<PAGE>

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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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

                                  FORM 10-KSB

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

                       ANNUAL REPORT UNDER SECTION 13 OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                    FOR FISCAL YEAR ENDED DECEMBER 31, 2001

                      Commission File Number:  000-30517

                      American Community Bancshares, Inc.
            (Exact Name of Registrant as specified in its charter)

                   North Carolina              56-2179531
              (State of Incorporation)      (I.R.S. Employer
                                           Identification No.)
                         2593 West Roosevelt Boulevard
                         Monroe, North Carolina 28110
                         (Address of Principal Office)

                                (704) 225-8444
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $1.00 PAR VALUE

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

   Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.  YES [X]    NO [_]

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

   The Registrant's revenues for the year ended December 31, 2001 were
$13,748,827.

   The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 21, 2002 was approximately $13,916,000.

   The number of shares of the Registrant's Common Stock outstanding on
December 31, 2001 was 1,642,241.

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

                     Documents Incorporated by Reference:

   Portions of Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders (Part III).

   Transitional Small Business Disclosure Format    Yes [_]    No [X]

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<PAGE>

                       FORM 10-KSB CROSS REFERENCE INDEX

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----
<S>          <C>                                                                            <C>
Part I
   Item 1.   Business......................................................................    1
   Item 2.   Properties....................................................................   16
   Item 3.   Litigation....................................................................   16
   Item 4.   Submission of Matters to a Vote of Security Holders........................... None

Part II
   Item 5.   Market for Registrant's Common Equity and Related Shareholder Matters.........   17
   Item 6.   Management's Discussion and Analysis or Plan of Operation.....................   18
   Item 7.   Financial Statements..........................................................  F-1
   Item 8.   Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosure.................................................................... None

Part III
   Item 9.   Directors, Executive Officers, Promoters, and Control Persons; Compliance with
             Section 16(a) of Exchange Act.................................................  *
   Item 10.  Executive Compensation........................................................  *
   Item 11.  Security Ownership of Certain Beneficial Owners and Management................  *
   Item 12.  Certain Relationships and Related Transactions................................  *

Part IV
   Item 13.  Exhibits and Reports on Form 8-K.............................................. II-1
             (a) Index to Exhibits......................................................... II-1
             (b) Reports on Form 8-K filed during the three months ended December 31, 2001. II-1
</TABLE>
--------
*  Information required by Item 9 is incorporated herein by reference to the
   information that appears under the captions "Proposal 1: ELECTION OF
   DIRECTORS", "Required Reports of Beneficial Ownership", and "Executive
   Officers" on pages 4 through 9 of Registrant's definitive Proxy Statement
   dated March 28, 2002.

   Information required by Item 10 is incorporated herein by reference to the
information that appears under the captions "Director Compensation", "Executive
Officers - Executive Compensation", and "401(k) Savings Plan" on pages 7
through 11 of Registrant's definitive Proxy Statement dated March 28, 2002.

   Information required by Item 11 is incorporated herein by reference to the
information that appears under the caption "Ownership of Voting Securities" on
pages 3 and 4 of Registrant's definitive Proxy Statement dated March 28, 2002.

   Information required by Item 12 is incorporated herein by reference to the
information that appears under the caption "Indebtedness of and Transactions
with Management" on pages 11 and 12 of Registrant's definitive Proxy Statement
dated March 28, 2002.

<PAGE>

                                   BUSINESS

Who We Are

   Bancshares is a bank holding company that owns all of the common stock of
the Bank, a North Carolina-chartered bank with deposit accounts insured by the
Bank Insurance Fund of the FDIC. Bancshares was incorporated on February 16,
2000 as a North Carolina-chartered corporation and became the holding company
for the Bank on April 28, 2000. To become the Bank's holding company,
Bancshares received approval of the Federal Reserve Board as well as the Bank's
shareholders. Upon receiving such approvals, each share of the common stock of
the Bank was exchanged on a one-for-one basis for shares of the common stock of
Bancshares.

   Since opening in November of 1998, we have accomplished the following:

  .  Assembled a management team consisting of bankers from our local markets
     who each have over 20 years of banking experience;

  .  Opened seven full service banking offices in Union County and Mecklenburg
     County, home of Charlotte, one of North Carolina's largest and fastest
     growing metropolitan areas;

  .  Registered 6 consecutive quarters of profitability after becoming
     profitable in our 6th quarter of operation;

  .  Developed separate divisions within the Bank to provide mortgage banking,
     factoring and leasing products;

  .  Implemented investment brokerage services through an agreement with
     Salomon Smith Barney;

  .  Augmented our capital base through a local, best-efforts common stock
     offering in early 2001 and the private placement of $3.5 million of trust
     preferred securities in late 2001 and early 2002;

  .  Listed our common stock on the Nasdaq SmallCap Market on July 17, 2001;

  .  Implemented a strong credit culture which, as of December 31, 2001,
     reflected nonperforming assets of $1.0 million or 0.56% of total assets.
     On the same date, our allowance for loan losses was $1.7 million or 1.23%
     of total loans and 187% of nonperforming loans; and

  .  Developed a local identity in the communities we serve by sponsoring a
     wide variety of civic and charitable events.

   The Bank operates for the primary purpose of serving the banking needs of
individuals, and small to medium-sized businesses in our market area. While
numerous banks in our market have chosen to focus on the affluent and high net
worth individuals, we have chosen to focus on middle income households and the
small business and entrepreneurial segment of our market. We offer a wide range
of banking services including checking, certificate of deposit and savings
accounts, commercial, consumer and personal loans, mortgage, factoring and
leasing services and other associated financial services. We have also targeted
the growing Hispanic market in our communities as a marketing niche by offering
more convenient Sunday banking at our Super Wal-Mart branch in Monroe and the
partnering with Telecommunicaciones SA to provide a "Smart Card" for easy and
safe transfer of funds to Mexico.

   The Bank initially operated in a temporary location at 2581 West Roosevelt
Boulevard, Monroe, North Carolina until its permanent headquarters was opened
in December 1999 at 2593 West Roosevelt Boulevard which is the local street
address for U.S. Highway 74. On December 7, 1998, the Bank opened a branch at
120 East Sunset Drive, Monroe, North Carolina, that initially functioned as a
limited service facility, but now provides a full array of banking services.

   In 1999, the Bank opened a full service branch on U.S. Highway 74 in Indian
Trail, North Carolina and in January 2000 opened a full service branch in the
Wal-Mart Superstore, also on U.S. Highway 74 in Monroe,

<PAGE>

North Carolina. The Bank also opened a full service branch in Marshville, North
Carolina in March 2000 also located on U.S. Highway 74. U.S. Highway 74 is a
major thoroughfare that traverses east to west through southern North Carolina
and connects Charlotte to Asheville and Wilmington, running through the center
of Mecklenburg and Union Counties. It has become a major commercial and
economic thoroughfare. In 2001, two new markets were opened by the
establishment of full service branches in the Mint Hill area in east Charlotte
and Mountain Island area in west Charlotte.

Our Market Area

   We consider our primary market area to be the Southern Piedmont area of
North Carolina, primarily in Union and Mecklenburg Counties; and to a lesser
extent, adjoining counties. We expect our presence in the Southern Piedmont
market area to increase in the future. The Bank serves our market area through
seven full service branch locations including the Wal-Mart Superstore branch
being open seven days a week to offer even more convenience to our customers.
The Bank's customers may access various banking services through five ATMs
owned by the Bank and ATMs owned by others, through debit cards, and through
the Bank's automated telephone banking products.

   Union County had an estimated 2001 population of 124,000 and Mecklenburg
County was estimated at 720,000. Both counties have a balanced and diversified
economy. Monroe, with a population of approximately 27,000, is the largest city
in Union County. Charlotte, with a population of approximately 552,000 is
Mecklenburg County's and North Carolina's largest city. Union County is
currently the second fastest growing county in North Carolina. Charlotte has
consistently been one of the fastest growing areas of the Southeast and is
ranked 26th in US population. In 2000, the unemployment rate was 2.3% for Union
County and 2.5% for Mecklenburg County; both significantly lower than the North
Carolina state rate of 3.9%. In 2000, Union County had a labor force of 63,200
and Mecklenburg County had 368,540. The major employment sectors in Union
County are manufacturing (30.5%), construction (16.1%), retail trade (16.0%),
and government (12.7%). Mecklenburg County's major employment sectors are
services (27.2%), wholesale and retain trade (25.5%), finance, insurance and
real estate (11.0%), government (10.3%) and manufacturing (10.3%).

Trust Preferred Securities

   On December 27, 2001, we formed a special purpose entity organized as a
business trust under the laws of the State of Delaware. This business trust,
called American Community Capital Trust I, was formed in order to allow us to
issue trust preferred securities. As part of the issuance of trust preferred
securities, we entered into a trust agreement with Wilmington Trust Company, as
property trustee and an indenture with Wilmington Trust Company, as indenture
trustee, and we issued debentures to American Community Capital Trust I under
the indenture. We also executed a guarantee agreement with Wilmington Trust
Company, as guarantee trustee, for the benefit of the eventual holders of our
trust preferred securities.

   On December 31, 2001 we privately placed 2,000 shares of American Community
Capital Trust I 9% Trust Preferred Securities, having a liquidation value of
$2,000,000. On March 1, 2002, we privately placed an additional 1,500 shares of
American Community Capital Trust I 9% Trust Preferred Securities, having a
liquidation value of $1,500,000. The trust preferred securities have a dividend
yield equal to 9% of their face value each year and distributions are paid on a
quarterly basis. We can defer the dividend payments for up to twenty
consecutive quarters. We can redeem the trust preferred securities on or after
March 1, 2007, with the prior approval of the Federal Reserve Board. We can
also redeem the trust preferred securities earlier than March 1, 2007 under
special circumstances.

   Bancshares' source of funds for the required interest payments on the trust
preferred securities is dividends payable by the Bank to Bancshares. However,
the Bank may not pay any dividends to Bancshares until its accumulated deficit
($391,000 at December 31, 2001), is eliminated by future earnings, if any.
Under the terms of the trust preferred securities, Bancshares is permitted to
defer the payment of interest on the trust preferred

                                      2

<PAGE>

securities for up to 20 consecutive calendar quarters. The amount of any
interest deferred also bears interest and must be paid at such time as funds
are available to Bancshares. Each of the purchasers of the trust preferred
securities were advised by Bancshares prior to their purchase of the trust
preferred securities that Bancshares would elect the deferral of interest
option available to it for one or more calendar quarters in 2002 until the
earnings of the Bank result in the elimination of the Bank's accumulated
deficit.

Strategy

   The Bank has expanded aggressively since its opening for business in
November 1998. Because of its strong capital position created during its
incorporation stage, the Bank had the requisite capital needed to permit it to
immediately establish branch offices. The Bank's branching strategy is
opportunistic: it has established branch offices in growing areas within Union
and Mecklenburg Counties where there are opportunities to hire experienced
local bankers who have a loyal following of deposit and loan customers. To date
we have centered each of our branch offices around such a local and experienced
banker. Management also believes it is important in the early formation years
to build branches that will provide convenience and efficiencies in its
operational infrastructure. The Bank only recently has chosen to compete in the
Charlotte market area by identifying local bankers and establishing branches in
the Mountain Island and Mint Hill areas of Charlotte. Charlotte is a highly
competitive banking market with many competitors including money center,
super-regional and community banks. The Bank's strategy is to develop a branch
network surrounding Charlotte and to take advantage of opportunities that
present themselves in both new geographic and new product markets. The Bank
reorganized itself into the holding company form of organization to give it the
greatest legal flexibility to take advantage of any opportunities that might
arise. We will continue to search for opportunities, either for de novo
branching, branch purchase or whole bank acquisitions, to complete our
encirclement of the growing Charlotte market by progressing in either a south
and west or north and west direction. In addition, we will remain open to
opportunistic expansion through acquisition of whole banks in other growing
metropolitan areas of North Carolina/South Carolina if the acquisition enhances
shareholder value and there exists synergies of operations and compatible
corporate culture (i.e. a community bank serving a community's needs).

Lending Activities

   General.  The Bank provides to its customers a full range of short- to
medium-term commercial, agricultural, Small Business Administration guaranteed,
mortgage, construction and personal loans, both secured and unsecured. The Bank
also makes real estate mortgage and construction loans. The Bank has maintained
a good balance between variable and fixed rate loans within its portfolio.
Variable rate loans accounted for 52% of the loan balances outstanding at
December 31, 2001 while fixed rate loans accounted for 48% of the balances. The
Bank also offers factoring and lease financing to our small business customers.

   The Bank's loan policies and procedures establish the basic guidelines
governing its lending operations. Generally, the guidelines address the types
of loans that the Bank seeks, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations and compliance with
laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrower's
total outstanding indebtedness to the Bank, including the indebtedness of any
guarantor. The policies are reviewed and approved at least annually by the
Board of Directors of the Bank. The Bank supplements its own supervision of the
loan underwriting and approval process with periodic loan audits by internal
loan examiners and outside professionals experienced in loan review work. The
Bank has focused its portfolio lending activities on typically higher yielding
commercial, construction and consumer loans rather than lower yielding 1-4
family mortgages which we typically sell in the secondary market.

                                      3

<PAGE>

   Loan Composition.  The following table sets forth at the dates indicated the
Bank's loan portfolio composition by type of loan:

<TABLE>
<CAPTION>
                                             2001             2000
                                       ---------------  ---------------
                                        Amount  Percent  Amount  Percent
       -                               -------- ------- -------- -------
                                            (Dollars in thousands)
       <S>                             <C>      <C>     <C>      <C>
       Real estate mortgage loans:
          1-4 family.................. $ 10,329   7.31% $  9,106   8.32%
          Commercial mortgage.........   54,281  38.43    29,538  26.99
          Construction/development....   13,692   9.69    17,085  15.61
       Home equity lines of credit....   12,996   9.20     9,694   8.86
       Commercial and industrial loans   39,285  27.81    35,673  32.59
       Lease financing, net...........      795     56        --     --
       Loans to individuals...........    9,889   7.00     8,348   7.63
                                       -------- ------  -------- ------
       Subtotal.......................  141,267 100.00%  109,444 100.00%
                                                ======           ======
       Allowance for loan losses......    1,736            1,385
                                       --------         --------
       Total.......................... $139,531         $108,059
                                       ========         ========
</TABLE>

   The following table sets forth the contractual maturity of loans at December
31, 2001:

<TABLE>
<CAPTION>
                                               Greater
                                               than One
                                         One     Year    More
                                       Year Or Through  Than 5
                                        Less   5 Years  Years    Total
                                       ------- -------- ------- --------
                                            (Dollars in thousands)
       <S>                             <C>     <C>      <C>     <C>
       Real estate--mortgage loans:
          1-4 family.................. $ 2,149 $ 8,145  $    35 $ 10,329
          Commercial mortgage.........  18,502  33,693    2,086   54,281
          Construction/development....  12,057   1,635       --   13,692
       Home equity lines of credit....      --      --   12,996   12,996
       Commercial and industrial loans  16,215  22,652      418   39,285
       Loans to individuals...........   2,771   7,096       22    9,889
       Lease financing, net...........      --     795       --      795
                                       ------- -------  ------- --------
              Total................... $51,694 $74,016  $15,557 $141,267
                                       ======= =======  ======= ========
</TABLE>

   The following table sets forth loans with fixed and variable rates having
contractual maturities greater than one year at December 31, 2001:

<TABLE>
<CAPTION>
                                      Fixed Rate Variable Rate  Total
                                      ---------- ------------- -------
                                           (Dollars in thousands)
          <S>                         <C>        <C>           <C>
          Commercial and industrial..  $17,769      $ 5,301    $23,070
          Real estate--mortgage loans   34,339       11,255     45,594
                                       -------      -------    -------
                                       $52,108      $16,556    $68,664
                                       =======      =======    =======
</TABLE>

   Real Estate Loans.  Real estate loans are made for purchasing, constructing
and refinancing one to four family, five or more family and commercial
properties. The Bank offers fixed and adjustable rate options, but limits the
maximum fixed rate term to five years. The Bank provides customers access to
long-term conventional real estate loans through its mortgage loan department,
which makes loans for the account of third parties.

                                      4

<PAGE>

   Residential one to four family loans amounted to $10.3 million at December
31, 2001. The Bank's residential mortgage loans are secured by properties
located within the Bank's market area. Most of the one to four family
residential mortgage loans that the Bank originates are for the account of
third parties. Such loans are closed by the third party and therefore are not
shown in the Bank's financial statements. The Bank receives a fee for each such
loan originated, with such fees aggregating $404,000 for the year ended
December 31, 2001. The Bank anticipates that it will continue to be an active
originator of residential loans for the account of third parties.

   The Bank has made, and anticipates continuing to make, commercial real
estate loans. Commercial real estate loans equaled $54.3 million at December
31, 2001. This lending has involved loans secured principally by commercial
buildings for office, storage and warehouse space. The Bank requires the
personal guaranty of borrowers and a demonstrated cash flow capability
sufficient to service the debt. Loans secured by commercial real estate may be
in greater amount and involve a greater degree of risk than one to four family
residential mortgage loans. Payments on such loans are often dependent on
successful operation or management of the properties.

   Another of the Bank's primary lending focuses is construction/development
lending with balances outstanding as of December 31, 2001 of $13.7 million. The
Bank originates one to four family residential construction loans for the
construction of custom homes (where the home buyer is the borrower) and
provides financing to builders and consumers for the construction of pre-sold
homes. The Bank generally receives a pre-arranged permanent financing
commitment from an outside banking entity prior to financing the construction
of pre-sold homes. The Bank is active in the construction market and on
occasion makes construction loans to builders of homes that are not presold,
but limits the number of loans to any one builder. This type of lending is only
done with local, well-established builders and not to large or national tract
builders. The Bank lends to builders who have demonstrated a favorable record
of performance and profitable operations and who are building in markets that
management believes it understands and in which it is comfortable with the
economic conditions. The Bank also makes commercial real estate construction
loans, primarily for owner-occupied properties. The Bank further endeavors to
limit its construction lending risk through adherence to established
underwriting procedures. The Bank generally requires documentation of all draw
requests and utilizes third party appraisers to inspect the project prior to
paying any draw requests from the builder. With few exceptions, the Bank
requires personal guarantees and secondary sources of repayment on construction
loans.

   Commercial Loans.  Commercial business lending is also a focus of the Bank's
lending activities. At December 31, 2001, the Bank's commercial loan portfolio
equaled $39.3 million. Commercial loans include both secured and unsecured
loans for working capital, expansion, and other business purposes. Short-term
working capital loans generally are secured by accounts receivable, inventory
and/or equipment. The Bank also makes term commercial loans secured by
equipment and real estate. Lending decisions are based on an evaluation of the
financial strength, cash flow, management and credit history of the borrower,
and the quality of the collateral securing the loan. With few exceptions, the
Bank requires personal guarantees and secondary sources of repayment.
Commercial loans generally provide greater yields and reprice more frequently
than other types of loans, such as real estate loans. More frequent repricing
means that yields on our commercial loans adjust with changes in interest rates.

   Loans to Individuals and Home Equity Lines of Credit.  Loans to individuals
(consumer loans) include automobile loans, boat and recreational vehicle
financing, home equity and home improvement loans and miscellaneous secured and
unsecured personal loans. Consumer loans generally can carry significantly
greater risks than other loans, even if secured, if the collateral consists of
rapidly depreciating assets such as automobiles and equipment. Repossessed
collateral securing a defaulted consumer loan may not provide an adequate
source of repayment of the loan. Consumer loan collections are sensitive to job
loss, illness and other personal factors. The Bank attempts to manage the risks
inherent in consumer lending by following established credit guidelines and
underwriting practices designed to minimize risk of loss.

                                      5

<PAGE>

   Leasing.  The Bank offers lease financing primarily to small businesses in
our local market. The type of lease financing is generally limited to heavy
machinery, manufacturing equipment, and specific vehicles. The leases are
structured as to provide no residual risk to the Bank. The leasing division
also requires personal guaranties on the majority of our leases. The leasing
division, by its ability to offer all types of leases, creates tax advantages
for Bancshares. The division's professional staff with over 50 years of
combined leasing experience in our market, enhances the ability of the Bank to
offer our customers a complete line of financial products.

   Factoring.  The Bank has entered into a contract with Factorworks, Inc.,
Newnan, Georgia to utilize its software to provide accounts receivable
financing to its customers. The contract is for two years and contains two
additional two-year automatic renewal clauses. Factorworks receives 30% of all
fees collected as compensation for use of their software. Utilization of the
Factorworks software aids in the management of credit risk and is less labor
intensive than alternative processing methods. Commercial customers are
evaluated to determine their qualification for the Factorworks program. Once a
customer is approved, invoices the customer wants to borrow against are entered
into the Factorworks software program. If desired, money is advanced against
any invoices. This factoring arrangement provides for a 20% holdback of the
factored invoice until payment is received reducing the exposure to the Bank.
The Bank does not engage in any invoice collection efforts. Once a customer's
invoice is 90 days delinquent, the customer is required to substitute other
acceptable invoices as collateral for money advanced. Customers utilizing this
product and service are normally small businesses whose accounts receivable are
from creditworthy corporations or governmental agencies. This further reduces
the credit risk to the Bank. Personal guarantees are required on all lines. All
loan officers have been trained to offer the Factorworks product with the Bank
earning a fee as well as interest on its factoring portfolio. The Bank
currently has approved factoring lines of $3.8 million with an actual balance
outstanding at December 31, 2001 of $1.7 million.

   Loan Approvals.  The Bank's loan policies and procedures establish the basic
guidelines governing its lending operations. Generally, the guidelines address
the type of loans that Bancshares seeks, target markets, underwriting and
collateral requirements, terms, interest rate and yield considerations and
compliance with laws and regulations. All loans or credit lines are subject to
approval procedures and amount limitations. These limitations apply to the
borrower's total outstanding indebtedness to the Bank, including the
indebtedness of any guarantor. The policies are reviewed and approved at least
annually by the Board of Directors of the Bank. The Bank supplements its own
supervision of the loan underwriting and approval process with periodic loan
audits by independent, outside professionals experienced in loan review work.

   Responsibility for loan review and loan underwriting resides with the Chief
Lending Officer. He is responsible for loan processing, loan underwriting and
approval. On an annual basis, the Board of Directors of the Bank determines the
President's lending authority, who then delegates lending authorities to the
Chief Lending Officer and other lending officers of the Bank. Delegated
authorities may include loans, letters of credit, overdrafts, uncollected funds
and such other authorities as determined by the Board of Directors or the
President within his delegated authority.

   The President and the Chief Lending Officer each have the authority to
approve loans up to the lending limit set by the Board of Directors, which was
$500,000 at December 31, 2001. All loans above the lending limit of the
President and the Chief Lending Officer are reviewed and approved by the Loan
Committee, which consists of the President and four outside directors. In
addition, the Chief Lending Officer serves as a non-voting member. At December
31, 2001 the Loan Committee had the authority to approve loans up to
$1,000,000. All loans above the lending limit of the Loan Committee are
reviewed and approved by the full Board of Directors. The Bank's legal lending
limit was $2.1 million at December 31, 2001. The Bank seldom makes loans
approaching its legal lending limit.

   The Bank is an active home mortgage originator and most of our offices have
trained lending personnel to originate home mortgage loans for the account of
third parties. We currently have seven lending relationships to which we sell
substantially all home mortgages to enable us to satisfy special lending
requests of its borrowing customers.

   The Bank offers a credit card on an agency basis as an accommodation to its
customers. The Bank assumes none of the underwriting risk.

                                      6

<PAGE>

Nonperforming Assets

   The table sets forth, for the period indicated, information about our
nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual
loans plus restructured loans), and total nonperforming assets.

<TABLE>
<CAPTION>
                                                      2001    2000   1999
                                                     ------  ------  -----
                                                     (Dollars in thousands)
    <S>                                              <C>     <C>     <C>
    Nonaccrual loans................................ $  930  $  158  $  --
    Restructured loans..............................     --      --     --
                                                     ------  ------  -----
       Total nonperforming loans....................    930     158     --
    Other real estate owned.........................     94      --     --
                                                     ------  ------  -----
       Total nonperforming assets................... $1,024  $  158  $  --
                                                     ======  ======  =====
    Accruing loans past due 90 days or more......... $   56  $   --  $  --
    Allowance for loan losses.......................  1,736   1,385    813
    Nonperforming loans to period end loans.........   0.66%   0.14%  0.00%
    Allowance for loan losses to period end loans...   1.23%   1.27%  1.37%
    Allowance for loan losses to nonperforming loans    187%    877%     0%
    Nonperforming assets to total assets............   0.56%   0.11%  0.00%
</TABLE>

   The financial statements are prepared on the accrual basis of accounting,
including the recognition of interest income on loans, unless a loan is placed
on nonaccrual basis. Loans are accounted for on a nonaccrual basis when there
are serious doubts about the collectibility of principal or interest. In
general, a loan is placed on nonaccrual status when the loan becomes past due
90 days. Loans are also placed on nonaccrual status in cases where there is
uncertainty as to whether the borrower can satisfy the contractual terms of the
loan agreement. Amounts received on nonaccrual loans generally are applied
first to principal and then to interest only after all principal has been
collected. Restructured loans are those for which concessions, including the
reduction of interest rates below a rate otherwise available to that borrower
or the deferral of interest or principal, have been granted due to the
borrower's weakened financial condition. Interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of
original principal will occur. Potential problem loans are loans which are
currently performing and are not included in nonaccrual or restructured loans
above, but about which we have serious doubts as to the borrower's ability to
comply with present repayment terms. These loans are likely to be included
later in nonaccrual, past due or restructured loans, so they are considered by
management in assessing the adequacy of the allowance for loan losses. At
December 31, 2001, no loans had been identified as potential problem loans.

   At December 31, 2001, Bancshares had $930,000 in nonaccrual loans. Interest
foregone on nonaccrual loans was approximately $16,000 for the year ended
December 31, 2001 and $6,000 for the year ended December 31, 2000.

   Other real estate owned consists of foreclosed properties. At December 31,
2001, other real estate owned totaled $94,000 or .05% of total assets, and
consisted of one single-family residence.

Analysis of Allowance for Loan Losses

   The allowance for loan losses is established through charges to earnings in
the form of a provision for loan losses. The allowance for loan losses is
increased by provisions charged to operations and by recoveries of

                                      7

<PAGE>

amounts previously charged off, and reduced by loans charged off. The adequacy
of the allowance is evaluated at least quarterly. In evaluating the adequacy of
the allowance, the growth, composition and industry diversification of the
portfolio, historical loan loss experience, current delinquency levels, adverse
situations that may affect a borrower's ability to repay, estimated value of
any underlying collateral, prevailing economic conditions and other relevant
factors deriving from our limited history of operations are all considered.
Because of Bancshares' limited history, the loss experience and allowance
levels of other similar banks and the historical experience encountered by
management and senior lending officers prior to joining Bancshares are also
considered. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses and may
require additions for estimated losses based upon judgments different from
those of management.

   Bancshares uses a risk grading program, as described under "ASSET QUALITY,"
to facilitate the evaluation of probable inherent loan losses and the adequacy
of the allowance for loan losses. In this program, risk grades are initially
assigned by loan officers, reviewed by Credit Administration, and reviewed by a
third party. Bancshares strives to maintain the loan portfolio in accordance
with conservative loan underwriting policies that result in loans specifically
tailored to the needs of Bancshares' market area. Every effort is made to
identify and minimize the credit risks associated with such lending strategies.
Bancshares has no foreign loans and does not engage in highly leveraged
transactions.

   Bancshares follows a loan review program designed to evaluate the credit
risk in the loan portfolio. Through this loan review process, an internally
classified watch list that helps management assess the overall quality of the
loan portfolio and the adequacy of the allowance for loan losses is maintained.
In establishing the appropriate classification for specific assets, management
considers, among other factors, the estimated value of the underlying
collateral, the borrower's ability to repay, the borrower's payment history and
the current delinquent status. As a result of this process, certain loans are
categorized as substandard, doubtful or loss and reserves are allocated based
on management's judgment and historical experience.

   Loans classified as "substandard" are those loans with clear and defined
weaknesses such as unfavorable financial ratios, uncertain repayment sources or
poor financial condition that may jeopardize the liquidation of the debt. They
are characterized by the distinct possibility that Bancshares will sustain some
losses if the deficiencies are not corrected. Loans classified as "doubtful"
are those loans that have characteristics similar to substandard loans but with
an increased risk that collection or liquidation in full is highly questionable
and improbable. Loans classified as "loss" are considered uncollectible and of
such little value that their continuance as assets is not warranted. This
classification does not mean that the loan has absolutely no recovery or
salvage value but rather it is not practical or desirable to defer writing off
this asset even though partial recovery may be achieved in the future. As a
practical matter, when loans are identified as loss they are charged off
against the allowance for loan losses. In addition to the above classification
categories, loans are also categorized based upon risk grade and loan type,
assigning an allowance allocation based upon each category.

   Growth in loans outstanding has, throughout Bancshares' history, been the
primary reason for increases in the allowance for loan losses and the resultant
provisions for loan losses necessary to provide for those increases. This
growth has been spread among the major loan categories, with the concentrations
of major loan categories being relatively consistent in recent years. Between
December 31, 1999 and December 31, 2001, the range of each major category of
loans as a percentage of total loans outstanding is as follows: 1-4 family
mortgage loans--7% to 8%, commercial mortgage loans--27% to 39%,
construction/development real estate loans--10 to 16%; home equity loans--7% to
9%; commercial and industrial loans--28% to 38%; and loans to individuals--7%
to 8%. For all full fiscal years through 2001, Bancshares' loan loss experience
was similar to that of other new banks, with net loan charge-offs in each year
no greater than .15% of average loans outstanding. The allowance for loan
losses at December 31, 2001 of $1.7 million represents 1.23% of total loans and
187% of nonperforming loans.

                                      8

<PAGE>

   The allowance for loan losses represents management's estimate of an amount
adequate to provide for known and inherent losses in the loan portfolio in the
normal course of business. Specific allowances are made that are allocated to
certain individual loans and pools of loans based on risk characteristics, as
discussed below. While management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the
allowance may be necessary and results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while Bancshares believes it has
established the allowance for loan losses in conformity with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing
the portfolio, will not require an increase in the allowance for loan losses.
In addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed herein.
Any material increase in the allowance for loan losses may adversely affect the
financial condition and results of operations of Bancshares.

   The following table describes the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes only and is not
necessarily indicative of the categories in which future losses may occur.

<TABLE>
<CAPTION>
                                                At December 31,
                                        ------------------------------
                                             2001            2000
        -                               --------------  --------------
                                                 % of            % of
                                                Total           Total
                                        Amount Loans(1) Amount Loans(1)
        -                               ------ -------- ------ --------
                                            (Dollars in thousands)
        <S>                             <C>    <C>      <C>    <C>
        Real estate loans.............. $  796   55.43% $  575   50.92%
        Home equity lines of credit....     79    9.20     104    8.86
        Commercial and industrial loans    679   27.81     574   32.59
        Lease financing, net...........     --    0.56      --    0.00
        Loans to individuals...........    182    7.00     132    7.63
                                        ------  ------  ------  ------
           Total....................... $1,736  100.00% $1,385  100.00%
                                        ======  ======  ======  ======
</TABLE>
--------
(1) Represents total of all outstanding loans in each category as a percent of
    total loans outstanding.

                                      9

<PAGE>

   The following table presents for the periods indicated information regarding
changes in the allowance for loan losses:

<TABLE>
<CAPTION>
                                                            At or for the Years Ended
                                                                   December 31,
                                                           ---------------------------
                                                             2001      2000     1999
                                                           --------  --------  -------
                                                              (Dollars in thousands)
<S>                                                        <C>       <C>       <C>
Balance at beginning of period............................ $  1,385  $    813  $    71
Charge-offs:
   Real estate loans......................................       --        --       --
   Home equity lines of credit............................       --        --       --
   Commercial and industrial loans........................      156        19
   Lease financing, net...................................       --        --       --
   Loans to individuals...................................       40        45       --
                                                           --------  --------  -------
       Total charge-offs..................................      196        64       --
                                                           --------  --------  -------
Recoveries:
   Real estate loans......................................       --        --       --
   Home equity lines of credit............................       --        --       --
   Commercial and industrial loans........................       --        --       --
   Lease financing, net...................................       --        --       --
   Loans to individuals...................................        4        --       --
                                                           --------  --------  -------
       Total recoveries...................................        4        --       --
                                                           --------  --------  -------
Net charge-offs...........................................      192        64       --
Provision for loan losses.................................      543       636      742
                                                           --------  --------  -------
Balance at end of period.................................. $  1,736  $  1,385  $   813
                                                           ========  ========  =======
Total loans outstanding................................... $141,267  $109,444  $59,306
Average loans outstanding................................. $127,486  $ 83,730  $33,396
Allowance for loan losses to total loans outstanding......     1.23%     1.27%    1.37%
Ratio of net loan charge-offs to average loans outstanding     0.15%     0.08%    0.00%
</TABLE>

Investment Activities

   Bancshares' portfolio of investment securities, all of which are available
for sale, consists solely of U.S. Government agency securities.

   Securities to be held for indefinite periods of time and not intended to be
held to maturity are classified as available for sale and carried at fair value
with any unrealized gains or losses reflected as an adjustment to stockholders'
equity. Securities held for indefinite periods of time include securities that
management intends to use as part of its asset/liability management strategy
and that may be sold in response to changes in interest rates and/or
significant prepayment risks. It is the Bank's policy to classify all
investment securities as available for sale.

                                      10

<PAGE>

   The following table summarizes the amortized costs, gross unrealized gains
and losses and the resulting market value of securities available for sale:

<TABLE>
<CAPTION>
                                                     2001
                                    ---------------------------------------
                                                Gross      Gross
                                    Amortized Unrealized Unrealized  Fair
                                      Cost      Gains      Losses    Value
                                    --------- ---------- ---------- -------
                                            (Dollars in thousands)
     <S>                            <C>       <C>        <C>        <C>
     Securities available for sale:
        U. S. Government agencies..  $12,525     $141       $--     $12,666
                                     =======     ====       ===     =======

                                                     2000
                                    ---------------------------------------
                                                Gross      Gross
                                    Amortized Unrealized Unrealized  Fair
                                      Cost      Gains      Losses    Value
                                    --------- ---------- ---------- -------
                                            (Dollars in thousands)
     Securities available for sale:
        U. S. Government agencies..  $   150     $  2       $--     $   152
                                     =======     ====       ===     =======
</TABLE>

   The following table summarizes the amortized cost and recorded and market
values of securities available-for-sale and held-to-maturity at December 31,
2001, by contractual maturity groups:

<TABLE>
<CAPTION>
                                          At December 31, 2001
                                         ----------------------
                                         Amortized      Fair
                                           Cost         Value
                                         ---------     -------
                                         (Dollars in thousands)
                   <S>                   <C>          <C>
                   Amounts maturing:
                      Within One Year...  $10,004     $10,095
                      One to Five Years.    2,521       2,571
                      Five to Ten Years.       --          --
                      Over Ten Years....       --          --
                                          -------      -------
                          Total.........  $12,525     $12,666
                                          =======      =======
</TABLE>

   The following table sets forth certain information regarding the carrying
values, weighted average yields and contractual maturities of Bancshares'
investment portfolio at December 31, 2001:

<TABLE>
<CAPTION>
                                                Carrying Value
                                            -----------------------
                                                     After
                                                      One
                                                     Year
                                              One   Through
                                            Year Or  Five
                                             Less    Years   Total
                                            ------- ------- -------
                                            (Dollars in thousands)
             <S>                            <C>     <C>     <C>
             Securities available for sale:
                U. S. Government Agencies.. $10,095 $2,571  $12,666
                                            ======= ======  =======
</TABLE>

<TABLE>
<CAPTION>
                                                  Average Yield
                                              ---------------------
                                                       After
                                                        One
                                              One      Year
                                              Year    Through
                                               Or      Five
                                              Less     Years  Total
                                              ----    ------- -----
                                              (Dollars in thousands
               <S>                            <C>     <C>     <C>
               Securities available for sale:
                  U. S. Government Agencies.. 4.52%    4.23%  4.46%
                                              ====     ====   ====
</TABLE>

                                      11

<PAGE>

Deposit Activities

   Bancshares provides a range of deposit services, including non-interest
bearing checking accounts, interest bearing checking and savings accounts,
money market accounts and certificates of deposit. These accounts generally
earn interest at rates established by management based on competitive market
factors and the desire to increase or decrease certain types or maturities of
deposits.

   The Bank periodically uses brokered deposits as consistent with asset and
liability management policies. At December 31, 2001 we had no broker deposits.
We rarely bid on political funds for municipalities as such deposits are
extremely rate sensitive and due to fiduciary pressures on government
officials, not as stable as regular corporate and individual customers.

   The Bank offers a variety of deposit programs to individual and to
small-to-medium size businesses and other organizations at interest rates
generally competitive with local market conditions. For some of our corporate
customers who require such a service, we provide a courier service for non-cash
deposit pickup. The following table sets forth the average balances and rates
for each of the deposit categories for the periods indicated:

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                               -----------------------------------------------
                                                     2001            2000            1999
                                               ---------------  --------------  --------------
                                               Average  Average Average Average Average Average
                                               Balance   Rate   Balance  Rate   Balance  Rate
                                               -------- ------- ------- ------- ------- -------
                                                            (Dollars in thousands)
<S>                                            <C>      <C>     <C>     <C>     <C>     <C>
Interest bearing NOW and money market
  accounts.................................... $ 26,891  2.16%  $17,095  3.53%  $ 7,132  3.34%
Other time deposits...........................   55,882  5.81    32,011  6.35    12,386  4.72
Time deposits greater than $100,000...........   47,155  6.21    28,818  6.51     8,895  6.46
                                               --------         -------         -------
   Total interest bearing deposits............  129,928  5.20    77,924  5.79    28,413  4.92
Demand and other non-interest-bearing deposits   15,590          10,104           4,156
                                               --------         -------         -------
   Total average deposits..................... $145,518  4.64   $88,028  5.13   $32,569  4.29
                                               ========  ====   =======  ====   =======  ====
</TABLE>

   The following table indicates the amount of the Bank's certificates of
deposit by interest rate and by time remaining until maturity as of December
31, 2001.

<TABLE>
<CAPTION>
                                              More than        More than
                            Three months     three months      six months
                              or less       to six months     to one year    More than one year      Total
                          ---------------  ---------------  ---------------  -----------------  ---------------
                                  Weighted         Weighted         Weighted           Weighted         Weighted
                                  Average          Average          Average            Average          Average
                          Amount    Rate   Amount    Rate   Amount    Rate    Amount     Rate   Amount    Rate
                          ------- -------- ------- -------- ------- -------- ------    -------- ------- --------
                                                     (Dollars in thousands)
<S>                       <C>     <C>      <C>     <C>      <C>     <C>      <C>       <C>      <C>     <C>
Certificates of $100,000
 or more................. $17,065   5.13%  $11,569   4.84%  $13,446   4.04%  $5,716      4.63%  $47,796   4.69%
Certificates of less than
 $100,000................  21,005   5.21%   13,829   4.45%   17,013   3.92%   5,812      4.33%   57,659   4.56%
</TABLE>

Borrowings

   Short-term borrowed funds consist of federal funds purchased and advances
from the FHLB with original maturities of less than one year. Long-term debt
consists solely of obligations under a capitalized lease for the

                                      12

<PAGE>

Bank's main office facility. The following table summarizes balance and rate
information for short-term borrowed funds and the capital lease obligation as
of the dates and for the periods indicated.

<TABLE>
<CAPTION>
                                                      At or for the Year
                                                            Ended
                                                         December 31,
                                                      -----------------
                                                        2001      2000
                                                       ------    ------
                                                         (Dollars in
                                                          thousands)
         <S>                                          <C>        <C>
         AMOUNTS OUTSTANDING AT END OF PERIOD:
         CAPITALIZED LEASE OBLIGATION:
         Amount...................................... $1,703     $1,702
         Weighted average rate.......................   8.24%      8.24%
         ADVANCES FROM THE FEDERAL HOME LOAN BANK:
         Amount......................................  9,000      5,000
         Weighted average rate.......................   4.92%      6.76%
         MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END:
         Federal funds purchased.....................  3,500      3,500
         Capitalized lease obligation................  1,703      1,702
         Advances from the Federal Home Loan Bank....  9,000      5,000
         AVERAGES DURING THE PERIOD:
         Federal funds purchased
         Average balance.............................     67         29
         Weighted average rate.......................   3.93%      7.36%
         Capitalized lease obligation
         Average balance.............................  1,702      1,702
         Weighted average rate.......................   8.24%      8.24%
         Advances from the Federal Home Loan Bank
         Average balance.............................  3,447      5,000
         Weighted average rate.......................   5.57%      6.48%
</TABLE>

   As an additional source of funding, we use advances from the Federal Home
Loan Bank of Atlanta. Outstanding advances at December 31, 2001 were as follows:

<TABLE>
<CAPTION>
                                                      Interest
          Maturity                                      Rate   Amount
          --------                                    -------- ------
                                                      (In thousands)
          <S>                                         <C>      <C>
          June 30, 2003..............................   4.77%  $2,000
          June 28, 2004..............................   5.24%   2,000
          December 19, 2011
          Callable one time only on December 19, 2006   4.85%   5,000
                                                               ------
                                                               $9,000
                                                               ======
</TABLE>

   Pursuant to collateral agreements with the Federal Home Loan Bank, advances
are secured by a blanket lien on the loan portfolio.

   Bancshares also has available lines of credit totaling $6.5 million from
correspondent banks at December 31, 2001.

Banking Technology

   We provide our customers with truncation of their deposit accounts (check
imaging) and 24 hour telephone banking that permits our depositors to check
balances, last cleared checks and deposit confirmation. Due to our imaging of
all documentation, our customer service representatives can access past
statements and paid checks in a matter of seconds, eliminating research fees
for our customers and eliminating any waiting time for such

                                      13

<PAGE>

research. We have not, as yet, implemented Internet banking but we continue to
study its potential for our customer base and have the capability to implement
it when we believe it will prove to be both a significant convenience and
marketing advantage. In spring of 2000, the Bank was awarded the OMNI award by
the Kirchman Corporation, one of the nation's largest provider of banking
software in honor of its commitment to technology.

   The Bank has five ATM facilities attached to five of its existing banking
offices and intends to expand this to each of its offices in the near future.
The Bank's ATM cards are linked to the nationwide Cirrus(R), Plus(R) and
Star(R) systems, allowing the Bank's customers to withdraw funds from any ATM
machine honoring these systems.

Competition

   Commercial banking in North Carolina is highly competitive in large part due
to early adoption of statewide branching. We compete in our market areas with
some of the largest banking organizations in the state and the country and
other financial institutions, such as federally and state-chartered savings and
loan institutions and credit unions, as well as consumer finance companies,
mortgage companies and other lenders engaged in the business of extending
credit or taking investment monies such as mutual funds and brokerage firms.
Many of our competitors have broader geographic markets and higher lending
limits than us and are also able to provide more services and make greater use
of media advertising. In Union County, for example, there are currently 33
offices of 9 different commercial banks (including the largest banks in North
Carolina). In Mecklenburg County, there are currently 227 offices of 18
different commercial banks (including the largest banks in North Carolina).
While we typically do not compete directly for loans with these larger banks,
they do influence our deposit products. We do compete more directly with
mid-size and small community banks that have offices in our market areas. There
are also a number of new community banks in Mecklenburg and Union Counties that
have a direct competitive effect as borrowers tend to "shop" the terms of their
loans and deposits.

   The enactment of legislation authorizing interstate banking has caused great
increases in the size and financial resources of some of our competitors. In
addition, as a result of interstate banking, out-of-state commercial banks have
acquired North Carolina banks and heightened the competition among banks in
North Carolina. For example, SouthTrust Bank, Birmingham, Alabama, a large
multi-state financial institution has branches throughout North Carolina,
including Mecklenburg County and Regions Bancshares, also from Birmingham,
Alabama, recently acquired a community bank in Charlotte.

   Despite the competition in our market areas, we believe that we have certain
competitive advantages that distinguish us from our competition. We believe
that our primary competitive advantages are our bankers, each of whom is well
known in his or her community with strong personal and business ties to that
community with a loyal customer following. Our bankers each have a strong local
identity and affiliation with their communities. We offer customers modern
banking services without forsaking community values such as prompt, personal
service and friendliness. We also have established local advisory boards in
some of our communities to help us better understand their needs and to be
"ambassadors" of the Bank in those communities. We offer many personalized
services and attract customers by being responsive and sensitive to their
individualized needs. We believe our approach to business builds goodwill among
our customers, shareholders, and the communities we serve that results in
referrals from shareholders and satisfied customers. We also rely on
traditional marketing to attract new customers. To enhance a positive image in
the community, we support and participate in local events and our officers and
directors serve on boards of local civic and charitable organizations. As an
example, the Bank was recognized in 1999, 2000, and 2001 for outstanding
contributions to the United Way Campaign for Union County. The Bank is very
active in the Special Olympics for Union County and has been honored by Special
Olympics as "Business of the Year" for out sponsorship and volunteer efforts.

                                      14

<PAGE>

   Union County also is home to a large Hispanic population and the Bank is
working with the government of Mexico to provide affordable and safe wire
transfer services from residents living in the United States to their relatives
in Mexico. We have signed an agreement with Telecomm USA Ltd. in conjunction
with Telecommunicaciones de Mexico. For a fee paid to the Bank, the service
allows Mexican citizens working in the United States to present U.S. dollars at
the Bank's branches for transfer to individuals in Mexico. This transfer uses a
"smart card" that is held by the Mexican national and encoded with the
necessary information to legally effect the transfer. Additionally, to better
serve the Hispanic population, the Bank's branch in the Wal-Mart Superstore in
Monroe is staffed with bilingual tellers and targets the fast growing Hispanic
market. Because the Wal-Mart Superstore branch is open seven days a week (the
only Union County bank to offer seven days a week banking), international
transfers and all other banking services can be completed at times other than
traditional banking hours.

   The Bank has also entered into a revenue sharing agreement with Salomon
Smith Barney, in which the Bank receives revenue for business generated by a
broker located in our offices. Currently, the service is only offered in our
main office but is expected to be offered in other branch locations should
demand for the service develop.

   As a community service providing a competitive edge, the Bank sponsors small
business seminars and features various speakers on topics of interest to
growing small businesses. The Bank attempts to bring together in one place a
variety of experts to discuss timely issues of importance to business owners
regarding such matters as e-commerce, investments, and estate and retirement
planning. This social setting also provides small business owners with an
opportunity to network with other small business owners in our communities.
Further, through its Kidz Club, the Bank offers savings accounts designed for
young savers. Lastly, the Bank has developed a Senior Citizens account for
customers 50 years and older. Named the "Golden Eagle Account" this product
offers free travelers checks, free safe deposit box, interest on daily
balances, free wallet-style checks, free quarterly breakfasts with guest
speakers and quarterly day trips. The Bank sponsors the quarterly day trips as
a way to attract Senior Citizens' accounts and to further tie them in their
loyalty to the Bank.

                                      15

<PAGE>

Properties

   The following table sets forth the location of our main office and branch
offices, as well as certain information relating to these offices to date.

<TABLE>
<CAPTION>
                                                   Approximate Owned
                                             Year    Square      or
          Office Location                   Opened   Footage   Leased
          ---------------                   ------ ----------- ------
          <S>                               <C>    <C>         <C>
          Main Office......................  1999    14,774    Leased
          2593 West Roosevelt Boulevard
          Monroe, NC 28110
          Indian Trail Branch..............  1999     3,850    Leased
          13860 East Independence Boulevard
          Indian Trail, NC 28079
          Sunset Branch....................  1999       450    Leased
          120 East Sunset Drive
          Monroe, NC 28110
          Wal-Mart Superstore Branch.......  2000       600    Leased
          2406 West Roosevelt Boulevard
          Monroe, NC 28110
          Marshville Branch................  2000     3,500    Leased
          7001 East Marshville Boulevard
          Marshville, NC 28103
          Mint Hill........................  2000     1,300    Leased
          7200 Matthews-Mint Hill Road
          Mint Hill, NC 28227
          Mountain Island Branch...........  2000     4,500     Owned
          3500 Mt. Holly-Huntersville Road
          Charlotte, NC 28216
</TABLE>

Employees

   As of December 31, 2001, we had 59 full-time employees and 5 part-time
employees. None of these employees are covered by a collective bargaining
agreement. We consider relations with our employees to be good.

Litigation

   There are no pending legal proceedings to which the Bank or Bancshares is a
party, or of which any of their property is the subject.

                                      16

<PAGE>

           MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   American Community Bancshares' stock is listed on the Nasdaq SmallCap market
under the symbol "ACBA". It began trading on this market on July 17, 2000.
Prior to July 17, 2000, it was traded on the OTC Bulletin Board System. The
prices reflected below are for Bancshares prior to April 28, 2000, the date of
organization. For dates prior thereto, the prices reflect the shares of common
stock of American Community Bank. There were 1,642,241 shares outstanding at
December 31, 2001 owned by approximately 2,000 shareholders. The table below
lists the high and low prices at which trades were completed during each
quarter indicated and are adjusted to reflect our stock split effective in the
form of a 10% stock dividend in January 2002.

<TABLE>
<CAPTION>
                                           Sale Price
                                          ------------
                                           High   Low
                                          ------ -----
                          <S>             <C>    <C>
                          2000
                          First Quarter*. $11.82 $8.75
                          Second Quarter*  10.91  7.50
                          Third Quarter..   8.58  6.36
                          Fourth Quarter.   9.21  7.27

                          2001
                          First Quarter.. $ 8.41 $7.05
                          Second Quarter.   8.18  7.05
                          Third Quarter..   8.41  6.59
                          Fourth Quarter.   9.08  7.55
</TABLE>
--------
*  The over-the-counter quotations to July 17, 2000 reflect inter-dealer
   prices, without retail mark-up, mark-down or commission and may not
   represent actual transactions.

                                      17

<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

  The following presents management's discussion and analysis of our financial
  condition and results of operations and should be read in conjunction with
  the financial statements and related notes included elsewhere in this
  Prospectus. This discussion contains forward-looking statements that involve
  risks and uncertainties. Our actual results could differ significantly from
  those anticipated in these forward-looking statements as a result of various
  factors, including those discussed in "Risk Factors" beginning on
  page     and "Special Note Regarding Forward-Looking Statements" on page
      in this Prospectus. All per share data has been adjusted to give
  retroactive effect to the stock split effected in the form of a 20% stock
  dividend in 1999 and a 10% stock dividend in January 2002. The following
  discussion is intended to assist in understanding the financial condition and
  results of operations of Bancshares. Because Bancshares has no material
  operations and conducts no business on its own other than owning its
  subsidiaries, the Bank and American Community Capital Trust I, and because
  American Capital Trust I had no operations subsequent to its formation in
  2001 other than the issuance of trust preferred securities, the discussion
  contained in this Management's Discussion and Analysis concerns primarily the
  business of the Bank. However, for ease of reading and because the financial
  statements are presented on a consolidated basis, Bancshares and the Bank are
  collectively referred to herein as American Community Bancshares or
  Bancshares unless otherwise noted.

                                   OVERVIEW

   In April 2000, Bancshares was formed as a holding company for the Bank. Upon
formation, one share of Bancshares' $1 par value common stock was exchanged for
each of the then outstanding 1,492,063 shares of the Bank's $5 par value common
stock. Bancshares formed a financing subsidiary, American Community Capital
Trust I ("Capital Trust I"), in order to raise capital in the form of trust
preferred securities. Bancshares currently has no operations and conducts no
business on its own other than owning the Bank and Capital Trust I.

   The Bank was opened for business as a North Carolina-chartered commercial
bank on November 16, 1998. It completed its first full fiscal year on December
31, 1999. The Bank operates out of its main office at 2593 West Roosevelt
Boulevard, Monroe, North Carolina. It also operates four other full service
branches in Union County and two full service branches in Mecklenburg County
for a total of seven offices.

   The Bank's lending activities are oriented to the consumer/retail customer
as well as the small-to-medium sized business located in the Union and
Mecklenburg County areas. The Bank offers commercial, consumer, and mortgage
lending products, as well as the ability to structure credit arrangements to
fit specialized needs through factoring, leasing arrangements and other
products. The deposit services offered by the Bank include small business and
personal checking and savings accounts and certificates of deposit. The Bank
concentrates on customer relationships in building its customer deposit base
and competes aggressively in the area of transaction accounts. Additional
funding includes borrowings from the Federal Home Loan Bank. The Bank also
offers investment services through an agreement with Salomon Smith Barney
investment brokers.

Comparison of Financial Condition at December 31, 2001 and 2000

   Total assets at December 31, 2001 increased by $41.2 million or 29.3% to
$182.0 million compared to $140.8 million at December 31, 2000. Bancshares had
earning assets of $171.3 million at year-end December 31, 2001 consisting of
$141.3 million in gross loans, $13.1 million in investment securities and
Federal Home Loan Bank (FHLB) stock and $16.9 million in overnight investments.
Total deposits as of December 31, 2001 increased by $32.9 million or 26.9% to
$154.9 million compared to $122.0 million at December 31, 2000. Total

                                      18

<PAGE>

borrowings as of December 31, 2001 increased by $4.0 million or 59.7% from $6.7
million to $10.7 million. Stockholders' equity was $13.6 million at December
31, 2001 compared to $11.4 million at December 31, 2000 for an increase of $2.2
million or 18.6%. The increase is due to the sale of common stock, which
yielded net proceeds of $1.3 million, and total comprehensive income of
$831,000.

   Gross loans grew by $31.8 million or 29.1% during 2001 from $109.4 million
as of December 31, 2000 to $141.3 million at year-end 2001. The composition of
the loan portfolio, by category, as of December 31, 2001 is as follows: 7% 1-4
family mortgage loans, 38% commercial mortgage loans, 10%
construction/development real estate loans, 9% home equity lines of credit, 28%
commercial loans, 1% leases and 7% consumer and other loans to individuals. The
real estate category experienced the most significant net increase growing
$22.6 million from $55.7 million to $78.3 million. Within the real estate
category, 1-4 family loans grew $1.2 million from $9.1 million to $10.3
million, commercial mortgage loans grew $24.8 million from $29.5 million to
$54.3 million while construction/development loans actually decreased $3.4
million from $17.1 million to $13.7 million. Net increases in other loan
categories included $3.3 million in home equity lines of credit, $3.6 million
in commercial loans, $795,000 in leases and $1.5 million in consumer and other
loans to individuals. The composition of the loan portfolio at December 31,
2000, by category, was, 8% 1-4 family mortgage loans, 27% commercial mortgage
loans, 16% construction/development real estate loans, 9% home equity lines of
credit, 32% commercial loans and 8% consumer and other loans to individuals.

   Bancshares recorded a $543,000 provision for loan losses for the year ended
December 31, 2001, representing a decrease of $93,000 from the $636,000
provision for the year ended December 31, 2000. Bancshares has continued to
increase the level of the allowance for loan losses principally as a result of
the continued growth in the loan portfolio. Total loans receivable increased by
$31.8 million during 2001, and by $50.1 million during 2000. The lower
provision for loan losses for the current year resulted largely from the
decrease in the growth rate of the loan portfolio in 2001 as compared to 2000.
Bancshares did, however, experience an increase in net loan charge-offs during
2001, to $192,000 from $64,000 in 2000. This increase in net-charge-offs in
2001 resulted entirely from one loan. The percentage of net loan charge-offs to
average loans outstanding was .15% for the year ended December 31, 2001 as
compared with .08% for year ended December 31, 2000. Nonperforming loans
totaled $930,000 or .66% of total loans at December 31, 2001, up from $158,000
or .14% of total loans at December 31, 2000. The allowance for loan losses at
December 31, 2001 of $1.7 million represents 1.23% of total loans and 187% of
nonperforming loans. The allowance for loan losses at December 31, 2000 of $1.4
million equaled 1.27% of total loans outstanding and 877% of nonperforming
loans at that date.

   Bancshares had investment securities of $12.7 million at December 31, 2001.
All investments are accounted for as available for sale under Statement of
Financial Accounting Standards (SFAS) No. 115 and are presented at fair value.
The portfolio increased by $12.5 million from the $152,000 balance at December
31, 2000. Additions to the investment portfolio included $22.3 million in new
securities purchases, $139,000 improvement in the portfolio fair market value
and $77,000 of net purchase discount accretion. Activities resulting in
portfolio decreases included $5.0 in security sales and $5.0 million in
security maturities.

   Interest-earning deposits with banks decreased by $6.0 million primarily as
a result of our decision to shift funds into investment securities which
provide higher yields. Bancshares holds funds in interest-earning deposits with
banks to provide liquidity for future loan demand and to satisfy fluctuations
in deposit levels.

   Non interest-earning assets increased by $3.0 million from $9.4 million at
December 31, 2000 to $12.4 million at December 31, 2001. The increase is
primarily attributable to an increase of $2.8 million to $6.6 million in the
cash and due from banks category. This includes cash on hand and customer
deposits and other cash receipts that are in the process of collection and not
available for overnight investment. Accrued interest receivable also increased
$252,000 to $915,000 at December 31, 2001 as a result of the increase in
earning assets. Bank premises and equipment was $3.9 million at December 31,
2001 a decrease of $638,000 from December 31, 2000. The decrease resulted
because of depreciation of $409,000 and the sale-leaseback of the Marshville
branch property. At the time of the sale-leaseback, the building had an
amortized cost of $801,000

                                      19

<PAGE>

and the gain of $147,000 realized in the transaction has been deferred and is
being amortized to income in proportion to rental expense over the ten year
term of the lease. Additions of property and equipment costing $572,000 were
made in 2001. Other assets increased by $573,000 at December 31, 2001 to
$938,000. This increase is primarily attributable to a $132,000 increase in net
deferred tax assets, a $108,000 increase in miscellaneous receivables and a
$67,000 increase in prepaid expenses.

   Total deposits increased $32.9 million or 26.9% from $122.0 million on
December 31, 2000 to $154.9 on December 31, 2001. The composition of the
deposit base, by category, at December 31, 2001 is as follows: 10% non-interest
bearing demand deposits, 2% savings deposits, 20% money market and interest
bearing demand deposits and 68% time deposits. All deposit categories
experienced increases over the twelve-month period. Dollar and percentage
increases by category were as follows: non-interest bearing demand deposits,
$4.1 million or 34%; savings deposits, $1.0 million or 54%, money market and
interest bearing demand deposits, $11.1 million or 57%, and time deposits,
$16.7 million or 19%. Time deposits of $100,000 or more totaled $47.8 million,
or 31% of total deposits at December 31, 2001. The composition of deposits at
December 31, 2000 was 10% non-interest bearing demand deposits, 1% savings
deposits, 16% money market and interest bearing demand deposits and 73% time
deposits. Time deposits of $100,000 or more at December 31, 2000 were $42.0
million or 34% of total deposits.

   During 2001, Bancshares maintained advances from the Federal Home Loan Bank
of Atlanta at varying amounts. At December 31, 2001 $9.0 million of advances
were outstanding with maturity dates ranging from June 2003 through December
2011. The balance of Federal Home Loan Bank advances at December 31, 2000 was
$5.0 million. These advances are secured by a blanket lien on 1-4 family
mortgage loans and certain loans secured by commercial property. Bancshares
also maintained the capital lease for its main office. The recorded obligation
under this capital lease at December 31, 2001 was $1.7 million. In addition,
Capital Trust I issued Trust Preferred securities in the amount of $2.0 million
during 2001 at a fixed rate of 9%. The Trust Preferred securities have a
maturity of thirty years with a five-year continuous call provision and are
eligible for inclusion as Tier 1 capital.

   Other liabilities increased by $169,000 to $766,000 at December 21, 2001
from $597,000 at December 31, 2000. The increase was primarily due to an
increase of $25,000 in accounts payable and accrued expenses and the
un-amortized deferred gain on the sale of the Marshville branch property of
$145,000.

   Bancshares began 2001 with total stockholders' equity of $11.4 million.
Total equity increased to $13.6 million at December 31, 2001. This increase was
due to the net comprehensive income for 2001 of $831,000 combined with the sale
of 150,178 shares of common stock which, after expenses of the sale, resulted
in net proceeds of $1.3 million.

Net Interest Income

   Like most financial institutions, the primary component of earnings for
Bancshares is net interest income. Net interest income is the difference
between interest income, principally from loan and investment securities
portfolios, and interest expense, principally on customer deposits and
borrowings. Changes in net interest income result from changes in volume,
spread and margin. Volume refers to the average dollar level of
interest-earning assets and interest-bearing liabilities, spread refers to the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities, and margin refers to net interest income
divided by average interest-earning assets and is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities, as
well as levels of noninterest-bearing liabilities. During the fiscal years
ended December 31, 2001, 2000 and 1999, average interest-earning assets were
$154.0 million, $99.4 million, and $42.3 million, respectively. During these
same periods, Bancshares' net yields on average interest-earning assets (net
interest margin) were 3.16%, 4.28%, and 4.81%, respectively.


                                      20

<PAGE>

   Average Balances and Average Rates Earned and Paid.  The following table
sets forth, for the periods indicated, information with regard to average
balances of assets and liabilities, as well as the total dollar amounts of
interest income from interest-earning assets and interest expense on
interest-bearing liabilities, resultant yields or costs, net interest income,
net interest spread, net interest margin and ratio of average interest-earning
assets to average interest-bearing liabilities. Average loans include
nonaccruing loans, the effect which is to lower the average rates.

<TABLE>
<CAPTION>
                                                   Year Ended                 Year Ended                Year Ended
                                               December 31, 2001          December 31, 2000          December 31, 1999
                                           -------------------------  -------------------------  ------------------------
                                           Average            Average Average            Average Average           Average
                                           Balance   Interest  Rate   Balance   Interest  Rate   Balance  Interest  Rate
-                                          --------  -------- ------- --------  -------- ------- -------  -------- -------
                                                                       (Dollars in thousands)
<S>                                        <C>       <C>      <C>     <C>       <C>      <C>     <C>      <C>      <C>
Interest-earning assets:..................
    Loans................................. $127,486  $10,806   8.48%  $ 83,730   $8,314   9.93%  $33,396   $3,062   9.17%
    Investments...........................   13,102      631   4.82%       360       22   6.11%      666       29   4.35%
    Interest-earning deposits.............   13,438      521   3.88%    15,311      911   5.95%    8,228      366   4.45%
                                           --------  -------          --------   ------          -------   ------
       Total interest-earning assets......  154,026   11,958   7.76%    99,401    9,247   9.30%   42,290    3,457   8.17%
                                                     -------   ----              ------   ----             ------   ----
Other assets..............................    9,291                      7,154                     2,908
                                           --------                   --------                   -------
       Total assets....................... $163,317                   $106,555                   $45,198
                                           ========                   ========                   =======
Interest-bearing liabilities:.............
    Deposits:.............................
       Savings............................ $  2,268       35   1.54%  $  1,593       35   2.20%  $   614       14   2.28%
       Money Market and NOW...............   24,623      547   2.22%    15,502      569   3.67%    6,518      224   3.44%
       Time...............................  103,037    6,175   5.99%    60,829    3,908   6.42%   21,281    1,160   5.45%
    Borrowings............................    5,216      337   6.46%     6,730      482   7.16%      428       26   6.07%
                                           --------  -------          --------   ------          -------   ------
       Total interest-bearing
        liabilities.......................  135,144    7,094   5.25%    84,654    4,994   5.90%   28,841    1,424   4.94%
                                                     -------   ----              ------   ----             ------   ----
Non-interest-bearing deposits.............   15,590                     10,104                     4,156
Other liabilities.........................      642                        408                       198
Stockholders' equity......................   11,941                     11,389                    12,003
                                           --------                   --------                   -------
Total liabilities and
 stockholders' equity..................... $163,317                   $106,555                   $45,198
                                           ========                   ========                   =======
Net interest income and interest rate
 spread...................................           $ 4,864   2.51%             $4,253   3.40%            $2,033   3.23%
                                                     =======   ====              ======   ====             ======   ====
Net yield on average
 interest-earning assets..................                     3.16%                      4.28%                     4.81%
                                                               ====                       ====                      ====
Ratio of average interest-earning
 assets to average interest-bearing
 liabilities..............................   113.97%                    117.42%                   146.63%
                                           ========                   ========                   =======
</TABLE>


                                      21

<PAGE>

Rate/Volume Analysis

   The following table analyzes the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.

<TABLE>
<CAPTION>
                                         December 31, 2001 vs. 2000 December 31, 2000 vs. 1999
                                         -------------------------  -------------------------
                                         Increase (Decrease) Due to Increase (Decrease) Due to
-                                        -------------------------  -------------------------
                                         Volume      Rate   Total    Volume     Rate   Total
-                                        ------    -------  ------  ------     ----    ------
                                                        (Dollars in thousands)
<S>                                      <C>       <C>      <C>     <C>        <C>    <C>
Interest income:
   Loans................................ $4,027    $(1,535) $2,492  $4,806     $446   $5,252
   Investment securities................    696        (87)    609     (16)       9       (7)
   Interest-earning deposits with banks.    (92)      (298)   (390)    368      177      545
                                         ------    -------  ------   ------     ----   ------
       Total interest income............  4,631     (1,920)  2,711   5,158      632    5,790
                                         ------    -------  ------   ------     ----   ------
Interest expense:
   Deposits.............................  2,858       (613)  2,245   2,651      463    3,114
   Borrowings...........................   (103)       (42)   (145)    417       39      456
                                         ------    -------  ------   ------     ----   ------
       Total interest expense...........  2,755       (655)  2,100   3,068      502    3,570
                                         ------    -------  ------   ------     ----   ------
Net interest income..................... $1,876    $(1,265) $  611  $2,090     $130   $2,220
                                         ======    =======  ======   ======     ====   ======
</TABLE>

Comparison of Results of Operations for the Years Ended December 31, 2001 and
2000

   Net Income (Loss).  Bancshares generated net income in 2001 of $746,000
compared to a net loss in 2000 of ($108,000). On a per share basis earnings
were $.42 for 2001 compared to a loss of ($.07) for 2000. Return on average
assets was .46% and (.10%) and return on average equity was 6.25% and (.95%)
for the years ended December 31, 2001 and 2000, respectively.

   Earnings for the year ended December 31, 2001 were positively impacted by
strong growth in average earning assets and by increases in net interest income
and non-interest income. The impact of the growth in average earning assets was
tempered by the sharp decline in short-term interest rates during the year,
which adversely impacted Bancshares' net interest margin during 2001. During
the year ended December 31, 2001, the Federal Reserve cut the target rate on
Federal Funds eleven times, reducing the target rate from 6.50% to 1.75%.

   Net Interest Income.  Net interest income increased $611,000 from $4.3
million in 2000 to $4.9 million in 2001. Total interest income benefited from
strong growth in average earning assets that offset the lower asset yields
resulting from the reductions in short-term rates during the year.

   Total average earning assets increased $54.6 million or 55% from an average
of $99.4 million in 2000 to an average of $154.0 million in 2001. Bancshares
experienced strong loan growth during 2001 with average loan balances
increasing by $43.8 million. The increase in average volume for investment
securities and interest-earning deposits was $10.9 million. The increase in
total interest income was $2.7 million resulting from an increase of $4.6
million due to growth in average earning assets and a decrease of $1.9 million
due to a decline in yield on earning assets. Average total interest-bearing
liabilities increased by $50.5 million during 2001, consisting of a $52.0
million in average interest-bearing deposits while average borrowings decreased
$1.5 million. The increase in interest expense of $2.1 million resulted from
$2.8 million of additional expense due to growth in interest-bearing
liabilities and a savings of $655,000 due to reductions in interest rates.

                                      22

<PAGE>

   Net interest margin is interest income earned on loans, securities and other
earning assets, less interest expense paid on deposits and borrowings,
expressed as a percentage of total average earning assets. The net interest
margin for the year ended 2001 was 3.16% compared to 4.28% for 2000. The
Federal Reserve Open Market Committee (FOMC) cut short-term interest rates
eleven times during 2001 for a total of 475 basis points. The decline in the
net interest margin resulted from the differences between the terms and
conditions of interest earning assets and interest-bearing liabilities.
Interest rates on a significant portion of our earning assets, such as certain
loans and short-term investments, are tied to index rates, including the prime
lending rate and the Federal Funds rate. Conversely, rates on a significant
portion of interest-bearing liabilities such as certificates of deposits and
borrowings remain fixed until maturity. When an interest rate reduction occurs
on certain assets are reduced immediately while the impact on deposits and
borrowings is delayed until such time as these instruments mature and are
replaced with instruments that reflect the interest rate reduction. The average
yield on earning assets for 2001 was 7.76% or 154 basis points lower than the
9.30% for 2000. The 2001 average cost of interest-bearing liabilities was 5.25%
or 65 basis points lower than the 5.90% for 2000. The interest rate spread,
which is the difference between the average yield on earning assets and the
cost of interest-bearing funds, declined 89 basis points from 3.40% in 2000 to
2.51% in 2001.

   Provision for Loan Losses.  Bancshares' provision for loan losses for 2001
was $543,000, representing a $93,000 or 15% decrease over the $636,000 recorded
for 2000. Provisions for loan losses are charged to income to bring the
allowance for loan losses to a level deemed appropriate by management based on
factors discussed under "Analysis of Loan Losses." The decrease in the 2001
provision, as compared to the 2000 provision, is principally due to the reduced
rate of growth in total outstanding loans from 85% in 2000 to 29% in 2001. The
allowance for loan losses was $1.7 million at December 31, 2001, representing
1.23% of total outstanding loans and 187% of non-performing loans. The
allowance for loan losses at December 31, 2000 was $1.4 million or 1.27% of
total outstanding loans at that date.

   Other Income.  Non-interest income increased by $877,000 or 96% to $1.8
million for the year ended December 31, 2001 compared with $914,000 for the
prior year. Non-interest income as a percentage of total revenue increased from
17.7% in 2000 to 26.9% in 2001. The largest components of non-interest income
were service charges on deposit accounts of $949,000 in 2001 as compared to
$539,000 in 2000 or a 76% increase, fees from mortgage banking operations of
$404,000 in 2001 as compared to $190,000 in 2000 or a 113% increase, and fees
from factoring operations of $219,000 in 2001 as compared to $127,000 in 2000
or a 72% increase. Service charge income increased primarily as a result of the
$16.2 million or 50% increase in deposit transaction accounts from $33.3
million at December 31, 2000 to $49.5 million at December 31, 2001. Fees from
mortgage banking operations increased due to the favorable mortgage interest
rate environment in 2001. Fees from factoring operations increased due to the
$1.1 million or 131% increase in the average balance of factored receivables
outstanding during the year, from $857,000 in 2000 to $2.0 million in 2001.

   Other Expenses.  Total non-interest expense increased from $4.6 million in
2000 to $5.4 million in 2001. This 16% increase was primarily due to the
expansion of the Bank's branches from six to seven and increases in
compensation associated with the increase in our mortgage banking operations.
The two categories of non-interest expenses most affected were personnel and
occupancy expense. These two categories accounted for $640,000 of the $727,000
increase in non-interest expense. Salaries and benefits expense was $2.7
million for the year ended December 31, 2001, representing a $476,000 or 21%
increase over the $2.2 million recorded for the prior year. Occupancy and
equipment cost was $1.0 million for the year ended December 31, 2001
representing a $164,000 or 19% increase over the $851,000 for the prior year.

   Provision for Income Taxes.  Bancshares had no income tax expense or benefit
in 2001 or 2000, principally due to adjustments to the valuation allowance
associated with deferred tax assets. It is expected that as Bancshares
continues to be profitable and begins to demonstrate a sustained pattern of
profitability, the valuation allowance will be adjusted accordingly with the
benefit reflected in net income.

                                      23

<PAGE>

Comparison of Results of Operations for the Years Ended December 31, 2000 and
1999

   Net Loss.  Bancshares generated a net loss in 2000 of ($108,000) compared to
a net loss in 1999 of ($900,000). On a per share basis (adjusted for the 20%
common stock dividend in 1999), earnings were a loss of ($.07) for 2000
compared to a loss of ($.60) for 1999. Return on average assets was (.10%) and
(1.99%) and return on average equity was (.95%) and (7.50%) for the two
comparative periods ended December 31, 2000 and 1999, respectively.

   Net Interest Income.  Net interest income increased $2.2 million from $2.0
million in 1999 to $4.3 million in 2000. Total interest income benefited from
strong growth in average earning assets combined with the increase in
short-term rates during the period.

   Total average earning assets increased $57.1 million or 135% from an average
of $42.3 million in 1999 to an average of $99.4 million in 2000. Bancshares
experienced strong loan growth during 2000 with average loans growing by $50.3
million. The increase in average volume for investment sercurities and
interest-earning deposits was $6.8 million. The net increase in total interest
income was $5.8 million resulting from an increase of $5.2 million due to
growth in average earning assets and an increase of $632,000 due to an increase
in yield on earning assets. Average interest-bearing liabilities increased by
$55.8 million during 2000 of which $49.5 million was attributable to deposits
and $6.3 million attributable to borrowings. The net increase in interest
expense of $3.6 million resulted from $3.1 million of additional expense due to
growth in interest-bearing liabilities and $502,000 due to increases in the
cost of funds.

   Net interest margin is interest income earned on loans, securities and other
earnings assets, less interest expense paid on deposits and borrowings,
expressed as a percentage of total average earning assets. The net interest
margin for the year ended 2000 was 4.28% compared to 4.81% for 1999. The
decline in net interest margin was primarily attributable to the ratio of
average interest-earning assets to average interest-bearing liabilities
decreasing from 146.63% in 1999 to 117.42% in 2000. This decline is the result
of average interest bearing liabilities as a percentage of average total assets
increasing from 64% in 1999 to 79% in 2000. The average yield on earning assets
for 2000 was 9.30% or 113 basis points higher than the 8.17% for 1999. The cost
of interest-bearing liabilities was 5.90% compared with 4.94% for the prior
year. The interest rate spread, which is the difference between the average
yield on earning assets and the cost of interest-bearing funds, increased 17
basis points from 3.23% in 1999 to 3.40% in 2000.

   Provision for Loan Losses.  Bancshares' provision for loan losses for 2000
was $636,000, representing a $106,000 or 14% decrease over the $742,000
recorded for 1999. Provisions for loan losses are charged to income to bring
the allowance for loan losses to a level deemed appropriate by management based
on factors discussed under "Analysis of Loan Losses." The allowance for loan
losses was $1.4 million at December 31, 2000, representing 1.27% of total
outstanding loans. The allowance for loan losses at December 31, 1999 was
$813,000 or 1.37% of total outstanding loans at that date.

   Other Income.  Non-interest income increased by $421,000 or 85% to $914,000
million for the year ended December 31, 2000 compared with $493,000 for the
prior year. The largest components of non-interest income in the current period
were service charges on deposit accounts of $539,000 in 2000 as compared to
$149,000 in 1999 or a 262% increase, mortgage loan brokerage fees of $190,000
in 2000 as compared to $340,000 in 1999 or a 44% decrease, and fees from
factoring operations of $127,000 in 2000 as compared to $2,000 in 1999. Service
charge income increased primarily as a result of the $14.1 million or 73%
increase in deposit transaction accounts from $19.2 million at December 31,
1999 to $33.3 million at December 31, 2000. Fees from mortgage banking
operations decreased due to the increase in mortgage interest rates in 2000.
Fees from factoring operations increased due to the $2.1 million increase in
the average balance of factored receivables outstanding during 2000.

   Other Expenses.  Total non-interest expense increased from $2.7 million in
1999 to $4.6 million in 2000. This 73% increase was primarily due to the
expansion of the Bank's branches from three to six. The two

                                      24

<PAGE>

categories of non-interest expenses most affected were personnel and occupancy.
These two categories accounted for $1.3 million of the $1.9 million increase in
non-interest expense. Salaries and benefits expense was $2.3 million for the
year ended December 31, 2000, representing a $1.0 million or 74% increase over
the $1.3 million recorded for the prior year. Occupancy and equipment cost was
$851,000 for the year ended December 31, 2000 representing a $338,000 or 66%
increase over the $513,000 for the prior year. Other expenses were $1.5 million
for the year ended December 31, 2000 representing a $661,000 increase over the
$880,000 for the prior year also primarily as a direct result of additional
branch locations.

   Provision for Income Taxes.  Bancshares had no income tax expense or benefit
in 2000 or 1999, principally due to the incurrence of net operating losses and
adjustments to the valuation allowance associated with deferred tax assets. It
is expected that as the Bank becomes profitable and begins to demonstrate a
sustained pattern of profitability, the valuation allowance will be adjusted
accordingly with the benefit reflected in net income.

Liquidity and Capital Resources

   Maintaining adequate liquidity while managing interest rate risk is the
primary goal of Bancshares' asset and liability management strategy. Liquidity
is the ability to fund the needs of Bancshares' borrowers and depositors, pay
operating expenses, and meet regulatory liquidity requirements. Maturing
investments, loan and mortgage-backed security principal repayments, deposit
growth and borrowings from the Federal Home Loan Bank are presently the main
sources of Bancshares' liquidity. Bancshares' primary uses of liquidity are to
fund loans, operating expenses, deposit withdrawals, repay borrowings and to
make investments.

   As of December 31, 2001, liquid assets (cash and due from banks,
interest-earning deposits with banks, and investment securities available for
sale) were approximately $36.2 million, which represents 19.9% of total assets
and 22.1% of total deposits and borrowings. Supplementing this liquidity,
Bancshares has available lines of credit from correspondent banks of
approximately $6.5 million and an additional line of credit with the Federal
Home Loan Bank equal to 15% of assets (subject to available qualified
collateral, with borrowings of $9 million outstanding from the FHLB at December
31, 2001). At December 31, 2001, outstanding commitments to extend credit were
$4.0 million and available line of credit balances totaled $22.9 million.
Management believes that the combined aggregate liquidity position of
Bancshares is sufficient to meet the funding requirements of loan demand and
deposit maturities and withdrawals in the near term.

   Certificates of deposit represented 68.1% of Bancshares' total deposits at
December 31, 2001 down from 72.7% at December 31, 2000. Bancshares' growth
strategy will include efforts focused at increasing the relative volume of
transaction deposit accounts. Certificates of deposit of $100,000 or more
represented 30.9% of Bancshares' total deposits at December 31, 2001. These
deposits are generally considered rate sensitive, but management believes most
of them are relationship-oriented. While Bancshares will need to pay
competitive rates to retain these deposits at maturity, there are other
subjective factors that will determine Bancshares' continued retention of those
deposits.

   Banks and bank holding companies, as regulated institutions, must meet
required levels of capital. The FDIC and the Federal Reserve, the primary
regulators of the Bank and Bancshares, respectively, have adopted minimum
capital regulations or guidelines that categorize components and the level of
risk associated with various types of assets. Financial institutions are
expected to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with these guidelines. At December 31,
2001, both Bancshares and the Bank maintained capital levels exceeding the
minimum levels for "well capitalized" bank holding companies and banks.

                                      25

<PAGE>

Capital Ratios

   Bancshares and the Bank are subject to minimum capital requirements. See
"SUPERVISION AND REGULATION." As the following table indicates, at December 31,
2001, we exceeded our regulatory capital requirements.

<TABLE>
<CAPTION>
                                                At December 31, 2001
                                           -----------------------------
                                                                 Well-
                                           Actual   Minimum   Capitalized
                                           Ratio  Requirement Requirement
       -                                   ------ ----------- -----------
       <S>                                 <C>    <C>         <C>
       American Community Bank:
          Total risk-based capital ratio.. 10.67%    8.00%       10.00%
          Tier 1 risk-based capital ratio.  9.51%    4.00%        6.00%
          Leverage ratio..................  7.94%    4.00%        5.00%
       American Community Bancshares:
          Total risk-based capital ratio.. 11.54%    8.00%          NA
          Tier 1 risk-based capital ratio. 10.38%    4.00%          NA
          Leverage ratio..................  8.66%    4.00%          NA
</TABLE>

Asset/Liability Management

   Bancshares' asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond Bancshares' control, such as market interest rates and competition, may
also have an impact on Bancshares' interest income and interest expense.

   In the absence of other factors, the yield or return associated with
Bancshares' earning assets generally will increase from existing levels when
interest rates rise over an extended period of time and, conversely, interest
income will decrease when interest rates decline. In general, interest expense
will increase when interest rates rise over an extended period of time and,
conversely, interest expense will decrease when interest rates decline.

   Interest Rate Gap Analysis.   As a part of its interest rate risk management
policy, Bancshares calculates an interest rate "gap." Interest rate "gap
analysis" is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period,
either through maturity or rate adjustment. The "gap" is the difference between
the amounts of such assets and liabilities that are subject to repricing. A
"positive gap" for a given period means that the amount of interest-earning
assets maturing or otherwise repricing within that period exceeds the amount of
interest-bearing liabilities maturing or otherwise repricing within the same
period. Accordingly, in a declining interest rate environment, an institution
with a "positive gap" would generally be expected, absent the effects of other
factors, to experience a decrease in the yield on its assets greater than the
decrease in the cost of its liabilities and its income should be negatively
affected. Conversely, the cost of funds for an institution with a "positive
gap" would generally be expected to increase more slowly than the yield on its
assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be positively affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "negative gap."

   The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2001, which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Money
market deposit accounts and negotiable order of withdrawal or other transaction
accounts are assumed to pay out over a five-year decay schedule. In making the
"gap" computations, standard assumptions regarding prepayment rates and deposit
decay rates have been used for interest-earning assets and interest-bearing
liabilities. In addition, the

                                      26

<PAGE>

table reflects scheduled principal payments, which will be received throughout
the lives of the loans. The interest rate sensitivity of Bancshares' assets and
liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by such assumptions.

<TABLE>
<CAPTION>
                                                    Terms to Repricing at December 31, 2001
                                               -------------------------------------------------
                                                            More       More
                                                            Than       Than     More
                                               1 Year or  1 Year to 3 Years to  Than
                                                 Less      3 Years   5 Years   5 Years   Total
-                                              ---------  --------- ---------- -------  --------
                                                             (Dollars in thousands)
<S>                                            <C>        <C>       <C>        <C>      <C>
INTEREST-EARNING ASSETS:
Loans receivable:
   Real estate mortgage loans................. $ 46,244    $15,001   $15,444   $ 1,613  $ 78,302
   Home equity lines of credit................   12,996         --        --        --    12,996
   Commercial and industrial loans............   25,496     11,050     2,739        --    39,285
   Loans to individuals.......................    5,135      3,639     1,103        12     9,889
   Lease financing, net.......................      159        425       211        --       795
Interest earning deposits with banks..........   16,926         --        --        --    16,926
Investment securities.........................   10,095      2,570        --        --    12,665
Stock in FHLB of Atlanta......................       --         --        --       450       450
                                               --------    -------   -------   -------  --------
       Total interest-earning assets.......... $117,051    $32,685   $19,497   $ 2,075  $171,308
                                               ========    =======   =======   =======  ========
INTEREST-BEARING LIABILITIES:
   Deposits:
       Interest-bearing demand................ $ 23,475    $ 6,351   $ 3,307   $    --  $ 33,133
       Time...................................   94,116     10,336     1,003        --   105,455
   Borrowings(1)..............................       --      4,000     5,000     1,703    10,703
   Trust preferred securities.................       --         --        --     2,000     2,000
                                               --------    -------   -------   -------  --------
       Total interest-bearing liabilities..... $117,591    $20,687   $ 9,310   $ 3,703  $151,291
                                               ========    =======   =======   =======  ========
INTEREST SENSITIVITY GAP PER
  PERIOD...................................... $   (540)   $11,998   $10,187   $(1,628) $ 20,017
CUMULATIVE INTEREST
  SENSITIVITY GAP............................. $   (540)   $11,458   $21,645   $20,017  $ 20,017
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
  INTEREST-EARNING ASSETS.....................     (.32)%     6.69%    12.64%    11.68%    11.68%
CUMULATIVE INTEREST-EARNING ASSETS AS A
  PERCENTAGE OF CUMULATIVE INTEREST
  BEARING LIABILITIES.........................    99.54%    108.29%   114.67%   113.23%   113.23%
</TABLE>
--------
(1) Includes advances from the Federal Home Loan Bank and capital lease
    obligations

Impact of Inflation and Changing Prices

   A commercial bank has an asset and liability composition that is distinctly
different from that of a company with substantial investments in plant and
inventory because the major portion of its assets are monetary in nature. As a
result, a bank's performance may be significantly influenced by changes in
interest rates. Although the banking industry is more affected by changes in
interest rates than by inflation in the prices of goods and services, inflation
is a factor, which may influence interest rates. However, the frequency and
magnitude of interest rate fluctuations do not necessarily coincide with
changes in the general inflation rate. Inflation does affect operating expenses
in that personnel expenses and the cost of supplies and outside services tend
to increase more during periods of high inflation.

                                      27

<PAGE>

                      AMERICAN COMMUNITY BANCSHARES, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              Page
                                                              No.
                                                              ----
              <S>                                             <C>
              Independent Auditors' Report................... F-2
              Consolidated Balance Sheets.................... F-3
              Consolidated Statements of Operations.......... F-4
              Consolidated Statements of Stockholders' Equity F-5
              Consolidated Statements of Cash Flows.......... F-6
              Notes to Consolidated Financial Statements..... F-7
</TABLE>

                                      F-1

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To Stockholders and the Board of Directors
American Community Bancshares, Inc. and Subsidiaries
Monroe, North Carolina

   We have audited the accompanying consolidated balance sheets of American
Community Bancshares, Inc. and Subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
Community Bancshares, Inc. and Subsidiaries at December 31, 2001 and 2000 and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.


  /s/  Dixon Odom PLLC
---------------------------

Charlotte, North Carolina
January 18, 2002

                                      F-2

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                          December 31, 2001 and 2000


<TABLE>
<CAPTION>
                                                                                   2001          2000
                                    ASSETS                                     ------------  ------------
<S>                                                                            <C>           <C>
Cash and due from banks....................................................... $  6,583,333  $  3,769,082
Interest-earning deposits with banks..........................................   16,926,003    22,948,824
Investment securities available for sale, at fair value (Note C)..............   12,665,557       151,547
Loans (Note D)................................................................  141,266,675   109,444,184
Allowance for loan losses (Note D)............................................   (1,736,000)   (1,385,000)
                                                                               ------------  ------------
       Net loans..............................................................  139,530,675   108,059,184
Accrued interest receivable...................................................      915,340       663,381
Bank premises and equipment (Note E)..........................................    3,947,063     4,585,252
Federal Home Loan Bank stock, at cost.........................................      450,000       250,000
Other assets..................................................................      937,563       364,884
                                                                               ------------  ------------
       Total assets........................................................... $181,955,534  $140,792,154
                                                                               ============  ============
                     LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
   Demand..................................................................... $ 16,320,830  $ 12,171,605
   Savings....................................................................    2,716,361     1,764,546
   Money market and NOW.......................................................   30,416,779    19,331,451
   Time (Note F)..............................................................  105,454,633    88,780,108
                                                                               ------------  ------------
       Total deposits.........................................................  154,908,603   122,047,710
Advances from Federal Home Loan Bank (Note G).................................    9,000,000     5,000,000
Capital lease obligation (Note H).............................................    1,703,479     1,701,668
Accrued expenses and other liabilities........................................      766,217       596,715
Guaranteed preferred beneficial interests in the Company's junior subordinated
  debentures (Note I).........................................................    2,000,000            --
                                                                               ------------  ------------
       Total liabilities......................................................  168,378,299   129,346,093
                                                                               ------------  ------------
Stockholders' Equity (Notes M and P)
   Preferred stock, no par value, 1,000,000 shares authorized; none issued....           --            --
   Common stock, 2001, $1 par value, 9,000,000 shares authorized, 1,642,241
     and 1,492,063 shares issued and outstanding..............................    1,642,241     1,492,063
   Additional paid-in capital.................................................   12,239,926    11,089,596
   Accumulated deficit........................................................     (391,291)   (1,137,145)
   Accumulated other comprehensive income.....................................       86,359         1,547
                                                                               ------------  ------------
       Total Stockholders' Equity.............................................   13,577,235    11,446,061
                                                                               ------------  ------------
Commitments (Notes E, H, J and N)
       Total liabilities and stockholders' equity............................. $181,955,534  $140,792,154
                                                                               ============  ============
</TABLE>

                            See accompanying notes.

                                      F-3

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 Years Ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                    2001        2000        1999
                                                                 ----------- ----------  ----------
<S>                                                              <C>         <C>         <C>
Interest income
   Loans........................................................ $10,806,488 $8,313,909  $3,062,029
   Investments..................................................     630,872     21,874      28,690
   Interest-earning deposits with banks.........................     521,110    911,139     366,128
                                                                 ----------- ----------  ----------
       Total interest income....................................  11,958,470  9,246,922   3,456,847
                                                                 ----------- ----------  ----------
Interest expense
   Money market, NOW and savings deposits.......................     582,456    604,368     237,536
   Time deposits................................................   6,174,731  3,907,665   1,160,029
   Borrowings...................................................     337,348    482,414      26,135
                                                                 ----------- ----------  ----------
       Total interest expense...................................   7,094,535  4,994,447   1,423,700
                                                                 ----------- ----------  ----------
       Net interest income......................................   4,863,935  4,252,475   2,033,147
Provision for loan losses (Note D)..............................     543,361    636,339     742,000
                                                                 ----------- ----------  ----------
       Net interest income after provision for loan losses......   4,320,574  3,616,136   1,291,147
                                                                 ----------- ----------  ----------
Non-interest income
   Service charges on deposit accounts..........................     949,390    538,688     148,964
   Mortgage banking operations..................................     404,422    190,220     340,427
   Factoring operations.........................................     219,036    126,952       1,199
   Other........................................................     217,509     57,735       2,418
                                                                 ----------- ----------  ----------
       Total non-interest income................................   1,790,357    913,595     493,008
                                                                 ----------- ----------  ----------
Non-interest expense
   Salaries and employee benefits...............................   2,718,515  2,242,707   1,287,396
   Occupancy and equipment......................................   1,014,602    850,806     513,211
   Other (Note L)...............................................   1,631,960  1,544,224     883,657
                                                                 ----------- ----------  ----------
       Total non-interest expense...............................   5,365,077  4,637,737   2,684,264
                                                                 ----------- ----------  ----------
       Income (loss) before income taxes........................     745,854   (108,006)   (900,109)
Income taxes (Note K)...........................................          --         --          --
                                                                 ----------- ----------  ----------
       Net income (loss)........................................ $   745,854 $ (108,006) $ (900,109)
                                                                 =========== ==========  ==========
       Basic and diluted net income (loss) per common share..... $       .42 $     (.07) $     (.55)
                                                                 =========== ==========  ==========
Weighted average common shares outstanding, basic and diluted...   1,779,763  1,641,269   1,641,269
                                                                 =========== ==========  ==========
</TABLE>

                            See accompanying notes.

                                      F-4

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 Years Ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                               Accumulated
                                  Common stock      Additional                    other         Total
                             ---------------------   paid-in     Accumulated  comprehensive stockholders'
                              Shares     Amount      capital       deficit       income        equity
                             --------- -----------  -----------  -----------  ------------- -------------
<S>                          <C>       <C>          <C>          <C>          <C>           <C>
Balance, January 1, 1999.... 1,243,385 $ 6,216,925  $ 6,364,734  $  (129,030)    $    --     $12,452,629
Net loss....................        --          --           --     (900,109)         --        (900,109)
Common stock issued
  pursuant to:
   20% stock split in the
     form of a dividend.....   248,678   1,243,390   (1,243,390)          --          --              --
                             --------- -----------  -----------  -----------     -------     -----------
Balance, December 31, 1999.. 1,492,063   7,460,315    5,121,344   (1,029,139)         --      11,552,520
Comprehensive loss:
   Net loss.................        --          --           --     (108,006)         --        (108,006)
   Unrealized holding gains
     on available-for-sale
     securities, net........        --          --           --           --       1,547           1,547
                             --------- -----------  -----------  -----------     -------     -----------
Total comprehensive loss....                                                                    (106,459)
                                                                                             -----------
Formation of American
  Community Bancshares, Inc.
  (Note A)..................        --  (5,968,252)   5,968,252           --          --              --
                             --------- -----------  -----------  -----------     -------     -----------
Balance, December 31, 2000.. 1,492,063   1,492,063   11,089,596   (1,137,145)      1,547      11,446,061
Comprehensive income:
   Net income...............        --          --           --      745,854          --         745,854
   Unrealized holding gains
     on available-for-sale
     securities, net........        --          --           --           --      84,812          84,812
                                                                                             -----------
Total comprehensive income..                                                                     830,666
                                                                                             -----------
Common stock issued
  pursuant to:
   Sale of common stock.....   150,178     150,178    1,150,330           --          --       1,300,508
                             --------- -----------  -----------  -----------     -------     -----------
Balance, December 31, 2001.. 1,642,241 $ 1,642,241  $12,239,926  $  (391,291)    $86,359     $13,577,235
                             ========= ===========  ===========  ===========     =======     ===========
</TABLE>

                            See accompanying notes.

                                      F-5

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years Ended December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                       2001          2000          1999
                                                                   ------------  ------------  ------------
<S>                                                                <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................. $    745,854  $   (108,006) $   (900,109)
Adjustments to reconcile net income (loss) to net cash provided
  (used) by operating activities:
   Depreciation and amortization..................................      332,219       325,294       159,375
   Provision for loan losses......................................      543,361       636,339       742,000
   Deferred income taxes..........................................     (190,000)           --            --
   Gain on sale of investment securities..........................       (3,410)           --            --
   Gain on sale of foreclosed assets..............................      (37,177)           --            --
   Deferred gain of sale of bank premises and equipment...........     (147,156)           --            --
   (Increase) decrease in loans held for sale.....................           --     1,072,261    (1,072,261)
   Interest added to capital lease obligation.....................        1,811         1,668            --
   Change in assets and liabilities:
       Increase in accrued interest receivable....................     (251,959)     (364,381)     (235,025)
       Increase in other assets...................................     (343,049)       (7,004)     (276,667)
       Increase in accrued expenses and other liabilities.........      169,502       242,338       132,077
                                                                   ------------  ------------  ------------
          Net cash provided (used) by operating activities........      819,996     1,798,509    (1,450,610)
                                                                   ------------  ------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale.............  (22,276,339)     (150,000)           --
Maturities of securities available for sale.......................    5,000,000            --            --
Proceeds from sale of securities available for sale...............    4,981,929            --            --
Net increase in loans from originations and repayments............  (32,591,669)  (50,202,072)  (54,526,607)
Purchases of bank premises and equipment..........................     (572,020)   (2,066,188)     (829,151)
Proceeds from sale of bank premises and equipment.................      947,944            --            --
Proceeds from sale of foreclosed assets...........................      525,150            --            --
Investment in foreclosed assets...................................       (4,962)           --            --
Purchase of Federal Home Loan Bank stock..........................     (200,000)           --      (212,600)
                                                                   ------------  ------------  ------------
   Net cash used by investing activities..........................  (44,189,967)  (52,418,260)  (55,568,358)
                                                                   ------------  ------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits...................................   16,186,368    14,051,643    16,182,141
Net increase in time deposits.....................................   16,674,525    53,008,857    31,127,160
Proceeds from sale of common stock................................    1,300,508            --            --
Proceeds from issuance of trust preferred securities..............    2,000,000            --            --
Advances from Federal Home Loan Bank..............................    4,000,000            --     5,000,000
                                                                   ------------  ------------  ------------
   Net cash provided by financing activities......................   40,161,401    67,060,500    52,309,301
                                                                   ------------  ------------  ------------
       Net increase (decrease) in cash and cash equivalents.......   (3,208,570)   16,440,749    (4,709,667)
Cash and cash equivalents, beginning..............................   26,717,906    10,277,157    14,986,824
                                                                   ------------  ------------  ------------
Cash and cash equivalents, ending................................. $ 23,509,336  $ 26,717,906  $ 10,277,157
                                                                   ============  ============  ============
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (NOTE S)

                            See accompanying notes.

                                      F-6

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2001, 2000 and 1999


NOTE A--ORGANIZATION AND OPERATIONS

   In April 2000, American Community Bancshares, Inc. ("Bancshares") was formed
as a holding company for American Community Bank. Upon formation, one share of
Bancshares' $1 par value common stock was exchanged for each of the then
outstanding 1,492,063 shares of American Community Bank's $5 par value common
stock. Bancshares currently has no material operations and conducts no business
on its own other than owning its wholly owned subsidiaries, American Community
Bank and American Community Capital Trust I.

   American Community Bank (the "Bank") was incorporated on November 13, 1998
and began banking operations on November 16, 1998. The Bank is engaged in
general commercial and retail banking in Union and Mecklenburg Counties, North
Carolina, operating under the banking laws of North Carolina and the rules and
regulations of the Federal Deposit Insurance Corporation and the North Carolina
Commissioner of Banks. The Bank undergoes periodic examinations by those
regulatory authorities.

   Bancshares formed American Community Capital Trust I (the "Trust") during
2001 in order to facilitate the issuance of trust preferred securities. The
Trust is a statutory business trust formed under the laws of the State of
Delaware, of which all common securities are owned by Bancshares.

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation

   The accompanying consolidated financial statements include the accounts of
American Community Bancshares, Inc., American Community Bank, and American
Community Capital Trust I, together referred to herein as the "Company." All
significant inter-company transactions and balances are eliminated in
consolidation.

  Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for losses on loans.

  Cash Equivalents

   For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
captions "cash and due from banks" and "interest-earning deposits with banks."

  Securities Available for Sale

   Available-for-sale securities are reported at fair value and consist of
bonds and notes not classified as trading securities nor as held-to-maturity
securities. Unrealized holding gains and losses on available-for-sale
securities are reported as a net amount in other comprehensive income. Gains
and losses on the sale of available-for-sale securities are determined using
the specific-identification method. Declines in the fair value of individual
held-to-maturity and available-for-sale securities below their cost that are
other than temporary would result in

                                      F-7

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


write-downs of the individual securities to their fair value. Such write-downs
would be included in earnings as realized losses. Premiums and discounts are
recognized in interest income using the interest method over the period
to maturity.

  Securities Held to Maturity

   Bonds and notes for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for premiums and discounts that
are recognized in interest income using the interest method over the period
to maturity.

  Loans Held for Sale

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

  Loans

   Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are reported at their outstanding principal adjusted
for any charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans and unamortized premiums or discounts on purchased
loans. Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments
are received.

  Allowance for Loan Losses

   The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. The provision
for loan losses is based upon management's best estimate of the amount needed
to maintain the allowance for loan losses at an adequate level. Loan losses are
charged against the allowance when management believes the uncollectibility of
a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

   The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of the current status of the portfolio, historical experience,
the nature and volume of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral,
and prevailing economic conditions. Because American Community Bank has been in
existence for a relatively short time, and therefore has a limited history,
management has also considered in applying its analytical methodology the loss
experience and allowance levels of other community banks. Management segments
the loan portfolio by loan type in considering each of the aforementioned
factors and their impact upon the level of the allowance for loan losses.

   Loans are considered impaired when it is probable that all amounts due under
the contractual terms of the loan will not be collected. The measurement of
impaired loans that are collateral dependent is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, or upon the fair value of the collateral if readily
determinable. If the recorded investment in the loan exceeds the measure of
fair value, a valuation allowance is established as a component of the
allowance for loan losses. While management

                                      F-8

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

uses the best information available to make evaluations, future adjustments to
the allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations. In addition, regulatory examiners
may require American Community Bank to recognize changes to the allowance for
loan losses based on their judgments about information available to them at the
time of their examination.

  Transfers of Financial Assets

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

  Foreclosed Assets

   Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from foreclosed assets.

  Bank Premises and Equipment

   Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on the straight-line method over the
shorter of the estimated useful lives of the assets or, for those assets leased
under capital leases, the lease term which is 30 years for buildings and 3 to 7
years for furniture and equipment. Leasehold improvements are amortized over
the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Repairs and maintenance costs are charged
to operations as incurred, and additions and improvements to premises and
equipment are capitalized. Upon sale or retirement, the cost and related
accumulated depreciation are removed from the accounts and any gains or losses
are reflected in current operations.

  Federal Home Loan Bank Stock

   As a requirement for membership, the Bank invests in stock of the Federal
Home Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.

  Income Taxes

   Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets are also recognized for operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which the temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
if it is more likely than not that the tax benefits will not be realized.

  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,

                                      F-9

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

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. Stock options
issued under the Company's stock option plans 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 and earnings per share and other disclosures as if the fair value based
method of accounting had been applied.

  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.

   The components of other comprehensive income and related tax effects are as
follows:

<TABLE>
<CAPTION>
                                                                    2001     2000  1999
                                                                  --------  ------ ----
<S>                                                               <C>       <C>    <C>
Unrealized holding gains on available-for-sale securities........ $142,398  $1,547 $--
Reclassification adjustment for losses (gains) realized in income   (3,410)     --  --
                                                                  --------  ------ ---
Net unrealized gains.............................................  138,988   1,547  --
Tax effect.......................................................  (54,176)     --  --
                                                                  --------  ------ ---
Net of tax amount................................................ $ 84,812  $1,547 $--
                                                                  ========  ====== ===
</TABLE>

  Per Share Results

   During 1999, the Company effected a five-for-four stock split in the form of
a 20% dividend. On December 18, 2001, the Company declared an eleven-for-ten
stock split to be effected in the form of a 10% stock dividend for stockholders
of record on January 16, 2002 and payable January 31, 2002. Basic and diluted
net income (loss) per common share have been computed by dividing net income
(loss) for the period by the weighted average number of shares of common stock
outstanding during the period after retroactively adjusting for these stock
dividends.

   Basic earnings per common share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per common share reflect
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 are determined using
the treasury stock method. The Company's outstanding stock options did not have
a dilutive effect on the computation of earnings per share; therefore, for
2001, 2000 and 1999, basic and diluted earnings per common share are the same
amounts.

                                     F-10

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


  Segment Reporting

   SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires management to report selected financial and descriptive
information about reportable operating segments. It also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. Generally, disclosures are required for segments internally
identified to evaluate performance and resource allocation. In all material
respects, the Company's operations are entirely within the commercial banking
segment, and the financial statements presented herein reflect the results of
that segment. Also, the Company has no foreign operations or customers.

  Derivative Financial Statements

   On January 1, 2001, the Bank adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The Company has no derivative
financial instruments and does not engage in any hedging activities;
accordingly, the adoption of the statement did not affect the Company's
financial statements.

  Recent Accounting Pronouncements

   In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. SFAS No. 142 changes the accounting for goodwill and certain
other intangible assets from an amortization method to an impairment only
approach. Since the Company does not have goodwill or other intangible assets,
the adoption of SFAS Nos. 141 and 142 on January 1, 2002 is not expected to
significantly affect the Company's financial statements.

   In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, and in August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS No. 143 requires that
obligations associated with the retirement of tangible long-lived assets be
recorded as a liability when those obligations are incurred, with the amount of
liability initially measured at fair value. SFAS No. 143 will be effective for
financial statements for fiscal years beginning after June 15, 2002, though
early adoption is encouraged. The application of this statement is not expected
to have a material impact on the Company's financial statements.

   SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144
applies to all long-lived assets including discontinued operations, and amends
Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
No. 144 requires that long-lived assets that are to be disposed of by sale be
measured at the lower of book or fair value less cost to sell. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and its provisions are generally expected to be applied
prospectively. The application of this statement is not expected to have a
material impact on the Company's financial statements.

  Reclassifications

   Certain amounts in the 2000 and 1999 financial statements have been
reclassified to conform to the 2001 presentation. The reclassifications had no
effect on net income (loss) or stockholders' equity as previously reported.

                                     F-11

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE C--INVESTMENT SECURITIES

   The following is a summary of the securities portfolio by major
classification at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                     2001
                               ------------------------------------------------
                                                Gross      Gross
                                              Unrealized Unrealized
                               Amortized Cost   Gains      Losses   Fair Value
                               -------------- ---------- ---------- -----------
<S>                            <C>            <C>        <C>        <C>
Securities available for sale:
   U. S. Government agencies..  $12,525,022    $140,535     $--     $12,665,557
                                ===========    ========     ===     ===========

                                                     2000
                               ------------------------------------------------
                                                Gross      Gross
                                              Unrealized Unrealized
                               Amortized Cost   Gains      Losses   Fair Value
                               -------------- ---------- ---------- -----------
Securities available for sale:
   U. S. Government agencies..  $   150,000    $  1,547     $--     $   151,547
                                ===========    ========     ===     ===========
</TABLE>

   The amortized cost and fair values of securities available for sale at
December 31, 2001 by contractual maturity are shown below. Actual expected
maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations.

<TABLE>
<CAPTION>
                                                 At December 31, 2001
                                               -------------------------
                                               Amortized Cost Fair Value
                                               -------------- ----------
                                                (Dollars in thousands)
        <S>                                    <C>            <C>
        Due within one year...................    $10,004      $10,095
        Due after one year through five years.      2,521        2,571
        Due after five years through ten years         --           --
        Due after ten years...................         --           --
                                                  -------      -------
           Total..............................    $12,525      $12,666
                                                  =======      =======
</TABLE>

   Securities with carrying values of $150,845 and $151,547 at December 31,
2001 and 2000, respectively, were pledged to secure public monies on deposit as
required by law.

NOTE D--LOANS AND THE ALLOWANCE FOR LOAN LOSSES

   Following is a summary of loans at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                           2001                 2000
                                   -------------------  -------------------
                                      Amount    Percent    Amount    Percent
                                   ------------ ------- ------------ -------
   <S>                             <C>          <C>     <C>          <C>
   Real estate mortgage loans:
      1-4 family.................. $ 10,328,927   7.31% $  9,105,541   8.32%
      Commercial mortgage.........   54,281,425  38.43%   29,538,323  26.99%
      Construction/development....   13,692,148   9.69%   17,084,944  15.61%
   Home equity lines of credit....   12,995,761   9.20%    9,693,846   8.86%
   Commercial and industrial loans   39,284,542  27.81%   35,673,375  32.59%
   Loans to individuals...........    9,889,046   7.00%    8,348,155   7.63%
   Lease financing, net...........      794,826     56%           --     --
                                   ------------ ------  ------------ ------
   Subtotal.......................  141,266,675 100.00%  109,444,184 100.00%
                                                ======               ======

   Allowance for loan losses......    1,736,000            1,385,000
                                   ------------         ------------
   Total.......................... $139,530,675         $108,059,184
                                   ============         ============
</TABLE>

                                     F-12

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   Loans are primarily made in Union and Mecklenburg Counties, North Carolina.
Real estate loans can be affected by the condition of the local real estate
market. Commercial and installment loans can be affected by the local economic
conditions.

   Impaired loans consist of nonaccrual loans which aggregated $930,000 and
$158,000 at December 31, 2001 and 2000, respectively.

   The Company has granted loans to certain directors and executive officers of
the Bank and their related interests. Such loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers and, in management's
opinion, do not involve more than the normal risk of collectibility. All loans
to directors and executive officers or their interests are submitted to the
Board of Directors for approval. A summary of loans to directors, executive
officers and their related interests follows:

<TABLE>
  <S>                                                             <C>
  Loans to directors and officers as a group at January 1, 2001.. $ 4,705,306
  Disbursements during year ended December 31, 2001..............     954,080
  Amounts collected during year ended December 31, 2001..........  (1,587,581)
                                                                  -----------
  Loans to directors and officers as a group at December 31, 2001 $ 4,071,805
                                                                  ===========
</TABLE>

   At December 31, 2001, the Company had pre-approved but unused lines of
credit totaling $1,077,013 to directors, executive officers and their related
interests.

   An analysis of the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                           2001        2000      1999
                                        ----------  ---------- --------
        <S>                             <C>         <C>        <C>
        Balance at beginning of period. $1,385,000  $  813,000 $ 71,000
                                        ----------  ---------- --------
        Provision charged to operations    543,361     636,339  742,000
                                        ----------  ---------- --------
        Charge-offs....................    196,035      64,339       --
        Recoveries.....................     (3,674)         --       --
                                        ----------  ---------- --------
        Net charge-offs................    192,361      64,339       --
                                        ----------  ---------- --------
        Balance at end of period....... $1,736,000  $1,385,000 $813,000
                                        ==========  ========== ========
</TABLE>

NOTE E--BANK PREMISES AND EQUIPMENT

   Following is a summary of bank premises and equipment at December 31, 2001
and 2000:

<TABLE>
<CAPTION>
                                                       2001        2000
                                                    ----------  ----------
     <S>                                            <C>         <C>
     Land.......................................... $  661,668  $  835,935
     Buildings and leasehold improvements..........  2,110,735   2,093,698
     Furniture and equipment.......................  1,701,153   1,540,180
     Construction in progress......................    380,275     612,786
                                                    ----------  ----------
                                                     4,853,831   5,082,599
     Less accumulated depreciation and amortization   (906,768)   (497,347)
                                                    ----------  ----------
     Total......................................... $3,947,063  $4,585,252
                                                    ==========  ==========
</TABLE>


                                     F-13

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   Depreciation and amortization expense amounting to $409,421, $325,294 and
$159,375 for the years ended December 31, 2001, 2000 and 1999, respectively, is
included in occupancy and equipment expense.

   At December 31, 2001, the Company has remaining contractual commitments of
approximately $616,000 for the construction of a new branch costing
approximately $716,000.

NOTE F--DEPOSITS

   Time deposits in denominations of $100,000 or more were $47,795,632 and
$41,992,074 at December 31, 2001 and 2000, respectively.

   At December 31, 2001, the scheduled maturities of certificates of deposit
were as follows:

<TABLE>
<CAPTION>
                            Less than  $100,000 or
                            $100,000      more        Total
                           ----------- ----------- ------------
                <S>        <C>         <C>         <C>
                2002...... $51,846,621 $42,079,674 $ 93,926,295
                2003......   2,188,961   1,566,810    3,755,771
                2004......   3,015,195   3,565,114    6,580,309
                2005......     389,375     473,157      862,532
                Thereafter     218,849     110,877      329,726
                           ----------- ----------- ------------
                Total..... $57,659,001 $47,795,632 $105,454,633
                           =========== =========== ============
</TABLE>

NOTE G--BORROWINGS

   Advances from the Federal Home Loan Bank of Atlanta consisted of the
following at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                              2001       2000
                                                                           ---------- ----------
<S>                                                                        <C>        <C>
6.76% due on March 30, 2001............................................... $       -- $5,000,000
4.77% due on June 30, 2003................................................  2,000,000         --
5.24% due on June 28, 2004................................................  2,000,000         --
4.85% due on December 19,2011, callable one time only on December 19, 2006  5,000,000         --
                                                                           ---------- ----------
Total..................................................................... $9,000,000 $5,000,000
                                                                           ========== ==========
</TABLE>

   Pursuant to collateral agreements with the Federal Home Loan Bank, advances
are secured by a blanket lien on the loan portfolio.

   The Company also had available lines of credit totaling $6.5 million from
correspondent banks at December 31, 2001.

NOTE H--LEASES

  Operating Leases

   The Company has entered into non-cancelable operating leases for the land on
which its main office is located and for other branch facilities and equipment.
These leases have terms from five to thirty years. In 2001, the Company entered
into a sale-leaseback arrangement. Under the arrangement, the Company sold its
Marshville branch property and leased it back for a period of ten years with
two renewal options for five years

                                     F-14

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

each. The leaseback has been accounted for as an operating lease. The gain of
$147,156 realized in this transaction has been deferred and is being amortized
to income in proportion to rental expense over the term of the lease. Future
rentals under these leases are as follows:
<TABLE>
<CAPTION>
                              Related
                               Party      Other      Total
                             ---------- ---------- ----------
                  <S>        <C>        <C>        <C>
                  2002...... $  121,101 $  237,779 $  358,880
                  2003......    121,101    231,707    352,808
                  2004......    121,101    235,432    356,533
                  2005......     93,970    190,383    284,353
                  2006......     62,733    187,124    249,857
                  2007--2019  1,678,325  1,377,507  3,055,832
                             ---------- ---------- ----------
                  Total..... $2,198,331 $2,459,932 $4,658,263
                             ========== ========== ==========
</TABLE>

   Total rent expense under operating leases was approximately $293,000,
$256,000 and $86,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

  Capital Lease Obligation

   The Company leases its main office facility under a capitalized lease.
Leases that meet the criteria for capitalization under generally accepted
accounting principles are recorded as assets and the related obligations are
reflected as obligations under capital leases on the accompanying balance
sheets. Amortization of property under capital lease is included in
depreciation expense. Included in premises and equipment at December 31, 2001
and 2000 is $1.7 million as the capitalized cost of the Company's main office
and accumulated amortization of $91,601 and $48,003 at December 31, 2001 and
2000, respectively.

   At December 31, 2001, aggregate future minimum lease payments due under this
capital lease obligation are as follows:

<TABLE>
            <S>                                         <C>
            2002....................................... $   138,372
            2003.......................................     138,372
            2004.......................................     138,372
            2005.......................................     148,057
            2006.......................................     148,057
            2007--2019.................................   3,961,083
                                                        -----------
            Total minimum lease payments...............   4,672,313
            Less amount representing interest..........  (2,968,834)
                                                        -----------
            Present value of net minimum lease payments $ 1,703,479
                                                        ===========
</TABLE>

   Both the operating and capital leases regarding the Company's main office
discussed above are leased from a director. Prior to the main facility being
completed in November 1999, the Company leased land for its temporary banking
facility from that same director. Total lease payments of $298,523, $277,601
and $55,975 were paid to this director under these leases during 2001, 2000 and
1999, respectively.

                                     F-15

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE I--GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES

   The Company has a cumulative trust preferred security (the "Trust
Preferred") outstanding through a wholly owned subsidiary. The Trust issuer has
invested the total proceeds from the sale of the Trust Preferred in the Junior
Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures") issued by the Company.

   On December 31, 2001, $2 million of trust preferred securities were placed
through American Community Capital Trust I (the "Trust"). The preferred
securities pay cumulative cash distributions quarterly at an annual rate of 9%.
The dividends paid to holders of the capital trust preferred securities, which
will be recorded as interest expense, are deductible for income tax purposes.
The quarterly distributions may, at the option of the Company, be deferred up
to five years. Unpaid distributions will be accrued as a component of interest
expense. The preferred securities are redeemable on December 31, 2006 or
afterwards at the par of $1,000 per share. Redemption is mandatory at December
31, 2032. The proceeds of the preferred securities were invested by the Trust
in $2 million principal amount of 9% junior subordinated debentures of the
Company due December 31, 2032. The Company guarantees the preferred securities
through the combined operation of the debentures and other related documents.
The Company's obligation under the guarantee is unsecured and subordinate to
senior and subordinated indebtedness of the Company. The preferred securities
qualify as Tier I capital for regulatory capital purposes.

   A description of the Trust Preferred securities outstanding is as follows:

<TABLE>
<CAPTION>
                                                                         Principal Amount
                                                                         ----------------
                                    Date of   Shares Interest  Maturity
Issuing Entity                      Issuance  Issued   Rate      Date       2001     2000
--------------                     ---------- ------ -------- ---------- ----------  ----
<S>                                <C>        <C>    <C>      <C>        <C>         <C>
American Community Capital Trust I 12/31/2001 2,000    9.00%  12/31/2031 $2,000,000  $--
</TABLE>

NOTE J--OTHER COMMITMENTS AND CONTRACTS

   The Company has entered into a non-cancelable contract with a third party
for data processing services. The estimated future minimum payments required
under this contract for the years ending December 31 are as follows:

<TABLE>
                                 <S>   <C>
                                 2002. $221,000
                                 2003.  238,000
                                       --------
                                 Total $459,000
                                       ========
</TABLE>

   The above future payments are based upon the anticipated future growth of
the Company and can therefore vary from the above estimates in any year.

NOTE K--INCOME TAXES

   The significant components of the provision for income taxes for the years
ended December 31, 2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                               2001       2000      1999
                                                                             ---------  --------  ---------
<S>                                                                          <C>        <C>       <C>
Current tax provision....................................................... $ 190,000  $     --  $      --
Deferred tax provision (benefit)............................................    63,000   (32,000)  (342,000)
                                                                             ---------  --------  ---------
Provision for income tax expense (benefit) before adjustment to deferred tax
  asset valuation allowance.................................................   253,000   (32,000)  (342,000)
Increase (decrease) in valuation allowance..................................  (253,000)   32,000    342,000
                                                                             ---------  --------  ---------
Net provision for income taxes.............................................. $      --  $     --  $      --
                                                                             =========  ========  =========
</TABLE>

                                     F-16

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


   The difference between the provisions for income taxes and the amounts
determined by applying the statutory federal income tax rate of 34% to income
(loss) before income taxes is summarized below:

<TABLE>
<CAPTION>
                                                                2001       2000      1999
                                                              ---------  --------  ---------
<S>                                                           <C>        <C>       <C>
Taxes (benefit) computed at statutory rate of 34%............ $ 254,000  $(37,000) $(306,000)
Effect of state income taxes.................................    34,000    (5,000)   (44,000)
Other........................................................   (35,000)   10,000      8,000
Increase (decrease) in deferred tax asset Valuation allowance  (253,000)   32,000    342,000
                                                              ---------  --------  ---------
                                                              $      --  $     --  $      --
                                                              =========  ========  =========
</TABLE>

   Significant components of deferred taxes at December 31, 2001 and 2000 are
as follows:

<TABLE>
<CAPTION>
                                                            2001       2000
                                                          ---------  ---------
<S>                                                       <C>        <C>
Deferred tax assets:
   Allowance for loan losses............................. $ 543,000  $ 421,000
   Pre-opening costs and expenses........................   120,000    186,000
   Net operating loss carryforwards......................        --    170,000
   Capital lease.........................................    37,000     19,000
   Deferred gain on sale-leaseback.......................    56,000
   Other.................................................        --      4,000
                                                          ---------  ---------
       Total deferred tax assets.........................   756,000    800,000
   Valuation allowance...................................  (479,000)  (732,000)
                                                          ---------  ---------
       Net deferred tax assets...........................   277,000     68,000
                                                          ---------  ---------
Deferred tax liabilities:
   Premises and equipment................................   (87,000)   (68,000)
   Net unrealized gains on available-for-sale securities.   (54,000)        --
                                                          ---------  ---------
       Total deferred tax liabilities....................  (141,000)   (68,000)
                                                          ---------  ---------
       Net recorded deferred tax assets.................. $ 136,000  $      --
                                                          =========  =========
</TABLE>

NOTE L--OTHER NON-INTEREST EXPENSE

   The major components of other non-interest expense for the years ended
December 31, 2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                 2001       2000      1999
                                              ---------- ---------- --------
    <S>                                       <C>        <C>        <C>
    Postage, printing and office supplies.... $  234,988 $  293,221 $165,280
    Advertising and promotion................    138,628    237,974  169,641
    Travel, meals, dues and subscriptions....    128,179    165,431  132,568
    Telephone................................    116,519     60,720   37,585
    Other....................................    405,408    329,561  128,806
    Data processing and technology...........    365,333    228,592  110,791
    Professional fees and contracted services    242,905    228,725  138,986
                                              ---------- ---------- --------
    Total.................................... $1,631,960 $1,544,224 $883,657
                                              ========== ========== ========
</TABLE>

                                     F-17

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


NOTE M--REGULATORY MATTERS

   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 direct material effect on the Company's and Bank's 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 capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.

   Quantitative measures established by regulation to ensure capital adequacy
require the Company and its bank subsidiaries to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2001 and 2000, that the Company and the Bank met all capital
adequacy requirements to which they are subject.

   As of December 31, 2001, the most recent notification from the Federal
Deposit Insurance Corporation categorized American Community Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
following tables. There are no conditions or events since the notification that
management believes have changed the Bank's category. The Company's and the
Bank's actual capital amounts and ratios as of December 31, 2001 and 2000 are
presented in the following table.

<TABLE>
<CAPTION>
                                                                       Minimum To Be
                                                                     Well Capitalized
                                                        Minimum For    Under Prompt
                                                          Capital    Corrective Action
                                            Actual      Requirement     Provisions
                                        -------------  ------------  ----------------
                                        Amount  Ratio  Amount  Ratio  Amount    Ratio
                                        ------- -----  ------- -----  -------   -----
                                                    (Dollars in Thousands)
<S>                                     <C>     <C>    <C>     <C>   <C>        <C>
December 31, 2001:
Total Capital to Risk Weighted Assets:
   Consolidated........................ $17,226 11.54% $11,938 8.00% $   N/A      N/A
   American Community Bank.............  15,926 10.67%  11,938 8.00%  14,923    10.00%
Tier 1 Capital to Risk Weighted Assets:
   Consolidated........................  15,490 10.38%   5,969 4.00%     N/A      N/A
   American Community Bank.............  14,190  9.51%   5,969 4.00%   8,954     6.00%
Tier 1 Capital to Average Assets:
   Consolidated........................  15,490  8.66%   7,151 4.00%     N/A      N/A
   American Community Bank.............  14,190  7.94%   7,151 4.00%   8,939     5.00%
</TABLE>

                                     F-18

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


<TABLE>
<CAPTION>
                                                                      Minimum To Be
                                                                    Well Capitalized
                                                       Minimum For    Under Prompt
                                                         Capital    Corrective Action
                                            Actual     Requirement     Provisions
                                        -------------  -----------  ----------------
                                        Amount  Ratio  Amount Ratio  Amount    Ratio
                                        ------- -----  ------ ----- -------   ------
                                                   (Dollars in Thousands)
<S>                                     <C>     <C>    <C>    <C>   <C>       <C>
December 31, 2000:
Total Capital to Risk Weighted Assets:
   Consolidated........................ $12,830 10.83% $9,480 8.00% $   N/A   $  N/A
   American Community Bank.............  12,830 10.83%  9,480 8.00%  11,850    10.00%
Tier 1 Capital to Risk Weighted Assets:
   Consolidated........................  11,445  9.66%  4,740 4.00%     N/A      N/A
   American Community Bank.............  11,445  9.66%  4,740 4.00%   7,110     6.00%
Tier 1 Capital to Average Assets:
   Consolidated........................  11,445 13.10%  3,493 4.00%     N/A      N/A
   American Community Bank.............  11,445 13.10%  3,493 4.00%   4,366     5.00%
</TABLE>

NOTE N--OFF-BALANCE SHEET RISK

   The Company is a party to financial instruments with off-balance sheet
credit 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. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.

   Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on
management's credit evaluation of the borrower. Collateral obtained varies but
may include real estate, stocks, bonds, and certificates of deposit.

   A summary of the contract amounts of the Company's exposure to off-balance
sheet credit risk as of December 31, 2001 is as follows:

<TABLE>
<S>                                                                 <C>
Financial instruments whose contract amounts represent credit risk:
   Commitments to extend credit.................................... $ 3,958,848
   Undisbursed lines of credit.....................................  14,729,882
   Undisbursed portion of construction loans.......................   8,121,961
</TABLE>

NOTE O--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS

   Financial instruments for which fair value disclosures are required include
cash and due from banks, interest-earning deposits with banks, investment
securities, loans, Federal Home Loan bank stock, deposit accounts, advances
from the Federal Home Loan Bank and trust preferred securities. Fair value
estimates are

                                     F-19

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

made at a specific moment in time, based on relevant market information and
information about the financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. Because no
active market readily exists for a portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.

   The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

  Cash and Due from Banks and Interest-earning Deposits with Banks

   The carrying amounts for cash and due from banks and interest-earning
deposits with banks approximate fair value because of the short maturities of
those instruments.

  Investment Securities

   Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.

  Loans

   For certain homogenous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value
of other types of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.

  Federal Home Loan Bank Stock

   The carrying value of Federal Home Loan Bank stock approximates fair value
based on the redemption provisions of the Federal Home Loan Bank.

  Deposits

   The fair value of demand deposits is the amount payable on demand at the
reporting date. The fair value of time deposits is estimated using the rates
currently offered for instruments of similar remaining maturities.

  Advances from Federal Home Loan Bank

   The fair value of advances from the Federal Home Loan Bank is based upon the
discounted value when using current rates at which borrowings of similar
maturity could be obtained.

  Trust Preferred Securities

   The fair values for trust preferred securities are equal to their carrying
value since the securities were issued on December 31, 2001.

                                     F-20

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


  Financial Instruments with Off-Balance Sheet Risk

   With regard to financial instruments with off-balance sheet risk discussed
in Note N, it is not practicable to estimate the fair value of future financing
commitments.

   The carrying amounts and estimated fair values of the Company's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                2001                2000
                                         ------------------- -------------------
                                         Carrying Estimated  Carrying Estimated
                                          amount  fair value  amount  fair value
                                         -------- ---------- -------- ----------
                                                 (Dollars in thousands)
<S>                                      <C>      <C>        <C>      <C>
Financial assets:
   Cash and due from banks.............. $  6,583  $  6,583  $  3,769  $  3,769
   Interest-earning deposits with banks.   16,926    16,926    22,949    22,949
   Investment securities................   12,666    12,666       152       152
   Loans................................  139,531   138,892   108,059   107,942
   Federal Home Loan Bank stock.........      450       450       250       250
Financial liabilities:
   Deposits.............................  154,909   153,323   122,048   119,162
   Advances from Federal Home Loan Bank.    9,000     8,916     5,000     4,999
   Trust preferred securities...........    2,000        --        --        --
</TABLE>

NOTE P--EMPLOYEE AND DIRECTOR BENEFIT PLANS

  401(k) Retirement Plan

   The Company has adopted a 401(k) retirement plan that covers all eligible
employees. The Company matches contributions of 3.0% of each employee's salary.
Contributions are funded when accrued. Expenses totaled $58,039, $35,351 and
$21,776 for the years ended December 31, 2001, 2000 and 1999, respectively.

  Stock Option Plans

   During 1999 the Company adopted, with shareholder approval, an Employee
Stock Option Plan (the "Employee Plan") and a Director Stock Option Plan (the
"Director Plan"). Each plan makes available options to purchase 149,206 shares
of the Company's common stock for an aggregate number of common shares reserved
for options under these plans of 298,412. The options granted under the
Director Plan vested immediately at the time of grant, while the options
granted under the Employee Plan vest over a five-year period. During 2001 the
Company adopted, with shareholder approval, the 2001 Incentive Stock Option
Plan (the "Incentive Option Plan"). The Incentive Option Plan makes available
options to purchase 82,000 shares of the Company's common stock at a price not
less than the fair value of the Company's common shares on the date of grant.
The options granted under the Incentive Option Plan vest over a five-year
period. Unexercised options, for all of the aforementioned plans, expire ten
years after the date of grant. The exercise price of all options granted to
date is the fair value of the Company's common shares on the date of grant. A
summary of the Company's option plans

                                     F-21

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999

as of and for the years ended December 31, 2001, 2000 and 1999, after
retroactively adjusting for the stock dividend paid in 1999, is as follows:

<TABLE>
<CAPTION>
                                                                   Outstanding Options
                                                                --------------------------
                                               Shares available                Weighted
                                                  for future      Number       average
                                                    grants      outstanding exercise price
                                               ---------------- ----------- --------------
<S>                                            <C>              <C>         <C>
At adoption...................................      298,412            --       $  --
   Options granted............................     (298,412)      298,412        9.19
   Options exercised..........................           --            --          --
   Options forfeited..........................           --            --          --
                                                   --------       -------       -----
At December 31, 1999..........................           --       298,412        9.19
   Options granted............................           --            --          --
   Options exercised..........................           --            --          --
   Options forfeited..........................           --            --          --
                                                   --------       -------       -----
At December 31, 2000..........................           --       298,412        9.19
   Adoption of the 2001 Incentive Option Plan.       82,000            --          --
   Options granted............................      (37,462)       37,462        7.82
   Options exercised..........................           --            --          --
   Options forfeited..........................        1,100        (1,100)       9.17
                                                   --------       -------       -----
At December 31, 2001..........................       45,638       334,774       $9.02
                                                   ========       =======       =====
</TABLE>

   At December 31, 2001, there were 208,888 exercisable options with a weighted
average exercise price of $9.18. At December 31, 2000, there were 179,206
exercisable options with a weighted average exercise price of $9.17. At
December 31, 1999, there were 149,206 exercisable options with a weighted
average exercise price of $9.17.


   No compensation cost is recognized by the Company when stock options are
granted because the exercise price equals the market price of the underlying
common stock on the date of the grant. If the Company had used the fair
value-based method of accounting for stock options for 2001, 2000 and 1999,
compensation costs would have increased by $69,000 in 2001 and 2000, and
$400,000 in 1999. The proforma effects on net income (loss) and net income
(loss) per common share, together with the assumptions used in estimating the
fair values of options granted, are displayed below:

<TABLE>
<CAPTION>
                                                    2001     2000     1999
                                                  --------  ------  --------
                                                    (Dollars in thousands)
   <S>                                            <C>       <C>     <C>
   Net income (loss):
      As reported................................ $    746  $ (108) $   (900)
      Proforma...................................      677    (177)   (1,300)
   Basic and diluted net income (loss) per share:
      As reported................................     0.42   (0.07)    (0.55)
      Proforma...................................     0.38   (0.11)    (0.79)
   Assumptions in estimating option values:
      Risk-free interest rate....................     3.50%     NA      4.75%
      Dividend yield.............................      -- %     NA       -- %
      Volatility.................................    23.19%     NA      5.00%
      Expected life..............................  7 years      NA   5 years
</TABLE>

                                     F-22

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


  Employment Agreement

   The Company has entered into an employment agreement with its chief
executive officer to ensure a stable and competent management base. The
agreement provides for a five-year term, but the agreement may be extended for
an additional year at the end of the initial term and annually thereafter. The
agreement provides for benefits as spelled out in the contract and cannot be
terminated by the Board of Directors, except for cause, without prejudicing the
officer's right to receive certain vested rights, including compensation. In
the event of a change in control of the Company and in certain other events, as
defined in the agreement, the Company or any successor to the Company will be
bound to the terms of the contract.

NOTE Q--SALE OF COMMON STOCK

   The Company completed the sale of 150,178 shares of its common stock at
$9.50 per share on March 21, 2001. Expenses associated with the sale amounted
to $126,182 resulting in net proceeds from the offering of $1,300,508.

NOTE R--PARENT COMPANY FINANCIAL DATA

   Following are condensed financial statements of American Community
Bancshares, Inc., which was formed during 2000, as of and for the years ended
December 31, 2001 and 2000:

                  Condensed Statements of Financial Condition

<TABLE>
<CAPTION>
                                                         2001         2000
                                                      -----------  -----------
<S>                                                   <C>          <C>
Assets:
   Cash and due from banks........................... $ 1,298,992  $        --
   Investment in American Community Bank.............  12,276,727   11,446,061
   Investment in American Community Capital Trust I..      61,860           --
   Note receivable from American Community Bank......   2,000,000           --
   Other assets......................................       1,516           --
                                                      -----------  -----------
                                                      $15,639,095  $11,446,061
                                                      ===========  ===========
Liabilities and Stockholders' Equity:
   Liabilities:
       Due to American Community Capital Trust I..... $ 2,061,860  $        --
                                                      -----------  -----------
   Stockholders' Equity:
       Common stock..................................   1,642,241    1,492,063
       Additional paid-in capital....................  12,239,926   11,089,596
       Accumulated deficit...........................    (391,291)  (1,137,145)
       Accumulated other comprehensive income........      86,359        1,547
                                                      -----------  -----------
       Total stockholders' equity....................  13,577,235   11,446,061
                                                      -----------  -----------
                                                      $15,639,095  $11,446,061
                                                      ===========  ===========
</TABLE>

                      Condensed Statements of Operations

<TABLE>
<CAPTION>
                                                           2001     2000
                                                         -------- ---------
    <S>                                                  <C>      <C>
    Equity in earnings (loss) of American Community Bank $745,854 $(108,006)
                                                         ======== =========
</TABLE>

                                     F-23

<PAGE>

             AMERICAN COMMUNITY BANCSHARES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

                       December 31, 2001, 2000 and 1999


                      Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                2001       2000
                                                                             ----------  ---------
<S>                                                                          <C>         <C>
Cash flows from operating activities
   Net income (loss)........................................................ $  745,854  $(108,006)
   Adjustments to reconcile net income (loss) to net cash used by operating
     activities:
       Equity in (earnings) loss of American Community Bank.................   (745,854)   108,006
                                                                             ----------  ---------
       Change in assets and liabilities:
          Increase in other assets..........................................     (1,516)        --
                                                                             ----------  ---------
          Net cash used by operating activities.............................     (1,516)        --
                                                                             ----------  ---------
Cash flows from financing activities
   Proceeds from sale of common stock.......................................  1,300,508         --
                                                                             ----------  ---------
          Net cash provided by financing activities.........................  1,300,508         --
                                                                             ----------  ---------
          Net increase in cash and cash equivalents.........................  1,298,992         --
Cash and cash equivalents, beginning........................................         --         --
                                                                             ----------  ---------
          Cash and cash equivalents, ending................................. $1,298,992  $      --
                                                                             ==========  =========
</TABLE>

NOTE S--SUPPLEMENTAL DISCLOSURE FOR STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          2001       2000       1999
                                                                       ---------- ---------- ----------
<S>                                                                    <C>        <C>        <C>
Supplemental Disclosure of Cash Flow Information
   Cash paid during the year for:
       Interest....................................................... $7,346,239 $4,637,053 $1,296,448
       Income taxes...................................................         --         --         --
Supplemental Disclosure of Noncash Investing and Financing
  Activities
   Transfer of loans to foreclosed assets............................. $  576,817 $       --         --
   Change in unrealized gain on available-for-sale securities, net of
     tax..............................................................     84,812      1,547         --
   Acquisition of bank premises and equipment through obligation
     under capital lease..............................................         --  1,700,000         --
</TABLE>

                                     F-24

<PAGE>

   (a) Index to Exhibits

<TABLE>
<CAPTION>
Exhibit
Number     Description of Exhibit
------     ----------------------
<C>        <S>

  3.1      Registrant's Articles of Incorporation *

  3.2      Registrant's Bylaws *

  4.1      Specimen Stock Certificate*

 10.1      Employment Agreement of Randy P. Helton*

 10.2      1999 Incentive Stock Option Plan*

 10.3      1999 Nonstatutory Stock Option Plan*

 10.4      401(k) Plan*

 10.5(i)   Issuance of Trust Preferred Securities by American Community Capital Trust I Indenture dated
             December 31, 2001***

 10.5(ii)  Issuance of Trust Preferred Securities by American Community Capital Trust I Expense Agreement
             dated December 31, 2001***

   10(iii) Issuance of Trust Preferred Securities by American Community Capital Trust I Amended and
             Restated Trust Agreement dated March 1, 2002***

   10(iv)  Issuance of Trust Preferred Securities by American Community Capital Trust I Supplemental
             Indenture dated March 1, 2002***

   10(v)   Issuance of Trust Preferred Securities by American Community Capital Trust I Subordinated
             Debenture dated March 1, 2002 ($2,061,860) ***

   10(vi)  Issuance of Trust Preferred Securities by American Community Capital Trust I Subordinated
             Debenture dated March 1, 2002 ($1,546,000) ***

   10(vii) Issuance of Trust Preferred Securities by American Community Capital Trust I Amended and
             Restated Preferred Securities Guarantee Agreement dated March 1, 2002***

 10.6      2001 Incentive Stock Option Plan**

   21      Subsidiaries of Registrant***

   99      Registrant's Definitive Proxy Statement****
</TABLE>
--------
*   Incorporated by reference from exhibits to Registrant's Registration
    Statement on Form S-4 (File No. 333-31148)
**  Incorporated by reference from exhibit 10.5 to Registrant's Annual Report
    for the year ended December 31, 2000 on Form 10-KSB.
*** Incorporated by reference from Registrant's Registration Statement on Form
    SB-2 (File No. 333-84484)
**** Filed with the Commission pursuant to Rule 14a-6.

(b) Reports on Form 8-K.

   A Form 8-K was filed on December 21, 2001 reporting under Item 5 a 10% stock
dividend payable in the first quarter of 2002.

                                     II-1

<PAGE>

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

                                                  /s/  RANDY P. HELTON
                                          _____________________________________
                                                      Randy P. Helton
                                               President and Chief Executive
                                                          Officer

March 27, 2002

                                     II-2

<PAGE>

   Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.


    /s/  RANDY P. HELTON             March 27, 2002
-----------------------------
 Randy P. Helton, President,
 Chief Executive Officer and
          Director

   /s/  DAN R. ELLIS, JR.            March 27, 2002
-----------------------------
  Dan R. Ellis, Jr., Chief
      Financial Officer

   /s/  ROBERT D. DINSMORE           March 27, 2002
-----------------------------
Robert D. Dinsmore, Director

    /s/  FRANK L. GENTRY             March 27, 2002
-----------------------------
       Frank L. Gentry

     /s/  THOMAS J. HALL             March 27, 2002
-----------------------------
  Thomas J. Hall, Director

     /s/  LARRY S. HELMS             March 27, 2002
-----------------------------
  Larry S. Helms, Director

    /s/  KENNETH W. LONG             March 27, 2002
-----------------------------
  Kenneth W. Long, Director

   /s/  L. STEVEN PHILIPS            March 27, 2002
-----------------------------
L. Steven Phillips, Director

    /s/  ALISON J. SMITH             March 27, 2002
-----------------------------
  Alison J. Smith, Director

    /s/  L. CARLTON TYSON            March 27, 2002
-----------------------------
 L. Carlton Tyson, Director

    /s/  DAVID D. WHITLEY            March 27, 2002
-----------------------------
 David D. Whitley, Director

    /s/  GREGORY N. WYLIE            March 27, 2002
-----------------------------
 Gregory N. Wylie, Director


                                     II-3

<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number     Description of Exhibit
------     ----------------------
<C>        <S>

   3.1     Registrant's Articles of Incorporation*

   3.2     Registrant's Bylaws*

   4.1     Specimen Stock Certificate*

  10.1     Employment Agreement of Randy P. Helton*

  10.2     1999 Incentive Stock Option Plan*

  10.3     1999 Nonstatutory Stock Option Plan*

  10.4     401(k) Plan*

  10.5(i)  Issuance of Trust Preferred Securities by American Community Capital Trust I Indenture dated
             December 31, 2001***

  10.5(ii) Issuance of Trust Preferred Securities by American Community Capital Trust I Expense Agreement
             dated December 31, 2001***

  10(iii)  Issuance of Trust Preferred Securities by American Community Capital Trust I Amended and
             Restated Trust Agreement dated March 1, 2002***

  10(iv)   Issuance of Trust Preferred Securities by American Community Capital Trust I Supplemental
             Indenture dated March 1, 2002***

  10(v)    Issuance of Trust Preferred Securities by American Community Capital Trust I Subordinated
             Debenture dated March 1, 2002 ($2,061,860)***

  10(vi)   Issuance of Trust Preferred Securities by American Community Capital Trust I Subordinated
             Debenture dated March 1, 2002 ($1,546,000)***

  10(vii)  Issuance of Trust Preferred Securities by American Community Capital Trust I Amended and
             Restated Preferred Securities Guarantee Agreement dated March 1, 2002***

  10.6     2001 Incentive Stock Option Plan**

  21       Subsidiaries of Registrant***

  99       Registrant's Definitive Proxy Statement****
</TABLE>
--------
*   Incorporated by reference from exhibits to Registrant's Registration
    Statement on Form S-4 (File No. 333-31148)
**  Incorporated by reference from exhibit 10.5 to Registrant's Annual Report
    for the year ended December 31, 2000 on Form 10-KSB.
*** Incorporated by reference from Registrant's Registration Statement on Form
    SB-2 (File No. 333-84484)
**** Filed with the Commission pursuant to Rule 14a-6.

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