##### 



Exhibit 13.1

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

The following discussion should be read in conjunction with our selected
financial information and the related notes presented elsewhere in this report,
as well as our historical financial statements which appear in this report.

Certain statements in this section constitute forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of First Shares to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.

Results of Operations for the Years Ended December 31, 2002, 2001 and 2000

Net Income

During 2002, we focused on earnings, continuing to grow total loans and
deposits, and increasing our market share as outlined in our strategic plan.
As part of this plan, 2002 was a record profitable year as lower interest rates
contributed to a widening of our net interest margin and non-interest income
increased. The year 2001 was a turning point as we reported net income
following losses in 2000 and 1999. Losses in those years resulted from our
expenditures to build an appropriate infrastructure. The focus on earnings
during 2002 resulted in net income of $1.3 million or $.84 per basic share for
2002 compared to $692,000 or $.44 per basic share for 2001. A net loss of
$858,000 or $.72 per share for 2000 was recorded. Having attained most of our
goals for 2002, the focus for 2003 and beyond will be a continuation of
improved earnings and market share growth through exceptional customer service.

Return on average assets (ROA) for 2002, 2001, and 2000 was .93%, .58%, and
(.94)% while return on average equity (ROE) was 16.85%, 9.99%, and (17.83)% for
those same periods.

Net Interest Income

Net interest income is the most significant component of our earnings. Net
interest income is the difference between interest and fees realized on earning
assets, primarily loans, securities and short-term investments and interest
paid on deposits and other borrowings. The net interest margin is this
difference expressed as a percentage of average earning assets. Net interest
income is determined by several factors, including the volume of earning assets
and liabilities, the mix of earning assets and liabilities, and interest rates.
For 2002, net interest income totaled $5.4 million compared to $4.4 million in
2001, an increase $1.0 million or 25.0%. This increase was driven primarily by
the increase in earning assets (most notably loans) as we increased our market
share in existing markets. Net interest income also increased from 2000 to
2001, by $1.1 million or 33.7%, as earning assets also experienced growth.

Interest income for 2002 totaled $9.2 million, compared to $9.2 million for
2001, an increase of $70,000 or .76%. While the slight increase in 2002 can be
attributed to some extent to growth in the investment portfolio, growth in the
loan portfolio was the primary contributor to the increase. Average
investments, including securities and federal funds sold, were $32.9 million in
2002, up by $10.2 million from 2001s $22.7 million level, an increase of
44.7%. The average loan balance growth was higher, increasing from $88.9
million in 2001 to $101.4 million in 2002, representing a 14.1% increase. The
increased volume of earning assets has been the dominant factor for growth in
interest income. Average yields, on a fully tax equivalent basis, negatively
influenced interest income, declining from 8.23% for 2001 to 6.91% for 2002.
During 2002, the Federal Reserve Bank cut interest rates several times,
resulting in falling rates on the loan portfolio as loans repriced or customers
refinanced loans at market rates.

1



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##### 



Interest expense declined from 2001 to 2002, decreasing by $1.0 million or
21.1%. The decrease was primarily rate driven, with average deposits
increasing, in all categories, by a total of $13.5 million, or 14.3%, during
2002. Time deposits increased the most, with the average balance rising by
$9.4 million. With the declining interest rate environment of 2002, the
average cost of deposits decreased from 4.73% in 2001 to 2.97% in 2002.
Borrowed funds were utilized during 2002 to support growth. An increase of
$250,000 in interest expense was realized during 2002 compared to 2001 from
these other funding sources included the issuance of mandatory convertible
debentures. The average cost of all interest bearing liabilities decreased
from 4.75% in 2001 to 3.1% in 2002.

Interest income totaled $9.2 million for 2001, up $1.6 million or 20.6%
compared to 2000. Average earning assets increased $27.3 million or 32.4%
during this period, with the loan portfolio primarily contributing to the
increase. The yield on interest earning assets decreased to 8.23% in 2001 from
9.04% in 2000.

Interest expense increased $469,000 or 10.8%, as average deposit balances
increased $23.2 million or 32.7%. Growth occurred in all deposit categories,
but was led by increases in time deposits. The total cost of all interest
bearing liabilities decreased, from 5.66% in 2000 to 4.75% in 2001, as interest
rates declined.

The following tables set forth an analysis of our net interest income (on a
tax-equivalent basis) for 2002, 2001, and 2000.

Average Balance Sheets and Interest Rates

ASSETS

|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |       |       |  |  |       |      |  
|-------------------------- | ---------- | -------------------------------------- | -------------------- | - | ------------------------ | ------- |  | -------- | ----- | ----- | ---- | ------- | ---- | ------- | ------- | - | -------- | ------- |  | ---- | ----- | ------- | ------- |  | ------- | -------- | - | - | ------ | ------ |  | ------- | ----- | ----- |  |  | ----- | ---- | -
|                           |            |                                        |                      |   | Years ended December 31, |        
|                           |            |                                        |                      |   |                          |        
|                           |            |                                        |                      |   | 2002                     |         |  | 2001     |       |       | 2000 |        
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |        
|                           |            |                                        |                      |   | Average                  |         |  |          |       |       |      | Average |      |         | Average |   |          |         |  |      |       | Average |         |  | Average |          |   |   |        |        |  | Average |      
|                           |            |                                        |                      |   | Balance                  |         |  | Interest |       |       | Rate |         |      | Balance |         |   | Interest |         |  | Rate |       |         | Balance |  |         | Interest |   |   | Rate   |       
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |       
|                           |            |                                        |                      |   | (Dollars in Thousands)   |        
|Interest earning assets    |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |       |       |  | 
|                           | Securities |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |       |       |  |  |      
|                           |            | Taxable                                |                      | $ | 28,848                   |         |  | $        | 1,553 |       |      |         | 5.38 | %       |         | $ | 20,323   |         |  | $    | 1,313 |         |         |  | 6.46    | %        |   | $ | 16,342 |        |  | $       | 1,105 |       |  |  | 6.76  | %   
|                           |            | Non-taxable (1)                        |                      |   | 2,584                    |         |  |          | 165   |       |      |         | 6.39 |         |         |   | 883      |         |  |      | 62    |         |         |  | 7.02    |          |   |   | 1,090  |        |  |         | 77    |       |  |  | 7.06  |     
|                           |            | Federal funds sold                     |                      |   | 1,473                    |         |  |          | 25    |       |      |         | 1.70 |         |         |   | 1,231    |         |  |      | 48    |         |         |  | 3.90    |          |   |   | 855    |        |  |         | 51    |       |  |  | 5.96  |     
|                           |            | Interest bearing balances
With banks   |                      |   | 32                       |         |  |          |      |       |      |         | 0.00 |         |         |   | 123      |         |  |      | 7     |         |         |  | 5.69    |          |   |   | 554    |        |  |         | 36    |       |  |  | 6.50  |     
|                           |            | Unrealized gain/loss on
AFS securities |                      |   | (35                      | )       |  |          |      |       |      |         | 0.00 |         |         |   | 182      |         |  |      |      |         |         |  | 0.00    |          |   |   | (285   | )      |  |         |      |       |  |  | 0.00  |     
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |       
|                           |            |                                        | Total securities     |   |                          | 32,902  |  |          |       | 1,743 |      |         |      | 5.30    |         |   |          | 22,742  |  |      |       | 1,430   |         |  |         | 6.29     |   |   |        | 18,556 |  |         |       | 1,269 |  |  |       | 6.84 |  
|                           | Loans      |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |       |       |  |  |      
|                           |            | Commercial                             |                      |   | 26,163                   |         |  |          | 1,817 |       |      |         | 6.94 |         |         |   | 19,803   |         |  |      | 1,684 |         |         |  | 8.50    |          |   |   | 12,494 |        |  |         | 1,409 |       |  |  | 11.28 |     
|                           |            | Real estate                            |                      |   | 49,356                   |         |  |          | 3,674 |       |      |         | 7.44 |         |         |   | 44,766   |         |  |      | 3,978 |         |         |  | 8.89    |          |   |   | 33,886 |        |  |         | 3,221 |       |  |  | 9.51  |     
|                           |            | Installment and other
Consumer         |                      |   | 25,930                   |         |  |          | 2,056 |       |      |         | 7.93 |         |         |   | 24,305   |         |  |      | 2,093 |         |         |  | 8.61    |          |   |   | 19,383 |        |  |         | 1,723 |       |  |  | 8.89  |     
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |       
|                           |            |                                        | Total loans          |   |                          | 101,449 |  |          |       | 7,547 |      |         |      | 7.44    |         |   |          | 88,874  |  |      |       | 7,755   |         |  |         | 8.73     |   |   |        | 65,763 |  |         |       | 6,353 |  |  |       | 9.66 |  
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |       
|                           |            |                                        | Total earning assets |   | $                        | 134,351 |  |          | $     | 9,290 |      |         |      | 6.91    | %       |   | $        | 111,616 |  |      | $     | 9,185   |         |  |         | 8.23     | % |   | $      | 84,319 |  |         | $     | 7,622 |  |  |       | 9.04 | %
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |       
|Noninterest earning assets |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |       |       |  | 
|                           |            | Allowance for loan losses              |                      |   | (1,228                   | )       |  |          |       |       |      |         |      |         |         |   | (1,009   | )       |  |      |       |         |         |  |         |          |   |   | (733   | )      |  |         |       |       |  |  |       |     
|                           |            | Premises and equipment                 |                      |   | 2,060                    |         |  |          |       |       |      |         |      |         |         |   | 1,941    |         |  |      |       |         |         |  |         |          |   |   | 1,928  |        |  |         |       |       |  |  |       |     
|                           |            | Cash and due from banks                |                      |   | 4,393                    |         |  |          |       |       |      |         |      |         |         |   | 3,797    |         |  |      |       |         |         |  |         |          |   |   | 2,733  |        |  |         |       |       |  |  |       |     
|                           |            | Accrued interest and other
Assets      |                      |   | 3,892                    |         |  |          |       |       |      |         |      |         |         |   | 3,410    |         |  |      |       |         |         |  |         |          |   |   | 2,725  |        |  |         |       |       |  |  |       |     
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |      
|                           |            |                                        | Total assets         |   | $                        | 143,468 |  |          |       |       |      |         |      |         |         |   | $        | 119,755 |  |      |       |         |         |  |         |          |   |   | $      | 90,972 |  |         |       |       |  |  |       |      |  
|                           |            |                                        |                      |   |                          |         |  |          |       |       |      |         |      |         |         |   |          |         |  |      |       |         |         |  |         |          |   |   |        |        |  |         |      

2



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##### 



LIABILITIES AND SHAREHOLDERS EQUITY

|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |       |       |  |      |      |      |   | 
|------------------------------- | -------------------------------------------- | -------------------------------------- | ------------------------------------------ | ------ | ------ | ------------------------ | - | ----- | -------- | ----- |  | ---- | ------- | ---- | ------- | ------- | ------ | -------- | - | ----- | ----- | ----- | ------- | ------- | ---- | ------- | -------- | ----- | ------ | ------ | - | ------- | ----- | ----- |  | ---- | ---- | ---- | - | 
|                                |                                              |                                        |                                            |        |        | Years ended December 31, |  
|                                |                                              |                                        |                                            |        |        |                          |  
|                                |                                              |                                        |                                            |        |        | 2002                     |   |       | 2001     |       |  | 2000 |        
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |        
|                                |                                              |                                        |                                            |        |        | Average                  |   |       |          |       |  |      | Average |      |         | Average |        |          |   |       |       |       | Average |         |      | Average |          |       |        |        |   | Average |      
|                                |                                              |                                        |                                            |        |        | Balance                  |   |       | Interest |       |  | Rate |         |      | Balance |         |        | Interest |   |       | Rate  |       |         | Balance |      |         | Interest |       |        | Rate   |  
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |  
|                                |                                              |                                        |                                            |        |        | (Dollars in Thousands)   |   |       |          |       | 
|Interest-bearing liabilities    |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |       |       |  |     
|                                | Deposits                                     |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |       |       |  |      |     
|                                |                                              | Interest-bearing demand
deposits       |                                            | $      | 28,073 |                          |   | $     | 378      |       |  |      | 1.35    | %    |         | $       | 26,006 |          |   | $     | 800   |       |         |         | 3.08 | %       |          | $     | 18,717 |        |   | $       | 920   |       |  |      | 4.92 | %   
|                                |                                              | Savings deposits                       |                                            |        | 7,599  |                          |   |       | 91       |       |  |      | 1.20    |      |         |         | 5,565  |          |   |       | 104   |       |         |         | 1.87 |         |          |       | 5,136  |        |   |         | 111   |       |  |      | 2.16 |     
|                                |                                              | Time deposits                          |                                            |        | 71,955 |                          |   |       | 2,724    |       |  |      | 3.79    |      |         |         | 62,540 |          |   |       | 3,552 |       |         |         | 5.68 |         |          |       | 47,090 |        |   |         | 2,905 |       |  |      | 6.17 |     
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |       
|                                |                                              |                                        | Total interest-bearing
Deposits            |        |        | 107,627                  |   |       |          | 3,193 |  |      |         | 2.97 |         |         |        | 94,111   |   |       |       | 4,456 |         |         |      | 4.73    |          |       |        | 70,943 |   |         |       | 3,936 |  |      |      | 5.55 |  
|                                | Borrowed funds                               |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |       |       |  |      |     
|                                |                                              | FHLB advances                          |                                            |        | 3,464  |                          |   |       | 155      |       |  |      | 4.47    |      |         |         | 4,129  |          |   |       | 204   |       |         |         | 4.94 |         |          |       | 4,047  |        |   |         | 266   |       |  |      | 6.57 |     
|                                |                                              | Repurchase agreements                  |                                            |        | 4,840  |                          |   |       | 47       |       |  |      | 0.97    |      |         |         | 737    |          |   |       | 9     |       |         |         | 1.22 |         |          |       |       |        |   |         |      |       |  |      | 0.00 |     
|                                |                                              | Federal funds purchase                 |                                            |        | 606    |                          |   |       | 11       |       |  |      | 1.82    |      |         |         | 382    |          |   |       | 22    |       |         |         | 5.76 |         |          |       | 732    |        |   |         | 51    |       |  |      | 6.97 |     
|                                |                                              | Notes payable                          |                                            |        | 1,715  |                          |   |       | 73       |       |  |      | 4.26    |      |         |         | 1, 755 |          |   |       | 113   |       |         |         | 6.44 |         |          |       | 875    |        |   |         | 82    |       |  |      | 9.37 |     
|                                |                                              | Debentures                             |                                            |        | 3,461  |                          |   |       | 312      |       |  |      | 9.01    |      |         |         |       |          |   |       |      |       |         |         | 0.00 |         |          |       |       |        |   |         |      |       |  |      | 0.00 |     
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |       
|                                |                                              |                                        | Total borrowed funds                       |        |        | 14,086                   |   |       |          | 598   |  |      |         | 4.25 |         |         |        | 7,003    |   |       |       | 348   |         |         |      | 4.97    |          |       |        | 5,654  |   |         |       | 399   |  |      |      | 7.06 |  
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |       
|                                |                                              |                                        | Total interest-bearing
Liabilities         |        | $      | 121,713                  |   |       | $        | 3,791 |  |      |         | 3.11 | %       |         | $      | 101,114  |   |       | $     | 4,804 |         |         |      | 4.75    | %        |       | $      | 76,597 |   |         | $     | 4,335 |  |      |      | 5.66 | %
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |       
|Noninterest-bearing liabilities |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |       |       |  |     
|                                | Noninterest-bearing demand
Deposits          |                                        |                                            | 13,385 |        |                          |   |       |          |       |  |      |         |      |         | 11,128  |        |          |   |       |       |       |         |         |      |         |          | 9,373 |        |        |   |         |       |       |  |      |     
|                                |                                              | Accrued interest and other
Liabilities |                                            |        | 451    |                          |   |       |          |       |  |      |         |      |         |         | 588    |          |   |       |       |       |         |         |      |         |          |       | 191    |        |   |         |       |       |  |      |      |     
|                                |                                              | Shareholders equity                   |                                            |        | 7,919  |                          |   |       |          |       |  |      |         |      |         |         | 6,925  |          |   |       |       |       |         |         |      |         |          |       | 4,811  |        |   |         |       |       |  |      |      |     
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |      
|                                |                                              |                                        | Total liabilities and
Shareholders equity |        | $      | 143,468                  |   |       |          |       |  |      |         |      |         |         | $      | 119,755  |   |       |       |       |         |         |      |         |          |       | $      | 90,972 |   |         |       |       |  |      |      |      |  
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |      
|Interest margin recap           |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |       |       |  |     
|                                | Net interest income and
interest rate spread |                                        |                                            |        |        |                          | $ | 5,499 |          |       |  | 3.80 | %       |      |         |         |        |          | $ | 4,381 |       |       |         | 3.48    | %    |         |          |       |        |        | $ | 3,287   |       |       |  | 3.38 | %   
|                                |                                              |                                        |                                            |        |        |                          |   |       |          |       |  |      |         |      |         |         |        |          |   |       |       |       |         |         |      |         |          |       |        |        |   |         |      
|                                | Net interest margin                          |                                        |                                            |        |        |                          |   |       |          |       |  | 4.09 | %       |      |         |         |        |          |   |       |       |       |         | 3.93    | %    |         |          |       |        |        |   |         |       |       |  | 3.90 | %   



---

|(1) Interest income on tax-exempt securities and loans has been adjusted to a tax equivalent basis using a marginal federal income tax rate of 34% for all years.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------

3



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##### 



|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |        |       |        |   |   |      |     |  
|------------------------------------ | ---------- | - | ---------------------- | --- |  | --------- | ------ | --- | ------ | ------ | ------ | ------ | - | - | ------ | --- | ------ | ------ | ----- | ------ | - | - | ---- | --- | -
|                                     |            |   | Volume/Rate Analysis   |    
|                                     |            |   |                        |    
|                                     |            |   | 2002-2001              |     |  | 2001-2000 |       
|                                     |            |   |                        |     |  |           |       
|                                     |            |   |                        |     |  |           | Change |     |        | Change |        |        |   |   |        |     | Change |        |       | Change |  
|                                     |            |   | Total                  |     |  | Due To    |        |     | Due To |        |        | Total  |   |   | Due To |     |        | Due To |      
|                                     |            |   | Change                 |     |  | Volume    |        |     | Rate   |        |        | Change |   |   | Volume |     |        | Rate   |      
|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |        |      
|                                     |            |   | (Dollars in thousands) |    
|INTEREST INCOME                      |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |        |       |        |   |   |      |    
|Loans                                |            | $ | (208                   | )   |  | $         | 1,018  |     |        | $      | (1,226 | )      |   | $ | 1,402  |     |        | $      | 2,063 |        |   | $ | (661 | )  
|Securities                           |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |        |       |        |   |   |      |    
|                                     | Taxable    |   |                        | 240 |  |           |        | 485 |        |        |        | (245   | ) |   |        | 208 |        |        |       | 259    |   |   |      | (51 | )
|                                     | Tax-exempt |   |                        | 103 |  |           |        | 109 |        |        |        | (6     | ) |   |        | (15 | )      |        |       | (15    | ) |   |      |    |  
|Interest-bearing balances with banks |            |   | (7                     | )   |  |           | (7     | )   |        |        |       |        |   |   | (29    | )   |        |        | (25   | )      |   |   | (4   | )  
|Federal funds sold                   |            |   | (23                    | )   |  |           | 8      |     |        |        | (31    | )      |   |   | (3     | )   |        |        | 18    |        |   |   | (21  | )  
|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |       
|Total interest income                |            | $ | 105                    |     |  | $         | 1,613  |     |        | $      | (1,508 | )      |   | $ | 1,563  |     |        | $      | 2,300 |        |   | $ | (737 | )  
|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |       
|INTEREST EXPENSE                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |        |       |        |   |   |      |    
|Interest-bearing DDAs                |            | $ | (422                   | )   |  | $         | 59     |     |        | $      | (481   | )      |   | $ | (120   | )   |        | $      | 290   |        |   | $ | (410 | )  
|Savings deposits                     |            |   | (13                    | )   |  |           | 31     |     |        |        | (44    | )      |   |   | (7     | )   |        |        | 9     |        |   |   | (16  | )  
|Time deposits                        |            |   | (828                   | )   |  |           | 479    |     |        |        | (1,307 | )      |   |   | 647    |     |        |        | 892   |        |   |   | (245 | )  
|FHLB Advances                        |            |   | (49                    | )   |  |           | (31    | )   |        |        | (18    | )      |   |   | (62    | )   |        |        | 5     |        |   |   | (67  | )  
|Federal funds purchased              |            |   | 38                     |     |  |           |       |     |        |        | 38     |        |   |   | 9      |     |        |        | 9     |        |   |   |     |    
|Repurchase agreements                |            |   | (11                    | )   |  |           |       |     |        |        | (11    | )      |   |   | (29    | )   |        |        |      |        |   |   | (29  | )  
|Notes payable                        |            |   | (40                    | )   |  |           |       |     |        |        | (40    | )      |   |   | 31     |     |        |        |      |        |   |   | 31   |    
|Debentures                           |            |   | 312                    |     |  |           | 312    |     |        |        |       |        |   |   |       |     |        |        |      |        |   |   |     |    
|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |       
|Total interest expense               |            | $ | (1,013                 | )   |  | $         | 850    |     |        | $      | (1,863 | )      |   | $ | 469    |     |        | $      | 1,205 |        |   | $ | (736 | )  
|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |       
|Net Interest income                  |            | $ | 1,118                  |     |  | $         | 763    |     |        | $      | 355    |        |   | $ | 1,094  |     |        | $      | 1,095 |        |   | $ | (1   | )  
|                                     |            |   |                        |     |  |           |        |     |        |        |        |        |   |   |        |     |        |       

The effect of the cost of liabilities declining faster than the yield on
earning assets was a widening of the net interest margin. Net interest income,
on a tax equivalent basis, for 2002 was $5.5 million, 25.0% higher than in
2001. Net interest income increased $1.1 million or 33.3% from 2000 to 2001.
The net interest margin, on a tax equivalent basis for 2002, 2001, and 2000 was
4.09%, 3.93%, and 3.90%. During 2000, average noninterest bearing liabilities
and equity supported 15.8% of average total assets, compared to 15.6% and 15.2%
in 2001 and 2002. Average time deposits comprised 66.9% of total average
deposits in 2002, compared to 66.5% and 66.4% in 2001 and 2000, respectively.
Interest expense on borrowed funds, including FHLB advances, repurchase
agreements, federal funds purchased, notes payable, and debentures declined
slightly in 2002 due to the declining variable rates attached to these funding
sources. The cost of borrowed funds also declined from 2000 to 2001, due to
the lower interest rate environment as these funds were required to support
growth.

Provision for Loan Losses and Asset
Quality

The provision for loan losses represents charges made to earnings to maintain
an adequate allowance for loan losses. The allowance is maintained at an
amount that we believe to be sufficient to absorb probable losses incurred in
the loan portfolio. We conduct, on a quarterly basis, a detailed evaluation of
the adequacy of the allowance. This evaluation considers the results of loan
review findings, an evaluation of known problem loans, results of regulatory
examinations and historical charge-off levels.

The tables below set forth a summary of the activity in and the composition of
the allowance for loan losses.

4



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Analysis of Allowance for Loan Losses

|                                                |                         |                  |                   |      |                              |      |        |      |    |      |        |      |    |      |  
|----------------------------------------------- | ----------------------- | ---------------- | ----------------- | ---- | ---------------------------- | ---- | ------ | ---- | -- | ---- | ------ | ---- | -- | ---- | -
|                                                |                         |                  |                   |      | For years ended December 31, |     
|                                                |                         |                  |                   |      |                              |     
|                                                |                         |                  |                   |      | 2002                         |      |        | 2001 |    |      | 2000   |     
|                                                |                         |                  |                   |      |                              |      |        |      |    |      |        |     
|                                                |                         |                  |                   |      | (Dollars in thousands)       |     
|Balance at beginning of year                    |                         | $                | 1,148             |      |                              | $    | 910    |      |    | $    | 549    |     
|Loans charged-off                               |                         |                  |                   |      |                              |      |        |      |    |      |        |     
|                                                | Commercial              |                  |                   | (104 | )                            |      |        | (9   | )  |      |        |     |   
|                                                | Real estate-commercial  |                  |                   | (31  | )                            |      |        | (49  | )  |      |        |     |   
|                                                | Real estate-residential |                  |                   | (28  | )                            |      |        | (33  | )  |      |        | (4   | ) 
|                                                | Consumer                |                  |                   | (74  | )                            |      |        | (76  | )  |      |        | (135 | ) 
|                                                |                         |                  |                   |      |                              |      |        |      |   
|                                                |                         |                  | Total charge-offs |      |                              | (237 | )      |      |    | (167 | )      |      |    | (139 | )
|                                                |                         |                  |                   |      |                              |      |        |      |   
|Charge-offs recovered                           |                         |                  |                   |      |                              |      |        |      |    |      |        |     
|                                                | Commercial              |                  |                   |     |                              |      |        |     |    |      |        | 23   |   
|                                                | Real estate-commercial  |                  |                   | 1    |                              |      |        | 1    |    |      |        |     |   
|                                                | Real estate-residential |                  |                   | 7    |                              |      |        | 14   |    |      |        | 2    |   
|                                                | Consumer                |                  |                   | 19   |                              |      |        | 59   |    |      |        | 58   |   
|                                                |                         |                  |                   |      |                              |      |        |      |   
|                                                |                         | Total recoveries |                   |      | 27                           |      |        |      | 74 |      |        |      | 83 |     
|                                                |                         |                  |                   |      |                              |      |        |      |   
|Net loans charged-off                           |                         |                  | (210              | )    |                              |      | (93    | )    |    |      | (56    | )   
|Current year provision                          |                         |                  | 448               |      |                              |      | 331    |      |    |      | 417    |     
|                                                |                         |                  |                   |      |                              |      |        |      |   
|Balance at end of year                          |                         | $                | 1,386             |      |                              | $    | 1,148  |      |    | $    | 910    |     
|                                                |                         |                  |                   |      |                              |      |        |      |   
|Loans at year end, including held for sale      |                         | $                | 117,607           |      |                              | $    | 93,715 |      |    | $    | 81,903 |     
|Ratio of allowance to loans at year end         |                         |                  | 1.18              | %    |                              |      | 1.22   | %    |    |      | 1.11   | %   
|Average loans                                   |                         | $                | 101,449           |      |                              | $    | 88,874 |      |    | $    | 65,763 |     
|Ratio of net loans charged-off to average loans |                         |                  | 0.21              | %    |                              |      | 0.10   | %    |    |      | 0.09   | %   

Allocation of Allowance for Loan Losses

|                        |  |                        |       |  |      |   |       |      |  |   |     | 
|----------------------- |  | ---------------------- | ----- |  | ---- | - | ----- | ---- |  | - | --- | 
|                        |  | December 31,           |      
|                        |  |                        |      
|                        |  | 2002                   |       |  | 2001 |   |       | 2000 | 
|                        |  |                        |       |  |      |   |       |      | 
|                        |  | (Dollars in thousands) |      
|Commercial              |  | $                      | 642   |  |      | $ | 510   |      |  | $ | 317 | 
|Real estate-residential |  |                        | 122   |  |      |   | 110   |      |  |   | 42  | 
|Consumer                |  |                        | 537   |  |      |   | 498   |      |  |   | 525 | 
|Unallocated             |  |                        | 85    |  |      |   | 30    |      |  |   | 26  | 
|                        |  |                        |       |  |      |   |       |      | 
|Total                   |  | $                      | 1,386 |  |      | $ | 1,148 |      |  | $ | 910 | 
|                        |  |                        |       |  |      |   |       |      | 

The provision for loan losses was $448,000, $331,000, and $417,000 for 2002,
2001, and 2000, respectively. Total charge-offs in 2002, 2001 and 2000 were
relatively consistent as a percentage of average loan balances. The provision
for all three years and related increase in the allowance are indicative of the
loan growth realized during all three years. Over the past few years, there
has also been a change in the risk complexion of the portfolio as we have
increased our commercial, commercial real estate, and construction loans.
Additionally, a significant portion of the consumer loan portfolio consists of
indirect loans, which tend to carry a higher level of risk than direct loans.

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The allowance for loan losses at year end 2002 was $1.4 million, or 1.18% of
total loans, compared to $1.1 million, or 1.22% of total loans, at year end
2001 and $910,000 or 1.11% at year end 2000.

We maintain the reserve at a level believed appropriate based on our ongoing
analysis of the risk in the portfolio. Individual loans identified as problems
are analyzed and portions of the allowance allocated to those loans, as needed.
Portions of the allowance are also allocated to pools of loans, primarily
consumer and residential real estate loans, based upon our historical
charge-off levels, judgmentally adjusted by us in consideration of growth,
trends in delinquent and non-performing loans, the local economy and other
factors.

Non-performing loans include nonaccrual loans, restructured loans, and loans
delinquent 90 days or more. Loans are classified as nonaccrual when we believe
the collection of interest is doubtful, typically when payments are past due 90
days, unless the loans are well secured and in the process of collection.

The table below sets forth a summary of non-performing loans.

Nonperforming Assets

|                          |                                               |   |                        |        |   |      |     |        |      |   |     |        |  
|------------------------- | --------------------------------------------- | - | ---------------------- | ------ | - | ---- | --- | ------ | ---- | - | --- | ------ | -
|                          |                                               |   | December 31,           |       
|                          |                                               |   |                        |       
|                          |                                               |   | 2002                   |        |   | 2001 |     |        | 2000 |  
|                          |                                               |   |                        |        |   |      |     |        |      |  
|                          |                                               |   | (Dollars in thousands) |       
|Principal balance         |                                               |   |                        |        |   |      |     |        |      |   |     |       
|                          | Nonaccrual                                    |   | $                      | 254    |   |      | $   | 312    |      |   | $   | 93     |  
|                          | 90 days or more past due                      |   |                        | 1      |   |      |     |       |      |   |     | 26     |  
|                          |                                               |   |                        |        |   |      |     |        |     
|Total nonperforming loans |                                               | $ | 255                    |        |   | $    | 312 |        |      | $ | 119 |       
|                          |                                               |   |                        |        |   |      |     |        |     
|                          | Nonperforming loans as a percent of loans     |   |                        | 0.22   | % |      |     | 0.33   | %    |   |     | 0.15   | %
|                          | Other real estate owned                       |   | $                      |       |   |      | $   | 39     |      |   | $   |       |  
|                          | OREO as a percent of loans                    |   |                        |       | % |      |     | 0.04   | %    |   |     | 0.00   | %
|                          | Allowance as a percent of nonperforming loans |   |                        | 543.53 | % |      |     | 367.95 | %    |   |     | 764.71 | %

Non-performing loans reflect a slight decrease over the past year, declining
from $312,000 at year-end 2001 to $255,000 at December 31, 2002, or from .33%
of total loans in 2001 to .22% of total loans in 2002. While the dollar amount
of non-performing loans remained relatively stable, it has declined as a
percent of the total portfolio.

Impaired loans are those loans for which full payment in accordance with the
contractual terms is not expected. The average balance for impaired loans was
$213,000, $211,000, and $0 for 2002, 2001, and 2000, respectively.

We designate certain loans for internal monitoring purposes on a watch list.
Loans may be placed on the watch list as a result of delinquent status, concern
about the borrowers financial condition or the value of the collateral
securing the loan, substandard classification during regulatory examinations,
or simply as a result of our desire to monitor more closely a borrowers
financial condition and performance. Watch category loans may include loans
with loss potential that are still performing and accruing interest and may be
current under the terms of the loan agreement; however, we may have a
significant degree of concern about the borrowers ability to continue
performing according to the terms of the loan. Loss exposure on these loans is
typically evaluated based primarily upon the estimated liquidation value of the
collateral securing the loan. Also, watch list loans may include credits
which, although adequately secured and performing, reflect a past delinquency
problem or unfavorable financial trends exhibited by the borrower.

At December 31, 2002, there were loans totaling $2.1 million graded
substandard, doubtful or loss included on the watch list. This compares to
$1.4 million graded substandard or doubtful at December 31, 2001. Of

6



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the watch list credits, $648,000 and $246,000 were classified as impaired at
the year-end 2002 and 2001, respectively.

Noninterest Income and
Expense

The table below sets forth an analysis of changes in noninterest income and
expense.

Noninterest Income and Expense

|                    |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |        |      |     |       |     |       | 
|------------------- | --------------------------------------------- | ------------------------ | ------------------------- | ----- | ---------------------- | ----- | ------ | --------- | -------------- | ----- | ---- | ----- | ----- | --------- | ------ | -------------- | ------ | ---- | --- | ----- | --- | ----- | 
|                    |                                               |                          |                           |       |                        |       |        |           | Percent change |       |      |       |       |           |        | Percent change |        |      |     |       |    
|                    |                                               |                          |                           |       | 2002                   |       |        | from 2001 |                |       | 2001 |       |       | from 2000 |        |                | 2000   |     
|                    |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |        |     
|                    |                                               |                          |                           |       | (Dollars in Thousands) |      
|Noninterest Income  |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |        |      |     |      
|                    | Service charges on deposit accounts           |                          | $                         | 402   |                        |       |        | 26.81     | %              |       | $    | 317   |       |           |        | 69.52          | %      |      | $   | 187   |    
|                    | Mortgage banking activities                   |                          |                           | 881   |                        |       |        | 95.34     |                |       |      | 451   |       |           |        | 215.38         |        |      |     | 143   |    
|                    | Increase in cash surrender value of insurance |                          |                           | 149   |                        |       |        | 27.35     |                |       |      | 117   |       |           |        | 25.81          |        |      |     | 93    |    
|                    | Net gain on sale of securities                |                          |                           | 222   |                        |       |        | 252.38    |                |       |      | 63    |       |           |        |               |        |      |     |      |    
|                    | Other                                         |                          |                           | 203   |                        |       |        | 31.82     |                |       |      | 154   |       |           |        | 85.54          |        |      |     | 83    |    
|                    |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |       
|                    |                                               | Total noninterest income |                           | $     | 1,857                  |       |        |           | 68.51          | %     |      | $     | 1,102 |           |        |                | 117.79 | %    |     | $     | 506 |      
|                    |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |        |     
|Noninterest Expense |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |        |      |     |      
|                    | Salaries and employee benefits                |                          | $                         | 3,168 |                        |       |        | 23.80     | %              |       | $    | 2,559 |       |           |        | 9.64           | %      |      | $   | 2,334 |    
|                    | Occupancy                                     |                          |                           | 454   |                        |       |        | 27.89     |                |       |      | 355   |       |           |        | (1.93          | )      |      |     | 362   |    
|                    | Equipment and data processing                 |                          |                           | 426   |                        |       |        | 12.70     |                |       |      | 378   |       |           |        | (1.56          | )      |      |     | 384   |    
|Advertising         |                                               |                          | 113                       |       |                        |       | (29.89 | )         |                |       | 87   |       |       |           | (30.40 | )              |        |      | 125 |      
|                    | Telephone                                     |                          |                           | 137   |                        |       |        | 17.09     |                |       |      | 117   |       |           |        | (4.88          | )      |      |     | 123   |    
|                    | Other                                         |                          |                           | 1,137 |                        |       |        | 20.57     |                |       |      | 943   |       |           |        | 7.16           |        |      |     | 880   |    
|                    |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |       
|                    |                                               |                          | Total noninterest expense |       | $                      | 5,435 |        |           |                | 22.44 | %    |       | $     | 4,439     |        |                |        | 5.49 | %   |       | $   | 4,208 | 
|                    |                                               |                          |                           |       |                        |       |        |           |                |       |      |       |       |           |        |                |       

Noninterest income increased $755,000, or 68.5% to $1.9 million for 2002
compared to $1.1 million in 2001. The increase is partially attributed to the
larger number of deposit accounts and a change in fee structure on those
accounts, which increased service charge income by 26.8%. Mortgage banking
activities generated $881,000 in noninterest income in 2002 compared to
$451,000 in 2001. This is the result of increased volume due to lower
interest rates. With the strong mortgage banking activity, we have relocated
our mortgage banking division from our main office to a new facility in
Greenwood. We entered into this lease in January 2002. This move was
necessary to accommodate the expansion of this department, as the number of
employees in this area has expanded. A net gain on the sale of securities also
contributed significantly to the increase in noninterest income. The net gain
on sale of securities was $222,000 for 2002 compared to $63,000 for 2001. Cash
surrender value earnings on life insurance investments increased $32,000.

Noninterest income also rose from 2000 to 2001, increasing by $596,000 or
117.8%. Gains from mortgage banking activity provided a substantial portion of
the increase. Increases in service charges due to higher number of deposit and
increases in earnings on cash surrender value also contributed to the increase.

An additional branch was opened in Bargersville in January 2000. During 2002,
our mortgage office was relocated from the Madison Avenue branch to a new
location in Greenwood. A new branch in Franklin was also opened during third
quarter of 2002. With the expansion in the branch network, the number of
employees increased from 61 in 2000 to 70 in 2001 to 85 in 2002. Salary and
employee benefits expense

7



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##### 



followed suit, increasing from $2.3 million in 2000 to $2.6 million in 2001, an
increase of 9.6%. Salary expense increased $609,000 or 23.8% from 2001 to
2002.

Occupancy and equipment expenses increased during 2002 in connection with the
additional branches that were added. Occupancy and equipment expense was
$880,000 for 2002 compared to $733,000 in 2001, an increase of $147,000 or
20.1%. Advertising expense increased from $87,000 in 2001 to $113,000 in 2002
or 29.9% representing approximately 2% of noninterest expense in each period.
We expect to maintain current expenditure levels in the future, as near term
growth goals have been obtained and as our past marketing efforts have
effectively established our institution in the market place.

In 2001, as compared to 2000, total noninterest expense increased $231,000 or
5.5%. This modest increase resulted primarily from annual salary increases and
related employee benefits increases. Advertising expense declined from
$125,000 in 2000 to $87,000 in 2001, as we focused on earnings and curtailed
advertising expenses having effectively established our identity in the
marketplace through our past advertising efforts.

Income Taxes

During 2002, we utilized the remaining balance, approximately $599,000, of a
net operating loss carryforward. A tax benefit of $125,000 was recorded during
the second quarter of 2002. The benefit represented the elimination of the
reserve on deferred tax assets. With the full utilization of the loss
carryforward, we began recording tax expense in the third quarter. While 2001
was a profitable year, we did not recognize tax expenses as tax net operating
losses generated in 1999 and 2000 offset tax expense. No benefit was
recognized for 2001 or 2000.

Financial Condition at December 31, 2002

Total assets were $155.3 million at year-end 2002 compared to $128.1 million at
year-end 2001, an increase of $27.2 million or 21.2%. The increase in total
assets was driven by growth in the loan portfolio, with net loans increasing
$19.9 million during this period. Increased loan totals were funded by
increased deposits and borrowings.

During July 2002, we completed a $5.0 million offering of redeemable
subordinated debentures and mandatory stock purchase contracts. The debentures
are unsecured and subordinated, have a remaining term of approximately 8.5
years, and accrue interest at 8% per annum payable quarterly in arrears. The
debentures mature on July 1, 2011, but are redeemable by the Company at any
time prior to their maturity. The stock purchase contracts require a purchaser
to buy common shares of the Company at $6.67 per share on January 1, 2011. A
purchaser may elect to purchase the common shares of the Company at any time
prior to that date at the same price per share. The stock purchase contracts
will be cancelled in the event the debentures are redeemed. Proceeds of $3.0
million were contributed to the Bank to support growth.

During 2001, we moved our Nashville branch into a permanent facility leased
from Frank A. Rogers, chairman of our board.

Securities

The following table sets forth information about securities.

8



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##### 



Securities Maturity Schedule

|                   |                                     |                          |   |                        |    |  |              |      |   |               |   |       |               |  |  |         |   |  |      |       |       |         |  |      |      |  |   |         |        |  |  |      |   |  |   |       |        | 
|------------------ | ----------------------------------- | ------------------------ | - | ---------------------- | -- |  | ------------ | ---- | - | ------------- | - | ----- | ------------- |  |  | ------- | - |  | ---- | ----- | ----- | ------- |  | ---- | ---- |  | - | ------- | ------ |  |  | ---- | - |  | - | ----- | ------ | 
|                   |                                     |                          |   | At December 31, 2002   |   
|                   |                                     |                          |   |                        |   
|                   |                                     |                          |   | 1 Year and Less        |    |  | 1 to 5 Years |      |   | 5 to 10 Years |   |       | Over 10 Years |  |  | Total   |  
|                   |                                     |                          |   | Balance                |    |  | Rate         |      |   | Balance       |   |       | Rate          |  |  | Balance |   |  | Rate |       |       | Balance |  |      | Rate |  |   | Balance |       
|                   |                                     |                          |   |                        |    |  |              |      |   |               |   |       |               |  |  |         |   |  |      |       |       |         |  |      |      |  |   |         |       
|                   |                                     |                          |   | (Dollars in thousands) |   
|Available-For-Sale |                                     |                          |   |                        |    |  |              |      |   |               |   |       |               |  |  |         |   |  |      |       |       |         |  |      |      |  |   |         |        |  |  |      |   |  |   |      
|                   | U.S. government & agencies          |                          | $ |                       |    |  |              |     | % |               | $ | 1,073 |               |  |  | 5.75    | % |  | $    | 1,850 |       |         |  | 4.96 | %    |  | $ | 2,272   |        |  |  | 5.96 | % |  | $ | 5,195 |       
|                   | States & political subdivisions (1) |                          |   | 12                     |    |  |              | 9.09 |   |               |   | 298   |               |  |  | 6.30    |   |  |      | 1,553 |       |         |  | 6.30 |      |  |   | 6,029   |        |  |  | 6.86 |   |  |   | 7,892 |       
|                   | Other securities                    |                          |   |                       |    |  |              |     |   |               |   | 1,020 |               |  |  | 7.23    |   |  |      | 539   |       |         |  | 7.72 |      |  |   | 5,283   |        |  |  | 7.72 |   |  |   | 6,842 |       
|                   | Mortgage backed securities          |                          |   |                       |    |  |              |     |   |               |   | 1,592 |               |  |  | 5.56    |   |  |      | 1,617 |       |         |  | 6.28 |      |  |   | 3,672   |        |  |  | 6.30 |   |  |   | 6,881 |       
|                   |                                     |                          |   |                        |    |  |              |      |   |               |   |       |               |  |  |         |   |  |      |       |       |         |  |      |      |  |   |         |        |  | 
|                   |                                     | Total available for sale |   | $                      | 12 |  |              |      |   |               |   | $     | 3,983         |  |  |         |   |  |      | $     | 5,559 |         |  |      |      |  |   | $       | 17,256 |  |  |      |   |  |   | $     | 26,810 | 
|                   |                                     |                          |   |                        |    |  |              |      |   |               |   |       |               |  |  |         |   |  |      |       |       |         |  |      |      |  |   |         |        |  | 



---

|(1) |  | Average rates were calculated on a tax equivalent basis using a marginal federal income tax rate of 34%.
|--- |  | --------------------------------------------------------------------------------------------------------

Securities are primarily designated as available for sale. To provide more
flexibility, held to maturity securities have been allowed to mature and
pay-off, with all security purchases since 1999 classified as available for
sale. The securities portfolio composition changed from being largely
comprised of U.S. Treasury and government agency securities to state and
political subdivisions as we became subject to tax during 2002.

In addition to securities of the U.S. Government and its agencies, we had
concentrations in two corporate securities that exceeded 10% of shareholders
equity at December 31, 2002. The obligors were Regional Diversified Funding
with a cost of $1.4 million and a fair value of $1.3 million and Ford Motor
Credit, with a cost of $1.0 million and fair value of $984,000.

Loans

The following table sets forth information about the loan portfolio

Loan Portfolio

|                                                           |  |                   |         |  |                   |                        |       |         |  |   |         |  |  |  |       |  
|---------------------------------------------------------- |  | ----------------- | ------- |  | ----------------- | ---------------------- | ----- | ------- |  | - | ------- |  |  |  | ----- | -
|                                                           |  | December 31, 2002 |         |  | December 31, 2001 |                       
|                                                           |  |                   |         |  |                   |                       
|                                                           |  | Balance           |         |  | Percent           |                        |       | Balance |  |   | Percent | 
|                                                           |  |                   |         |  |                   |                        |       |         |  |   |         | 
|                                                           |  |                   |         |  |                   | (Dollars in thousands) |      
|Loan Portfolio Composition (including
loans held for sale) |  |                   |         |  |                   |                        |       |         |  |   |         |  |  |  |       |  
|Commercial                                                 |  | $                 | 25,461  |  |                   |                        | 21.6  | %       |  | $ | 19,606  |  |  |  | 20.9  | %
|Commercial real estate                                     |  |                   | 15,797  |  |                   |                        | 13.4  |         |  |   | 12,725  |  |  |  | 13.6  |  
|Residential real estate                                    |  |                   | 32,897  |  |                   |                        | 28.0  |         |  |   | 27,296  |  |  |  | 29.1  |  
|Construction                                               |  |                   | 15,595  |  |                   |                        | 13.3  |         |  |   | 10,292  |  |  |  | 11.0  |  
|Consumer                                                   |  |                   | 27,857  |  |                   |                        | 23.7  |         |  |   | 23,796  |  |  |  | 25.4  |  
|                                                           |  |                   |         |  |                   |                        |       |         |  |   |         | 
|                                                           |  | $                 | 117,607 |  |                   |                        | 100.0 | %       |  | $ | 93,715  |  |  |  | 100.0 | %
|                                                           |  |                   |         |  |                   |                        |       |         |  |   |         | 

9



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##### 



|                        |             |   |                                      |        |  |       |        |        |        |   |        |        |  |   |        |         | 
|----------------------- | ----------- | - | ------------------------------------ | ------ |  | ----- | ------ | ------ | ------ | - | ------ | ------ |  | - | ------ | ------- | 
|                        |             |   | Loan Maturities at December 31, 2002 |       
|                        |             |   |                                      |       
|                        |             |   | 1 Year                               |        |  | 1  5 |        |        | Over 5 |   |        |        |  |  
|                        |             |   | and Less                             |        |  | Years |        |        | Years  |   |        | Total  | 
|                        |             |   |                                      |        |  |       |        |        |        |   |        |        | 
|                        |             |   | (Dollars in Thousands)               |       
|Commercial              |             | $ | 16,845                               |        |  | $     | 7,978  |        |        | $ | 638    |        |  | $ | 25,461 |        
|Commercial real estate  |             |   | 5,456                                |        |  |       | 7,314  |        |        |   | 3,027  |        |  |   | 15,797 |        
|Real estate-residential |             |   | 17,132                               |        |  |       | 5,424  |        |        |   | 10,341 |        |  |   | 32,897 |        
|Construction            |             |   | 13,366                               |        |  |       | 1,858  |        |        |   | 371    |        |  |   | 15,595 |        
|Consumer                |             |   | 1,804                                |        |  |       | 15,443 |        |        |   | 10,610 |        |  |   | 27,857 |        
|                        |             |   |                                      |        |  |       |        |        |        |   |        |       
|                        | Total loans |   | $                                    | 54,603 |  |       | $      | 38,017 |        |   | $      | 24,987 |  |   | $      | 117,607 | 
|                        |             |   |                                      |        |  |       |        |        |        |   |        |       

|               |             |   |                                                               |        |  |        |        |        |       |   |        |         | 
|-------------- | ----------- | - | ------------------------------------------------------------- | ------ |  | ------ | ------ | ------ | ----- | - | ------ | ------- | 
|               |             |   | Sensitivity to Changes in Interest Rates at December 31, 2002 |       
|               |             |   |                                                               |       
|               |             |   | 1 Year                                                        |        |  | Over   |        |        |       |   |       
|               |             |   | and Less                                                      |        |  | 1 Year |        |        | Total |  
|               |             |   |                                                               |        |  |        |        |        |       |  
|               |             |   | (Dollars in Thousands)                                        |       
|Fixed rates    |             | $ | 7,768                                                         |        |  | $      | 44,831 |        |       | $ | 52,599 |        
|Variable rates |             |   | 49,827                                                        |        |  |        | 15,181 |        |       |   | 65,008 |        
|               |             |   |                                                               |        |  |        |        |        |      
|               | Total loans |   | $                                                             | 57,595 |  |        | $      | 60,012 |       |   | $      | 117,607 | 
|               |             |   |                                                               |        |  |        |        |        |      

Total loans, including loans held for sale, increased $23.9 million or 25.5%
from year-end 2001 to year-end 2002 as we continued to increase market share in
existing markets, principally in the Johnson County area. Loan growth occurred
in all categories.

Commercial loans, including commercial real estate grew by 27.6% or $8.9
million from 2001 to 2002 and comprised 35.0% of our portfolio at December 31,
2002. Growth in this segment was attributed to our continued focus in the
communities we serve, which includes the Greenwood area. Residential mortgages
increased $5.6 million or 20.5% to $32.9 million. Included in residential real
estate loans are loans held for sale totaling $6.5 million at December 31,
2002. Contributing to this growth was refinancing markets from the continued
low interest rate environment of 2002. With the significant growth obtained in
other sectors of the loan portfolio, mortgage loans now comprise the second
largest segment of the portfolio at 28.0%. Nonetheless, our portfolio remains
largely secured by real estate, with residential, commercial and construction
real estate loans comprising 54.7% of the portfolio at year end 2002.

Consumer loans experienced growth, increasing $4.1 million from 2001 to 2002.
Total consumer loans were $27.9 million and comprised 23.7% of the portfolio at
year-end 2002. A strong indirect lending program was the main factor spurring
this growth, as we maintain relationships with several local auto and
recreational vehicle dealers. Underwriting standards for indirect loans are
consistent with the standards applied to direct loans in an effort to maintain
strong asset quality.

While we have achieved double-digit loan growth, we have continued to focus on
asset quality. This is evidenced by a modest increase in our net charge-offs
and non-performing loans. While we have experienced a modest increase in net
charge-offs and non-performing loans, our watch list loans, as a percentage of
average loan balances, has declined. Watch list loans to average loan balances
at December 31, 2002 were 1.57% compared to 1.82% at year-end 2001.

Deposits

Year-end total deposits increased $11.7 million or 10.5%, from 2001 to 2002,
with growth again by further penetration of existing markets and active
advertising campaigns. Noninterest-bearing deposits increased

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##### 



to $15.8 million from $11.3 million. At December 31, 2002, $28.4 million or
40.6% of our time deposits had balances of greater than $100,000. The average
balance of time deposits issued in amounts greater than $100,000 totaled $34.8
million in 2002 and $26.6 million in 2001, representing 48.4% and 42.6% of
total average time deposits in each period.

The following table sets forth more information about deposits.

Maturity Ranges of Time Deposits with Balances of $100,000 or More at December 31, 2002

|                    |       |   |                |        | 
|------------------- | ----- | - | -------------- | ------ | 
|                    |       |   | (In thousands) |       
|3 months or less    |       | $ | 8,597          |       
|3 through 6 months  |       |   | 7,919          |       
|6 through 12 months |       |   | 5,392          |       
|Over 12 months      |       |   | 6,495          |       
|                    |       |   |               
|                    | Total |   | $              | 28,403 | 
|                    |       |   |               

Capital

Our subsidiary, First Bank, is subject to various regulatory capital guidelines
as required by federal banking agencies. With consolidated assets exceeding
$150 million at yearend 2002, First Shares is also subject to regulatory
capital guidelines. These guidelines define the various components of core
capital and assign risk weights to various categories of assets.

Tier 1 capital consists of shareholders equity net of intangible assets and
excluding unrealized gains and losses on securities available or sale, as
defined by bank regulators. The definition of Tier 2 capital includes the
amount of allowance for loan losses which does not exceed 1.25% of gross risk
weighted assets. Additionally, the mandatory convertible debentures are
considered tier 2 capital. Total capital is the sum of Tier 1 and Tier 2
capital.

The minimum requirements under the capital guidelines are generally at least a
4.00% leverage ratio (Tier 1 capital divided by average assets excluding
unrealized gains/losses), a 4.00% Tier 1 risk-based capital ratio (Tier 1
capital divided by risk-weighted assets), and a 8.00% total capital ratio (Tier
1 capital plus Tier 2 capital divided by risk-weighted assets).

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
well-capitalized institution must achieve a Tier 1 risk-based capital ratio
of at least 6.00%, and a total capital ratio of at least 10.00%, and a leverage
ratio of at least 5.00% and not be under a capital directive order. Failure to
meet capital requirements can initiate regulatory action that could have a
direct material effect on our financial statements. If only adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth, and expansion is
limited, in addition to the institution being required to submit a capital
restoration plan.

At December 31, 2002, we were not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material effect on our consolidated
liquidity, capital resources or operations.

The following table sets forth our actual capital amounts and ratios.

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Capital Ratios

|                         |                                              |   |                        |        |   |      |         |        |      |   |         |       |  
|------------------------ | -------------------------------------------- | - | ---------------------- | ------ | - | ---- | ------- | ------ | ---- | - | ------- | ----- | -
|                         |                                              |   | Bank                   |       
|                         |                                              |   |                        |       
|                         |                                              |   | December 31,           |       
|                         |                                              |   |                        |       
|                         |                                              |   | 2002                   |        |   | 2001 |         |        | 2000 |  
|                         |                                              |   |                        |        |   |      |         |        |      |  
|                         |                                              |   | (Dollars in thousands) |       
|Tier 1 capital           |                                              |   |                        |        |   |      |         |        |      |   |         |      
|                         | Shareholders equity                         |   | $                      | 13,567 |   |      | $       | 9,014  |      |   | $       | 8,168 |  
|                         | Add/less: Unrealized loss/gain on securities |   |                        | 40     |   |      |         | 5      |      |   |         | (23   | )
|                         | Less: intangible assets                      |   |                        | (75    | ) |      |         | (119   | )    |   |         | (163  | )
|                         |                                              |   |                        |        |   |      |         |        |     
|                         | Total Tier 1 capital                         |   | $                      | 13,532 |   |      | $       | 8,900  |      |   | $       | 7,982 |  
|                         |                                              |   |                        |        |   |      |         |        |     
|Total risk-based capital |                                              |   |                        |        |   |      |         |        |      |   |         |      
|                         | Tier 1 capital                               |   | $                      | 13,532 |   |      | $       | 8,900  |      |   | $       | 7,982 |  
|                         | Allowable allowance for loan losses          |   |                        | 1,386  |   |      |         | 1,148  |      |   |         | 910   |  
|                         |                                              |   |                        |        |   |      |         |        |     
|                         | Total risk-based capital                     |   | $                      | 14,918 |   |      | $       | 10,048 |      |   | $       | 8,892 |  
|                         |                                              |   |                        |        |   |      |         |        |     
|Risk weighted assets     |                                              | $ | 129,399                |        |   | $    | 98,656  |        |      | $ | 87,726  |      
|                         |                                              |   |                        |        |   |      |         |        |     
|Average assets           |                                              | $ | 158,807                |        |   | $    | 128,015 |        |      | $ | 101,385 |      
|                         |                                              |   |                        |        |   |      |         |        |     
|Risk-based ratios        |                                              |   |                        |        |   |      |         |        |      |   |         |      
|                         | Tier 1                                       |   |                        | 10.46  | % |      |         | 9.02   | %    |   |         | 9.10  | %
|                         | Total risk-based capital                     |   |                        | 11.53  | % |      |         | 10.18  | %    |   |         | 10.14 | %
|Leverage Ratio           |                                              |   | 8.52                   | %      |   |      | 6.95    | %      |      |   | 7.87    | %    

Liquidity and Rate Sensitivity

Liquidity refers to the availability of funds to meet deposit withdrawals and
borrowing repayments, fund loan commitments and pay expenses. We have many
sources of liquid funds, including cash and cash equivalents, payments and
maturities of loans and securities, and growth in deposits. In addition, we
have the ability to sell securities available for sale, and may borrow from the
Federal Reserve and the Federal Home Loan Bank.

We believe we have sufficient liquidity to meet reasonable borrower, depositor,
and creditor needs in the present economic environment. We have not received
any recommendations from regulatory authorities which would materially affect
liquidity, capital resources or operations.

Our interest rate sensitivity position is influenced by the timing of the
maturity or repricing of interest earning assets and interest-bearing
liabilities. One method of gauging sensitivity is by a static gap analysis, as
presented in the table below.

Rate sensitivity gap is defined as the difference between the repricing of
interest earning assets and the repricing of interest bearing liabilities
within certain defined time frames. Rising interest rates are likely to
increase net interest income in a positive gap position, while declining rates
are likely to be beneficial in a negative gap position.

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##### 



Liquidity and Interest Rate Sensitivity

|                                                 |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |        |        |       |        |        |         |   |         | 
|------------------------------------------------ | -------------------------------- | - | ---------------------------------- | ------ | ---------------------- | ------ | ------- | --------- | - | ------ | ------- | ------ | - | ------ | ------ | ------ | ----- | ------ | ------ | ------- | - | ------- | 
|                                                 |                                  |   |                                    |        | At December 31, 2002   |       
|                                                 |                                  |   |                                    |        |                        |       
|                                                 |                                  |   |                                    |        | 1 to 90                |        |         | 91 to 365 |   |        | 1 to 5  |        |   | Over 5 |        |        |       |        |       
|                                                 |                                  |   |                                    |        | Days                   |        |         | Days      |   |        | Years   |        |   | Years  |        |        | Total |       
|                                                 |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |        |        |       |       
|                                                 |                                  |   |                                    |        | (Dollars in thousands) |       
|Interest earning assets                          |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |        |        |       |        |        |        
|                                                 | Loans                            |   | $                                  | 44,373 |                        |        | $       | 10,229    |   |        | $       | 38,018 |   |        | $      | 24,987 |       |        | $      | 117,607 |  
|                                                 | Securities                       |   |                                    | 2,749  |                        |        |         | 810       |   |        |         | 8,930  |   |        |        | 14,321 |       |        |        | 26,810  |  
|                                                 | Restricted stock                 |   |                                    | 670    |                        |        |         |          |   |        |         |       |   |        |        |       |       |        |        | 670     |  
|                                                 |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |       
|                                                 |                                  |   | Total earning assets               |        | $                      | 47,792 |         |           | $ | 11,039 |         |        | $ | 46,948 |        |        | $     | 39,308 |        |         | $ | 145,087 | 
|                                                 |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |       
|Interest bearing liabilities                     |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |        |        |       |        |        |        
|                                                 | Interest-bearing demand deposits |   | $                                  | 29,224 |                        |        | $       |          |   |        | $       |       |   |        | $      |       |       |        | $      | 29,224  |  
|                                                 | Savings deposits                 |   |                                    | 8,200  |                        |        |         |          |   |        |         |       |   |        |        |       |       |        |        | 8,200   |  
|                                                 | Time deposits                    |   |                                    | 17,734 |                        |        |         | 29,823    |   |        |         | 22,223 |   |        |        | 109    |       |        |        | 69,889  |  
|                                                 | Federal funds purchase           |   |                                    | 2,245  |                        |        |         |          |   |        |         |       |   |        |        |       |       |        |        | 2,245   |  
|                                                 | Repurchase agreements            |   |                                    | 5,684  |                        |        |         |          |   |        |         |       |   |        |        |       |       |        |        | 5,684   |  
|                                                 | FHLB advances                    |   |                                    |       |                        |        |         | 5,700     |   |        |         | 1,000  |   |        |        | 2,000  |       |        |        | 8,700   |  
|                                                 | Note payable                     |   |                                    | 75     |                        |        |         | 225       |   |        |         | 1,175  |   |        |        |       |       |        |        | 1,475   |  
|                                                 | Debentures                       |   |                                    |       |                        |        |         |          |   |        |         |       |   |        |        | 5,000  |       |        |        | 5,000   |  
|                                                 |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |       
|                                                 |                                  |   | Total interest bearing liabilities |        | $                      | 63,161 |         |           | $ | 35,748 |         |        | $ | 24,398 |        |        | $     | 7,109  |        |         | $ | 130,416 | 
|                                                 |                                  |   |                                    |        |                        |        |         |           |   |        |         |        |   |        |       
|Rate sensitive gap                               |                                  | $ | (15,369                            | )      |                        | $      | (24,709 | )         |   | $      | 22,550  |        |   | $      | 32,199 |        |       | $      | 14,671 |        
|Rate sensitive cumulative gap                    |                                  | $ | (15,369                            | )      |                        | $      | (40,078 | )         |   | $      | (17,528 | )      |   | $      | 14,671 |        |       |        | N/A    |        
|Cumulative gap as a percentage of earning assets |                                  |   | (10.59                             | )%     |                        |        | (27.62  | )%        |   |        | (12.08  | )%     |   |        | 10.11  | %      |       |        | N/A    |        

As of December 31, 2002, our rate sensitive liabilities exceeded rate sensitive
assets through the one year horizon. This would indicate that when rates
increase, net interest income may decline. In order to accurately determine the
effect of changes in interest rates, the repricing effect of each type of
interest-earning asset and interest-bearing liability must be measured. Assets
and liabilities have different characteristics and the magnitude of change
differs for each. Management continually monitors the changes to net interest
income which may result from changing interest rates.

A significant assumption that creates the large negative gap in the 0 to 3
month category is that all interest-bearing demand and savings accounts are
subject to immediate repricing. While it is true that, contractually, those
accounts are subject to immediate repricing, the rates paid on those accounts
are generally not tied to specific indices and are influenced by market
conditions and other factors. Accordingly, a general movement in interest
rates, either up or down, may not have any immediate effect on the rates paid
on these deposit accounts. The foregoing table illustrates only one source of
information about sensitivity to interest rate movements. Our asset and
liability management process also uses simulations that take into account the
time that various assets and liabilities may reprice and the degree to which
various categories of such assets and liabilities will respond to general
interest rate movements. Interest rate risk can only be represented by a
measurement of the effects of changing interest rates given the capacity for
and magnitude of change on specific assets and liabilities.

13