
                          INDEPENDENT AUDITOR'S REPORT



To the Stockholders and Directors
First National Corporation
Strasburg, Virginia

We have audited the accompanying  consolidated  balance sheets of First National
Corporation  and  Subsidiaries as of December 31, 1999 and 1998, and the related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for the years ended  December 31,  1999,  1998 and 1997.  These  financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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 First  National
Corporation  and  Subsidiaries as of December 31, 1999 and 1998, and the results
of their  operations and their cash flows for the years ended December 31, 1999,
1998 and 1997, in conformity with generally accepted accounting principles.



/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia
January 19, 2000
<PAGE>
                           FIRST NATIONAL CORPORATION

                           Consolidated Balance Sheets

                           December 31, 1999 and 1998
<TABLE>
<CAPTION>

           Assets                                            1999            1998
                                                        -------------    -------------

<S>                                                     <C>              <C>
Cash and due from banks                                 $   4,107,951    $   5,025,590
Federal funds sold                                               --          2,859,000
Securities(fair value:1999,$45,129,197;
  1998, $48,262,497)                                       45,129,197       48,262,527
Loans, net of allowanceforloanlosses,1999,$1,447,011;
  1998 $1,226,196                                         149,313,459      128,371,407
Bank premises and equipment                                 4,699,847        4,317,646
Interest receivable                                         1,165,602        1,150,951
Other real estate                                             343,181          343,181
Other assets                                                1,858,810          805,382
                                                        -------------    -------------

          Total assets                                  $ 206,618,047    $ 191,135,684
                                                        =============    =============

  Liabilities and Stockholders' Equity

Liabilities
  Deposits:
      Noninterest-bearing demand deposits               $  18,656,217    $  19,555,288
      Savings and interest-bearing demand deposits         79,937,401       74,990,558
      Time deposits                                        54,828,086       60,461,938
                                                        -------------    -------------
          Total deposits                                $ 153,421,704    $ 155,007,784
  Federal funds purchased                                   1,547,000             --
  Long-term debt                                           33,622,072       17,709,827
  Accrued expenses                                            850,917          817,065
  Commitments and contingent liabilities                         --               --
                                                        -------------    -------------
          Total liabilities                             $ 189,441,693    $ 173,534,676
                                                        -------------    -------------

Stockholders' Equity

  Common stock, par value $5 per share; authorized
    2,000,000 shares; issued and outstanding 793,991
    and 788,903 shares                                  $   3,969,955    $   3,944,515
  Surplus                                                   1,531,634        1,417,280
  Retained earnings                                        13,016,843       11,892,298
  Accumulated other comprehensive income (loss)            (1,342,078)         346,915
                                                        -------------    -------------
          Total stockholders'                           $  17,176,354    $  17,601,008
                                                        -------------    -------------

          Total liabilities and stockholders' equity    $ 206,618,047    $ 191,135,684
                                                        =============    =============
</TABLE>


 See Notes to Consolidated Financial Statements.


<PAGE>
                           FIRST NATIONAL CORPORATION

                       Consolidated Statements of Income
                  Years Ended December 31, 1999, 1998 and 1997




                                             1999         1998           1997
                                             ----         ----           ----
Interest Income:
  Interest and fees on loans             $12,018,276   $11,032,938   $ 9,585,166
  Interest on federal funds sold              60,874        85,556        72,338
  Interest on deposits in banks               31,007        28,121        27,828
  Interest on investment securities,
    taxable                                     --          31,061       142,761
  Interest and dividends on securities
    available for sale:
      Taxable                              2,611,409     2,385,641     1,669,348
      Nontaxable                             399,140       357,030       356,755
      Dividends                               96,152        73,050        78,267
                                         -----------   -----------   -----------

         Total interest income           $15,216,858   $13,993,397   $11,932,463
                                         -----------   -----------   -----------

Interest Expense:
  Interest on deposits                   $ 6,273,697   $ 6,202,042   $ 5,614,295
  Interest on federal funds purchased        104,447        29,462        19,612
  Interest on long-term debt               1,304,924       878,732       104,182
                                         -----------   -----------   -----------

         Total interest expense          $ 7,683,068   $ 7,110,236   $ 5,738,089
                                         -----------   -----------   -----------

         Net interest income             $ 7,533,790   $ 6,883,161   $ 6,194,374

Provision for loan losses                    495,000       330,000       220,000
                                         -----------   -----------   -----------

         Net interest income after
           provision for loan losses     $ 7,038,790   $ 6,553,161   $ 5,974,374
                                         -----------   -----------   -----------

 See Notes to Consolidated Financial Statements.

<PAGE>
                           FIRST NATIONAL CORPORATION

                        Consolidated Statements of Income
                                   (Continued)
                  Years Ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>


                                                       1999                1998              1997
                                                   ------------       ------------        -----------

<S>                                                <C>                <C>                  <C>
Noninterest Income:

  Service charges                                   $   674,458        $   620,479        $   568,276
  Fees for other customer services                      227,250            156,336            118,097
  Profits on securities available for sale                1,383            198,325             11,149
  Gain on sale of assets and other real estate                               9,216              2,268
  Other                                                 216,531            265,209            219,974
                                                    -----------        -----------        -----------

         Total noninterest income                   $ 1,119,622        $ 1,249,565        $   919,764
                                                    -----------        -----------        -----------

Noninterest Expenses:

  Salaries and employee benefits                    $ 2,694,501        $ 2,608,261        $ 2,365,875
  Occupancy expense                                     317,518            273,930            245,429
  Equipment expense                                     511,038            514,828            528,289
  Advertising                                           189,630            218,121            271,294
  Telephone                                             168,331            160,235            138,256
  Other                                               1,389,765          1,330,785          1,097,338
                                                    -----------        -----------        -----------

          Total noninterest expenses                $ 5,270,783        $ 5,106,160        $ 4,646,481
                                                    -----------        -----------        -----------

          Income before income taxes                $ 2,887,629        $ 2,696,566        $ 2,247,657

Provision for income taxes                              853,341            791,884            636,335
                                                    -----------        -----------        -----------

          Net income                                $ 2,034,288        $ 1,904,682        $ 1,611,322
                                                    ===========        ===========        ===========

Earnings Per Common Share,
  basic                                                  $ 2.57             $ 2.43             $ 2.08
                                                 ==============     ==============     ==============

Earnings Per Common Share,
  diluted                                                $ 2.57             $ 2.42             $ 2.08
                                                 ==============     ==============     ==============
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>

                           FIRST NATIONAL CORPORATION

                      Consolidated Statements of Cash Flows

                  Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>

                                                         1999          1998           1997
                                                   -------------- -------------- --------------
<S>                                                <C>               <C>               <C>
Cash Flows from Operating Activities
  Net income                                       $    2,034,288 $    1,904,682 $    1,611,322
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation                                        447,081        428,114        419,751
      Provision for loan losses                           495,000        330,000        220,000
      (Gain) on sale of assets and other
        real estate                                          --           (9,216)        (2,268)
      (Profits) on securities available for sale           (1,383)      (198,325)       (11,149)
      Accretion of security discounts                     (33,037)       (53,129)       (49,763)
      Amortization of security premiums                   171,476        188,545        107,910
      Deferred tax (benefit)                              (77,398)       (69,254)       (70,181)
      Changes in assets and liabilities:
        (Increase) in interest receivable                 (14,651)        (2,489)      (257,112)
        (Increase) decrease in other assets              (385,471)        12,500       (217,728)
        (Increase) in other real estate                      --          (39,225)      (115,431)
        Increase in accrued expenses                       33,852         67,733        159,315
                                                   -------------- -------------- --------------
              Net cash provided by
                operating activities               $    2,669,757 $    2,559,936 $    1,794,666
                                                   -------------- -------------- --------------

Cash Flows from Investing Activities
  Proceeds from sale of securities available
    for sale                                       $    8,983,346 $   11,529,144 $    9,105,427
  Proceeds from maturities, calls, and principal
    payments of investment securities                      19,487      1,640,428      1,364,430
  Proceeds from maturities, calls, and principal
    payments of securities available for sale           7,275,640     17,842,596      5,892,658
  Purchase of securities available for sale           (15,841,279)   (37,495,168)   (23,906,086)
  (Increase) decrease in federal funds sold             2,859,000     (2,859,000)          --
  Proceeds on sale of equipment                              --           23,725         13,030
  Purchases of bank premises and equipment               (549,754)      (834,415)    (1,044,089)
  Net (increase) in loans                             (21,437,052)   (16,322,706)   (14,292,570)
  Proceeds on sale of other real estate                      --          738,031           --
                                                   -------------- -------------- --------------
              Net cash (used in)
                investing activities               $  (18,690,612)$  (25,737,365)$  (22,867,200)
                                                   -------------- -------------- --------------
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>
                           FIRST NATIONAL CORPORATION

                      Consolidated Statements of Cash Flows
                                   (Continued)
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                           1999            1998            1997
                                                       -------------   -------------   -------------
<S>                                                    <C>             <C>             <C>
Cash Flows from Financing Activities
  Net increase in demand deposits,
    NOW accounts, and savings accounts                 $  4,047,772    $  9,287,430    $ 17,138,568
  Net increase (decrease) in certificates of deposit     (5,633,852)      5,958,502      (1,465,131)
  Proceeds from long-term debt                           24,000,000      11,300,000       5,000,000
  Principal payments on long-term debt                   (8,087,755)        (51,409)        (20,188)
  Net proceeds from issuance of common stock                139,794         287,037          70,090
  Cash dividends paid                                      (909,743)       (784,927)       (639,870)
  Increase (decrease) in federal funds purchased          1,547,000      (1,417,000)      1,102,000
                                                       ------------    ------------    ------------
              Net cash provided by
                financing activities                   $ 15,103,216    $ 24,579,633    $ 21,185,469
                                                       ------------    ------------    ------------

              Increase (decrease) in cash
                 and cash equivalents                   $  (917,639)   $  1,402,204    $    112,935

Cash and Cash Equivalents

  Beginning                                               5,025,590       3,623,386       3,510,451
                                                       ------------    ------------    ------------

  Ending                                               $  4,107,951    $  5,025,590    $  3,623,386
                                                        ===========    ============    ============

Supplemental Disclosures of Cash Flow
  Information

    Cash payments for:
      Interest                                         $  7,697,721    $  7,073,034    $  5,714,898
                                                        ===========    ============    ============

      Income taxes                                     $    910,863    $    906,157    $    652,286
                                                        ===========    ============    ============

Supplemental Disclosures of Noncash
  Investing and Financing Activities

    Other real estate acquired in
      settlement of loans                               $      --      $    115,000    $       --
                                                        ===========    ============    ============

    Unrealized gain (loss) on securities
      available for sale                                $(2,559,080)   $     18,093    $    459,908
                                                        ===========    ============    ============

</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>
                           FIRST NATIONAL CORPORATION

           Consolidated Statements of Changes in Stockholders' Equity
                  Years Ended December 31, 1999, 1998 and 1997



<TABLE>
<CAPTION>

                                                      Common                       Retained
                                                      Stock         Surplus        Earnings
                                                  -------------   ------------   ------------

<S>                                               <C>             <C>            <C>
Balance, December 31, 1996                        $   3,872,030   $  1,132,638   $  9,801,091
  Comprehensive income:
    Net income                                             --             --        1,611,322
    Other comprehensive income net of tax:
      Unrealized holding gains arising during the
        period (net of tax, $160,160)                      --             --             --
      Reclassification adjustment (net of tax, $3,791)     --             --             --
    Other comprehensive income (net of tax, $156,369)      --             --             --
    Total comprehensive income                             --             --             --
  Cash dividends - $0.82 per share                         --             --         (639,870)
  Issuance of 3,141 shares of common stock, dividend       --
    reinvestment plan                                    15,705         54,385           --
                                                  -------------   ------------   ------------
Balance, December 31, 1997                        $3,887,735.00   $  1,187,023   $ 10,772,543
  Comprehensive income:
    Net income                                             --             --        1,904,682
    Other comprehensive income net of tax:
      Unrealized holding gains arising during the
        period (net of tax, $73,583)                       --             --             --
      Reclassification adjustment (net of tax, $67,431)    --             --             --
    Other comprehensive income (net of tax, $6,152)        --             --             --
    Total comprehensive income                             --             --             --
  Cash dividends - $1.00 per share                         --             --         (784,927)
  Issuance of 8,542 shares of common stock, employee
    stock options                                        42,710        158,680           --
  Issuance of 2,814 shares of common stock, dividend
    reinvestment plan                                    14,070         71,577           --
                                                  -------------   ------------   ------------
Balance, December 31, 1998                        $   3,944,515   $  1,417,280   $ 11,892,298
  Comprehensive income:
    Net income                                             --             --        2,034,288
    Other comprehensive income net of tax:
      Unrealized holding losses arising during the
        period (net of tax, $870,557)                      --             --             --
      Reclassification adjustment (net of tax, $470)       --             --             --
    Other comprehensive income (net of tax, $870,087)      --             --             --
    Total comprehensive income                             --             --             --
  Cash dividends - $1.15 per share                         --             --         (909,743)
  Issuance of 1,553 shares of common stock, employee
    stock options                                         7,765         30,042
  Issuance of 3,535 shares of common stock, dividend
    reinvestment plan                                    17,675         84,312           --
                                                  -------------   ------------   ------------
Balance, December 31, 1999                        $   3,969,955   $  1,531,634   $ 13,016,843
                                                  =============   ============   ============

</TABLE>



<TABLE>
<CAPTION>
                                                         Accumulated
                                                            Other
                                                        Comprehensive  Comprehensive
                                                        Income (Loss)     Income          Total
                                                        -------------  -------------   ------------

<S>                                                     <C>            <C>           <C>
Balance, December 31, 1996                              $    31,435                  $ 14,837,194
  Comprehensive income:
    Net income                                                 --      $  1,611,322     1,611,322
    Other comprehensive income net of tax:
      Unrealized holding gains arising during the
        period (net of tax, $160,160)                          --           310,897          --
      Reclassification adjustment (net of tax, $3,791)         --            (7,358)         --
                                                                       ------------
    Other comprehensive income (net of tax, $156,369)       303,539    $    303,539       303,539
                                                                       ------------
    Total comprehensive income                                 --      $  1,914,861          --
                                                                       ============
  Cash dividends - $0.82 per share                             --                        (639,870)
  Issuance of 3,141 shares of common stock, dividend
    reinvestment plan                                          --                          70,090
                                                        -----------                  ------------
Balance, December 31, 1997                              $   334,974                  $ 16,182,275
  Comprehensive income:
    Net income                                                 --      $  1,904,682     1,904,682
    Other comprehensive income net of tax:
      Unrealized holding gains arising during the
        period (net of tax, $73,583)                           --           142,835          --
      Reclassification adjustment (net of tax, $67,431         --          (130,894)         --
                                                                       ------------
    Other comprehensive income (net of tax, $6,152)          11,941    $     11,941        11,941
                                                                       ------------
    Total comprehensive income                                 --      $  1,916,623          --
                                                                       ============
  Cash dividends - $1.00 per share                             --                        (784,927)
  Issuance of 8,542 shares of common stock, employee
    stock options                                              --                         201,390
  Issuance of 2,814 shares of common stock, dividend
    reinvestment plan                                          --                          85,647
                                                        -----------                  ------------
Balance, December 31, 1998                              $   346,915                  $ 17,601,008
  Comprehensive income:
    Net income                                                 --      $  2,034,288     2,034,288
    Other comprehensive income net of tax:
      Unrealized holding losses arising during the
        period (net of tax, $870,557)                          --        (1,688,080)         --
      Reclassification adjustment (net of tax, $470)           --              (913)         --
                                                                       ------------
    Other comprehensive income (net of tax, $870,087)    (1,688,993)   $ (1,688,993)   (1,688,993)
                                                                       ------------
    Total comprehensive income                                 --      $    345,295          --
                                                                       ============
  Cash dividends - $1.15 per share                             --                        (909,743)
  Issuance of 1,553 shares of common stock, employee
    stock options                                                                          37,807
  Issuance of 3,535 shares of common stock, dividend
    reinvestment plan                                          --                         101,987
                                                        -----------                  ------------
Balance, December 31, 1999                              $(1,342,078)                 $ 17,176,354
                                                        ===========                  ============
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                           FIRST NATIONAL CORPORATION

                   Notes to Consolidated Financial Statements

Note 1.  Nature of Banking Activities and Significant Accounting Policies

First National  Corporation and Subsidiaries (the Corporation) grant commercial,
financial,  agricultural,  residential  and  consumer  loans to customers in the
Shenandoah Valley Region of Virginia. The loan portfolio is well diversified and
generally is collateralized  by assets of the customers.  The loans are expected
to be repaid from cash flow or proceeds from the sale of selected  assets of the
borrowers.

The accounting and reporting  policies of the  Corporation  conform to generally
accepted  accounting  principles  and to accepted  practices  within the banking
industry.

Principles of Consolidation

The  consolidated  financial  statements of First National  Corporation  and its
wholly-owned  subsidiaries,  First  Bank (the  Bank) and  First  Bank  Financial
Corporation,   include  the  accounts  of  all  three  companies.  All  material
intercompany balances and transactions have been eliminated in consolidation.

Securities

Investments are accounted for as follows:

a.  Securities Held to Maturity

Securities  classified  as  held to  maturity  are  those  debt  securities  the
Corporation  has both the intent and ability to hold to maturity  regardless  of
changes in market  conditions,  liquidity  needs or changes in general  economic
conditions.  These  securities are carried at cost adjusted for  amortization of
premium and  accretion of discount,  computed by the interest  method over their
contractual lives.

b.  Securities Available for Sale

Securities classified as available for sale are those debt and equity securities
that the Corporation  intends to hold for an indefinite  period of time, but not
necessarily to maturity. Any decision to sell a security classified as available
for sale would be based on various factors,  including  significant movements in
interest  rates,  changes in the  maturity mix of the  Corporation's  assets and
liabilities,  liquidity  needs,  regulatory  capital  considerations,  and other
similar  factors.  Securities  available  for sale are  carried  at fair  value.
Unrealized   gains  or  losses  are   reported  as  increases  or  decreases  in
stockholders' equity, net of the related deferred tax effect.  Realized gains or
losses,  determined on the basis of the cost of specific  securities  sold,  are
included in earnings.


<PAGE>


                   Notes to Consolidated Financial Statements

Loans

The Corporation grants mortgage,  commercial and consumer loans to customers.  A
substantial  portion of the loan  portfolio  is  represented  by mortgage  loans
throughout  the  Shenandoah  Valley  Region  of  Virginia.  The  ability  of the
Corporation's debtors to honor their contracts is dependent upon the real estate
and general economic conditions in this area.

Loans that  management  has the intent and  ability to hold for the  foreseeable
future or until maturity or pay-off  generally are reported at their outstanding
unpaid  principal  balances  less the allowance for loan losses and any deferred
fees or costs on  originated  loans.  Interest  income is  accrued on the unpaid
principal balance.  Loan origination fees, net of certain origination costs, are
deferred and  recognized  as an  adjustment  of the related loan yield using the
interest method.

The accrual of interest on mortgage and commercial  loans is discontinued at the
time the loan is 90 days  delinquent  unless the credit is  well-secured  and in
process of collection.  Credit card loans and other personal loans are typically
charged off no later than 180 days past due.  In all cases,  loans are placed on
nonaccrual  or  charged-off  at an earlier  date if  collection  of principal or
interest is considered doubtful.

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

Allowance for Loan Losses

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

The allowance for loan losses is evaluated on a regular basis by management  and
is based 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.

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.


<PAGE>


                   Notes to Consolidated Financial Statements

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

Bank Premises and Equipment

Bank premises and equipment  are stated at cost less  accumulated  depreciation.
For financial reporting, depreciation is computed using the straight-line method
over the  estimated  useful lives of the assets,  which range from five to forty
years.  Gains and  losses on  routine  dispositions  are  reflected  in  current
operations.

Other Real Estate

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

Income Taxes

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

Earnings Per Share

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

Cash and Cash Equivalents

The  Corporation has defined cash  equivalents as those amounts  included in the
balance sheet caption "Cash and Due from Banks".


<PAGE>


                   Notes to Consolidated Financial Statements

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  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 in the near
term relate to the determination of the allowance for loan losses, the valuation
of foreclosed real estate and deferred tax assets.

Advertising Costs

The  Corporation  follows  the  policy  of  charging  the  production  costs  of
advertising to expense as incurred. Total advertising expense incurred for 1999,
1998 and 1997 was $189,630, $218,121 and $271,294, respectively.

Comprehensive Income

The Corporation  adopted SFAS No. 130, "Reporting  Comprehensive  Income," as of
January  1,  1998.  Accounting  principles  generally  require  that  recognized
revenue,  expenses, gains and losses be included in net income. Although certain
changes  in assets  and  liabilities,  such as  unrealized  gains and  losses on
available  for sale  securities,  are  reported as a separate  component  of the
equity  section of the balance  sheet,  such items,  along with net income,  are
components of comprehensive  income.  The adoption of SFAS No. 130 had no effect
on the Corporation's net income or stockholders' equity.

Emerging Accounting Standards

In June 1998, the Financial  Accounting  Standards  Board issued  Statement 133,
"Accounting  for  Derivative  Instruments  and Hedging  Activities,"  which,  as
amended, requires adoption in years beginning after June 15, 2000. The Statement
requires the  Corporation  to recognize all  derivatives on the balance sheet at
fair value.  Because the Corporation does not use  derivatives,  management does
not  anticipate  that the adoption of the new Statement  will have any effect on
the Corporation's earnings or financial position.


<PAGE>

                   Notes to Consolidated Financial Statements

Note 2.  Securities

Amortized costs and fair values of securities  available for sale as of December
31, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>

                                                    1999
                           ---------------------------------------------------------
                                            Gross           Gross
                             Amortized    Unrealized      Unrealized       Fair
                                Cost         Gains         (Losses)        Value
                            -----------   -----------     -----------    -----------
<S>                         <C>           <C>             <C>            <C>
U.S. Treasury securities
  and obligations of U.S.
  government corporations
  and agencies              $38,336,732   $     6,519     $(1,707,906)   $36,635,345

Obligations of states and
  political subdivisions      6,826,091        23,515        (404,172)     6,445,434

Corporate securities                816        48,592            --           49,408

Other                         1,999,010          --              --        1,999,010
                            -----------   -----------     -----------    -----------
                            $47,162,649   $    78,626     $(2,112,078)   $45,129,197
                            ===========   ===========     ===========    ===========

</TABLE>

<TABLE>
                                                     1998
                           ---------------------------------------------------------
                                            Gross           Gross
                             Amortized    Unrealized      Unrealized       Fair
                                Cost         Gains         (Losses)        Value
                            -----------   -----------     -----------    -----------
<S>                         <C>           <C>             <C>            <C>
U.S. Treasury securities
  and obligations of U.S.
  government corporations
  and agencies              $39,966,768   $   272,308     $   (98,954)   $40,140,122

Obligations of states and
  political subdivisions      6,558,718       326,143          (1,218)     6,883,643

Corporate securities              4,010        27,350            --           31,360

Other                         1,187,916          --              --        1,187,916
                            -----------   -----------    ------------    -----------
                            $47,717,412   $   625,801     $  (100,172)   $48,243,041
                            ===========   ===========    ============    ===========
</TABLE>

<PAGE>

                   Notes to Consolidated Financial Statements


The  amortized  cost  and  fair  value of  securities  available  for sale as of
December 31, 1999, by  contractual  maturity,  are shown below.  Maturities  may
differ from contractual  maturities in  mortgage-backed  securities  because the
mortgages  underlying  the  securities  may be  called  or  repaid  without  any
penalties, therefore these securities are not included in a maturity analysis.


                                              Amortized               Fair
                                                 Cost                Value
                                        -------------------  -------------------

  Due in one year or less                       $2,609,063           $2,532,589
  Due after one year through five years         25,809,959           24,713,561
  Due after five years through ten years        16,499,897           15,608,326
  Due after ten years                              243,904              226,303
  Corporate securities                                 816               49,408
  Other                                          1,999,010            1,999,010
                                               -----------          -----------
                                               $47,162,649          $45,129,197
                                               ===========          ===========


Amortized  costs and fair  values of  securities  being held to  maturity  as of
December 31, 1998, are as follows:

<TABLE>

                                                     1998
                           ---------------------------------------------------------
                                            Gross           Gross
                             Amortized    Unrealized      Unrealized       Fair
                                Cost         Gains         (Losses)        Value
                            -----------   -----------     -----------    -----------
<S>                         <C>           <C>             <C>            <C>
  Mortgage-backed
    securities              $    19,486   $        --     $      (30)    $    19,456
                            ===========   ===========     ==========     ===========
</TABLE>


There were no sales of securities  being held to maturity  during 1999, 1998 and
1997.

Proceeds from sales of securities available for sale during 1999, 1998, and 1997
were  $8,983,346,  $11,529,144,  and  $9,105,427,  respectively.  Gross gains of
$58,652,  $199,657, and $41,973 and gross losses of $57,269, $1,332, and $30,824
were realized on

Securities having a book value of $8,388,918 and $7,786,481 at December 31, 1999
and 1998, were pledged to secure public deposits and for other purposes required
by law.

<PAGE>

                   Notes to Consolidated Financial Statements


Note 3.  Loans

Loans at December 31, 1999 and 1998, are summarized as follows:


                                                  1999       1998
                                                --------   --------
                                                     (Thousands)
Real estate loans:
Construction and land development               $ 10,205   $  5,415
Secured by farm land                               1,489        851
Secured by 1-4 family residential                 58,712     47,965
Other real estate loans                           20,971     21,381
Loans to farmers (except those
secured by real estate)                              466        585
Commercial and industrial loans
(except those secured by real estate)             26,441     25,632
Loans to individuals for personal expenditures    31,829     27,376
All other loans                                      670        513
Total loans                                     $150,783   $129,718
                                                --------   --------
Less:  Unearned income                                23        121
          Allowance for loan losses                1,447      1,226
                                                --------   --------
Loans, net                                      $149,313   $128,371
                                                ========   ========


Note 4.  Allowance for Loan Losses

Transactions  in the allowance for loan losses for the years ended  December 31,
1999, 1998 and 1997, were as follows:

                                    1999            1998           1997
                                 -----------    -----------    -----------

Balance at beginning of year     $ 1,226,196    $ 1,112,318    $   974,412
Provision charged to operating
  expense                            495,000        330,000        220,000
Loan recoveries                       64,712         17,184         14,914
Loan charge-offs                    (338,897)      (233,306)       (97,008)
                                 -----------    -----------    -----------
Balance at end of year           $ 1,447,011    $ 1,226,196    $ 1,112,318
                                 ===========    ===========    ===========




Impairment of loans having recorded investments of $303,479 at December 31, 1999
and $164,569 at December 31, 1998 has been  recognized in  conformity  with SFAS
Statement No. 114. The average recorded investment in impaired loans during 1999
and 1998 was $234,024 and $195,574.  The total allowance for loan losses related
to these loans was $45,522 and $78,228. There was no interest income on impaired
loan recognized for cash payments received in 1999 or 1998.

Nonaccrual  loans excluded from impaired loan disclosure under SFAS 114 amounted
to $34,125 and $42,385 at December 31, 1999 and 1998, respectively.  If interest
on these loans had been accrued,  such income would have  approximated  $374 and
$1,326 for 1999 and 1998.


<PAGE>

                   Notes to Consolidated Financial Statements


Note 5.  Bank Premises and Equipment

Bank premises and  equipment are  summarized as follows at December 31, 1999 and
1998:

                                                  1999         1998
                                               ----------   ----------

        Land                                   $  676,566   $  669,425
        Buildings and leasehold improvements    3,846,468    3,745,278
        Furniture and equipment                 4,409,616    4,075,850
        Construction in process                   387,185   $     --
                                               ----------   ----------
                                               $9,319,835   $8,490,553
        Less accumulated depreciation           4,619,988    4,172,907
                                               ----------   ----------
                                               $4,699,847   $4,317,646
                                               ==========   ==========

Depreciation  expense included in operating expenses for 1999, 1998 and 1997 was
$447,081, $428,114, and $419,751, respectively.


Note 6.  Deposits

The aggregate amount of time deposits, in denominations of $100,000 or more, was
$12,993,309 and $11,262,920 and at December 31, 1999 and 1998, respectively.

At December 31, 1999, the scheduled maturities of time deposits are as follows:

         2000                          $     26,239,870
         2001                                18,604,113
         2002                                 3,467,170
         2003                                 3,449,950
         2004                                 3,066,983
                                       ----------------
                                       $     54,828,086
                                       ================

Note 7.  Short-Term Borrowings

The Corporation had unused lines of credit totaling  $31,459,000  available with
non-affiliated banks at December 31, 1999.


<PAGE>

                   Notes to Consolidated Financial Statements


Note 8.  Long-Term Debt

At December 31, 1999, the  Corporation had borrowings from the Federal Home Loan
Bank system  totaling  $33,622,072  which mature through  February 11, 2019. The
interest rate on these notes payable ranges from 5.34% to 6.25%. The Corporation
has pledged real estate loans and Federal Home Loan Bank stock as  collateral on
these borrowings. Principal payments on these notes are due as follows:

         2000                         $     15,098,908
         2001                                  107,609
         2002                                5,117,074
         2003                                  127,374
         2004                                  138,579
         Later years                        13,032,528
                                      ----------------
                                      $     33,622,072
                                      ================

Note 9.  Income Taxes


Net deferred tax assets  consist of the following  components as of December 31,
1999 and 1998:

                                                     1999        1998
                                                  ----------   --------
Deferred tax assets:
   Allowance for loan losses                      $  405,592   $330,738
   Pension payable                                    97,694    103,294
   Interest on nonaccrual loans                          127      8,766
   Securities available for sale                     691,374       --
                                                  ----------   --------
                                                  $1,194,787   $442,798
                                                  ==========   ========


Deferred tax liabilities:
    Depreciation                                  $   85,072   $ 69,500
    Bond accretion                                     2,044      5,862
    Loan origination costs                              --       28,537
    Securities available for sale                       --      178,714
                                                  ----------   --------
                                                  $   87,116   $282,613
                                                  ----------   --------

                                                  $1,107,671   $160,185
                                                  ==========   ========




<PAGE>

                   Notes to Consolidated Financial Statements


The  provision  for income  taxes  charged  to  operations  for the years  ended
December 31, 1999, 1998 and 1997 consists of the following:


                                     1999          1998           1997
                                   ---------     ---------      ---------

Current tax expense                $ 930,739     $ 861,138      $ 706,516
Deferred tax expense (benefit)        77,398)      (69,254)       (70,181)
                                   ---------     ---------      ---------
                                   $ 853,341     $ 791,884      $ 636,335
                                   =========     =========      =========

The income tax  provision  differs from the amount of income tax  determined  by
applying the U.S.  federal  income tax rate to pretax income for the years ended
December 31, 1999, 1998 and 1997, due to the following:

                                      1999         1998           1997
                                   ---------     ---------      ---------

Computed "expected" tax expense    $ 981,794     $ 916,832      $ 764,203
(Decrease) in income taxes
  resulting from:
    Tax-exempt interest income      (116,413)     (106,451)      (110,540)
    Other                            (12,040)      (18,497)       (17,328)
                                   ---------     ---------      ---------
                                   $ 853,341     $ 791,884      $ 636,335
                                   =========     =========      =========

Low income  housing  credits  totalled  $32,179 for the years ended December 31,
1999, 1998 and 1997.

Note 10.  Fund Restrictions and Reserve Balance

Transfers of funds from the banking  subsidiary to the parent corporation in the
form of loans,  advances and cash  dividends are restricted by federal and state
regulatory  authorities.  As of  December  31,  1999,  the  aggregate  amount of
unrestricted funds which could be transferred from the banking subsidiary to the
parent corporation, without prior regulatory approval, totalled $3,774,608.

The Bank must  maintain  a reserve  against  its  deposits  in  accordance  with
Regulation D of the Federal Reserve Act. For the final weekly  reporting  period
in the years ended  December 31, 1999 and 1998,  the aggregate  amounts of daily
average   required   balances   were   approximately   $740,000  and   $612,000,
respectively.

Note 11.  Benefit Plans

The Bank has a  noncontributory,  defined benefit pension plan for all full-time
employees over 21 years of age with one year of service.  Benefits are generally
based upon years of service and average  compensation for the five  highest-paid
consecutive  years of service.  The Bank funds pension costs in accordance  with
the  funding  provisions  of  the  Employee   Retirement  Income  Security  Act.
Information about the plan follows:


<PAGE>

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>

                                                1999            1998            1997
                                             -----------     -----------     -----------
<S>                                          <C>             <C>             <C>
Change in Benefit Obligation

Benefit obligation, beginning of year        $ 1,559,147     $ 1,822,867     $ 1,400,560
  Service cost                                   150,965         156,069         145,319
  Interest cost                                  116,936         136,715         105,042
  Actuarial loss                                 (72,350)         36,572         184,053
  Benefits paid                                  (65,249)       (593,076)        (12,107)
                                             -----------     -----------     -----------
  Benefit obligation, end of year            $ 1,689,449     $ 1,559,147     $ 1,822,867
                                             ===========     ===========     ===========

Changes in Plan Assets
  Fair value of plan assets,
  beginning of year                          $ 1,262,632     $ 1,689,889     $ 1,270,505
  Actual return on plan assets                   159,395          26,745         281,660
  Employer contributions                         187,873         139,074         149,831
  Benefits paid                                  (65,249)       (593,076)        (12,107)
                                             -----------     -----------     -----------
  Fair value of assets, end of year          $ 1,544,651     $ 1,262,632     $ 1,689,889
                                             ===========     ===========     ===========


  Funded status                              $  (144,798)    $  (296,515)    $  (132,978)
  Unrecognized net actuarial (gain) loss        (117,140)         13,485        (148,432)
  Unrecognized net obligation at transition      (61,881)        (67,507)        (73,133)
  Unrecognized prior service cost                 42,501          45,771          49,041
                                             -----------     -----------     -----------
  Accrued cost included in other liabilities $  (281,318)    $  (304,766)    $  (305,502)
                                             ===========     ===========     ===========

</TABLE>

<TABLE>
<CAPTION>

                                                1999            1998            1997
                                             -----------     -----------     -----------

<S>                                          <C>             <C>             <C>
Components of Net Periodic Benefit Cost

  Service cost                               $   150,965     $   156,069     $   145,319
  Interest cost                                  116,936         136,715         105,042
  Expected return on plan assets                (101,120)       (152,090)       (114,345)
  Amortization of prior service cost               3,270           3,270           3,270
  Amortization of net obligation at
  transition                                      (5,626)         (5,626)         (5,626)
  Recognized net actuarial (gain)                   --              --            (1,256)
                                             -----------     -----------     -----------
  Net periodic benefit cost                  $   164,425     $   138,338     $   132,404
                                             ===========     ===========     ===========

Weighted-Average Assumptions as
  of December 31
  Discount rate                                    7.50%           7.50%           7.50%
  Expected return on plan assets                   9.00%           9.00%           9.00%
  Rate of compensation increase                    5.00%           5.00%           5.00%
</TABLE>
<PAGE>

                   Notes to Consolidated Financial Statements


The  Corporation  provides  a  profit  sharing  thrift  plan  for  all  eligible
employees.  Participating  employees  may elect to  contribute up to 6% of their
salaries.  The  Corporation  contributes  an  amount  equal to  one-half  of the
employees' contributions. The Corporation's contributions in 1999, 1998 and 1997
were $48,572, $50,187, and $54,399, respectively.

On January 6, 1999,  the Bank  adopted a Director  Split  Dollar Life  Insurance
Plan. This Plan provides life insurance  coverage to insurable  directors of the
Bank. The Bank owns the policies and is entitled to all values and proceeds. The
Plan  provides  retirement  benefits and the payment of benefits at the death of
the  insured  director.  The  amount  of  benefits  will  be  determined  by the
performance of the policies over the director's life.


Note 12.  Commitments and Contingencies

In the normal course of business,  there are outstanding various commitments and
contingent liabilities, such as guarantees,  commitments to extend credit, etc.,
which  are  not  reflected  in  the  accompanying   financial  statements.   The
Corporation does not anticipate losses as a result of these transactions.

The  Corporation  has cash  accounts in other  commercial  banks.  The amount on
deposit at these banks at December 31, 1999,  exceeded the  insurance  limits of
the Federal Deposit Insurance Corporation by approximately $183,566.

See Note 16 with respect to financial instruments with off-balance-sheet risk.


Note 13.  Transactions With Related Parties

During the year,  employees,  executive  officers and directors  (and  companies
controlled by them) were customers of and had transactions  with the Corporation
in the normal course of business.  These transactions were made on substantially
the same terms as those prevailing for other customers.

An  analysis  of loans  (exclusive  of loans  to any  such  person  which in the
aggregate  did  not  exceed  $60,000)  made  by the  Corporation  to  directors,
executive  officers,  or  principal  stockholders  or to any  associate  of such
persons is shown in the following table:

                   Balance                                           Balance
                 January 1,         New             Loan           December 31,
                     1999          Loans         Repayments            1999
               -------------   -------------   ---------------   ---------------

               $   2,802,548   $     647,714    $      876,242    $    2,574,020
               =============   =============    ==============    ==============




<PAGE>

                   Notes to Consolidated Financial Statements


Note 14.  Lease Commitments

The  Corporation  was  obligated  under  noncancelable  leases  for the  banking
premises.  Total rental expense for operating leases for 1999, 1998 and 1997 was
$43,259,  $33,839 and $24,094,  respectively.  Minimum rental  commitments under
noncancelable  leases with terms in excess of one year as of  December  31, 1999
were as follows:

                                               Operating
                  Year                          Leases
         ----------------------             ----------------

         2000                               $         33,175
         2001                                         22,023
         2002                                          7,200
                                            ----------------
         Total minimum payments             $         62,398
                                            ================


Note 15.  Dividend Reinvestment Plan

The  Company  has in effect a  Dividend  Reinvestment  Plan  which  provides  an
automatic  conversion of dividends into common stock for enrolled  shareholders.
Stock is issued at 100% of fair market value on each dividend record date.


Note 16.  Financial Instruments With Off-Balance-Sheet Risk

The Corporation is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the  financing  needs of its customers and
to reduce its own exposure to fluctuations  in interest  rates.  These financial
instruments  include commitments to extend credit and standby letters of credit.
Those instruments  involve, to varying degrees,  elements of credit and interest
rate risk in excess of the amount  recognized in the balance sheet. The contract
or notional amounts of those  instruments  reflect the extent of involvement the
Corporation has in particular classes of financial instruments.

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

A summary of the contract or notional  amount of the  Corporation's  exposure to
off-balance-sheet risk as of December 31, 1999 and 1998, is as follows:

                                                     1999             1998
                                                 ------------     ------------
         Financial instruments whose contract
           amounts represent credit risk:
              Commitments to extend credit       $ 19,137,000     $ 19,734,000
              Standby letters of credit          $    553,525     $    729,665


<PAGE>

                   Notes to Consolidated Financial Statements


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 Corporation  evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed  necessary  by the  Corporation  upon  extension  of credit,  is based on
management's  credit evaluation of the counterparty.  Collateral held varies but
may  include  accounts  receivable,   inventory,  property  and  equipment,  and
income-producing commercial properties.

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

Standby letters of credit are conditional  commitments issued by the Corporation
to guarantee the  performance of a customer to a third party.  Those  guarantees
are  primarily  issued to support  public and  private  borrowing  arrangements,
including commercial paper, bond financing, and similar transactions. The credit
risk  involved  in  issuing  letters of credit is  essentially  the same as that
involved in extending  loan  facilities  to  customers.  The  Corporation  holds
security  agreements  on  accounts   receivable,   inventory  and  equipment  as
collateral   supporting  those   commitments  for  which  collateral  is  deemed
necessary.  The extent of collateral held for those  commitments at December 31,
1999, varies from 0 percent to 100 percent; the average amount collateralized is
55.1 percent.


Note 17.  Disclosures About Fair Value of Financial Instruments

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

Cash and Short-Term Investments

For those short-term  instruments,  the carrying amount is a reasonable estimate
of fair value.

Securities

For  securities  held for investment  purposes,  fair values are based on quoted
market prices or dealer quotes.

Loan Receivables

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


<PAGE>

                   Notes to Consolidated Financial Statements


Deposit Liabilities

The fair value of demand deposits,  savings  accounts,  and certain money market
deposits is the amount  payable on demand at the reporting  date. The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Borrowings

The carrying  amounts of federal funds  purchased,  borrowings  under repurchase
agreements,  and other short-term  borrowings under repurchase  agreements,  and
other  short-term  borrowings  maturing  within 90 days  approximate  their fair
values. Fair values of other borrowings are estimated using discounted cash flow
analyses based on the  Corporation's  current  incremental  borrowing  rates for
similar types of borrowing arrangements.

Off-Balance-Sheet Financial Instruments

The fair  value of  commitments  to extend  credit is  estimated  using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For  fixed-rate  loan  commitments,  fair value also  considers  the  difference
between current levels of interest rates and the committed rates.

The fair value of stand-by letters of credit is based on fees currently  charged
for similar  agreements or on the estimated  cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.

At December  31,  1999 and 1998,  the  carrying  amounts and fair values of loan
commitments and stand-by letters of credit were deemed immaterial.


<PAGE>

                   Notes to Consolidated Financial Statements


The estimated  fair values of the  Corporation's  financial  instruments  are as
follows:

<TABLE>

                                                                       1999                        1998
                                                            --------------------------   -------------------------
                                                              Carrying        Fair        Carrying        Fair
                                                               Amount         Value         Amount        Value
                                                            -----------   ------------   -----------   -----------
                                                                 (in thousands)                 (in thousands)

<S>                                                         <C>           <C>            <C>           <C>
     Financial assets:

       Cash and short-term investments                      $     4,108   $      4,108   $     7,885   $     7,885
       Securities                                                45,129         45,129        48,263        48,263
       Loans                                                    149,313        149,710       128,371       132,930
       Accrued interest receivable                                1,166          1,166         1,151         1,151
                                                            -----------   ------------   -----------   -----------
           Total financial assets                           $   199,716   $    200,113   $   185,670   $   190,229
                                                            ===========   ============   ===========   ===========

     Financial liabilities:

       Deposits                                             $   153,422   $   152,962    $   155,008   $   156,075
       Federal funds purchased                                    1,547          1,547           - -           - -
       Accrued interest payable                                     411            411           425           425
       Long-term debt                                            33,622         31,883        17,710        18,623
                                                            -----------   ------------   -----------   -----------
           Total financial liabilities                      $   189,002   $    186,803   $   173,143   $   175,123
                                                            ===========   ============   ===========   ===========
</TABLE>


Note 18.  Regulatory Matters

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

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table  below) of total and Tier 1 capital  (as  defined in the  regulations)  to
risk-weighted  assets,  and of Tier 1  capital  to  average  assets.  Management
believes,  as of  December  31,  1999,  that the  Corporation  meets all capital
adequacy requirements to which it is subject.

As of December 31, 1999, the most recent  notification  from the Federal Reserve
Bank  categorized  the  Corporation  as well  capitalized  under the  regulatory
framework for prompt  corrective  action. To be categorized as well capitalized,
the Corporation must maintain minimum total risk-based,  Tier 1 risk-based,  and
Tier 1 leverage  ratios as set forth in the table.  There are no  conditions  or
events  since that  notification  that  management  believes  have  changed  the
institution's category.


<PAGE>

                   Notes to Consolidated Financial Statements


The  Corporation's  actual capital  amounts and ratios are also presented in the
table.

<TABLE>
<CAPTION>

                                                                                                         Minimum
                                                                                                        To Be Well
                                                                                                     Capitalized Under
                                                                      Minimum Capital                Prompt Corrective
                                            Actual                      Requirement                  Action Provisions
                                   -----------------------         ---------------------            --------------------
                                   Amount            Ratio         Amount          Ratio            Amount         Ratio
                                   ------            -----         ------          -----            ------         -----

                                                                 (Amount in Thousands)
<S>                             <C>                  <C>         <C>               <C>           <C>               <C>
As of December 31, 1999:
  Total Capital (to Risk
    Weighted Assets):
      Consolidated              $    19,966          13.7%      >$    11,631       >   8.0%                   N/A
                                                                -                  -
      First Bank                $    19,732          13.6%      >$    11,622       >   8.0%      >$    14,527      >   10.0%
                                                                -                  -             -                 -
  Tier 1 Capital (to Risk
    Weighted Assets):
      Consolidated              $    18,519          12.7%      >$     5,815       >   4.0%                   N/A
                                                                -                  -
      First Bank                $    18,285          12.6%      >$     5,811       >   4.0%      >$     8,716      >    6.0%
                                                                -                  -             -                 -
  Tier 1 Capital (to
    Average Assets):
      Consolidated              $    18,519          8.9%       >$     8,311       >   4.0%                   N/A
                                                                -                  -
      First Bank                $    18,285          8.8%       >$     8,313       >   4.0%      >$    10,391      >    5.0%
                                                                -                  -             -                 -
As of December 31, 1998:
  Total Capital (to Risk
    Weighted Assets):
      Consolidated              $    18,480          14.8%      >$    10,017       >   8.0%                   N/A
                                                                -                  -
      First Bank                $    18,269          14.6%      >$    10,007       >   8.0%      >$    12,509      >   10.0%
                                                                -                  -             -                 -
  Tier 1 Capital (to Risk
    Weighted Assets):
      Consolidated              $    17,254          13.8%      >$     5,009       >   4.0%                   N/A
                                                                -                  -
      First Bank                $    17,043          13.6%      >$     5,004       >   4.0%      >$     7,505      >    6.0%
                                                                -                  -             -                 -
  Tier 1 Capital (to
    Average Assets):
      Consolidated              $    17,254           9.0%      >$     7,655       >   4.0%                   N/A
                                                                -                  -
      First Bank                $    17,043           8.9%      >$     7,650       >   4.0%      >$     9,562      >    5.0%
                                                                -                  -             -                 -
</TABLE>

<PAGE>

                   Notes to Consolidated Financial Statements


Note 19.  Incentive Stock Option Plan

The Corporation had an incentive stock option plan for all full-time  employees,
which  expired in 1995.  Options  previously  granted  may be  exercised  by the
participants until the options expire, which is five years after the date of the
original option grant.

The status of the stock option plan during 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>

                                   1999                              1998                               1997
                      -------------------------------   -------------------------------   --------------------------------
                        Weighted                          Weighted                           Weighted
                         Average                           Average                           Average
                         Number          Exercise          Number          Exercise           Number          Exercise
                        of Shares          Price          of Shares          Price          of Shares          Price
                      --------------   --------------   --------------   --------------   ---------------  ---------------
<S>                           <C>            <C>               <C>             <C>                <C>             <C>
Outstanding at
  January 1                   6,555          $ 23.43           15,780          $ 23.51            19,003          $ 23.55
Exercised                    (1,553)           23.93           (8,542)           23.58                 0              - -
Forfeited                    (1,442)           23.95             (683)           23.58            (3,223)           23.76
                             ------                            ------                             ------
Outstanding and
  exercisable at
  December 31                 3,560            23.00            6,555            23.43            15,780            23.51
                             ======                            ======                             ======
</TABLE>


At December 31, 1999,  3,560 shares were  outstanding and exercisable at a price
of $23.00 with a remaining contractual life of six months.


Note 20.  Earnings Per Share

The  following  table  presents  the weighted  average  number of shares used in
computing  earnings per share and the effect on the weighted  average  number of
shares of dilutive  potential common stock.  Potential dilutive common stock has
no effect on income available to common stockholders.

<TABLE>
<CAPTION>

                                                1999                          1998                         1997
                                     ----------------------------   -------------------------     ----------------------
                                                      Per Share                    Per Share                  Per Share
                                         Shares        Amount          Shares       Amount         Shares       Amount
                                     -------------   ------------   ------------   ----------     ---------   ----------

<S>                                        <C>       <C>                 <C>       <C>              <C>       <C>
   Basic EPS                               790,947   $       2.57        783,897   $     2.43       775,508   $     2.08
                                                     ============                  ==========                 ==========
   Effect of dilutive
    securities, stock
    options                                    935                         3,006                        445
                                      ------------                  ------------                -----------

   Diluted EPS                             791,882    $       2.57       786,903   $      2.42      775,953   $     2.08
                                      ============    ============  ============   ===========  ===========   ==========

</TABLE>



<PAGE>

                   Notes to Consolidated Financial Statements


Note 21.  Parent Corporation Only Financial Statements

                           FIRST NATIONAL CORPORATION
                            (Parent Corporation Only)

                                 Balance Sheets
                           December 31, 1999 and 1998


<TABLE>
<CAPTION>

          Assets                                          1999            1998
                                                      ------------    -----------

<S>                                                   <C>             <C>
Cash                                                  $     62,715    $    39,041
Investment in subsidiaries, at cost, plus
  undistributed net income                              16,943,287     17,389,973
Other assets                                               170,352        171,994
                                                      ------------    -----------

         Total assets                                 $ 17,176,354    $17,601,008
                                                      ============    ===========

  Liabilities and Stockholders' Equity

Liabilities

  Accounts payable                                    $       --      $      --
                                                      ------------    -----------
Stockholders' Equity

  Common stock                                        $  3,969,955    $ 3,944,515
  Surplus                                                1,531,634      1,417,280
  Retained earnings                                     13,016,843     11,892,298
  Accumulated other comprehensive income (loss)         (1,342,078)       346,915
                                                      ------------    -----------

         Total stockholders' equity                   $ 17,176,354    $17,601,008
                                                      ------------    -----------

         Total liabilities and stockholders' equity   $ 17,176,354    $17,601,008
                                                      ============    ===========

</TABLE>
<PAGE>

                   Notes to Consolidated Financial Statements


                           FIRST NATIONAL CORPORATION
                           (Parent Corporation Only)

                              Statements of Income
                  Years Ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>


                                            1999        1998         1997
                                        ----------   ----------   ----------

<S>                                     <C>          <C>          <C>
Income, dividends from subsidiary       $  800,000   $  464,000   $  535,000
                                        ----------   ----------   ----------

Expenses:

  Registration fees                     $      850   $      850   $      850
  Stationery and supplies                   15,599       11,290       10,363
  Legal and professional fees               22,121       14,487        6,677
  Other                                     22,333       42,215       32,358
                                        ----------   ----------   ----------

         Total expenses                 $   60,903   $   68,842   $   50,248
                                        ----------   ----------   ----------

         Income before allocated tax
           benefits and undistributed
           income of subsidiary         $  739,097   $  395,158   $  484,752

Allocated income tax benefits               52,886       54,528       49,263
                                        ----------   ----------   ----------

         Income before equity in
           undistributed income
           of subsidiary                $  791,983   $  449,686   $  534,015

Equity in undistributed income of
  subsidiary                             1,242,305    1,454,996    1,077,307
                                        ----------   ----------   ----------

         Net income                     $2,034,288   $1,904,682   $1,611,322
                                        ==========   ==========   ==========
</TABLE>

<PAGE>

                   Notes to Consolidated Financial Statements


                           FIRST NATIONAL CORPORATION
                            (Parent Corporation Only)

                            Statements of Cash Flows
                  Years Ended December 31, 1999, 1998 and 1997




<TABLE>
<CAPTION>
                                                 1999           1998          1997
                                             -----------    -----------    -----------

<S>                                          <C>            <C>            <C>
Cash Flows from Operating Activities
  Net income                                 $ 2,034,288    $ 1,904,682    $ 1,611,322
  Adjustments to reconcile net income
    to net cash provided by operating
    activities:
      Undistributed earnings of subsidiary    (1,242,305)    (1,454,996)    (1,077,307)
      Decrease in other assets                     1,640         16,752         17,062
                                             -----------    -----------    -----------
        Net cash provided by operating
          activities                         $   793,623    $   466,438    $   551,077
                                             -----------    -----------    -----------

Cash Flows from Financing Activities
  Net proceeds from issuance of common
    stock                                    $   139,794    $   287,037    $    70,090
  Cash dividends paid                           (909,743)      (784,927)      (639,870)
                                             -----------    -----------    -----------
         Net cash (used in) financing
           activities                        ($  769,949)   ($  497,890)   ($  569,780)
                                             -----------    -----------    -----------

         Increase (decrease) in cash and
            cash equivalents                 $    23,674    ($   31,452)   ($   18,703)

Cash and Cash Equivalents
  Beginning                                       39,041         70,493         89,196
                                             -----------    -----------    -----------

  Ending                                     $    62,715    $    39,041    $    70,493
                                             ===========    ===========    ===========
</TABLE>
