<PAGE>

                                                                    Exhibit 13.1

2002 Annual Report

Table of Contents

<TABLE>
<S>                                                                         <C>
Letter to Stockholders ...................................................     1

Consolidated Balance Sheets ..............................................     2

Consolidated Statements of Income ........................................     3

Consolidated Statements of Stockholders' Equity ..........................     4

Consolidated Statements of Cash Flows ....................................     5

Notes to Consolidated Financial Statements ...............................     6

Independent Auditor's Report .............................................    23

Management's Discussion and Analysis .....................................    24
</TABLE>

<PAGE>

Consolidated Balance Sheets
December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                      2002              2001
                                                                 ---------------  ----------------
<S>                                                              <C>              <C>
Assets
   Cash and due from banks                                       $     4,136,609  $      4,100,572
   Interest-bearing deposits in banks                                     18,042            31,357
   Federal funds sold                                                  3,243,500         1,495,312
   Investment securities available for sale                           13,570,299        11,145,354
   Restricted equity securities                                          431,108           365,708
   Loans, net of allowance for loan losses
     of $380,206 in 2002 and $410,364 in 2001                         35,084,509        32,993,495
   Property and equipment, net                                         1,802,624         1,844,744
   Accrued income                                                        207,829           221,830
   Other assets                                                           65,297            43,878
                                                                 ---------------  ----------------
         Total assets                                            $    58,559,817  $     52,242,250
                                                                 ===============  ================
Liabilities and Stockholders' Equity
  Deposits:
   Noninterest-bearing                                           $     4,645,903  $      3,949,350
   Interest-bearing                                                   45,954,303        40,679,341
                                                                 ---------------  -----------------
         Total deposits                                               50,600,206        44,628,691

   Long-term debt                                                        106,367           113,501
   Accrued interest payable                                               53,477            47,364
   Other liabilities                                                      94,097           138,914
                                                                 ---------------  ----------------
         Total liabilities                                            50,854,147        44,928,470
                                                                 ---------------  ----------------
   Commitments and contingencies                                               -                 -

Stockholders' equity:
   Preferred stock, $1 par value; 1,000,000 shares
     authorized; none outstanding                                              -                 -
   Common stock, $5 par value; 10,000,000 shares
    authorized; 926,399 shares outstanding
     in 2002 and 2001                                                  4,631,995         4,631,995
   Additional paid-in capital                                          2,803,782         2,803,782
   Retained earnings (deficit)                                           215,881          (185,923)
   Accumulated other comprehensive income                                 54,012            63,926
                                                                 ---------------  ----------------
         Total stockholders' equity                                    7,705,670         7,313,780
                                                                 ---------------  ----------------
         Total liabilities and stockholders' equity              $    58,559,817  $     52,242,250
                                                                 ===============  ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       2

<PAGE>

Consolidated Statements of Income
Years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Interest income:
   Loans and fees on loans                                      $      2,622,357  $     2,816,251  $      2,761,911
   Federal funds sold                                                     32,326          103,008            34,764
   Taxable investment securities                                         517,273          769,836           973,260
                                                                ----------------  ---------------  ----------------
         Total interest income                                         3,171,956        3,689,095         3,769,935
                                                                ----------------  ---------------  ----------------
Interest expense:
   Deposits                                                            1,096,726        1,627,245         1,854,098
   Federal funds purchased                                                 2,505            2,583            11,245
   Long-term debt                                                          6,250            6,682             7,015
                                                                ----------------  ---------------  ----------------
         Total interest expense                                        1,105,481        1,636,510         1,872,358
                                                                ----------------  ---------------  ----------------
         Net interest income                                           2,066,475        2,052,585         1,897,577

Provision for loan losses                                                142,000           67,600           140,750
                                                                ----------------  ---------------  ----------------
         Net interest income after provision
          for loan losses                                              1,924,475        1,984,985         1,756,827
                                                                ----------------  ---------------  ----------------

Noninterest income:
   Service charges on deposit accounts                                   215,273          215,196           182,496
   Net realized gains on sales of securities                              29,737                -                 -
   Other income                                                          149,371          190,659           129,354
                                                                ----------------  ---------------  ----------------
         Total noninterest income                                        394,381          405,855           311,850
                                                                ----------------  ---------------  ----------------

Noninterest expense:
   Salaries and employee benefits                                        743,927          744,235           718,207
   Occupancy and equipment                                               207,189          246,815           247,875
   Data processing                                                       292,967          260,426           228,034
   Other expense                                                         563,999          570,095           473,387
                                                                ----------------  ---------------  ----------------
         Total noninterest expense                                     1,808,082        1,821,571         1,667,503
                                                                ----------------  ---------------  ----------------

         Income before income taxes                                      510,774          569,269           401,174

Income tax expense                                                       108,970                -                 -
                                                                ----------------  ---------------  ----------------
         Net income                                             $        401,804  $       569,269  $        401,174
                                                                ================  ===============  ================

Basic earnings per share                                        $            .43  $           .61  $            .43
                                                                ================  ===============  ================
Diluted earnings per share                                      $            .43  $           .61  $            .41
                                                                ================  ===============  ================
Basic weighted average shares outstanding                                926,399          926,399           926,399
                                                                ================  ===============  ================
Diluted weighted average shares outstanding                              926,399          926,399           972,611
                                                                ================  ===============  ================
</TABLE>

See Notes to Consolidated Financial Statements

                                       3

<PAGE>

Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                          Common Stock         Additional       Retained        Other
                                     ----------------------     Paid-in         Earnings     Comprehensive
                                      Shares       Amount       Capital        (Deficit)     Income (Loss)       Total
                                     --------   -----------   ------------   -------------  --------------   -------------
<S>                                  <C>        <C>           <C>            <C>            <C>              <C>
December 31, 1999                     926,399   $ 4,631,995   $  2,803,782   $  (1,156,366) $     (486,432)  $   5,792,979

Comprehensive income
Net income                                  -             -              -         401,174               -         401,174
Change in net unrealized
   gain (loss) on securities
   available for sale                       -             -              -               -         375,890         375,890
                                                                                                             -------------
Total comprehensive income                                                                                         777,064
                                     --------   -----------   ------------   -------------  --------------   -------------
December 31, 2000                     926,399     4,631,995      2,803,782        (755,192)       (110,542)      6,570,043

Comprehensive income
Net income                                  -             -              -         569,269               -         569,269
Change in net unrealized
   gain (loss) on securities
   available for sale                       -             -              -               -         174,468         174,468
                                                                                                             -------------
Total comprehensive income                                                                                         743,737
                                     --------   -----------   ------------     -----------  --------------   -------------
December 31, 2001                     926,399     4,631,995     2,803,782         (185,923)         63,926       7,313,780

Comprehensive income
Net income                                  -             -              -         401,804               -         401,804
Change in net unrealized
   gain (loss) on securities
   available for sale, net of
   taxes of $27,825                         -             -              -               -           9,712           9,712
Reclassified gains realized on
   sale of securities, net of
   taxes of $10,111                         -             -              -               -         (19,626)        (19,626)
                                                                                                             -------------
Total comprehensive income                                                                                         391,890
                                     --------   -----------   ------------   -------------  --------------   -------------
December 31, 2002                     926,399   $ 4,631,995   $  2,803,782   $     215,881  $       54,012   $   7,705,670
                                     ========   ===========   ============   =============  ==============   =============
</TABLE>

See Notes to Consolidated Financial Statements

                                       4

<PAGE>

Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                      2002              2001            2000
                                                                ----------------  ---------------  -------------
<S>                                                             <C>               <C>              <C>
Cash flows from operating activities:
   Net income                                                   $        401,804  $       569,269  $     401,174
   Adjustments to reconcile net income
    to net cash used by operations:
     Depreciation and amortization                                       121,737          119,047        122,807
     Provision for loan losses                                           142,000           67,600        140,750
     Net realized gains on securities                                    (29,737)               -              -
     Amortization of premium on securities, net                          276,268           (3,250)        16,483
     Changes in assets and liabilities:
       Accrued income                                                     14,001          152,739        (67,118)
       Other assets                                                      (49,244)           3,164         13,858
       Accrued interest payable                                            6,113          (18,707)         4,976
       Other liabilities                                                 (44,817)          99,096         11,864
                                                                ----------------  ---------------  -------------
         Net cash flows from operating activities                        838,125          988,958        644,794
                                                                ----------------  ---------------  -------------

Cash flows from investing activities:
   Net (increase) decrease in federal funds sold                      (1,748,188)      (1,445,312)       710,000
   Purchases of investment securities                                (17,169,357)     (21,445,768)   (22,174,813)
   Sales of available for sale securities                              2,895,835        1,504,559              -
   Maturities of investment securities                                11,619,957       23,880,498     21,449,985
   Purchases of restricted equity securities                             (65,400)               -              -
   Net (increase) decrease in loans                                   (2,233,014)          17,856     (1,649,027)
   Purchases of property and equipment                                   (79,617)         (58,637)       (33,680)
                                                                ----------------  ---------------  -------------
         Net cash provided by (used in) investing activities          (6,779,784)       2,453,196     (1,697,535)
                                                                ----------------  ---------------  --------------

Cash flows from financing activities:
   Net increase (decrease) in deposits                                 5,971,515       (1,592,562)       451,520
   Net increase (decrease) in federal funds purchased                          -          (18,000)        18,000
   Repayment of long-term debt                                            (7,134)          (6,701)        (6,368)
                                                                ----------------  ---------------  -------------
         Net cash provided by (used in) financing activities           5,964,381       (1,617,263)       463,152
                                                                ----------------  ---------------  -------------
         Net increase (decrease) in cash and cash equivalents             22,722        1,824,891       (589,589)

Cash and cash equivalents, beginning                                   4,131,929        2,307,038      2,896,627
                                                                ----------------  ---------------  -------------
Cash and cash equivalents, ending                               $      4,154,651  $     4,131,929  $   2,307,038
                                                                ================  ===============  =============

Supplemental disclosure of cash flow information:
   Interest paid                                                $      1,099,368  $     1,655,217  $   1,867,382
                                                                ================  ===============  =============
   Income taxes paid                                            $         90,000  $             -  $           -
                                                                ================  ===============  =============
</TABLE>

See Notes to Consolidated Financial Statements

                                       5

<PAGE>

Notes to Consolidated Financial Statements

Note 1.  Organization and Summary of Significant Accounting Policies

Organization

CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. On August 29, 1994, the Company's wholly
owned subsidiary, Community National Bank (the Bank), was chartered under the
laws of the United States and the Bank opened for business in Pulaski, Virginia.
As an FDIC insured National Banking Association, the Bank operates two banking
offices and is subject to regulation by the Comptroller of the Currency. The
Company is regulated by the Federal Reserve.

The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.

Critical accounting policies

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

Principles of consolidation

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

Use of estimates

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

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection with
the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.

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

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

Cash and cash equivalents

For presentation in the consolidated statement of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"cash and due from banks" and "interest-bearing deposits in banks".

                                       6

<PAGE>

Notes to Consolidated Financial Statements

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

Trading securities

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

Securities held to maturity

Bonds, notes and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. Currently the Company has no securities
held to maturity.

Securities available for sale

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

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

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

Loans Receivable

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

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

Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.

Allowance for Loan Losses

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

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

                                       7

<PAGE>

Notes to Consolidated Financial Statements

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

Allowance for Loan Losses, continued

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

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

Property and equipment

Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation computed by the straight-line method over
the following estimated useful lives:

                                                        Years
                                                        -----
         Buildings and land improvements             20 to 40
         Furniture and equipment                      5 to 10

Foreclosed properties

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

Stock-based compensation

The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting has been applied.

Transfers of Financial Assets

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

                                       8

<PAGE>

Notes to Consolidated Financial Statements

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

Income Taxes

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

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

Earnings per share

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

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

Business segments

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

Comprehensive income

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

Financial Instruments

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

In the ordinary course of business the Company has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and commercial and standby letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received. The Company does not utilize interest-rate exchange
agreements or interest-rate futures contracts.

                                       9

<PAGE>

Notes to Consolidated Financial Statements

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

Fair value of financial instruments

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and 1estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

Cash and due from banks and interest-bearing deposits in banks: The carrying
amounts reported in the balance sheet for these items approximate the assets'
fair values.

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

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

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

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

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

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

Reclassification

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

                                       10

<PAGE>

Notes to Consolidated Financial Statements

Note 2.  Restricted Cash

To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $335,000 and $284,000 for the periods including December 31, 2002
and 2001, respectively.

Note 3.  Securities

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

<TABLE>
<CAPTION>
                                                   Amortized        Unrealized       Unrealized           Fair
                                                     Cost              Gains           Losses             Value
                                               ---------------  ----------------  ---------------  ----------------
<S>                                            <C>              <C>               <C>              <C>
2002
   Mortgage-backed securities                  $    13,488,461  $        106,276  $        24,438  $     13,570,299
                                               ===============  ================  ===============  ================
2001
   U. S. Government agency securities          $     2,108,450  $         38,530  $             -  $      2,146,980
   Mortgage-backed securities                        8,972,978            49,688           24,292         8,998,374
                                               ---------------  ----------------  ---------------  ----------------
                                               $    11,081,428  $         88,218  $        24,292  $     11,145,354
                                               ===============  ================  ===============  ================
</TABLE>

At December 31, 2002 and 2001 substantially all investment securities were
pledged as collateral for public deposits or other banking purposes.

Restricted equity securities consist mainly of investments in stock of the
Federal Home Loan Bank of Atlanta ("FHLBA") and the Federal Reserve. Both of
those entities are upstream correspondents of the Bank. The FHLBA requires
financial institutions to make equity investments in the FHLBA in order to
borrow from it. The Bank is required to hold that stock so long as it borrows
from the FHLBA. The Federal Reserve requires banks to purchase stock as a
condition of membership in the Federal Reserve system.

The amortized cost and approximate market value at December 31, 2002 of
investment securities by scheduled maturity are shown below.

<TABLE>
<CAPTION>
                                                                                         Available for Sale
                                                                                  ---------------------------------
                                                                                     Amortized           Fair
                                                                                       Cost              Value
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Due in one year or less                                                           $             -  $              -
Due in one year through five years                                                        380,639           391,440
Due in five years through ten years                                                     2,513,062         2,517,682
Due after ten years                                                                    10,594,760        10,661,177
                                                                                  ---------------  ----------------
                                                                                  $    13,488,461  $     13,570,299
                                                                                  ===============  ================
</TABLE>

For mortgage backed securities, the Company reports maturities based on
anticipated lives. Actual results may differ due to interest rate fluctuations.

                                       11

<PAGE>

Notes to Consolidated Financial Statements

Note 4.  Loans Receivable

The major components of loans in the consolidated balance sheets at December 31
are as follows:

<TABLE>
<CAPTION>
                                                                                        2002             2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Commercial                                                                        $    16,274,146  $     14,571,109
Real estate:
   Construction and land development                                                      201,466           208,718
   Farmland                                                                                50,640            61,338
   Residential, 1-4 families                                                           13,547,523        14,042,175
   Residential, multifamily                                                               107,700                 -
   Nonfarm, nonresidential                                                                 39,989            61,968
Agricultural                                                                                1,401            20,000
Consumer:
   Credit cards and other revolving credit                                                618,292           475,111
   Other consumer                                                                       4,230,274         3,603,131
States and political subdivisions                                                               -                 -
Other                                                                                     454,876           441,626
                                                                                  ---------------  ----------------
                                                                                       35,526,307        33,485,176

Net deferred loan fees                                                                    (61,592)          (81,317)
Allowance for loan losses                                                                (380,206)         (410,364)
                                                                                  ---------------  ----------------
                                                                                  $    35,084,509  $     32,993,495
                                                                                  ===============  ================
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       2002             2001             2000
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Balance, beginning                                              $        410,364  $       429,905  $        321,574
                                                                ----------------  ---------------  ----------------

Loans charged off                                                       (174,019)         (87,181)          (34,044)
Recoveries                                                                 1,861               40             1,625
                                                                ----------------  ---------------  ----------------
Net loans charged off                                                   (172,158)         (87,141)          (32,419)

Provision for loan losses                                                142,000           67,600           140,750
                                                                ----------------  ---------------  ----------------
Balance, ending                                                 $        380,206  $       410,364  $        429,905
                                                                ================  ===============  ================
</TABLE>

An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, is as follows:

<TABLE>
<CAPTION>
                                                                                        2002             2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Impaired loans without a valuation allowance                                      $             -  $         98,505
Impaired loans with a valuation allowance                                                  52,729            63,714
                                                                                  ---------------  ----------------
         Total impaired loans                                                     $        52,729  $        162,219
                                                                                  ===============  ================

Valuation allowance related to impaired loans                                     $        32,000  $         38,500
                                                                                  ===============  ================
</TABLE>

                                       12

<PAGE>

Notes to Consolidated Financial Statements

Note 4.  Loans Receivable, continued

The average annual recorded investment in impaired loans and interest income
recognized on impaired loans for the years ended December 31, (all approximate)
is summarized below:

<TABLE>
<CAPTION>


                                                                   2002       2001       2000
                                                                --------  ---------  ----------
<S><C>
Average investment in impaired loans                            $ 57,170  $ 179,633  $  169,037
                                                                ========  =========  ==========
Interest income recognized on impaired loans                    $      -  $   1,511  $   10,120
                                                                ========  =========  ==========
Interest income recognized on a cash basis on impaired loans    $      -  $   1,511  $    9,593
                                                                ========  =========  ==========
</TABLE>



No additional funds are committed to be advanced in connection with impaired
loans.

Note 5.  Property and Equipment

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

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

Land                                         $       280,000  $        280,000
Land improvements                                     51,492            51,492
Buildings                                          1,390,855         1,375,510
Furniture and equipment                              856,790           792,518
                                             ---------------  ----------------
                                                   2,579,137         2,499,520
Less accumulated depreciation                       (776,513)         (654,776)
                                             ---------------  ----------------
                                             $     1,802,624  $      1,844,744
                                             ===============  ================

Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
$121,737, $119,047 and $122,807, respectively.

Note 6.  Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2002 and 2001 was $5,074,220 and $5,446,339, respectively. At
December 31, 2002, the scheduled maturities of time deposits are as follows:

                               Three months or less          $      3,007,309
                               Four months to one year              6,848,810
                               Two to three years                   5,143,297
                               Four to five years                   6,514,683
                                                             ----------------
                                                             $     21,514,099
                                                             ================

Note 7.  Short-term Debt

Short-term debt consists of federal funds purchased and advances from the
Federal Home Loan Bank, which generally mature within one to four days from the
transaction date, and other short-term borrowings. Additional information at
December 31 and for the years then ended is summarized below:

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

Outstanding balance at December 31                      $       -  $          -
                                                        =========  ============
Year-end weighted averaged rate                                 -             -
                                                        =========  ============
Daily average outstanding during the year               $  18,402  $    182,778
                                                        =========  ============
Average rate for the year                                   1.66%         2.52%
                                                        =========  ============
Maximum outstanding at any month-end during the year    $       0  $  2,000,000
                                                        =========  ============


                                       13

<PAGE>

Notes to Consolidated Financial Statements

Note 7.  Short-term Debt, continued

At December 31, 2002, the Bank had established lines of credit totaling
$2,000,000 with various correspondent banks to provide additional liquidity if,
and as needed. In addition, the Bank has the ability to borrow up to ten percent
of bank assets from the Federal House Loan Bank of Atlanta, subject to the
pledging of specific collateral. There were no amounts outstanding under these
arrangements at December 31, 2002 or 2001.

Note 8.  Other Borrowed Funds

Other borrowed funds consist of a mortgage note payable in monthly installments
of $1,115 including interest at 5.67%. This note is secured by certain real
estate. Annual requirements to repay this debt are as follows:

                        2003            $     7,549
                        2004                  7,988
                        2005                  8,453
                        2006                  8,945
                        2007                  9,466
                        After                63,966
                                        -----------
                                        $   106,367
                                        ===========

Note 9.  Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):

<TABLE>
<CAPTION>
                                                December 31, 2002     December 31, 2001
                                            ----------------------  ---------------------
                                               Carrying    Fair     Carrying     Fair
                                                Amount     Value     Amount      Value
                                            ----------- ----------  ---------  ----------
<S>                                         <C>         <C>         <C>        <C>
Financial assets
   Cash and cash equivalents                $    4,155  $    4,155  $   4,132  $    4,132
   Federal funds sold                            3,244       3,244      1,495       1,495
   Securities, available-for-sale               13,570      13,570     11,145      11,145
   Restricted securities                           431         431        366         366
   Loans, net of allowance for loan losses      35,085      36,474     32,993      33,855

Financial liabilities
   Deposits                                     50,600      51,443     44,629      44,884
   Other borrowed funds                            106         106        114         114

Off-balance-sheet assets (liabilities)
   Commitments to extend credit and
     standby letters of credit                       -           -          -           -

Note 10.  Earnings Per Share

The following table details the computation of basic and diluted earnings per
share for each year ended December 31.
</TABLE>

<TABLE>
<CAPTION>
                                                         2002       2001       2000
                                                     ----------  ---------  ----------
<S>                                                  <C>         <C>        <C>
Net income available to common shareholders          $  401,804  $ 569,269  $  401,174
                                                     ==========  =========  ==========

Basic weighted average common shares outstanding        926,399    926,399     926,399
Effect of dilutive securities, options                        -          -      46,212
                                                     ----------  ---------  ----------
Diluted weighted average common shares outstanding      926,399    926,399     972,611
                                                     ==========  =========  ==========

Basic earnings per share                             $      .43  $     .61  $      .43
                                                     ==========  =========  ==========
Diluted earning per share                            $      .43  $     .61  $      .41
                                                     ==========  =========  ==========
</TABLE>


                                       14

<PAGE>

Notes to Consolidated Financial Statements

Note 11.  Employee Benefit Plans

The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees who have
completed one year of service. Participants may contribute a percentage of
compensation, subject to a maximum allowed under the Code. In addition, the Bank
may make additional contributions at the discretion of Board of Directors. The
Bank made contributions of $3,045, $2,948, and $2,678 for the years ended
December 31, 2002, 2001 and 2000.

Note 12.  Common Stock

The Company has adopted a stock option plan under which up to 344,375 shares of
stock may be issued. Shares subject to the plan may be issued in any combination
of incentive stock options, non-incentive stock options, or restricted stock,
provided that the total number of shares issuable pursuant to incentive stock
options may not be more than 62,500 without shareholder approval. Termination of
restrictions on any restricted stock granted and expiration of any non-incentive
stock options granted are controlled by the terms of each individual grant.
Incentive stock options expire no more than 10 years from the date of grant.
Exercise prices of all options are determined by each individual grant except
that incentive stock options may not be granted at less than fair market value
and non-incentive stock options may not be granted at less than 80% of fair
market value on each option's respective date of grant. Vesting of options, if
not immediately exercisable, is determined in accordance with the terms of each
option granted.

Activity under the plan during the years ended December 31, 2002, 2001 and 2000
is summarized below:

<TABLE>
<CAPTION>
                                                   Granted and Outstanding
                             ---------------------------------------------------------
                              Available     Incentive     Non-incentive
                                 for          Stock           Stock       Restricted
                                Grant        Options         Options         Stock
                             ------------  ------------ ---------------  -------------
<S>                          <C>           <C>          <C>              <C>

Balance December 31, 1999         113,082             -         231,293              -
                             ------------  ------------ ---------------  -------------

Granted                            (5,692)            -           5,692              -
Exercised                               -             -               -              -
                             ------------  ------------ ---------------  -------------
Balance December 31, 2000         107,390             -         236,985              -
                             ------------  ------------ ---------------  -------------

Granted                            (5,222)            -           5,222              -
Exercised                               -             -               -              -
                             ------------  ------------ ---------------  -------------
Balance December 31, 2001         102,168             -         242,207              -
                             ------------  ------------ ---------------  -------------

Granted                            (5,222)            -           5,222              -
Exercised                               -             -               -              -
                             ------------  ------------ ---------------  -------------
Balance December 31, 2002          96,946             -         247,429              -
                             ============  ============ ===============  =============
</TABLE>

                                       15

<PAGE>

Notes to Consolidated Financial Statements

Note 12.  Common Stock, continued

Additional information relating to the plan is listed below:
<TABLE>
<CAPTION>
                                                                            2002            2001           2000
                                                                       -------------  -------------  --------------
<S>                                                                    <C>            <C>            <C>
Outstanding options at December 31
   Exercise price, beginning of the year(1)                            $        8.04  $        8.05  $         8.06
   Exercise price, end of the year(1)                                  $        7.96  $        8.04  $         8.05
   Range of exercise prices:
     From                                                              $        4.00  $        7.50  $         8.00
     To                                                                $        9.13  $        9.13  $         9.13
   Remaining contractual life in months(1)                                        35             47              60
   Exercisable options                                                       247,429        242,207         236,985

Weighted average exercise price of options
   Granted during the year                                             $        4.00  $        7.50  $         8.00
   Exercised during the year                                           $           -  $           -  $            -
   Forfeited during the year                                           $           -  $           -  $            -
   Expired during the year                                             $           -  $           -  $            -

Significant assumptions used in determining fair value(3)
   Risk-free interest rate                                                       n/a          2.00%           5.25%
   Expected life in years                                                        n/a             10              10
   Expected dividends                                                            n/a          0.00%            0.0%
   Expected volatility                                                           n/a          28.8%           25.8%

Grant-date fair value
   Options granted during the year                                     $      70,497  $      32,097  $       27,120
   Restricted stock awards granted during the year                     $           -  $           -  $            -

Results of operations
   Compensation cost recognized in income for
     all stock-based compensation awards                               $           -  $           -  $            -
                                                                       =============  =============  ==============
   Pro forma net income(2)                                             $     331,307  $     537,172  $      374,054
                                                                       =============  =============  ==============
   Pro forma earnings per common share(2)                              $          36  $          58  $           40
                                                                       =============  =============  ==============
   Pro forma earnings per common share, diluted(2)                     $          36  $          58  $           38
                                                                       =============  =============  ==============
</TABLE>
----------------
/(1)/  Weighted average

/(2)/  As if the fair value based method prescribed by SFAS No. 123 has been
       applied.

/(3)/  For 2002, fair value is based on exchange value as specified in the
       merger agreement.

                                       16

<PAGE>

Notes to Consolidated Financial Statements

Note 13.  Income Taxes

Current and deferred income tax components

The components of income tax expense (all Federal) are as follows:

<TABLE>
<CAPTION>
                                                                      2002             2001              2000
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Current                                                         $        112,320  $             -  $              -
Deferred                                                                  62,161          196,660           133,433
Deferred tax asset valuation allowance change                            (65,511)        (196,660)         (133,433)
                                                                ----------------  ---------------  ----------------
                                                                $        108,970  $             -  $              -
                                                                ================  ===============  ================
</TABLE>

Rate reconciliation

A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate expense included in the consolidated statement of
operations follows:

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

<S>                                                             <C>               <C>              <C>
Tax at statutory federal rate                                   $        173,663  $       193,551  $        136,399
Other                                                                        818            3,109            (2,966)
Deferred tax asset valuation allowance change                            (65,511)        (196,660)         (133,433)
                                                                ----------------  ---------------  ----------------
                                                                $        108,970  $             -  $              -
                                                                ================  ===============  ================
</TABLE>

Deferred tax analysis

The significant components of net deferred tax assets (all Federal) at December
31, are summarized as follows:

<TABLE>
<CAPTION>
                                                                                        2002              2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Deferred tax assets
   Allowance for loan losses                                                      $        77,487  $         98,087
   Net operating losses                                                                         -            32,538
   Deferred fee income                                                                     20,786            27,648
   Contributions                                                                                -               349
                                                                                  ---------------  ----------------
     Deferred tax assets                                                                   98,273           158,622
                                                                                  ---------------  ----------------

Deferred tax liabilities
   Accretion of discount on investment securities                                          (1,177)           (4,055)
   Depreciation                                                                           (93,746)          (89,056)
                                                                                  ---------------  ----------------
     Deferred tax liabilities                                                             (94,923)          (93,111)
                                                                                  ---------------  ----------------

         Deferred tax asset valuation allowance                                                 -           (65,511)
                                                                                  ---------------  ----------------
         Net deferred tax asset                                                   $         3,350  $              -
                                                                                  ===============  ================
</TABLE>

                                       17

<PAGE>

Notes to Consolidated Financial Statements

Note 14.  Commitments and Contingencies

Financial instruments with off-balance-sheet risk

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

Exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of
credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments.

A summary of commitments at December 31 are as follows:

<TABLE>
<CAPTION>
                                                             2002             2001
                                                       ---------------  ----------------
<S>                                                    <C>              <C>
Commitments to extend credit                           $     6,724,000  $      6,663,000
Standby letters of credit                                      297,000                 -
                                                       ---------------  ----------------
                                                       $     7,021,000  $      6,663,000
                                                       ===============  ================
</TABLE>

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

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

Litigation

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

                                       18

<PAGE>

Notes to Consolidated Financial Statements

Note 14.  Commitments and Contingencies, continued

Concentrations of credit risk

Substantially all of the Company's loans, commitments to extend credit and
standby letters of credit have been granted to customers in the Company's market
area and such customers are generally depositors of the Company. The
concentrations of credit by type of loan are set forth in Note 4. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. Standby letters of credit were granted primarily to
commercial borrowers. The Company's primary focus is consumer oriented and small
business transactions, and accordingly, it does not have a significant number of
credits to any single borrower or group of related borrowers in excess of
$500,000. The Company has cash and cash equivalents on deposit with financial
institutions which exceed federally-insured limits.

Note 15.  Regulatory Restrictions

Dividends

The Company's dividend payments (when available) will be made primarily from
dividends received from the Bank. Under applicable federal law, the Comptroller
of the Currency restricts national bank total dividend payments in any calendar
year to net profits of that year, as defined, combined with retained net profits
for the two preceding years. The Comptroller also has authority under the
Financial Institutions Supervisory Act to prohibit a national bank from engaging
in an unsafe or unsound practice in conducting its business. It is possible,
under certain circumstances, that the Comptroller could assert that dividends or
other payments would be an unsafe or unsound practice.

Capital requirements

The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in regulations.
Management believes, as of December 31, 2002, that the Bank meets all capital
adequacy requirements to which it is subject.

As of December 31, 2002, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category. The Company's actual capital amounts and ratios are also
presented in the table.

                                       19

<PAGE>

Notes to Consolidated Financial Statements

Note 15.  Regulatory Restrictions, continued
<TABLE>
<CAPTION>
                                                                                             Minimum
                                                                                            To Be Well
                                                                        Minimum         Capitalized Under
                                                                        Capital         Prompt Corrective
                                                      Actual            Required        Action Provisions
                                              -------------------  -----------------   --------------------
                                                Amount     Ratio     Amount    Ratio     Amount       Ratio
                                              ----------   ------  ----------  -----   ----------     -----
<S>                                           <C>          <C>     <C>         <C>     <C>            <C>
December 31, 2002
   Total capital to risk-weighted assets:
     Consolidated                             $8,031,864   23.5%   $2,732,177   8.0%          n/a       n/a
     Bank only                                $5,699,460   17.0%   $2,675,932   8.0%   $3,344,915      10.0%

   Tier 1 capital to risk-weighted assets:
     Consolidated                             $7,651,658   22.4%   $1,366,966   4.0%          n/a       n/a
     Bank only                                $5,320,828   15.9%   $1,337,966   4.0%   $2,006,949       6.0%

   Tier 1 capital to average assets:
     Consolidated                             $7,651,658   13.3%   $2,309,746   4.0%          n/a       n/a
     Bank only                                $5,320,828    9.3%   $2,293,933   4.0%   $2,867,416       5.0%

December 31, 2001
   Total capital to risk-weighted assets:
     Consolidated                             $7,660,219   24.1%   $2,542,861   8.0%          n/a       n/a
     Bank only                                $5,334,451   17.0%   $2,518,389   8.0%   $3,147,987      10.0%

   Tier 1 capital to risk-weighted assets:
     Consolidated                             $7,249,854   22.8%   $1,271,431   4.0%          n/a       n/a
     Bank only                                $4,940,990   15.7%   $1,259,195   4.0%   $1,888,612       6.0%

   Tier 1 capital to average assets:
     Consolidated                             $7,249,854   13.5%   $2,150,635   4.0%          n/a       n/a
     Bank only                                $4,940,990    9.3%   $2,136,635   4.0%   $2,670,794       5.0%
</TABLE>

Inter-company transactions

Legal lending limits on loans by the Bank to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
loan amount do not apply. Under this definition, the legal lending limit for the
Bank on loans to the Company was approximately $500,000 at December 31, 2002. No
23A transactions existed at December 31, 2002 or 2001.

                                       20

<PAGE>

Notes to Consolidated Financial Statements

Note 16.  Transactions with Related Parties

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

Aggregate loan transactions with related parties were as follows:

<TABLE>
<CAPTION>
                                                                                        2002             2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Balance, beginning                                                                $     1,846,950  $      1,879,468

Change in relationship                                                                          -                 -
New loans and advances                                                                  1,222,111         1,122,738
Repayments                                                                             (1,056,414)       (1,155,256)
                                                                                  ---------------  ----------------
Balance, ending                                                                   $     2,012,647  $      1,846,950
                                                                                  ===============  ================
</TABLE>

Note 17.  Parent Company Financial Information

Condensed financial information of CNB Holdings, Inc. is presented as follows:

                                 Balance Sheets
                           December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                        2002              2001
                                                                                  ---------------  ----------------
<S>                                                                               <C>              <C>
Assets
   Cash and due from banks                                                        $       137,693  $          3,527
   Interest-bearing deposits                                                            1,500,000         2,000,000
   Loans, net of allowance of $1,574
    and $1,574 in 2002 and 2001                                                           653,157           304,325
   Investment in subsidiary bank at equity                                              5,374,840         5,002,537
   Other assets                                                                            49,902             3,391
                                                                                  ---------------  ----------------
         Total assets                                                             $     7,715,592  $      7,313,780
                                                                                  ===============  ================

Liabilities
   Accounts payable and other liabilities                                         $         9,922  $              -
                                                                                  ---------------  ----------------

Stockholders' equity
   Common stock                                                                         4,631,995         4,631,995
   Additional paid-in capital                                                           2,803,782         2,803,782
   Retained earnings (deficit)                                                            215,881          (185,923)
   Unrealized appreciation on subsidiary's investment
    securities available for sale                                                          54,012            63,926
                                                                                  ---------------  ----------------
         Total stockholders' equity                                                     7,705,670         7,313,780
                                                                                  ---------------  ----------------
         Total liabilities and stockholders' equity                               $     7,715,592  $      7,313,780
                                                                                  ===============  ================
</TABLE>

                                       21

<PAGE>

Notes to Consolidated Financial Statements

Note 17.  Parent Company Financial Information, continued

                              Statements of Income
                  Years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                      2002              2001             2000
                                                                ----------------  ---------------  ----------------
<S>                                                             <C>               <C>              <C>
Income
   Interest on loans                                            $         99,339  $        18,034  $         48,895
   Interest income on deposits                                                 -           33,085                 -
                                                                ----------------  ---------------  ----------------
                                                                          99,339           51,119            48,895
                                                                ----------------  ---------------  ----------------
Expenses
   Professional fees                                                      39,759           23,945            19,735
   Other expenses                                                         30,397           13,713            37,638
                                                                ----------------  ---------------  ----------------
       Total expenses                                                     70,156           37,658            57,373
                                                                ----------------  ---------------  ----------------
       Income (loss) before tax and equity
         in undistributed income of subsidiary                            29,183           13,461            (8,478)

Federal income tax expense                                                 9,596                -                 -
                                                                ----------------  ---------------  ----------------
       Income (loss) before equity in undistributed income of
         subsidiary                                                       19,587           13,461            (8,478)

Equity in undistributed income of subsidiary                             382,217          555,808           409,652
                                                                ----------------  ---------------  ----------------
       Net income                                               $        401,804  $       569,269  $        401,174
                                                                ================  ===============  ================
</TABLE>

                            Statements of Cash Flows
                  Years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                                       2002             2001             2000
                                                                ----------------  ---------------- ----------------
<S>                                                             <C>               <C>              <C>
Cash flows from operating activities
   Net income                                                   $        401,804  $       569,269  $        401,174
   Adjustments:
      Increase in equity in undistributed income of subsidiary          (382,217)        (555,808)         (409,652)
      (Increase) decrease in other assets                                (46,511)           2,442               644
      Increase in other liabilities                                        9,922                -                 -
                                                                ----------------  ---------------  ----------------
          Net cash provided (used) by operating activities               (17,002)          15,903            (7,834)
                                                                ----------------  ---------------  ----------------
Cash flows from investing activities
   Net (increase) decrease in loans                                     (348,832)         340,904           (75,568)
                                                                ----------------  ---------------  ----------------
          Net cash provided (used) by investing activities              (348,832)         340,904           (75,568)
                                                                ----------------  ---------------  ----------------
Cash flows from financing activities                                           -                -                 -
                                                                ----------------  ---------------  ----------------
          Increase (decrease) in cash and due from banks                (365,834)         356,807           (83,402)

Cash and cash equivalents, beginning                                   2,003,527        1,646,720         1,730,122
                                                                ----------------  ---------------  ----------------
Cash and cash equivalents, ending                               $      1,637,693  $     2,003,527  $      1,646,720
                                                                ================  ===============  ================
</TABLE>

Note 18.  Subsequent Event

The stockholders of the Company approved a plan to merge into MountainBank
Financial Corporation (MFC) on March 7, 2003, the details of which are contained
in a proxy statement/prospectus dated January 30, 2003. MountainBank Financial
Corporation will be the surviving corporation from the merger. Holders of CNB
will receive a minimum of .5551 and maximum of .7508 shares of MFC common stock
or $13.50 cash, provided that at least 50% but not more than 55% of the
aggregate consideration must be in MFC common stock.

                                       22

<PAGE>

                          Independent Auditor's Report

Board of Directors and Stockholders
CNB Holdings, Inc.
Pulaski, Virginia

We have audited the consolidated balance sheets of CNB Holdings, Inc. and
subsidiary (Community National Bank) as of December 31, 2002 and 2001 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

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

/s/ LARROWE & COMPANY, PLC

Galax, Virginia
January 24, 2003, except for Note 18, as to
  which the date is March 7, 2003

                                       23

<PAGE>

Management's Discussion and Analysis

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

The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of the Company as of the dates and
for the periods indicated. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto.

The Consolidated Financial Statements include the financial information of the
Company and the Bank. As the Bank represents substantially all of the Company's
activities, comparative discussions of consolidated versus non-consolidated
financial statements are unnecessary.

The Company is not aware of any current recommendations by regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between the Company and either the OCC or the Federal Reserve Board, nor has
either regulatory agency made any recommendations concerning the operations of
the Company that could have a material effect on its liquidity, capital
resources or results of operations.

Overview

The Company commenced operations on March 8, 1993, while the Bank began
operations on August 29, 1994. The Company's sole subsidiary, the Bank, operates
by attracting deposits from the general public and using such deposit funds to
make commercial, consumer, and residential construction and permanent mortgage
real estate loans. Revenues are derived principally from interest on loans and
investments. Changes in the volume and mix of these assets and liabilities, as
well as changes in the yields earned and rates paid, determine changes in net
interest income.

The Company's assets grew by 12% in 2002 to end the year with total assets of
approximately $58.6 million. The size of the Company remained relatively
constant in 2001 and 2000 as assets decreased 1% and increased 2% in those years
respectively. Total deposits increased to $50.6 million at December 31, 2002 or
13% for the year. Total deposits were $44.6 million at December 31, 2001
compared to $46.2 million at December 31, 2000. The Company's net loans
increased $2.1 million in 2002 to $35.1 million, and decreased $85,000 in 2001
to $33.0 million from $33.1 million in 2000.

Merger Activities

The stockholders of the Company approved a plan to merge into MountainBank
Financial Corporation (MFC) on March 7, 2003, the details of which are contained
in a proxy statement/prospectus dated January 30, 2003. MountainBank Financial
Corporation will be the surviving corporation from the merger. Holders of CNB
will receive a minimum of .5551 and maximum of .7508 shares of MFC common stock
or $13.50 cash, provided that at least 50% but not more than 55% of the
aggregate consideration must be in MFC common stock.

                                       24

<PAGE>

Management's Discussion and Analysis

Net Interest Income

Net interest income, the principal source of income for the Company and the
Bank, is the amount of income generated by earning assets (primarily loans and
investment securities) less the interest expense incurred on interest-bearing
liabilities (primarily deposits used to fund earning assets). Changes in the
volume and mix of interest-earning assets and interest-bearing liabilities, as
well as their respective yields and rates, have a significant impact on the
level of net interest income. The preceding table presents the average balances
of total interest-earning assets and total interest-bearing liabilities for the
periods indicated, showing the average distribution of assets, liabilities and
stockholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used for the purposes of
this table and other statistical disclosures were calculated by using the daily
average balances.

During 2002, interest income decreased $518,000 to $3.2 million from $3.8
million in 2001. 2001 interest income decreased $81,000, compared to 2000.
Interest income for 2000 was $3.8 million. The decreases in 2002 and 2001 were
due to the declining interest rate environment that has prevailed over that
period. The increase in interest income during 2000 was due to increases in
yields on average interest-earning assets while the amount of these assets
remained relatively constant. Average earning assets were $50.8 million during
2002, $49.7 million during 2001 and $46.5 million during 2000. Yields on
interest-earning assets during 2002, 2001 and 2000 trended downward as a result
of the rapidly declining rate environment. Those yields were 6.24%, 7.42%, and
8.11%, respectively.

Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
loans yielded 7.97%, 8.52% and 8.71% in 2002, 2001 and 2000, respectively,
reflecting the change in the overall interest rate environment.

Interest expense was $1.1 million in 2002, a significant decrease of 32.45% from
2001. Interest expense was $1.6 million in 2001, a decrease of 12.6% from 2000.
The reductions in 2002 and 2001 were due to the rapidly declining interest rate
environment. The slight increase in 2000 was due primarily to an increase in
average interest-bearing liabilities. Average interest-bearing liabilities were
$44.9, $43.0 and $42.0 million during 2002, 2001 and 2000, respectively. The
average rate paid on these liabilities decreased to 2.46% in 2002. This
represents a decrease of 135 basis points from 2001. During 2001 the average
rate paid on interest-bearing liabilities was 3.81%, a decrease of 65 basis
points from 4.46% paid in 2000. These changes in cost of funds mirror the rate
environment for the past three years.

Net interest income was relatively unchanged in 2002. Net interest income was
$2.1, $2.1 and $1.9 million during 2002, 2001, and 2000 respectively. The
stability of net interest income over these periods is also reflected in the
company's net interest margins which were 4.07% in 2002, 4.13% in 2001 and 4.08%
in 2000.

                                       25

<PAGE>

Management's Discussion and Analysis

             Net Interest Income and Average Balances (thousands)(1)

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                     ---------------------------------------------------------------------------------------
                                                2002                           2001                         2000
                                     ---------------------------   ---------------------------  ----------------------------
                                               Interest                    Interest                      Interest
                                     Average   Income/   Yield/   Average   Income/   Yield/   Average    Income/   Yield/
                                     Balance   Expense    Cost    Balance   Expense    Cost    Balance    Expense    Cost

<S>                                 <C>        <C>       <C>      <C>      <C>       <C>      <C>        <C>        <C>
Interest-earning assets:

  Investment securities              $ 15,873  $    517    3.26%  $13,898  $    770     5.54% $  14,267  $     973    6.82%
  Federal funds sold                    2,038        32     1.57    2,766       103     3.72        517         35    6.77
  Loans, net                           32,890     2,622     7.97   33,014     2,816     8.52     31,719      2,762    8.71
                                    ---------  --------  -------  -------  --------  -------  ---------  ---------  ------
  Total interest-earning assets        50,801    3,171             49,678     3,689              46,503      3,770
                                    ---------                     -------  --------           ---------  ---------
Yield on average interest-earning
     assets                                                 6.24%                       7.42%                         8.11%
                                                         =======                     =======                        ======

Noninterest-earning assets:
  Cash and due from banks               4,050                       2,895                         3,011
  Premises and equipment                1,819                       1,873                         1,961
  Interest receivable and other           259                         341                           360
                                    ---------                     -------                     ---------
   Total noninterest-earning
     assets                             6,128                       5,109                         5,332
                                    ---------                     -------                     ---------
   Total assets                     $  56,929                     $54,787                     $  51,835
                                    =========                     =======                     =========

Interest-bearing liabilities:
  Demand deposits                    $ 15,594       123     0.79%  $13,692      337     2.46% $  14,417        538    3.73%
  Savings deposits                      9,108       107     1.17     8,936      232     2.59      8,584        294    3.42
  Time deposits                        20,119       867     4.31    20,032    1,058     5.28     18,664      1,022    5.48
  Federal funds purchased                  18         2     1.11        24        1     4.16        162         11    6.79
  Other borrowed funds                    110         6     5.45       276        9     3.26        123          7    5.69
                                    ---------  --------  -------   -------  -------- -------  ---------  ---------  ------
   Total interest-bearing
     liabilities                       44,949     1,105            42,960     1,637              41,950      1,872
                                    ---------  --------           -------  --------           ---------  ---------
   Cost of average
    interest-bearing liabilities                            2.46%                       3.81%                         4.46%
                                                         =======                     =======                        ======

Noninterest-bearing liabilities:
  Demand deposits                       4,429                       4,729                         3,730
  Interest payable and other              110                         169                           143
                                    ---------                     -------                     ---------
   Total noninterest-bearing
    liabilities                         4,539                       4,898                         3,873
                                    ---------                     -------                     ---------
   Total liabilities                   49,488                      47,858                        45,823

Stockholders' equity                    7,441                       6,929                         6,012
                                    ---------                     -------                     ---------
  Total liabilities and
   stockholders' equity             $  56,929                     $54,787                     $  51,835
                                    =========                     =======                     =========
   Net interest income                         $  2,066                    $  2,052                      $   1,898
                                               ========                    ========                      =========
   Net yield on
    interest-earning assets                                 4.07%                       4.13%                         4.08%
                                                         =======                     =======                        ======
</TABLE>

-----------------
(1) Income and yields are computed on a tax equivalent basis.

                                       26

<PAGE>

Management's Discussion and Analysis

The effects of changes in volumes and rates on net interest income for various
periods are shown in the following table.

                    Rate/Volume Variance Analysis (thousands)

<TABLE>
<CAPTION>
                                2002 Compared to 2001                 2001 Compared 2000                 2000 Compared to 1999
                                ---------------------                 ------------------                 ---------------------
                          Interest                            Interest                            Interest
                          Income/   Variance Attributable To  Income/   Variance Attributable To  Income/   Variance Attributable To
                          Expense   ------------------------  Expense   ------------------------  Expense   ------------------------
                          Variance    Rate        Volume      Variance     Rate       Volume      Variance      Rate       Volume
                          --------    ----        ------      --------     ----       ------      --------      ----       ------
<S>                       <C>       <C>         <C>           <C>       <C>          <C>          <C>       <C>          <C>
Interest-earning assets:
  Taxable investment
    securities            $ (253)   $   (350)   $      97     $  (203)  $   (178)    $    (25)    $   142   $      96          46
  Federal funds sold         (71)        (48)         (23)         68        (84)         152         (22)          8         (30)
  Loans                     (194)       (182)         (12)         54        (59)         113           2          22         (20)
                          --------  --------    ---------     -------   --------     --------     -------   ---------    --------
    Total                   (518)       (580)          62         (81)      (321)         240         122         126          (4)
                          --------  --------    ---------     -------   --------     --------     -------   ---------    --------

Interest-bearing
 liabilities:
   Demand deposits          (214)       (256)          42        (201)      (174)         (27)         73         (69)        142
   Savings deposits         (125)       (129)           4         (62)       (74)          12          55          17          38
   Time deposits            (191)       (195)           4          36        (39)          75         (87)         54        (141)
   Short-term borrowings      (2)          4           (6)         (8)        (9)           1           -          (1)          1
                          --------  --------    ---------     -------   ---------    --------     -------   ---------    --------
     Total                  (532)       (576)          44        (235)      (296)          61          41           1          40
                          --------  --------    ---------     -------   ---------    --------     -------   ---------    --------
     Net interest income  $   14    $     (4)   $      18     $   154   $    (25)    $    179     $    81   $     125         (44)
                          ========  ========    =========     =======    =========   ========     =======   =========    ========
</TABLE>

     Provision for Loan Losses

     The provision for loan losses is charged to income in an amount necessary
     to maintain an allowance for loan losses adequate to provide for expected
     losses in the Bank's loan portfolio. The level of the allowance for loan
     losses is determined by management's assessment of a variety of factors,
     including the collectibility of past due loans, volume of new loans,
     composition of the loan portfolio, and general economic outlook. Loan
     losses and recoveries are charged or credited directly to the allowance for
     loan losses.

     The provision for loan losses was $142,000 in 2002. This is a 110% increase
     from 2001. The provision for loan losses was $67,600 in 2001, down 52% from
     2000. The increase in the loan loss provision in 2002 was made because of
     increased charge-offs in the loan portfolio. The Bank's allowance for loan
     losses as a percentage of gross loans was 1.1% at the end of 2002 and 1.2%
     and 1.3% at the end of 2001 and 2000, respectively. Additional information
     regarding loan loss provisions is discussed in "Nonperforming and Problem
     Assets."

     Noninterest Income

     Noninterest income consists of revenues generated from a variety of
     financial services and activities. The majority of noninterest income is a
     result of service charges on deposit accounts including charges for
     insufficient funds, checks and fees charged for non-deposit services.
     Noninterest income also includes fees charged for various bank services
     such as safe deposit box rental fees and letter of credit fees and
     secondary market mortgage loan origination fees. A portion of noninterest
     income is gains on the sale of investment securities. Although the Bank
     generally follows a buy and hold philosophy with respect to investment
     securities, occasionally the need to sell some investment securities is
     created by changes in market rate conditions or by efforts to restructure
     the portfolio to improve the Bank's liquidity or interest rate risk
     positions.

                                       27

<PAGE>

Management's Discussion and Analysis

During 2002, noninterest income remained relatively unchanged as decreases in
certain fees were offset by gains on the sale of investment securities. During
2001, noninterest income increased 30.1% to $406,000. The majority of the
increase in noninterest income in 2001 was due to increased service charges on
deposit accounts due to an increased fee structure and increased ATM and check
cashing fees. Also, in 1998 the bank began originating home mortgages for
placement in the secondary market and received $28,000, $31,000 and $12,000 in
fee income in 2002, 2001 and 2000, respectively.

The Bank's fee structure is reviewed annually to determine if adjustments to
fees are warranted. The last fee adjustment was made in the fourth quarter of
1999. Management believes that the current fee structure is competitive in the
Bank's market. The sources of noninterest income for the past three years are
summarized in the table below.

                    Sources of Noninterest Income (thousands)

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                             -------------------------------
                                               2002       2001        2000
                                             --------   -------    ---------
<S>                                          <C>        <C>        <C>
Service charges in deposit accounts          $    215   $   215    $     182
Gain on sale of investment securities              30         -            -
Mortgage loan origination fees                     28        31           12
Administration fees                                33        34           30
Rent                                               25        20           20
Other                                              63       106           88
                                             --------   -------    ---------
   Total noninterest income                  $    394   $   406    $     312
                                             ========   =======    =========
</TABLE>

Noninterest Expense

Noninterest expense decreased 0.8% to $1.8 million during 2002. Noninterest
expense increased in 2001 to $1.8 million, an increase of 11.2% from 2000.
Noninterest expense was $1.7 million in 2000. The overhead ratio of noninterest
expense to adjusted total revenues (net interest income plus noninterest income
excluding securities transactions) was 74% in 2002, 74% in 2001 and 75% in 2000.

Total personnel expenses, the largest component of noninterest expense, was
unchanged from 2001 to 2002. Those expenses increased $26,000, or 3.6% in 2001
to $744,000 compared to $718,000 during 2000. These fluctuations in expense are
due to an effort by Company management to enhance compensation for key employees
during 1999 and a decrease in the number of employees as a result on increased
efficiencies during 2000 and 2001.

Combined occupancy and furniture and equipment expense decreased to $207,000
during 2002 after remaining relatively constant at $247,000 during 2001, and
$248,000 during 2000. The decrease in 2002 was due primarily to decreases in
maintenance and insurance expenses.

Professional services expense, fees paid to attorneys, independent auditors,
consultants and bank examiners decreased to $159,000 during 2002 from $169,000
and $86,000 during 2001 and 2000. The primary reason for the increase during
2001 is legal fees related to defending a lawsuit which was settled in 2002.
Additional costs were incurred in 2002 related to merger activities.

Data processing services consisting primarily of account processing, credit card
processing fees, and product licensing fees increased $33,000 to $293,000 in
2002. Those expenses increased $32,000 during 2001 to $260,000 compared to
$228,000 in 2000. The increases in 2002 and 2001 are due mainly to a new data
processing contract. These fees relate directly to the number of accounts
serviced and transactions processed. Management expects these expenses to
continue to increase as the Bank grows.

                                       28

<PAGE>

Management's Discussion and Analysis

During 2000, management made a focused effort to reduce noninterest expense and
was successful. Noninterest expense has historically increased and will most
likely continue to increase as the Bank grows. However, as the Bank becomes more
mature, growth in net interest income will outpace growth in noninterest
expense. Accordingly, management believes the Bank's overhead ratio will
continue to improve. The primary elements of noninterest expense for the past
three years are as summarized in the following table.

                   Sources of Noninterest Expense (thousands)

                                                 Years Ended December 31,
                                             -------------------------------
                                               2002        2001       2000
                                             ---------   --------   --------
Salaries and wages                           $     626   $    639   $    619
Employee benefits                                  118        105         99
                                             ---------   --------   --------
   Total personnel expense                         744        744        718

Occupancy expense                                  109        144        146
Furniture and equipment                             98        103        102
Data processing                                    293        260        228
Printing and supplies                              106        108        115
Professional services                              159        169         86
Postage                                             62         52         41
Telephone                                           25         24         24
Dues and subscriptions                               8          7          8
Directors fees                                      64         41          -
Education and seminars                              15         13          6
Advertising and public relations                    25         19         21
Insurance expense                                   22         26         13
Regulatory assessments                              38         41         53
Stock transfer agent fees                            -          -         13
Amortization of organizational cost                  -          -          -
Year 2000 testing                                    -          -          -
Other operating expense                             40         71         94
                                             ---------   --------   --------
   Total noninterest expenses                $   1,808   $  1,822   $  1,668
                                             =========   ========   ========

Income Taxes

Income tax expense is based on amounts reported in the statements of income
(after adjustments for non-taxable income and non-deductible expenses) and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The deferred tax assets and liabilities represent the future Federal income tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.

The Company's deferred income tax benefits and liabilities are the result of
temporary differences in loss carryforwards, provisions for loan losses,
valuation reserves, depreciation, deferred income, and investment security
discount accretion.

Income tax expense, substantially all federal, for 2002 was $108,970 as the
Company exhausted prior net operating loss carryforwards and began to incur
income tax expense. Net deferred tax assets totaled $3,350 at December 31, 2002.
Net deferred income tax assets of $66,000 and $262,000 at December 31, 2001 and
2000, respectively, were offset by a valuation allowance. Accordingly, no income
tax expense or benefit was reported during those years.

                                       29

<PAGE>

Management's Discussion and Analysis

Earning Assets

Average earning assets increased 2.3% to $50.8 million during 2002. Average
earning assets were $49.7 million during 2001 and $46.5 million during 2000. The
percent of average earning assets to total assets has not changed significantly
during the past three years. The ratio was 89.2%, 90.7% and 89.7% during 2002,
2001, and 2000, respectively. The mix of average earning assets did not change
materially during the past three years. A summary of average assets is shown in
the following table.

                          Average Asset Mix (thousands)

<TABLE>
<CAPTION>
                                                        Years Ended December 31,
                                    ---------------------------------------------------------------
                                            2002                  2001                  2000
                                    --------------------  --------------------  -------------------
                                     Average              Average               Average
                                     Balance   Percent    Balance    Percent    Balance    Percent
                                    --------   -------    ---------  -------    ---------  --------
<S>                                 <C>        <C>        <C>        <C>        <C>        <C>
Earnings assets:

   Loans, net                       $ 32,890     57.77%   $  33,014    60.25%   $  31,719     61.19%
   Investment securities              15,873     27.88       13,898    25.36       14,267     27.52
   Federal funds sold and other        2,038      3.58        2,766     5.04          517      1.00
                                    --------   -------    ---------  -------    ---------  --------
   Total earning assets               50,801     89.23       49,678    90.65       46,503     89.71
                                    --------   -------    ---------  -------    ---------  --------

Nonearning assets:

   Cash and due from banks             4,050      7.11%       2,895     5.28        3,011      5.81
   Premises and equipment              1,819      3.20        1,873     3.42        1,961      3.78
   Other assets                          259      0.46          341      .65          360       .70
                                    --------   -------    ---------  -------    ---------  --------
   Total nonearning assets             6,128     10.77        5,109     9.35        5,332     10.29
                                    --------   -------    ---------  -------    ---------  --------
   Total assets                     $ 56,929    100.00%   $  54,787   100.00%   $  51,835    100.00%
                                    ========   =======    =========  =======    =========  ========
</TABLE>

Loans

The Bank makes both consumer and commercial loans to borrowers in all
neighborhoods within its market area, including the low- and moderate-income
areas. The Bank's market area is generally defined to be all or portions of
Pulaski County, Virginia and the City of Radford, Virginia. The Bank emphasizes
consumer based installment loans, commercial loans to small and medium sized
businesses and real estate loans.

Net loans consist of total loans less unearned income and the allowance for loan
losses. Average net loans decreased 0.4% to $32.9 million in 2002. Average net
loans increased 4.0% to $33.0 million during 2001 and decreased less than 1%
during 2000 to $31.7. The increase in average net loans outstanding during the
past years is due to the efforts of the Bank's management, increases in loan
demand and to the Bank's growing reputation in the community. Loan growth has
slowed during 2002 as a result of decreased loan demand, the slowing economy and
management's focus on higher profitability instead of growth.

A significant portion of the loan portfolio, $13.9 million or 39.3%, is made up
of loans secured by various types of real estate. Total loans secured by one to
four family residential properties represented 38.1% and 41.9% of total loans at
the end of 2002 and 2001, respectively. Loans for commercial and business
purposes increased 11.5% during 2002 to $16.3 million and increased 8.9% to
$14.6 million at the end of 2001 compared to 2000 year end numbers. The amounts
of loans outstanding by type at December 31, 2002 and 2001 are shown in the
following table.

                                       30

<PAGE>

Management's Discussion and Analysis

                       Loan Portfolio Summary (thousands)

<TABLE>
<CAPTION>
                                            December 31, 2002     December 31, 2001
                                           --------------------  ------------------
                                             Amount        %        Amount      %
                                           ----------  --------  ---------- -------
<S>                                        <C>         <C>       <C>        <C>
Construction and development               $      201      0.57% $     209     0.62%
Farmland                                           51      0.14         61     0.18
1-4 family residential                         13,548     38.14     14,042    41.94
Multi-family residential                          108      0.30          -        -
Nonfarm, nonresidential                            40      0.11         62     0.19
                                           ----------  --------  ---------  -------
Total real estate                              13,948     39.26     14,374    42.93

Agricultural                                        1      0.00         20     0.06
Commercial and industrial                      16,274     45.81     14,571    43.52
Credit cards and other revolving credit           618      1.74        475     1.42
Other consumer                                  4,230     11.91      3,603    10.76
Other                                             455      1.28        442     1.31
                                           ----------  --------  ---------  -------
         Total                             $   35,526    100.00% $  33,485   100.00%
                                           ==========  ========  =========  =======
</TABLE>

The loan maturity distribution as of December 31, 2002 is set forth in the
following table.

                     Maturity Schedule of Loans (thousands)

<TABLE>
<CAPTION>
                                                          December 31, 2002
                               --------------------------------------------------------------------
                                Commercial                                             Total
                               Financial and      Real                      -----------------------
                                Agriculture      Estate         Others         Amount          %
                               -------------   -----------   ------------   ------------  --------
<S>                            <C>             <C>           <C>            <C>            <C>
Total loans:
   One year or less            $      5,372    $     3,369   $      1,225   $      9,966     28.05%
   Over one to three years            2,008          3,234          1,302          6,544     18.42
   Over three to five years           6,822          4,987          2,623         14,432     40.62
   Over five years                    2,073          2,358            153          4,584     12.91
                               ------------    -----------   ------------   ------------  --------
         Total loans           $     16,275    $    13,948   $      5,303   $     35,526    100.00%
                               ============    ===========   ============   ============  ========
</TABLE>

Investment Securities

The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases, to fund loans, to meet the Bank's interest rate sensitivity
goals, and to generate income.

Securities are classified as securities held to maturity when management has the
intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Securities held to maturity are carried at cost adjusted
for amortization or premiums and accretion of discounts. Securities to be held
for indefinite periods of time are classified as securities available for sale.
Unrealized gains and losses on securities available for sale are recognized as
direct increases or decreases in shareholders' equity. Securities available for
sale include securities that may be sold in response to changes in market
interest rates, changes in the security's prepayment risk, increases in loan
demand, general liquidity needs and other similar factors. The entire securities
portfolio is classified as available for sale.

Management of the investment portfolio has always been conservative with
virtually all investments taking the form of purchases of U.S. Treasury, U.S.
Government agency and State and local bond issues. Management views the
investment portfolio as a source of income, and purchases securities with that
in mind. However, adjustments are necessary in the portfolio to provide an
adequate source of liquidity which can be used to meet funding requirements for
loan demand and deposit fluctuations and to control interest rate risk.
Therefore, management may sell certain securities prior to their maturity.

                                       31

<PAGE>

Management's Discussion and Analysis

The table bellow presents the investment portfolio at December 31, 2002 by major
types of investments and maturity ranges. Maturities may differ from scheduled
maturities in mortgage-backed securities because the mortgages underlying the
securities may be called or repaid prior to the scheduled maturity date.
Maturities on all other securities are based on the contractual maturity.

                        Investment Securities (thousands)

<TABLE>
<CAPTION>
                                                              December 31, 2002
                           --------------------------------------------------------------------------------------
                                                 Amortized Cost Due
                           -------------------------------------------------------------
                              Due      After One    After Five                Restricted
                            Within      Through       Through     After Ten     Equity                   Market
                           One Year   Five Years     Ten Years      Years     Securities      Total       Value
                           --------   ----------    ----------    ---------   ----------   -----------  ---------
<S>                        <C>        <C>           <C>           <C>         <C>          <C>          <C>

U. S. Government agencies  $      -   $        -    $        -    $       -   $        -   $         -  $       -
Mortgage-backed securities        -          381         2,513       10,595            -        13,489     13,570
Equity securities                 -            -             -            -          431           431        431
                           --------   ----------    ----------    ---------   ----------   -----------  ---------
         Total             $      -   $      381    $    2,513    $  10,595   $      431   $    13,920  $  14,001
                           ========   ==========    ==========    =========   ==========   ===========  =========

Weighted average yields:

U.S. Government agencies          -%           -%            -%           -%           -%
Mortgage-backed securities        -         4.69          1.99         3.27         3.07
                           --------   ----------    ----------    ---------   ----------
         Consolidated             -%        4.69%         1.99%        3.27%        3.07%
                           ========   ==========    ==========    =========   ==========
</TABLE>

The falling interest rate environment in 2002 caused the average yield on the
investment portfolio to decrease to 3.1% from 5.1% in 2001 and 6.8% 2000. At
December 31, 2002, the market value of the investment portfolio was $14.0
million, representing appreciation of $81,000 above amortized cost. This
compared to a market value of $11.5 million and an appreciation of $64,000 above
amortized cost a year earlier. This increase in market value is due primarily to
the falling rate environment during of 2002.

Federal Funds Sold

Federal funds represent the most liquid portion of the Bank's invested funds and
generally the lowest yielding portion of earning assets. Management has made an
effort to maintain Federal funds at the lowest level possible consistent with
prudent interest rate risk management strategies and liquidity needs. Average
Federal funds sold decreased $728,000 or 26.3% to $2.0 million in 2002, from
$2.8 million during 2001 and was $517,000 in 2000.

Deposits

The Bank relies on deposits generated in its market area to provide the majority
of funds needed to support lending activities and for investments in liquid
assets. More specifically, core deposits (total deposits less time deposits in
denominations of $100,000 or more) are the primary funding source.

The Bank's balance sheet growth is largely determined by the availability of
deposits in its markets, the cost of attracting the deposits, and the prospects
of profitably utilizing the available deposits by increasing the loan or
investment portfolios. Market conditions have resulted in depositors shopping
for better deposit rates more than in the past. An increased customer awareness
of interest rates adds to the importance of rate management. The Bank's
management must continuously monitor market pricing, competitor's rates, and
internal interest rate spreads to maintain the Bank's growth and profitability.
The Bank attempts to structure rates so as to promote deposit and asset growth
while at the same time increasing the overall profitability of the Bank.

                                       32

<PAGE>

Management's Discussion and Analysis

Average total deposits were $49.3 million, an increase of 3.9% during 2002.
Average total deposits were $47.4 million in 2001, which represented an increase
4.4% from $45.4 million in 2000. Average core deposits were $45.8 million in
2002 and $43.1 million in 2001, up from $41.7 million in 2000. The percentage of
the Bank's average deposits that are interest-bearing increased to 91.0% from
90.0% in 2001. Average demand deposits, which earn no interest, decreased
$300,000 to $4.4 million during 2002 from $4.7 million in 2001.

The average certificates of deposit issued in denominations of $100,000 or more
decreased to $3.5 million from $4.3 million in 2001 and $3.7 million in 2000.
Average certificates of deposit issued in denominations of $100,000 or more as a
percentage of total average deposits were 7.10%, 9.07% and 8.15% for the years
ended December 31, 2002, 2001, and 2000, respectively.

Large municipal deposits from local governments were $8.3 million, $9.2 million
and $12.3 million at December 31, 2002, 2001 and 2000, respectively. Management
believes that the Bank is paying market rates for these deposits. Management's
strategy has been to support loan and investment growth with core deposits and
not to aggressively solicit the more volatile, large denomination certificates
of deposit. Large denomination certificates of deposit and large municipal
deposits are particularly sensitive to changes in interest rates. Management
considers these deposits to be volatile and invests these funds in order to
minimize liquidity and interest rate risks.

Average deposits for the three years ended December 31, 2002, 2001 and 2000 are
summarized in the following table.

                             Deposit Mix (thousands)

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                        -----------------------------------------------------------------------------
                                                  2002                      2001                       2000
                                        ------------------------   -----------------------   ------------------------

                                          Average                    Average                   Average
                                          Balance       Percent      Balance      Percent      Balance      Percent
                                        -----------  ---------    -----------   --------     -----------  ---------
<S>                                     <C>          <C>          <C>           <C>          <C>          <C>
Interest-bearing deposits:
   Now accounts                         $    15,594      31.66%   $    13,692      28.89%    $    14,417      31.76%
   Money market                               2,944       5.98          3,893       8.21           4,561      10.05
   Savings                                    6,164      12.52          5,043      10.64           4,023       8.86
   Other time deposits                       16,624      33.75         15,740      33.21          14,962      32.96
   Large denomination time deposits           3,495       7.10          4,292       9.07           3,702       8.15
                                        -----------  ---------    -----------   --------     -----------  ---------
       Total interest bearing deposits       44,821      91.01         42,660      90.02          41,665      91.78

Noninterest bearing deposits:
   Demand deposits                            4,429        8.99         4,729       9.98           3,730       8.22
                                        -----------   ---------   -----------   --------     -----------  ---------
       Total deposits                   $    49,250      100.00%  $    47,389    100.00%     $    45,395     100.00%
                                        ===========   =========   ============  ========     ===========  =========
</TABLE>

The following table provides maturity information relating to time deposits of
$100,000 or more at December 31, 2002 and 2001.

                   Large Time Deposit Maturities, (thousands)

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

Remaining maturity of three months or less            $       885    $    1,494
Remaining maturity over three through twelve months           955         2,421
Remaining maturity over twelve months                       3,234         1,531
                                                      -----------    ----------
     Total time deposits of $100,000 or more          $     5,074    $    5,446
                                                      ===========    ==========


                                       33

<PAGE>

Management's Discussion and Analysis

Other Borrowed Funds

Other borrowed funds consist of a mortgage loan of $106,000 and $114,000 at
December 31, 2002 and 2001, respectively. The average balance for 2002 and 2001
was $110,000 and $276,000, respectively. The large increase in average balance
during 2001 was a $2.0 million advance that was outstanding for 30 days during
the year. Interest expense was $6,000 in 2002, $9,000 in 2001 and $7,000 in
2000.

There was no short-term debt at December 31, 2002 or 2001, however, the Company
had short-term debt at December 31, 2000 consisting of $18,000 in Federal Funds
purchased. The average balance of short-term debt was $18,000, $24,000 and
$162,000 in 2002, 2001 and 2000, respectively. The related interest expense on
these borrowings was $2,000, $1,000, and $11,000 in 2002, 2001 and 2000
respectively, resulting in costs of funds of 1.1%, 4.2% and 6.8%, for said
periods.

Capital Adequacy

Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier I) capital (common stockholders' equity and
qualifying preferred stockholders' equity, less intangible assets) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets and qualifying
subordinated debt) to risk-weighted assets of 8.0%. See "Supervision and
Regulation."

In addition, a minimum leverage ratio of average Tier I capital to average total
assets for the previous quarter, ranging from 3% to 5%, is required by federal
bank regulators subject to the regulator's evaluation of the Bank's overall
safety and soundness. As of December 31, 2002, the Bank had a ratio of year-end
Tier I capital to average total assets for the fourth quarter of 9.3%. The Bank
exceeds all required regulatory capital ratios and is considered well
capitalized.

Shareholders' equity was $7.7 million at year-end 2002, which was an increase of
$392,000 over 2001. This increase was due to net income of $402,000 and a
decrease in the market value of investment securities of $10,000. Equity was
$6.6 million at December 31, 2000. Average shareholders' equity as a percentage
of average total assets was 13.1% in 2002, 12.6% in 2001 and 11.6% in 2000.

At December 31, 2002 the Bank had a ratio of Tier I capital to risk-weighted
assets of 15.9% and a ratio of total regulatory capital to risk-weighted assets
of 17.0%, well above the regulatory minimum of 4.0% and 8.0%, respectively.

The Bank's analysis of capital for the quarters December 31, 2002 and 2001 is
presented in the following table.

                         Risk-Based Capital, (thousands)

<TABLE>
<CAPTION>
                                                                        2002               2001
                                                                 -----------------  ----------------
<S>                                                              <C>                <C>
Tier I capital                                                   $           5,321  $          4,941
Qualifying allowance for loan losses/1/                                        378               394
                                                                 -----------------  ----------------
         Total regulatory capital                                $           5,699  $          5,335
                                                                 =================  ================

         Total risk-weighted assets                              $          33,449  $         31,480
                                                                 =================  ================
</TABLE>

<TABLE>
<S>                                                                         <C>               <C>
Tier I as a percent of risk-weighted assets                                 15.91%            15.70%
Total Tier II capital as a percent of risk-weighted assets                  17.04%            16.95%
Leverage ratio/2/                                                            9.28%             9.25%
</TABLE>
______________________________
     /1/Limited to 1.25% of risk-weighted assets.
     /2/Period end Tier I capital to adjusted average assets per quarter.


                                       34

<PAGE>

Management's Discussion and Analysis

Common Stock Outstanding

There were 926,399 common shares outstanding at December 31, 2002, 2001 and
2000. Approximately 1,000 shareholders of record hold these shares.

Nonperforming and Problem Assets

Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and attempts to manage
them effectively. The Bank also attempts to reduce repayment risks by adhering
to internal credit policies and procedures. These policies and procedures
include officer and customer limits, periodic loan documentation review and
follow up on exceptions to credit policies.

The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Some of the factors which management considers in determining
the appropriate level of the allowance for credit losses are: past loss
experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, regulatory policies, and in particular, how such
conditions relate to the market areas that the Bank serves. Bank regulators also
periodically review the Bank's loans and other assets to assess their quality.
Loans deemed uncollectible are charged to the allowance. Provisions for loan
losses and recoveries on loans previously charged off are added to the
allowance.

The accrual of interest on loans is discontinued on a loan when, in the opinion
of management, there is an indication that the borrower may be unable to meet
payments as they become due. Upon such discontinuance, all unpaid accrued
interest is reversed.

The provision for loan losses, net charge-offs and the activity in the allowance
for loan losses is detailed in the following table.

                      Allowance for Loan Losses (thousands)
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                          -----------------------------------------
                                                                               2002          2001          2000
                                                                          ------------   -----------   ------------
<S>                                                                       <C>            <C>           <C>
Allowance for loan losses, beginning                                      $        410   $       430   $        322
Provision for loan losses, added                                                   142            68            141
                                                                          ------------   -----------   ------------
                                                                                   552           498            463

Loans charged off                                                                 (174)          (88)           (34)
Recoveries of loans previously charged off                                           2             -              1
                                                                          ------------   -----------   ------------
         Net charge-offs                                                          (172)          (88)           (33)
                                                                          ------------   -----------   ------------
         Allowance for loan losses, ending                                $        380   $       410   $        430
                                                                          ============   ===========   ============
</TABLE>

The loan portfolio also included loans to various borrowers (watch loans) at
period-end for which management had concerns about the ability of the borrowers
to continue to comply with present loan repayment terms, and which could result
in some or all of these loans being uncollectible. Management monitors these
loans carefully and has provided for these loans in the allowance for loan
losses.

Management realizes that general economic trends greatly affect loan losses and
no assurances can be made about future losses. Management does, however,
consider the allowance for loan losses to be adequate at December 31, 2002 and
2001. The allocation of the reserve for loan losses is shown in the following
table.

                                       35

<PAGE>

Management's Discussion and Analysis

             Allocation of the Allowance for Loan Losses (thousands)
<TABLE>
<CAPTION>
                                                                          December 31,
                                            -----------------------------------------------------------------------
                                                     2002                     2001                    2000
                                            ----------------------   ---------------------   ----------------------
Balance at end of period applicable to:       Amount     Percent/1/  Amount      Percent/1/  Amount       Percent/1/
--------------------------------------        ------     -------     ------      -------     ------       -------
<S>                                         <C>             <C>      <C>            <C>      <C>           <C>
Commercial, financial and agricultural      $     179       45.81%   $     193      43.58%   $      182    $39.92%
Real estate, construction                           -        0.57            -       0.62             -       0.69
Real estate, mortgage                              81       38.69           87      42.31            91      45.50
Installment loans to individuals, other           120       14.93          130      13.49           157      13.89
                                            ---------   ---------    ---------   --------    ----------   --------
         Total                              $     380      100.00%   $     410     100.00%   $      430   $100.00%
                                            =========   =========    =========   ========    ==========   =======
</TABLE>

______________________________
     /1/Percent of loans in each category to total loans.

Nonperforming Assets at December 31, 2002, 2001 and 2000 are analyzed in the
table below.

                        Nonperforming Assets (thousands)
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                          -----------------------------------------
                                                                               2002          2001          2000
                                                                          ------------   -----------   ------------
<S>                                                                       <C>            <C>           <C>
Nonaccrual loans                                                          $         53   $       162   $        127
Restructured loans                                                                   -             -            113
Foreclosed and in-substance foreclosed properties                                    -             -              -
                                                                          ------------   -----------   ------------
                                                                          $         53   $       162   $        240
                                                                          ============   ===========   ============
</TABLE>

Nonperforming assets were .1% and .5% of gross loans outstanding at year-end
2002 and 2001, respectively. In addition to the nonperforming assets, there was
one loan of approximately $1,500 which was past due 90 days or more at December
31, 2002. Net loan charge-offs as a percentage of average loans were .5%, .3%,
and .1% in 2002, 2001 and 2000, respectively. The allowance for loan losses was
$380,000, $410,000 and $430,000 at December 31, 2002, 2001 and 2000,
respectively, or 1.1% of gross loans at December 31, 2002 and 1.2% and 1.3% for
December 31, 2001 and 2000, respectively.

Liquidity and Sensitivity

The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash in order to fund depositors'
withdrawals or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on assets that earn
interest against liabilities on which interest is paid, to protect the Bank from
wide fluctuations in its net interest income which could result from interest
rate changes.

Management must insure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to
increase large denomination certificates, Federal funds lines from correspondent
banks, borrowings from the Federal Reserve Bank, as well as the ability to
generate funds through the issuance of long-term debt and equity.

Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either reprice or mature. Management attempts to
maintain the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates.

                                       36

<PAGE>

Management's Discussion and Analysis

The table below shows the sensitivity of the Bank's balance sheet at the
repricing dates indicated, but is not necessarily indicative of the position on
other dates. The table below was prepared assuming mortgage backed securities
will reprice according to schedule. Historically, mortgage back securities have
repriced sooner than scheduled.

                            Interest Rate Sensitivity

<TABLE>
<CAPTION>
                                                               December 31, 2002
                                                             Maturities/Repricing
                                         --------------------------------------------------------------
                                             1-3         4-12         13-60      Over 60
                                           Months       Months       Months       Months        Total
                                           ------       ------       ------       ------        -----
<S>                                      <C>          <C>          <C>           <C>           <C>
Earning assets:
   Loans                                 $   7,546    $   7,096    $  20,294     $    590      $ 35,526
   Investments                                   -            -          381       13,539        13,920
   Federal funds sold and other              3,262            -            -            -         3,262
                                         ---------    ---------    ---------     --------      --------
     Total                                  10,808        7,096       20,675       14,129        52,708
                                         ---------    ---------    ---------     --------      --------

Interest-bearing liabilities:
   Other deposits                           24,440            -            -            -        24,440
   Certificates of deposit                   3,007        6,849       11,658            -        21,514
   Other borrowed funds                          2            5           35           64           106
                                         ---------    ---------    ---------     --------      --------
         Total                           $  27,449    $   6,854    $  11,693     $     64      $ 46,060
                                         =========    =========    =========     ========      ========

Interest rate gap                          (16,641)         242        8,982       14,065         6,648

Cumulative interest sensitivity gap        (16,641)     (16,399)      (7,417)       6,648

Ratio of sensitivity gap to total
   earnings assets                          (31.57)%       0.46%       17.04%       26.68%        12.61%
Cumulative ratio of sensitivity gap
   to total earnings assets                 (31.57)%     (31.11)%     (14.07)%      12.61%
</TABLE>

At December 31, 2002, the Company was cumulatively asset-sensitive (earning
assets subject to interest rate changes exceeded interest-bearing liabilities
subject to changes in interest rates). NOW, savings and money market accounts
repricing within three months were $24.4 million, which historically have not
been as interest-sensitive as other types of interest-bearing deposits. Removing
the impact of NOW and money market accounts, the Bank is asset sensitive in all
time frames displayed in the table.

Certificates of deposit in denominations of $100,000 or more and large municipal
deposits are especially susceptible to interest rate changes. These deposits are
matched with short-term investments. Matching sensitive positions alone does not
ensure that the Bank has no interest rate risk. The repricing characteristics of
assets are different from the repricing characteristics of funding sources.
Thus, net interest income can be impacted by changes in interest rates even if
the repricing opportunities of assets and liabilities are perfectly matched.

Effects of Inflation

Interest rates are affected by inflation, but the timing and magnitude of the
changes may not coincide with changes in the consumer price index. Management
actively monitors the Bank's interest rate sensitivity in order to minimize the
effects of inflationary trends on the Bank's operations. Other areas of
non-interest expenses may be more directly affected by inflation.

                                       37

<PAGE>

Management's Discussion and Analysis

Selected Financial Data

The following table summarizes selected financial data considered to be
significant indicators of the Company's operating results and financial
condition for the periods indicated.

                             Selected Financial Data

<TABLE>
<CAPTION>
                                                  2002              2001             2000                1999
                                            ----------------  ---------------   ---------------   ----------------
<S>                                         <C>               <C>               <C>               <C>
Summary of Operations
   Interest income                          $          3,172  $         3,689   $         3,770   $          3,648
   Interest expense                                    1,105            1,636             1,872              1,831
                                            ----------------  ---------------   ---------------   ----------------
         Net interest income                           2,067            2,053             1,898              1,817

   Provision for credit losses                           142               68               141                173
   Other income                                          394              406               312                265
   Other expense                                       1,808            1,822             1,668              1,880
   Income taxes                                          109                -                 -                  -
                                            ----------------  ---------------   ---------------   ----------------
         Net income                         $            402  $           569   $           401   $             29
                                            ================  ===============   ===============   ================

Per Share Data
   Basic earnings per share                 $             43  $            61   $            43   $             03
   Diluted earnings per share                             43               61                41                 03
   Book value                                           8.32             7.89              7.09               6.25

Average Balance Sheet Summary
   Loans, net                               $         32,890  $        33,014   $        31,719   $         31,950
   Securities                                         15,873           13,898            14,267             13,515
   Total assets                                       56,929           54,787            51,835             52,212
   Deposits                                           49,250           47,389            45,395             45,547
   Shareholders' equity                                7,441            6,929             6,012              6,016

Selected Ratios
   Average equity to average assets                    13.07%           12.65%            11.60%             11.52%
   Return on average assets                             0.71%            1.03%               08%                06%
   Return on average equity                             5.40%            8.21%             6.67%                48%
</TABLE>

                                       38