments with off-balance  sheet
          risk in the normal course of business to meet the  financing  needs of
          its customers.  These  financial  instruments  include  commitments to
          extend  credit and standby  letters of credit and involve,  to varying
          degrees,  elements of credit and  interest  rate risk in excess of the
          amount  recognized in the balance  sheet.  The  Company's  exposure to
          credit loss in the event of  nonperformance  by the other party to the
          financial  instrument  for  commitments  to extend  credit and standby
          letters of credit is represented by the  contractual  amounts of those
          instruments.


          The  Company  uses the same credit and  collateral  policies in making
          commitments  and  conditional  obligations  as it does for  on-balance
          sheet    instruments.    The   Company   evaluates   each   customer's
          creditworthiness  on a  case-by-case  basis.  The amount of collateral
          obtained if deemed  necessary by the Company upon  extension of credit
          is based on  management's  credit  evaluation.  Commitments  to extend
          credit are  agreements  to lend to a  customer  as long as there is no
          violation of any condition  established  in the contract.  Commitments
          generally have fixed expiration dates or other termination clauses and
          may require payment of a fee. Since many of the commitments may expire
          without  being  drawn  upon,  the  total  commitment  amounts  do  not
          necessarily represent future cash requirements.

          At December 31, 2002, the Company's  commitments to extend  additional
          credit totaled  approximately $25.1 million, the majority of which are
          at  variable  rates  of  interest.  Included  in the  Company's  total
          commitments  are  standby  letters  of  credit.  Letters of credit are
          commitments  issued by the Company to guarantee the  performance  of a
          customer to a third party and totaled  $61,000 at December  31,  2002.
          The credit risk


                                       34
<PAGE>

          involved in the  underwriting  of letters of credit is essentially the
          same as that involved in extending loan facilities to customers.

Note 17 - Fair Value of Financial Instruments
          -----------------------------------

          SFAS 107,  "Disclosures  about Fair Value of  Financial  Instruments,"
          requires  disclosure  of  fair  value  information,   whether  or  not
          recognized  in  the  statement  of  financial  position,  when  it  is
          practicable  to  estimate  fair  value.  SFAS 107  defines a financial
          instrument as cash, evidence of an ownership interest in an entity, or
          contractual  obligations  which  require the exchange of cash or other
          financial  instruments.  Certain items which are specifically excluded
          from the  disclosure  requirements,  including  the  Company's  common
          stock, premises and equipment and other assets and liabilities.


          Fair  value  approximates  book  value  for  the  following  financial
          instruments due to the short-term  nature of the instrument:  cash and
          due from  banks,  interest-bearing  deposits in banks,  federal  funds
          sold, federal funds purchased, repurchase agreements,  short-term FHLB
          advances,  and other short-term  borrowings.  Fair value of investment
          securities is estimated 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.

          Fair value for  variable  rate loans that reprice  frequently  and for
          loans  that  mature  in less  than one  year is based on the  carrying
          value,  reduced  by an  estimate  of  credit  losses  inherent  in the
          portfolio. Fair value of fixed rate real estate, consumer,  commercial
          and other  loans  maturing  after one year is based on the  discounted
          present  value of the  estimated  future  cash  flows,  reduced  by an
          estimate of credit losses  inherent in the  portfolio.  Discount rates
          used in these computations approximate the rates currently offered for
          similar loans of comparable terms and credit quality.

          Fair  value  for   demand   deposit   accounts   and   variable   rate
          interest-bearing  accounts with no fixed maturity date is equal to the
          carrying value.  Certificate of deposit accounts  maturing during 2002
          are valued at their carrying  value.  Certificate of deposit  accounts
          maturing  after  2002 are  estimated  by  discounting  cash flows from
          expected   maturities   using  current   interest   rates  on  similar
          instruments.  Fair  value  for  long-term  FHLB  advances  is based on
          discounted cash flows using the current market rate.

          The estimated  fair market value of  commitments  to extend credit and
          standby  letters  of credit are equal to their  carrying  value as the
          majority of these  off-balance sheet instruments have relatively short
          terms to maturity and are written with variable rates of interest.

          The Company has used  management's  best estimate of fair values based
          on the above  assumptions.  Thus, the fair values presented may not be
          the  amounts,  which  could  be  realized  in  an  immediate  sale  or
          settlement  of the  instrument.  In addition,  any income tax or other
          expense  which would be incurred in an actual sale or  settlement  are
          not taken into consideration in the fair value presented.



                                       35
<PAGE>




          The estimated  fair values of the Company's  financial  instruments at
          December 31 are as follows:

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

                                                     Carrying         Estimated         Carrying        Estimated
                                                      Amount          Fair Value         Amount         Fair Value
                                                      ------          ----------         ------         ----------
<S>                                                  <C>             <C>               <C>              <C>
          Financial assets:
            Cash and due from banks                  $  8,097,022    $  8,097,022      $   381,844      $   381,844
             Interest-bearing bank balances             5,827,723       5,827,723                -                -
            Federal funds sold                          6,688,000       6,688,000          929,000          929,000
            Securities available for sale              20,559,645      20,559,645       12,407,758       12,407,758
            Loans, net                                 91,942,506      92,248,000       63,068,648       63,684,000

            Financial liabilities:
            Deposits                                 $119,718,680    $121,566,000      $70,918,406      $73,639,000
            FHLB advances                             $ 7,000,000    $  7,000,000                -                -
</TABLE>

Note 18 - Parent Company Financial Information
          ------------------------------------

          The following is condensed  financial  information  of First  National
          Bancshares,  Inc.  (parent company only) at December 31, 2002 and 2001
          and for each of the years in the three-year period ending December 31,
          2002.

<TABLE>
<CAPTION>
                                            First National Bancshares, Inc.
                                               Condensed Balance Sheets

                                                                     2002                2001
                                                                     ----                ----
<S>                                                              <C>                 <C>
              Assets:
                Cash                                             $  1,027,861        $  1,029,687
                Investment in bank subsidiary                      10,520,181           9,734,057
                                                                 ------------        ------------
                    Total                                        $ 11,548,042        $ 10,763,744
                                                                 ============        ============

              Liabilities and shareholders' equity:
                Accruals and other liabilities                   $      3,916        $      6,164
                Shareholders' equity                               11,544,126          10,757,580
                                                                 ------------        ------------

                    Total                                        $ 11,548,042        $ 10,763,744
                                                                 ============        ============
</TABLE>



                                       36
<PAGE>


<TABLE>
<CAPTION>
                         First National Bancshares, Inc.
                         Condensed Statements of Income

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

<S>                                              <C>                    <C>                  <C>
Interest income                                  $    13,780            $   37,898           $   189,515
Interest expense                                           -                     -                (6,481)
                                                 -----------            ----------           -----------

        Net interest income                           13,780                37,898               183,034

Payment from bank subsidiary for
    organizational costs                                   -                     -               402,480

Salaries                                                   -                     -               120,998
Professional fees                                      6,818                   476                 7,072
Shareholder relations                                 19,542                12,521                 9,446
Other                                                  2,385                 1,317                38,425
                                                 -----------            ----------           -----------
     Non-interest expense                             28,745                14,314               175,941

Equity in undistributed net income
     (loss) of bank subsidiary                       610,094              (226,832)           (1,074,705)
                                                 -----------            ----------           -----------

Net income (loss) before income taxes                595,129              (203,248)             (665,132)
Income taxes                                               -                     -                     -
                                                 -----------            ----------           -----------
          Net income (loss)                      $   595,129            $ (203,248)          $  (665,132)
                                                 ===========            ==========           ===========

</TABLE>



                                       37
<PAGE>



<TABLE>
<CAPTION>
                                             First National Bancshares, Inc.

                                            Condensed Statements of Cash Flows

                                                                           2002               2001              2000
                                                                           ----               ----              ----
<S>                                                                     <C>              <C>               <C>
   Operating activities:
     Net income (loss)                                                  $  595,129       $ (203,248)       $   (665,132)
     Adjustments to reconcile net income (loss) to net
        cash provided by (used for) operating activities:
     Equity in undistributed net (income) loss of bank
        subsidiary                                                        (610,094)         226,832           1,074,705
     Discount accretion                                                          -                -            (126,900)
     Decrease in other assets                                                    -                -              92,650
     Increase/(decrease) in other liabilities                               (2,248)          (4,486)              3,396
                                                                        ----------       ----------        ------------

     Net cash provided by (used for) operating activities                  (17,213)          19,098             378,719
                                                                        ----------       ----------        ------------

   Investing activities:
     Purchase of investment securities                                           -                -         (34,269,732)
     Maturity of investment securities                                           -                -          45,594,000
     Repayment from bank for equipment and other assets                          -                -              52,320
     Increase/(decrease) in due to bank subsidiary                               -           (5,711)              5,711
     Capital contribution to bank subsidiary                                     -                -         (11,000,000)
                                                                        ----------       ----------        ------------
     Net cash provided/(used) by investing activities                            -           (5,711)            382,299
                                                                        ----------       ----------        ------------

   Financing activities:
     Proceeds from exercise of employee stock options                       15,387                -                   -
     Proceeds from stock offering net of costs                                   -                -             519,261
     Redemption of stock of organizer                                            -                -                (100)
     Increase (decrease) on line of credit                                       -                -            (390,000)
                                                                        ----------       ----------        ------------
     Net cash provided by financing activities                              15,387                -             129,161

    Net increase (decrease) in cash and cash equivalents                    (1,826)          13,387             890,179

    Balance, beginning of year                                           1,029,687        1,016,300             126,121
                                                                        ----------       ----------        ------------

    Balance, end of year                                               $ 1,027,861       $1,029,687        $  1,016,300
                                                                        ==========       ==========        ============
</TABLE>







                                       38
<PAGE>




                              [Insert company logo]


                               BOARD OF DIRECTORS

                                    Chairman
                                Norman F. Pulliam
                      President, Pulliam Investment Company
                            *************************



C. Dan Adams
    President, The Capital Corporation
Mellnee G. Buchheit
    President, Buchheit News Management
Jerry L. Calvert
    President & CEO, First National Bancshares
Martha C. Chapman
     Community Volunteer
W. Russel Floyd
   Business Administrator, Floyd's Mortuary
Dr. C. Tyrone Gilmore, Sr.
      VP/Customer Relations, Compass Learning, Inc.
Dr. Gaines W. Hammond, Jr.
   Urologist, Hammond Urology, P.A.
Benjamin R. Hines
    President, Spencer/Hines Properties
William A. Hudson
    Vice Chairman, Diversco
Peter E. Weisman
  Managing Member, Kinney Hill Associates
Donald B. Wildman
   Partner, JSHW Law Firm
Coleman L. Young, Jr.
   President, CLY, Inc.

                ************************************************


                               [Insert bank logo]


                               EXECUTIVE OFFICERS

                                Jerry L. Calvert
                      President and Chief Executive Officer

                             Robert W. Murdoch, Jr.
                 Senior Vice President & City Executive Officer

                                 Kitty B. Payne
                 Senior Vice President & Chief Financial Officer

                               David H. Zabriskie
                  Senior Vice President & Chief Lending Officer


                                       39
<PAGE>


                         FIRST NATIONAL BANCSHARES, INC.
                             SHAREHOLDER INFORMATION

Market for Common Stock

     First National Bancshares,  Inc. common stock is traded on the OTC Bulletin
Board under the symbol FNSC. At February 28, 2003,  there were 358  shareholders
of record.  The number of  shareholders of record does not reflect the number of
persons  or  entities  who hold the stock in nominee or  "street"  name  through
various brokerage firms.

     All of our currently issued and outstanding  common stock was issued in our
initial public offering on November 10, 1999. The price per share in the initial
public offering was $10.00 per share.  There is currently not a well-established
public  trading  market in the common stock,  and trading and  quotations of the
common  stock have been  limited  and  sporadic.  Because  there has not been an
established  market for our common  stock,  we may not be aware of all prices at
which the common stock has been  traded.  Based on  information  available to us
from a limited number of sellers and purchasers of our common stock,  we believe
transactions  in the common stock,  on a per share basis,  ranged from $10.75 to
$15.25 during 2002 and from $10.00 to $12.00 during 2001.  There is no assurance
that these prices reflect the market value of our common stock.

     The following is a summary of the bid prices for our common stock  reported
by the OTC Bulletin Board for the periods indicated:
<TABLE>
<CAPTION>
                                                   2002                           2001
                                             High            Low            High            Low
<S>                                       <C>            <C>             <C>            <C>
       First Quarter                      $ 13.00        $ 10.75         $ 10.75        $ 10.50
       Second Quarter                       14.00          11.00          10.875          10.00
       Third Quarter                        15.00          13.00           11.00          10.00
       Fourth Quarter                       15.25          14.00           12.00          10.25
</TABLE>

     The price listed above are quotations,  which reflect  inter-dealer prices,
without retail mark-up,  mark-down or commission,  and may not represent  actual
transactions.

Registered Market Makers                    Stock Transfer Agent and Registrar

Scott & Stringfellow, Inc.                First Citizens Bank and Trust Company
Hill Thompson Magid, L.P.                           of South Carolina
Monroe Securities, Inc.                               P.O. Box 29
ASG Securities, Inc.                              Columbia, SC  29202
Baird, Patrick & Co., Inc.                            (803) 733-2703

Annual Meeting

     The Annual  Meeting  of  Shareholders  will be held at 5:30 PM on  Tuesday,
April 22, 2003 at our main offices at 215 N. Pine Street, Spartanburg, SC 29302.
All  shareholders  of record as of February  28, 2003 are eligible to attend and
vote.

Financial Information

     Analysts, investors and others seeking financial information, including our
Annual  Report to the SEC on Form 10-KSB,  should  contact:  Ms. Kitty B. Payne,
First National Bancshares,  Inc., P.O. Box 3508, Spartanburg,  SC 29304.


                                General Counsel

                  Nelson, Mullins, Riley & Scarborough, L.L.P.
                                First Union Plaza
                      999 Peachtree Street, NE / Suite 1400
                             Atlanta, Georgia 30309



                                       40
<PAGE>



                               [Insert bank logo]




                                OFFICE LOCATIONS

                                   Main Office
                         (across from Converse College)
                             Manager - Marilyn Smith
                               215 N. Pine Street
                              Spartanburg, SC 29302
                               Phone: 864-948-9001
                                Fax: 864-948-0001

                                 Westside Office
                              (across from Saturn)
                             Manager - Keith Hughes
                               2680 Reidville Road
                              Spartanburg, SC 29301
                               Phone: 864-576-7220
                                Fax: 864-576-7282

                             Boiling Springs Office
                               (next to Hardee's)
                           Manager - Foster Alexander
                            3090 Boiling Springs Road
                            Boiling Springs, SC 29316
                               Phone: 864-578-8600
                                Fax: 864-578-8664

                             24-Hour Account Access
                                  864-948-9008


                Visit us online at www.firstnational-online.com!





<PAGE>




                       Doing Business RIGHT Here at Home.





























[Insert company logo]

Post Office Box 3508
Spartanburg, SC  29304
(864) 948-9001
www.firstnational-online.com