SECURITIES AND EXCHANGE COMMISSION ~~WASHINGTON, D.C. 20549~~

~~FORM~~WASHINGTON, ~~10-Q QUARTERLY~~D.C. ~~REPORT PURSUANT TO SECTION 13 OR 15(d)~~20549 ~~OF THE SECURITIES EXCHANGE ACT OF 1934~~

For Quarterly Period Ended		Commission File Number:
September 30, 2002		0-24133

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarterly Period Ended		Commission File Number:
June 30, 2003		0-24133

FRANKLIN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Tennessee		62-1376024
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
230 Public Square, Franklin, Tennessee		37064
(Address of principal executive offices)		(Zip Code)


Registrant’s telephone number, including area code (615)790-2265

Not applicable (Former name, former address and formal fiscal year, if changed since last report)

(Former name, former address and formal fiscal year, if changed since last report)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x [X] No o [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Common Stock, No Par Value		~~7,909,751~~	8,358,123 shares
Class		~~Outstanding at November 6, 2002~~	Outstanding at July 30, 2003

TABLE OF CONTENTS

PART I. — FINANCIAL INFORMATION PART II. OTHER INFORMATION SIGNATURES EXHIBIT INDEX SECTION 906 CERTIFICATION OF THE CEO AND CFO


	PART I. - FINANCIAL INFORMATION
Item I. Financial Statements
	ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNATURES
EXHIBIT INDEX
EX-31.1 CERTIFICATION
EX-31.2 CERTIFICATION
EX-32 CERTIFICATIONS

PART I. —- FINANCIAL INFORMATION

Item I. Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)

				(In thousands)
				September 30,			December 31,
				June 30,			December 31,
				2002			2001
				2003			2002
Assets
Cash and cash equivalents				$	2735,~~117~~431		$	2328,~~665~~061
Federal funds sold					1,~~636~~270			—18,922
Investment securities available-for-sale, at fair value					4651,~~672~~359			5968,~~964~~325
Mortgage-backed securities available-for-sale, at fair value					~~178~~235,~~903~~008			~~176~~189,~~340~~647
Investment securities held-to-maturity, fair value $10,774 at September 30, 2002 and $9,894 December 31, 2001					10,773			9,916
Investment securities held-to-maturity, fair value $3,916 at June 30, 2003 and $8,137 December 31, 2002					3,801			8,043
Mortgage-backed securities held-to-maturity, fair value $201 at September 30, 2002 and $282 at December 31, 2001					202			270
Mortgage-backed securities held-to-maturity, fair value $120 at June 30, 2003 and $198 at December 31, 2002					113			185
Federal Home Loan and Federal Reserve Bank stock, restricted					4,~~073~~340			34,~~951~~113
Loans held for sale					19,~~232~~428			2019,~~530~~432
Loans					~~517~~524,~~131~~906			~~422~~538,~~058~~263
Allowance for loan losses					(56,~~407~~106	)		(45,~~269~~761	)
			Loans, net		~~511~~518,~~724~~800			~~417~~532,~~789~~502
Premises and equipment, net					9,~~952~~158			109,~~545~~691
Accrued interest receivable					3,~~753~~654			3,~~620~~713
Mortgage servicing rights					3,~~148~~699			23,~~254~~749
Foreclosed assets, net					565			3,037
Repossessed and foreclosed assets, net					2,110			1,555
Other assets					34,~~388~~098			3,~~970~~295
				$	821,138			735,851
			Total assets	$	892,269		$	891,233
Liabilities and Stockholders’ Equity
Liabilities:
	Deposits:
		Noninterest-bearing		$	67110,~~255~~195		$	5278,~~852~~507
		Interest-bearing			~~614~~648,~~775~~914			~~564~~679,~~399~~865
		~~Total deposits~~	Total deposits		~~682~~759,~~030~~109			~~617~~758,~~251~~372
Repurchase agreements	~~Repurchase agreements~~				200			3,200
Long-term debt and other borrowings	~~Long-term debt and other borrowings~~				8774,~~285~~900			76,~~568~~382
Accrued interest payable	~~Accrued interest payable~~				1,~~323~~802			1,~~661~~478
Other liabilities	~~Other liabilities~~				32,~~940~~325			16,~~761~~253
			Total liabilities		~~774~~838,~~778~~336			~~700~~842,~~441~~685
Stockholders’ equity:
	Common stock, No par value. Authorized 500,000,000 shares; issued 7,908,231 and 7,843,241 at September 30, 2002 and December 31, 2001, respectively				12,106			11,597
	Common stock, No par value. Authorized 500,000,000 shares; issued 8,354,360 and 7,968,022 at June 30, 2003 and December 31, 2002, respectively				15,151			12,659
	Accumulated other comprehensive gain (loss), net of tax				3,460			(94	)
	Accumulated other comprehensive gain, net of tax				2,660			2,807
	Unearned compensation related to outstanding restricted stock awards				(~~192~~120	)		—(147	)
	Retained earnings				3036,~~986~~242			2333,~~907~~229
			Total stockholders’ equity		4653,~~360~~933			3548,~~410~~548
				$	~~821~~892,~~138~~269		$	~~735~~891,~~851~~233

See Notes to Unaudited Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited and in thousands except for per share data)

				Three Months Ended		~~Three Months Ended~~						Six Months Ended		~~Nine Months Ended~~
						September 30,								September 30,
				June 30,								June 30,
						2002				2001				2002				2001
				2003				2002				2003				2002
Interest income:
	Interest and fees on loans	~~Interest and fees on loans~~		$	8,614	$	~~9,028~~	$	8,768		~~8,700~~	$	17,202		~~26,161~~	$	17,133		~~25,488~~
	Taxable securities	~~Taxable securities~~			2,735		~~3,429~~		3,693		~~3,847~~		5,672		~~10,991~~		7,562		~~11,326~~
	Tax-exempt securities	~~Tax-exempt securities~~			365		~~263~~		254		~~147~~		652		~~744~~		481		~~530~~
	Federal funds sold	~~Federal funds sold~~			16		29		4		69		77		50		21		~~268~~
		Total interest income		~~Total interest income~~	11,730		~~12,749~~		12,719		~~12,763~~		23,603		~~37,946~~		25,197		~~37,612~~
Interest expense:
	Certificates of deposit over $100,000	~~Certificates of deposit over $100,000~~			1,274		~~1,320~~		1,381		~~2,570~~		2,518		~~4,280~~		2,960		~~8,210~~
	Other deposits	~~Other deposits~~			1,578		~~2,020~~		1,930		~~2,817~~		3,343		~~5,855~~		3,835		~~9,458~~
	Federal Home Loan Bank advances	~~Federal Home Loan Bank advances~~			842		~~856~~		853		~~886~~		1,672		~~2,549~~		1,693		~~2,679~~
	Other borrowed funds	~~Other borrowed funds~~			234		~~268~~		321		~~373~~		455		~~870~~		602		~~1,248~~
		Total interest expense		~~Total interest expense~~	3,928		~~4,464~~		4,485		~~6,646~~		7,988		~~13,554~~		9,090		~~21,595~~
		Net interest income		~~Net interest income~~	7,802		~~8,285~~		8,234		~~6,117~~		15,615		~~24,392~~		16,107		~~16,017~~
Provision for loan losses					485		~~760~~		800		~~360~~		1,405		~~2,210~~		1,450		~~950~~
		Net interest income after provision for loan losses	~~Net interest income after provision for loan losses~~		7,317		~~7,525~~		7,434		~~5,757~~		14,210		~~22,182~~		14,657		~~15,067~~
Other income:
	Service charges on deposit accounts	~~Service charges on deposit accounts~~			709		~~749~~		698		~~601~~		1,357		~~2,137~~		1,388		~~1,801~~
	Mortgage banking activities	~~Mortgage banking activities~~			1,363		~~1,144~~		814		~~686~~		2,728		~~2,780~~		1,636		~~2,214~~
	Other service charges, commissions and fees	~~Other service charges, commissions and fees~~			172		~~129~~		166		~~166~~		331		~~467~~		339		~~583~~
	Commissions on sale of annuities and brokerage activity	~~Commissions on sale of annuities and brokerage activity~~			21		~~113~~		130		91		48		~~374~~		261		~~286~~
	Gain on sale of mortgage loans	~~Gain on sale of mortgage loans~~			497		~~675~~		74		18		989		~~801~~		126		—
	Gain on sale of investment securities	~~Gain on sale of investment securities~~			632		~~428~~		82		~~281~~		1,009		~~591~~		163		~~1,085~~
		Total other income		~~Total other income~~	3,394		~~3,238~~		1,964		~~1,843~~		6,462		~~7,150~~		3,913		~~5,969~~
Other expenses:
	Salaries and employee benefits	~~Salaries and employee benefits~~			3,033		~~3,042~~		2,943		~~2,636~~		6,167		~~8,854~~		5,812		~~7,679~~
	Occupancy expense	~~Occupancy expense~~			527		~~531~~		525		~~516~~		1,043		~~1,579~~		1,048		~~1,552~~
	Mortgage banking	~~Mortgage banking~~			1,672		~~388~~		335		~~300~~		2,236		~~1,076~~		688		~~787~~
	Furniture and equipment	~~Furniture and equipment~~			298		~~330~~		347		~~357~~		607		~~1,018~~		688		~~1,049~~
	Communications and supplies	~~Communications and supplies~~			142		~~159~~		163		~~161~~		292		~~473~~		314		~~503~~
	Advertising and marketing	~~Advertising and marketing~~			99		~~102~~		99		98		209		~~307~~		205		~~293~~
	FDIC and regulatory assessments	~~FDIC and regulatory assessments~~			79		69		68		59		154		~~202~~		133		~~170~~
		Loss on sale of mortgage loans					—				—				—				140
	Repossessed and foreclosed assets, net				2,613				577				2,635				803
		Foreclosed assets, net					2				—				805				5
	Merger expenses				10				—				19				—
		Merger expenses					360				—				360				—
	Other				662				535				1,236				1,079
		Other					681				557				1,759				1,597
		Total other expenses			9,135				5,592				14,598				10,770
				Total other expenses			5,664				4,684				16,433				13,775
		Income before income taxes			1,576				3,805				6,074				7,800
				Income before income taxes			5,099				2,916				12,899				7,261
Income taxes					494				1,299				2,102				2,684
Income taxes							1,833				1,074				4,517				2,629
		Net income		$	1,082			$	2,506			$	3,972			$	5,116
				Net income		$	3,266				1,842				8,382				4,632
Net income per share – basic				$	0.13			$	0.32			$	0.48			$	0.65
	Net income per share – basic					$	0.41				0.24				1.06				0.59
Net income per share - diluted				$	0.12			$	0.28			$	0.44			$	0.58
	Net income per share — diluted					$	0.37				0.22				0.95				0.56
Dividends declared per share					0.05775				0.0550				0.1155				0.1100
Dividends declared per share							0.055				0.0525				0.165				0.1575
Weighted average shares outstanding:
Weighted average shares outstanding:
Basic					8,329				7,906				8,237				7,883
Basic							7,908				7,821				7,891				7,813
Diluted					9,098				8,858				8,959				8,754
Diluted							8,844				8,435				8,785				8,328

See Notes to Unaudited Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

															Accumulated			Unamortized
			Common Stock												Other			Cost of
									Comprehensive			Retained			Comprehensive			Restricted
			Shares			Amount			Income (Loss)			Earnings			Income (Loss)			Stock Awards			Total
BALANCE — JANUARY 1, 2001				7,800			11,479						18,663			588			—			30,730
BALANCE - JANUARY 1, 2003				7,968			12,659						33,229			2,807			(147	)		48,548
Comprehensive income:
	Net Income									43,~~632~~972			43,~~632~~972									43,~~632~~972
	Other comprehensive income, net of tax:
		Unrealized holding gain on securities arising (net of tax of $821)								1,340
		Unrealized holding losses on securities (net of tax of $474)								(773	)
		Less: Reclassification adjustment for gains included in net income (net of $412 tax)								673
		Less: Reclassification adjustment for gains included in net income (net of $383 tax)								626
	Other comprehensive income									~~2,013~~(147	)					~~2,013~~(147	)					~~2,013~~(147	)
Comprehensive income										63,~~645~~825
Exercise of stock options and issuance of common stock				22387			432,439												27			432,466
Cash dividend declared; $.1575 per share													(1,231	)								(1,231	)
Tax benefit of stock options exercised							56															56
BALANCE — SEPTEMBER 30, 2001				7,822			11,522						22,064			2,601			—			36,187
Cancellation of restricted stock				(1	)		(3	)											—			(3	)
BALANCE — JANUARY 1, 2002				7,843			11,597						23,907			(94	)		—			35,410
Cash dividend declared; $.1115 per share													(959	)								(959	)
Comprehensive income:
BALANCE - JUNE 30, 2003				8,354			15,151						36,242			2,660			(120	)		53,933
	Net Income									8,382			8,382									8,382
	Other comprehensive income, net of tax:
		Unrealized holding gains on securities arising (net of tax of $1,954)								3,188
		Less: Reclassification adjustment for gains included in net income (net of $225 tax)								366
	Other comprehensive income									3,554						3,554						3,554
Comprehensive income										11,936
Exercise of stock options and issuance of common stock				51			273												44			317
Issuance of restricted stock				14			236												(236	)		0
Cash dividend declared; $.165 per share													(1,303	)								(1,303	)
BALANCE — SEPTEMBER 30, 2002				7,908			12,106						30,986			3,460			(192	)		46,360

See Notes to Unaudited Consolidated Financial Statements.

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

				(In thousands)
				Nine Months Ended
				Six Months Ended
				September 30,
				June 30,
				2002			2001
				2003			2002
Cash flows from operating activities:
	Net income			$	83,~~382~~972		$	45,~~632~~116
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation, amortization and accretion			552,187			~~341~~(89	)
		Provision for loan losses			21,~~210~~405			~~950~~1,450
		Loans originated for sale			(~~126~~143,~~653~~168	)		(8970,~~172~~871	)
		Proceeds from sale of loans			~~129~~147,~~187~~250			8782,~~876~~681
		Gain on sale of investment securities			(~~591~~1,009	)		(~~1,085~~163	)
		(Gain) loss on sale of loans			(822	)		140
		Gain on sale of loans			(942	)		(147	)
		Loss on foreclosed assets			805			5
		Loss on repossessed and foreclosed assets			2,635			803
		Loss (gain) on sale of premises and equipment			98			(8	)
		(Gain) loss on sale of premises and equipment			(1	)		16
		(Increase) decrease in accrued interest receivable			(133	)		279
		Decrease (increase) in accrued interest receivable			59			(139	)
		Decrease in accrued interest payable			(338	)		(969	)
		Increase (decrease) in accrued interest payable			324			(483	)
		(Decrease) increase in other liabilities			(132	)		2,722
		Decrease in other liabilities			(4,038	)		(881	)
		Increase in other assets			(35,~~795~~113	)		(2,~~708~~873	)
			Net cash provided by operating activities		8,273			3,003
		Tax benefit of stock options exercised			56			—
			Net cash provided by operating activities		3,617			14,420
Cash flows from investing activities:
	(Increase) decrease in federal funds sold				(1,636	)		7,531
	Decrease (increase) in federal funds sold				17,652			(1,386	)
	Proceeds from sale of securities available-for-sale				6539,~~523~~444			~~140~~29,~~953~~415
	Proceeds from maturities of securities available-for-sale				42102,~~016~~046			4727,~~050~~404
	Proceeds from maturities of securities held-to-maturity				34,~~809~~358			63653
	Purchases of securities available-for-sale				(89169,~~287~~854	)		(~~199~~49,~~271~~676	)
	Purchase of securities held-to-maturity				~~(4,114~~—	)		—(4,113	)
	Purchase of Federal Home Loan and Federal Reserve stock				(~~122~~227	)		(~~176~~79	)
	Net increase in loans				(96,559	)		(70,063	)
	Net decrease (increase) in loans				9,161			(63,443	)
	Proceeds from sale of foreclosed assets				4,466			40
	Proceeds from sale of repossessed and foreclosed assets				364			2,772
	Purchases of premises and equipment, net				(~~430~~29	)		(~~856~~192	)
			Net cash used in investing activities		(76,334	)		(74,729	)
			Net cash provided by (used in) investing activities		2,915			(58,645	)
Cash flows from financing activities
	Net proceeds from issuance of common stock				~~317~~2,519			43286
	Dividends paid				(~~1,300~~936	)		(~~1,230~~865	)
	Increase in deposits				~~64,779~~737			6835,~~225~~279
	(Decrease) increase in repurchase agreements				(3,000	)		1,679
	Decrease in repurchase agreements				—			(1,062	)
	Increase (decrease) in other borrowings				10,717			(27	)
	(Decrease) increase in other borrowings				(1,482	)		9,733
			Net cash provided by financing activities		~~71,513~~838			6843,~~690~~371
			Net increase (decrease) in cash and cash equivalents		37,~~452~~370			(~~3,036~~854	)
Cash and cash equivalents at beginning of period					2328,~~665~~061			1823,~~976~~665
Cash and cash equivalents at end of period				$	2735,~~117~~431		$	1522,~~940~~811
Cash payments for interest				$	137,~~892~~664		$	2215,~~564~~432
Cash payments for income taxes				$	42,~~668~~803		$	23,~~076~~424

See Notes to Unaudited Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION
Notes to Unaudited Consolidated Financial Statements

NOTE A —- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Franklin Financial Corporation and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ~~three and nine~~six-month period ~~periods~~ ended ~~September~~June 30, ~~2002~~2003 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2002~~2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2001~~ 2002.

NOTE B –- SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2001~~2002. During the ~~nine~~six months ended ~~September~~June 30, ~~2002~~2003, there were no significant changes to those accounting policies ~~except as they relate to loan commitments that relate to the origination or acquisition of mortgage loans that will be held for sale~~.

On July 1, 2002, the Company adopted Derivatives Implementation Group (DIG) Issue No. C13, When a Loan Commitment is Included in the Scope of Statement 133 (“DIG Issue No. C13”). DIG Issue No. C13 is implementation guidance for Statement of Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, issued by the Financial Accounting Standards Board in April, 2002 which requires loan commitments that relate to the origination or acquisition of mortgage loans that will be held for sale to be accounted for as derivative financial instruments in accordance with SFAS No. 133, as amended. The adoption of DIG Issue No. C13 on July 1, 2002 was not material to the Company’s consolidated financial statements at that date. A preStock-~~tax~~based ~~gain of approximately $478,000 is included in results of~~Compensation ~~operations for the third quarter of 2002 representing the fair value of loan~~ ~~commitments as of September 30, 2002. The gain or loss resulting from~~ accounting for such loan commitments as derivative financial instruments is reflected in gain or loss on sale of mortgage loans in the accompanying unaudited consolidated statements of income for the three and nine-month periods ended September 30, 2002. The asset resulting from accounting for such loan commitments as derivative financial instruments is reflected in other assets in the accompanying unaudited consolidated balance sheets as of September 30, 2002.

~~Certain~~At ~~reclassifications~~June 30, ~~have~~2003, ~~been~~the ~~made~~Company has three stock-based employee compensation plans, which are described more fully in Note 14 to the ~~2001~~Consolidated ~~financial~~Financial Statements ~~statements~~included in the Company’s 2002 Annual Report on Form 10-K. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. The Company ~~conform~~calculates compensation expense on the restricted stock plan as the difference between the market price of the underlying stock on the date of the grant and the purchase price, if any, and recognizes such amount on a straight-line basis over the restriction period in which the restricted stock is earned by the recipient. No stock-based employee compensation cost is reflected in net income for the Company’s two stock option plans, as all options granted under those plans had an exercise price equal to the ~~2002~~market ~~classification~~value of the underlying common stock on the date of grant.

~~NOTE~~The Cfollowing —table ~~DIVIDENDS~~illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. No options were granted during the three and six months ended June 30, 2003 and during the three months ended June 30, 2002.

In September 2002, the Company’s Board of Directors declared a $.055 per share cash dividend payable on October 2, 2002.


		Six months ended
		June 30,		June 30,
		2003		2002
Net earnings available to stockholders:
	As reported	$	3,972	$	5,116
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		(1,705	)

Pro forma		$	3,972	$	3,411

NOTE D – SEGMENTS


		June 30,
		2003		2002
Basic earnings per share:
	As reported	$	0.48	$	0.65
	Pro forma		—		0.43
Diluted earnings per share available to stockholders:
	As reported	$	0.44	$	0.58
	Pro forma		—		0.39

In calculating the pro forma disclosures, the fair value of the options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted average assumptions:


	2003		2002
Dividend yield		—		1.7	%
Expected volatility		—		34	%
Risk-free interest rate range		—		4.5 - 4.8	%
Expected life		—	7-10 years

The weighted-average fair value of options, calculated using the Black-Scholes option pricing model, granted during the six months ended June 30, 2002 was $6.06 per share.

NOTE C - DIVIDENDS

In May 2003, the Company’s Board of Directors declared a $.05775 per share cash dividend payable on July 2, 2003.

NOTE D - SEGMENTS

The Company’s reportable segments are determined based on management’s internal reporting approach, which is by operating subsidiaries. The reportable segments of the Company are comprised of the Franklin National Bank (“Bank”) segment, excluding its subsidiaries, and the Mortgage Banking segment, Franklin Financial Mortgage.

The Bank segment provides a variety of banking services to individuals and businesses through its branches in Brentwood, Franklin, Fairview, Nashville and Spring Hill, Tennessee. Its primary deposit products are demand deposits, savings deposits, and certificates of deposit, and its primary lending products are commercial business, construction, real estate mortgage and consumer loans. The Bank segment primarily earns interest income from loans and investments in securities. It earns other income primarily from deposit and loan fees.

The Mortgage Banking segment originates, purchases and sells residential mortgage loans. It sells loan originations into the secondary market, but retains much of the applicable servicing. As a result of the retained servicing, the Mortgage Banking segment capitalizes mortgage servicing rights and amortizes these rights over the estimated lives of the associated loans. Its primary sources of revenue are fees and servicing income, but it also reports interest income earned on warehouse balances waiting for funding. The segment originates retail mortgage loans in the Nashville and Chattanooga, Tennessee metropolitan areas. It also purchases wholesale mortgage loans through correspondent relationships with other banks.

The “All Other” segment consists of the Company’s insurance and securities subsidiaries and the bank holding company operations which do not meet the quantitative threshold for separate disclosure. The revenue earned by the insurance and securities subsidiaries is reported in other income in the consolidated financial statements and the revenue earned by the bank holding company consists of intercompany transactions that are eliminated in consolidation.

No transactions with a single customer contributed 10% or more of the Company’s total revenue. The accounting policies for each segment are the same as those used by the Company. The segments include overhead allocations and intercompany transactions that were recorded at estimated market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results of the two reportable segments of the Company are included in the following table.

~~Three~~No ~~Months~~transactions ~~Ended~~with ~~September 30,~~a ~~2002~~single customer contributed 10% or more of the Company’s total revenue. The accounting policies for each segment are the same as those used by the Company. The segments include overhead allocations and intercompany transactions that were recorded at estimated market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results of the two reportable segments of the Company are included in the following table.

			Three Months Ended June 30, 2003
							Mortgage
(In thousands)				Bank			Banking			All Other			Eliminations			Consolidated
Total interest income				$	1211,~~550~~517		$	~~242~~249		$	~~677~~681		$	(~~720~~717	)	$	1211,~~749~~730
Total interest expense					43,~~252~~751			39			~~501~~434			(~~328~~296	)		43,~~464~~928
Net interest income					87,~~298~~766			~~203~~210			~~176~~247			(~~392~~421	)		87,~~285~~802
Provision for loan losses					~~760~~485			—			—			—			~~760~~485
Net interest income after provision					7,~~538~~281			~~203~~210			~~176~~247			(~~392~~421	)		7,~~525~~317
Total other income					1,~~245~~436			1,~~823~~859			31,~~387~~237			(31,~~217~~138	)		3,~~238~~394
Total other expense					36,~~986~~348			12,~~104~~571			~~896~~537			(~~322~~321	)		59,~~664~~135
Income before taxes					42,~~797~~369			~~922~~(502	)		~~2,667~~947			(31,~~287~~238	)		51,~~099~~576
Provision for income taxes					~~1,742~~762			~~312~~(159	)		(~~221~~109	)		—			~~1,833~~494
Net income (loss)				$	31,~~055~~607		$	~~610~~(343	)	$	21,~~888~~056		$	(31,~~287~~238	)	$	31,~~266~~082
Other significant items
	Total assets			$	~~795~~865,~~038~~578		$	2324,~~947~~301		$	8691,~~768~~807		$	(8489,~~615~~417	)	$	~~821~~892,~~138~~269
	Depreciation, amortization and accretion				~~(120~~828	)		~~231~~416			3331			—			~~144~~1,275
Revenues from external customers
	Total interest income			$	1211,~~507~~481		$	~~242~~249		$	—		$	—		$	1211,~~749~~730
	Total other income				1,~~245~~436			1,~~823~~859			~~170~~99			—			3,~~238~~394
		Total income		$	1312,~~752~~917		$	2,~~065~~108		$	~~170~~99		$	—		$	15,~~987~~124
Revenues from affiliates
	Total interest income			$	4336		$	—		$	~~677~~681		$	(~~720~~717	)	$	—
	Total other income				—			—			31,~~217~~138			(31,~~217~~138	)		—
		Total income		$	4336		$	—		$	31,~~894~~819		$	(31,~~937~~855	)	$	—

Three Months Ended September 30, 2001


			Three Months Ended June 30, 2002
						Mortgage
(In thousands)			Bank			Banking		All Other			Eliminations			Consolidated

Total interest income			$	12,567		$	195	$	680		$	(723	)	$	12,719
Total interest expense				4,274			37		505			(331	)		4,485

Net interest income				8,293			158		175			(392	)		8,234
Provision for loan losses				800			—		—			—			800

Net interest income after provision				7,493			158		175			(392	)		7,434

Total other income				847			887		3,106			(2,876	)		1,964
Total other expense				4,409			972		535			(323	)		5,593

Income before taxes				3,931			73		2,746			(2,945	)		3,805
Provision for income taxes				1,351			29		(81	)		—			1,299

Net income (loss)			$	2,580		$	44	$	2,827		$	(2,945	)	$	2,506

Other significant items
	Total assets		$	769,366		$	13,921	$	81,452		$	(79,271	)	$	785,468
	Depreciation, amortization and accretion			(201	)		193		33			—			25
Revenues from external customers
	Total interest income		$	12,524		$	195	$	—		$	—		$	12,719
	Total other income			847			887		230			—			1,964

		Total income	$	13,371		$	1,082	$	230		$	—		$	14,683

Revenues from affiliates
	Total interest income		$	43		$	—	$	680		$	(723	)	$	—
	Total other income			—			—		2,876			(2,876	)		—

		Total income	$	43		$	—	$	3,556		$	(3,599	)	$	—

						Mortgage
(In thousands)			Bank			Banking			All Other			Eliminations			Consolidated
Total interest income			$	12,602		$	209		$	752		$	(800	)	$	12,763
Total interest expense				6,350			74			686			(464	)		6,646
Net interest income				6,252			135			66			(336	)		6,117
Provision for loan losses				360			—			—			—			360
Net interest income after provision				5,892			135			66			(336	)		5,757
Total other income				978			686			2,147			(1,968	)		1,843
Total other expense				3,684			777			541			(318	)		4,684
Income before taxes				3,186			44			1,672			(1,986	)		2,916
Provision for income taxes				1,218			(12	)		(132	)		—			1,074
Net income (loss)			$	1,968		$	56		$	1,804		$	(1,986	)	$	1,842
Other significant items
	Total assets		$	666,832		$	13,423		$	76,711		$	(73,731	)	$	683,235
	Depreciation, amortization and accretion			(127	)		137			29			—			39
Revenues from external customers
	Total interest income		$	12,554		$	209			—			—		$	12,763
	Total other income			978			686			179			—			1,843
		Total income	$	13,532		$	895		$	179			—		$	14,606
Revenues from affiliates
	Total interest income		$	48		$	—		$	752		$	(800	)	$	—
	Total other income			—			—			1,968			(1,968	)		—
		Total income	$	48		$	—		$	2,720		$	(2,768	)	$	—

Nine Months Ended September 30, 2002


			Six Months Ended June 30, 2003
					Mortgage
(In thousands)			Bank		Banking		All Other			Eliminations			Consolidated

Total interest income			$	23,201	$	474	$	1,358		$	(1,430	)	$	23,603
Total interest expense				7,618		72		885			(587	)		7,988

Net interest income				15,583		402		473			(843	)		15,615
Provision for loan losses				1,405		—		—			—			1,405

Net interest income after provision				14,178		402		473			(843	)		14,210

Total other income				2,567		3,710		4,232			(4,047	)		6,462
Total other expense				10,254		3,978		1,009			(643	)		14,598

Income before taxes				6,491		134		3,696			(4,247	)		6,074
Provision for income taxes				2,235		73		(206	)		—			2,102

Net income (loss)			$	4,256	$	61	$	3,902		$	(4,247	)	$	3,972

Other significant items
	Total assets		$	865,578	$	24,301	$	91,807		$	(89,417	)	$	892,269
	Depreciation, amortization and accretion			1,344		779		64			—			2,187
Revenues from external customers
	Total interest income		$	23,129	$	474	$	—		$	—		$	23,603
	Total other income			2,567		3,710		185			—			6,462

		Total income	$	25,696	$	4,184	$	185		$	—		$	30,065

Revenues from affiliates
	Total interest income		$	72	$	—	$	1,358		$	(1,430	)	$	—
	Total other income			—		—		4,047			(4,047	)		—

		Total income	$	72	$	—	$	5,405		$	(5,477	)	$	—

						Mortgage
(In thousands)			Bank			Banking		All Other			Eliminations			Consolidated
Total interest income			$	37,402		$	670	$	2,031		$	(2,157	)	$	37,946
Total interest expense				12,923			119		1,498			(986	)		13,554
Net interest income				24,479			551		533			(1,171	)		24,392
Provision for loan losses				2,210			—		—			—			2,210
Net interest income after provision				22,269			551		533			(1,171	)		22,182
Total other income				2,953			3,585		9,342			(8,730	)		7,150
Total other expense				12,404			3,029		1,967			(967	)		16,433
Income before taxes				12,818			1,107		7,908			(8,934	)		12,899
Provision for income taxes				4,525			379		(387	)		—			4,517
Net income (loss)			$	8,293		$	728	$	8,295		$	(8,934	)	$	8,382
Other significant items
	Total assets		$	795,038		$	23,947	$	86,768		$	(84,615	)	$	821,138
	Depreciation, amortization and accretion			(636	)		590		101			—			55
Revenues from external customers
	Total interest income		$	37,276		$	670		—			—		$	37,946
	Total other income			2,953			3,585		612			—			7,150
		Total income	$	40,229		$	4,255	$	612			—		$	45,096
Revenues from affiliates
	Total interest income		$	126		$	—	$	2,031		$	(2,157	)	$	—
	Total other income			—			—		8,730			(8,730	)		—
		Total income	$	126		$	—	$	10,761		$	(10,887	)	$	—

Nine Months Ended September 30, 2001


			Six Months Ended June 30, 2002
							Mortgage
(In thousands)				Bank			Banking		All Other			Eliminations			Consolidated

Total interest income				$	24,852		$	428	$	1,354		$	(1,437	)	$	25,197
Total interest expense					8,671			80		997			(658	)		9,090

Net interest income					16,181			348		357			(779	)		16,107
Provision for loan losses					1,450			—		—			—			1,450

Net interest income after provision					14,731			348		357			(779	)		14,657

Total other income					1,709			1,762		5,955			(5,513	)		3,913
Total other expense					8,419			1,925		1,071			(645	)		10,770

Income before taxes					8,021			185		5,241			(5,647	)		7,800
Provision for income taxes					2,783			67		(166	)		—			2,684

Net income (loss)				$	5,238		$	118	$	5,407		$	(5,647	)	$	5,116

Other significant items
	Total assets			$	769,366		$	13,921	$	81,452		$	(79,271	)	$	785,468
	Depreciation, amortization and accretion				(516	)		359		68			—			(89	)
Revenues from external customers
	Total interest income			$	24,769		$	428	$	—		$	—		$	25,197
	Total other income				1,709			1,762		442			—			3,913

		Total income		$	26,478		$	2,190	$	442		$	—		$	29,110

Revenues from affiliates
	Total interest income			$	83		$	—	$	1,354		$	(1,437	)	$	—
	Total other income				—			—		5,513			(5,513	)		—

		Total income		$	83		$	—	$	6,867		$	(6,950	)	$	—

						Mortgage
(In thousands)			Bank			Banking		All Other			Eliminations			Consolidated
Total interest income			$	37,036		$	740	$	2,385		$	(2,549	)	$	37,612
Total interest expense				20,611			354		2,313			(1,683	)		21,595
Net interest income				16,425			386		72			(866	)		16,017
Provision for loan losses				950			—		—			—			950
Net interest income after provision				15,475			386		72			(866	)		15,067
Total other income				3,248			2,219		5,537			(5,035	)		5,969
Total other expense				10,706			2,431		1,524			(886	)		13,775
Income before taxes				8,017			174		4,085			(5,015	)		7,261
Provision for income taxes				3,034			32		(437	)		—			2,629
Net income (loss)			$	4,983		$	142	$	4,522		$	(5,015	)	$	4,632
Other significant items
	Total assets		$	666,832		$	13,423	$	76,711		$	(73,731	)	$	683,235
	Depreciation, amortization and accretion			(118	)		373		86			—			341
Revenues from external customers
	Total interest income		$	36,872		$	740		—			—		$	37,612
	Total other income			3,248			2,219		502			—			5,969
		Total income	$	40,120		$	2,959	$	502			—		$	43,560
Revenues from affiliates
	Total interest income		$	164		$	—	$	2,385		$	(2,549	)	$	—
	Total other income			—			—		5,035			(5,035	)		—
		Total income	$	164		$	—	$	7,420		$	(7,584	)	$	—

NOTE E – LOANS

~~NOTE~~In Eaddition –to ~~TRUST~~the ~~PREFERRED~~disclosures ~~SECURITIES~~included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 related to loans and allowance for loan losses, the following represents information regarding non-accrual loans and loans past due 90 days or more that were still accruing interest.

During 2000, the Company issued $16 million of trust preferred securities through Franklin Capital Trust I, a Delaware business trust and wholly owned subsidiary of the Company. These securities pay cumulative cash distributions at a quarterly variable rate of three-month LIBOR plus 3.50% of the liquidation amount of $1,000 per preferred security on a quarterly basis beginning October 15, 2000. These securities have a thirty-year maturity and may be redeemed by the Company upon the earlier of five years or the occurrence of certain other events. The Company received net proceeds of $15.2 million from the offering, which it used to repay approximately $5.0 million of indebtedness under its line of credit, purchase investment securities as part of a leverage program to offset the interest expense associated with the Trust Preferred Securities, and for general corporate purposes, including capital investments in the Bank. Subject to certain limitations, the Trust Preferred Securities qualify as Tier 1 capital and are carried in Long-term Debt and Other Borrowings on the Company’s Consolidated Balance Sheet. As a result of the Trust Preferred Securities offering, the Company initiated a leverage program to enhance margins and offset the interest expense associated with the Trust Preferred Securities. During the third quarter of 2000, the Company purchased approximately $81.3 million in investment securities as part of the leverage program. The leverage program was funded by $52.0 million in Federal Home Loan Bank advances, $10.5 million received in the Trust Preferred Securities offering and $18.8 million in deposit growth. The Company plans to utilize cash flow from the investment securities to assist with future loan growth.


	June 30, 2003		June 30, 2002		December 31, 2002

	(in thousands)
Loans accounted for on a non-accrual basis	$	2,397	$	413	$	5,218
Accruing loans which are contractually past due 90 days or more as to principal and interest payments		1,372		754		2,459

NOTE F – ~~LOANS~~MORTGAGE BANKING

InThe ~~addition to the disclosures included in the~~ Company’s ~~Annual~~mortgage ~~Report~~banking onsubsidiary ~~Form 10-K~~has ~~for~~net ~~the~~worth ~~year~~requirements ~~ended~~with ~~December 31,~~the U.S. ~~2001~~Department ~~related~~of toHousing ~~loans~~ and ~~allowance~~Urban ~~for loan~~Development ~~losses, the following represents information regarding non-accrual loans~~ and ~~loans~~Federal ~~past~~Home ~~due~~Loan ~~90 days or more still accruing interest as required by the~~Mortgage ~~adoption~~Corporation of ~~Statement of Position (“SOP”) 01-6~~$250,000. ~~Accounting~~The byCompany ~~Certain~~exceeded ~~Entities (Including~~this ~~Entities~~requirement ~~with~~as ~~Trade Receivables) That Lend to or Finance the Activities~~ of ~~Others~~June 30, 2003 ~~during~~and ~~the nine-month period ended September~~December 3031, 2002.

	September 30,		September 30,		December 31,
	2002		2001		2001
			(in thousands)
Loans accounted for on a non-accrual basis	$	5,204	$	479	$	1,023
Accruing loans which are contractually past due 90 days or more as to principal and interest payments		173		444		260

NOTE G – MORTGAGE BANKING

The Company’s mortgage banking subsidiary has net worth requirements with the U.S. Department of Housing and Urban Development and Federal Home Loan Mortgage Corporation of $250,000. The Company exceeds this requirement as of September 30, 2002 and December 31, 2001.

Changes in the balance of mortgage servicing rights, net, were as follows:

		Three Months Ended						Nine Months Ended
		Six Months Ended June 30,
		September 30,						September 30,
		2003			2002
		2002			2001			2002			2001
		(In Thousands)
Balance — beginning of period		$	2,736		$	1,605		$	2,254		$	1,481
Balance - beginning of period		$	3,749		$	2,254
	Additions		~~631~~1,648			~~225~~815			~~1,446~~			~~548~~
	Amortization		(~~219~~761	)		(~~121~~333	)		~~(552~~	)		~~(320~~	)
	Impairment adjustment		—(937	)		—			—			—
Balance — end of period		$	3,148		$	1,709		$	3,148		$	1,709
Balance - end of period		$	3,699		$	2,736

Accumulated amortization of mortgage servicing rights was approximately $12,~~942~~985,000 and $12,~~390~~224,000 at ~~September~~June 30, 2003 ~~2002~~ and December 31, ~~2001~~2002, respectively.

At ~~September~~June 30, ~~2002~~2003, the weighted-average amortization period of the Company’s mortgage servicing rights originated in the first six months of 2003 was 53.73 years. Projected amortization expense for the gross carrying value of mortgage servicing rights at ~~September~~June 30, ~~2002~~ 2003 is estimated to be as follows (in thousands):

Remainder of 2002	$	246
Remainder of 2003	$	885
2003		921
2004		1,599
2004		759
2005		1,391
2005		558
2006		641
2006		296
2007		248
2007		199
2008		114
After 2007		169
After 2008		62
Gross carrying value of mortgage rights	$	3,148
Gross carrying value of mortgage servicing rights	$	4,940

NOTE HG – DEFINITIVE AFFILIATION AGREEMENT

On July 23, 2002, the Company signed a definitive ~~Affiliation~~affiliation ~~Agreement~~agreement, ~~which~~as amended on September 9, 2002 and December 10, 2002, which provides for the acquisition of the Company by Fifth Third Bancorp, ~~an Ohio corporation~~ (“Fifth Third”) through ~~the~~ a merger of the Company with and into a ~~wholly~~ wholly-owned subsidiary of Fifth Third. The Board of Directors of the Company approved the ~~Affiliation~~definitive ~~Agreement~~affiliation agreement and the transactions contemplated thereby.

AsOn aMarch 27, ~~result of the merger~~2003, ~~each shareholder of~~ the Company ~~will~~entered ~~receive,~~into onan ~~a tax-free~~additional ~~basis,~~amendment ~~between~~to ~~0.3832~~the affiliation ~~and~~agreement ~~0.4039~~to ~~shares~~extend ofits ~~common~~termination ~~stock~~date ofto ~~Fifth~~June 30, ~~Third~~2004. As consideration for ~~each~~this ~~share~~amendment, ofFifth ~~Company~~Third ~~common~~agreed ~~stock~~to ~~owned,~~amend ~~with~~ the ~~exact~~ exchange ratio to ~~be determined~~provide ~~based~~shareholders onof the ~~average~~Company ~~closing~~shares ~~price~~ of ~~the~~Fifth Third common stock ~~of Fifth~~ ~~Third~~valued ~~for~~at ~~the~~a ~~ten~~fixed ~~consecutive~~price ~~trading~~of ~~days~~$31.00 ~~ending~~per onshare ~~the fifth trading day preceding the closing~~ of the ~~merger.~~Company, ~~The~~plus ~~transaction~~any ~~is expected to close in~~increase in the ~~first~~book ~~quarter~~value ofper ~~2003~~share ~~and~~(excluding iscertain ~~subject~~items toas ~~the~~defined ~~approval~~in of the ~~Company’s~~ ~~shareholders~~amendment) ~~and normal regulatory approvals. The terms~~ of the ~~Affiliation Agreement are more fully described in the~~ Company’s ~~Current~~common ~~Report~~stock onfrom ~~Form~~March ~~8-K as~~31, ~~filed~~2003 ~~with~~through the ~~Securities and Exchange Commission on July 25, 2002, which~~most ~~report~~recent ~~also~~quarter ~~contains~~end aprior ~~copy~~to of the ~~Affiliation Agreement~~closing. ~~On September 10~~Further, ~~2002~~ in the ~~Company~~event ~~filed~~that ~~a Form 8-K regarding an amendment to the Affiliation~~Fifth ~~Agreement~~Third ~~between~~is ~~the~~not ~~Company~~granted ~~and~~regulatory ~~Fifth~~approval ~~Third~~for ~~Bancorp.~~the

NOTE I – CONTINGENCIES

The Company is involved in various legal proceedings in the normal course of business. On August 24, 2000, the Company was served with a suit alleging breach of contract, tortuous interference with contract, fraud and civil conspiracy in connection with the denial of a loan to a potential borrower involved in a real estate transaction. The plaintiff seeks compensatory damages not to exceed $20 million and punitive damages not to exceed $40 million.

~~The~~merger ~~case~~on isor ~~scheduled~~before ~~for~~May 31, ~~trial on February 25~~2004, ~~2003. Management believes~~ the ~~claims~~Company ~~are~~will ~~frivolous~~have ~~and without merit and~~ the ~~Company~~right ~~has meritorious defenses against these actions~~to ~~and~~terminate the ~~chances~~agreement ~~for~~and ~~recovery~~to byreceive ~~the~~a ~~plaintiff~~termination ~~are~~fee ~~remote.~~of No$27 million ~~provision has been~~from ~~made~~Fifth ~~in the accompanying financial statements for the ultimate resolution of this matter~~Third.

~~There~~NOTE ~~are~~H ~~also~~– ~~other~~CONTINGENCIES ~~legal~~AND ~~actions in which the Company is a defendant.~~GUARANTEES ~~Management believes the Company also has meritorious defenses~~ ~~against these claims and intends to defend such actions vigorously. No provision has been made in the consolidated financial statements for the ultimate resolution of these matters.~~

~~ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Contingencies

The Company is involved in various legal proceedings in the normal course of business. On August 24, 2000, Jerrold S. Pressman filed a complaint in the U.S. District Court for the Middle District of Tennessee, against Franklin National Bank ~~represents~~and ~~virtually~~Gordon ~~all~~E. Inman, Chairman of the ~~assets~~Board of the Company. ~~The~~and the Bank, ~~located~~alleging inbreach ~~Franklin~~of contract, ~~Tennessee~~tortious interference with contract, ~~opened~~fraud, and civil conspiracy in ~~December~~connection ofwith ~~1989~~the ~~and~~denial ~~continues~~of a loan to a potential ~~experience~~borrower ~~substantial~~involved ~~growth~~in a real estate transaction. The Bank ~~has~~and ~~nine~~Mr. Inman ~~full~~filed their ~~service~~answers ~~branches.~~in Inthis matter on September 18, 2000, and a motion for Summary ~~August~~Judgment ~~1996~~on October 10, 2000. The Court denied the Bank’s ~~opened~~motion anfor ~~insurance~~Summary Judgment ~~subsidiary~~on February 15, ~~Franklin Financial Insurance~~2001. InOn ~~October~~July 27, ~~1997~~2001, the Bank ~~opened~~and aMr. Inman ~~financial~~filed ~~services subsidiary,~~a ~~Franklin~~second ~~Financial~~motion ~~Securities~~for Summary Judgment. The ~~financial~~Court ~~services~~granted ~~subsidiary~~in ~~offers~~part and denied in ~~financial~~part ~~planning~~the Bank and ~~securities~~Mr. Inman’s ~~brokerage~~motion ~~services~~for ~~through~~Summary ~~Legg~~Judgment ~~Mason Financial~~on ~~Partners~~October 5, 2001. The Incase ~~December~~was ~~1997,~~set ~~the~~for ~~Bank~~trial ~~began~~to ~~operating~~begin ~~its~~on ~~mortgage division~~March 5, as2002; ahowever, ~~separate~~on ~~subsidiary~~February 22, 2002, ~~Franklin~~the ~~Financial~~Court, ~~Mortgage.~~on Inits ~~August~~own ~~1998~~Motion, continued the ~~mortgage~~trial ~~subsidiary~~until ~~opened~~September 10, 2002. aMr. Pressman’s ~~retail~~amended ~~mortgage~~complaint ~~origination~~seeks ~~office~~compensatory damages in an amount ~~Chattanooga,~~not ~~Tennessee.~~to ~~Franklin~~exceed ~~Financial~~$20 million ~~Mortgage~~and ~~originates,~~punitive ~~sells~~damages ~~and services~~in ~~wholesale~~an ~~and~~amount ~~retail~~not ~~mortgage~~to ~~loans~~exceed $40 million from each defendant. InOn September 3, ~~2000~~2002, the ~~Company~~Court granted Mr. ~~formed~~Pressman’s ~~Franklin~~motion ~~Capital~~to ~~Trust~~Continue I,Trial aand ~~Delaware~~set ~~business~~February 25, ~~trust~~2003, ~~and~~to ~~wholly~~begin ~~owned~~the ~~subsidiary~~trial. ofA ~~the~~bench ~~Company,~~trial ~~for~~on the ~~purpose~~merits of ~~issuing~~the ~~Trust~~case ~~Preferred Securities~~was toheld ~~the~~between ~~public~~February 25 and March 7, 2003. InOn ~~December~~April 30, ~~2000~~2003, the ~~Company~~United ~~received~~States ~~approval~~District ~~from~~Judge issued an Order in which a judgment was entered for the ~~Federal~~Defendants ~~Reserve~~Franklin National Bank and toMr. Inman ~~convert~~on ~~from~~all aof ~~bank~~Mr. Pressman’s ~~holding~~claims. ~~company~~On toMay 2, a2003, ~~financial~~Mr. Pressman ~~holding~~filed ~~company~~a toNotice ~~allow~~of Appeal to the ~~Company~~United ~~additional~~States ~~avenues~~Court of Appeals for ~~growth~~the Sixth ~~opportunities~~Circuit. InA ~~May~~Proof ~~2001,~~Brief of Appellee Franklin National Bank will be timely filed with the ~~Company’s~~Court. ~~stock~~No ~~began~~provision ~~trading~~has onbeen made in the ~~NASDAQ~~accompanying consolidated ~~National~~financial ~~Market~~statements ~~under~~for the ~~symbol~~ultimate ~~“FNFN”~~resolution of this matter.

~~Recent~~There ~~Developments~~are also other legal actions in which the Company is a defendant. Management under the advice of legal counsel believes the Company also has meritorious defenses against these claims and intends to defend such actions vigorously. No provision has been made in the consolidated financial statements for the ultimate resolution of these matters.

~~On July 23, 2002, the Company signed a definitive Affiliation Agreement which~~Guarantees ~~provides for the acquisition of the Company by Fifth Third Bancorp, an Ohio~~ corporation (“Fifth Third”) through the merger of the Company with and into a wholly owned subsidiary of Fifth Third. The Board of Directors of the Company approved the Affiliation Agreement and the transactions contemplated thereby.

AsIn ~~a result of~~ the ~~merger,~~ordinary ~~each~~course ~~shareholder~~ of business, the Company ~~will~~sells ~~receive,~~mortgage onloans awithout ~~tax-free~~recourse ~~basis,~~that ~~between~~may ~~0.3832~~have ~~and~~to ~~0.4039~~be ~~shares~~subsequently ofrepurchased ~~common~~due ~~stock~~to ofdefects ~~Fifth Third~~that ~~for~~occurred ~~each~~during ~~share~~the origination of ~~Company~~the ~~common~~loan. ~~stock~~The ~~owned~~defects are categorized as documentation errors, ~~with~~underwriting ~~the~~errors, ~~exact~~early ~~ratio~~payment todefaults beand fraud. ~~determined~~When ~~based~~a onloan ~~the~~sold ~~average~~to ~~closing~~an ~~price~~investor ofwithout ~~the~~recourse ~~common~~fails ~~stock~~to ofperform, ~~Fifth~~the investor ~~Third~~will ~~for~~typically review the ~~ten~~loan ~~consecutive~~to ~~trading~~determine ~~days~~whether ~~ending~~defects onin the ~~fifth~~origination process ~~trading~~occurred. ~~day preceding~~If ~~the~~a ~~closing~~defect ofis identified, the ~~merger~~Company ~~The~~may ~~transaction~~be isrequired ~~expected~~ to either ~~close~~repurchase in the ~~first~~loan ~~quarter~~or ofindemnify ~~2003~~the ~~and~~investor isfor ~~subject~~losses tosustained. ~~the~~If there ~~approval~~are ofno defects, the Company~~’s shareholders~~ ~~and~~has ~~normal~~no ~~regulatory~~commitment ~~approvals.~~to ~~The~~repurchase ~~terms of~~ the ~~Affiliation~~loan. ~~Agreement~~The ~~are~~requirement ~~more~~to ~~fully~~repurchase ~~described~~the loan or indemnify the ~~Company’s~~investor ~~Current~~is ~~Report~~generally limited onto ~~Form~~90 ~~8-K~~days ~~as filed~~from ~~with~~the date the ~~Securities~~related ~~and~~mortgage ~~Exchange~~loan ~~Commission~~is onsold ~~July~~to the investor. As of June 2530, ~~2002~~2003, ~~which report~~these ~~also~~guarantees ~~contains~~totaled a$74.7 million. ~~copy~~No reserve ofhas ~~the~~been ~~Affiliation~~established ~~Agreement.~~at ~~On September~~June 1030, ~~2002~~2003 to cover the potential exposure related to these guarantees as the Company ~~filed~~does anot ~~Form 8-K~~believe ~~regarding~~the anultimate ~~amendment~~loss related to ~~the~~this ~~Affiliation Agreement~~exposure ~~between~~is ~~the~~material ~~Company~~to ~~and~~the ~~Fifth~~consolidated ~~Third~~financial ~~Bancorp~~statements.

~~Critical~~The ~~Accounting~~Company ~~Policies~~maintains insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles. In addition to the insurance coverage provided, the Company will indemnify certain officers and directors for actions taken on behalf of the Company.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified two policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate to the methodology for the determination of our allowance for loan losses and to the valuation of our mortgage servicing rights.

~~The~~ITEM ~~allowance~~2 ~~for~~- ~~loan losses is maintained at a level which, in management~~MANAGEMENT’~~s judgment,~~S isDISCUSSION ~~adequate~~AND toANALYSIS ~~absorb~~OF ~~credit~~FINANCIAL ~~losses~~CONDITION ~~inherent~~AND inRESULTS ~~the~~OF ~~loan portfolio.~~OPERATIONS ~~The amount of the allowance is based on management’s evaluation of the~~ ~~collectibility of the loan portfolio, including the nature of the portfolio,~~ credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. A loan is considered impaired when management has determined it is possible that all amounts due according to the contractual terms of the loan agreement will not be collected. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries.

~~Servicing assets on loans sold are measured by allocating the previous carrying~~Overview ~~amount between the assets sold and the retained interests based on their~~ ~~relative fair values at the date of transfer. Our mortgage servicing rights are~~ related to in-house originations serviced for others. The initial amount recorded as mortgage servicing rights is essentially the difference between the amount that can be realized when loans are sold, servicing released, as compared to loans sold, servicing retained. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights.

~~These~~The ~~policies~~Bank ~~and~~represents virtually all of the ~~judgments,~~assets ~~estimates~~of ~~and~~the ~~assumptions~~Company. ~~are~~The ~~described~~Bank, located in ~~greater~~ ~~detail~~Franklin, inTennessee, ~~subsequent~~opened ~~sections~~in December of ~~Management’s~~1989 ~~Discussion~~ and ~~Analysis~~continues to ~~and~~experience ingrowth. ~~Note~~The 1Bank tohas nine full service branches. In August 1996, the ~~Consolidated~~Bank opened an insurance subsidiary, Franklin Financial Insurance. ~~Statements~~In ~~included~~October in1997, the Bank opened a financial services subsidiary, ~~Company’s~~Franklin ~~2001~~Financial ~~Annual~~Securities. ~~Report~~The onfinancial ~~Form 10-K~~services subsidiary offers financial planning and securities brokerage services through Legg Mason Financial Partners. WeIn ~~believe~~December ~~that~~1997, the ~~judgments~~Bank began operating its mortgage division as a separate subsidiary, Franklin Financial Mortgage. In August 1998, ~~estimates~~the ~~and~~mortgage ~~assumptions~~subsidiary ~~used~~opened a retail mortgage origination office in Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells and services wholesale and retail mortgage loans. In September 2000, the ~~preparation~~Company formed ofFranklin ~~our~~Capital ~~consolidated~~Trust ~~financial~~I, a Delaware business trust and wholly owned ~~statements~~subsidiary ~~are~~of ~~appropriate~~the ~~given~~Company, for the ~~factual~~purpose ~~circumstances~~of atissuing Trust Preferred Securities to the ~~time~~public. ~~However~~ In December 2000, ~~given~~the Company received approval from the ~~sensitivity~~Federal ofReserve ~~our~~Bank ~~consolidated~~to ~~financial~~convert ~~statements~~from a bank holding company to a financial ~~these~~holding ~~critical~~company ~~accounting~~to ~~policies,~~allow the ~~use~~Company ofadditional ~~other~~avenues ~~judgments~~for growth opportunities. In May 2001, ~~estimates~~the ~~and assumptions~~Company’s ~~could~~stock ~~result~~began intrading ~~actual~~on ~~results~~the ~~differing~~NASDAQ National ~~from~~Market ~~those~~under ~~estimates~~the symbol “FNFN”.

~~Financial~~Recent ~~Condition~~Developments

~~Total~~On ~~assets increased $85.3~~July ~~million~~23, ~~or 11.6%~~2002, ~~since~~the ~~December 31,~~Company ~~2001,~~entered tointo a definitive Affiliation Agreement ~~total~~(the “Agreement”) which provides for the acquisition of ~~$821.1 million~~the atCompany ~~September 30~~by Fifth Third Bancorp, ~~2002.~~an ~~The~~Ohio ~~growth~~corporation in(“Fifth ~~assets~~Third”) ~~has~~through ~~been~~the merger of the ~~funded~~Company ~~primarily~~with byand into a ~~$64.8 million~~wholly ~~increase~~owned insubsidiary ~~deposits,~~of aFifth ~~$10~~Third.~~7 million~~ The original ~~increase~~Agreement inprovided ~~long~~that each shareholder of the Company would receive, on a tax-~~term~~free ~~debt~~basis, between 0.3832 and ~~other~~0.4039 ~~borrowings~~shares ~~and~~of ~~net~~common ~~income~~stock of ~~$8.4 million.~~Fifth Third ~~Total~~for ~~deposits~~each ~~were~~share ~~$682.0 million~~of atCompany ~~September 30~~common stock owned, ~~2002~~with the exact ratio to be determined based on the average closing price of the common stock of Fifth Third for the ten consecutive trading days ending on the fifth trading day preceding the closing of the merger.

~~The~~On ~~Bank continues to experience excellent loan demand as demonstrated by the growth in net loans of $93.9~~September ~~million~~9, or2002 ~~22.5%,~~and ~~since~~ December 3110, ~~2001.~~2002, ~~Loans held~~the ~~for~~parties ~~sale~~amended ~~decreased~~the ~~$1.3 million,~~Agreement to orextend ~~6.3%,~~the ~~since~~deadlines ~~December 31, 2001. The allowance~~ for ~~loan~~certain ~~losses~~regulatory ~~increased~~and ~~$1.1 million,~~other orfilings ~~26.7%,~~by ~~since~~Fifth ~~December 31,~~Third ~~2001,~~and to ~~$5.4 million,~~extend orthe ~~approximately~~termination ~~1.01%~~date offor ~~total~~the ~~loans,~~Agreement atto ~~September~~April 301, ~~2002~~ 2003. The reasons ~~increase~~for ~~is primarily~~ the ~~result~~delay ofrelated ~~growth~~to inan ~~the~~investigation ~~loan~~by ~~portfolio~~various ~~and~~banking regulators ~~does~~and ~~not reflect~~ a ~~decline~~moratorium inimposed ~~overall~~by ~~asset~~the ~~quality.~~banking ~~The~~regulators ~~Company~~prohibiting ~~has~~acquisitions ~~seen~~by ~~significant~~Fifth ~~growth in construction and commercial real estate loans~~Third, ~~which carry~~including ~~a higher reserve factor. Management believes that~~ the ~~level~~pending acquisition of the ~~allowance~~ ~~for~~Company. ~~loan~~On ~~losses is adequate at September~~March 3027, ~~2002. Management reviews~~ in2003, ~~detail~~Fifth ~~the~~Third ~~level~~announced ofthat ~~the~~it ~~allowance~~entered ~~for~~into ~~loan losses on~~ a ~~quarterly~~written ~~basis.~~agreement ~~The allowance~~with ~~is below~~ the ~~Bank’s peer group average as a percentage of loans,~~ ~~however~~Federal ~~the~~Reserve Bank’s ~~past due loans, at 1.99%~~ of ~~total~~Cleveland ~~loans~~and atthe ~~September 30, 2002,~~Ohio ~~have~~Department ~~historically~~of ~~been below peer group average. At September 30~~Commerce, ~~2002,~~Division ~~the~~of ~~Bank~~Financial ~~had~~Institutions ~~non-accrual~~arising ~~loans~~out of ~~$5.2 million~~the ~~compared~~previously todiscussed ~~non-accrual~~regulatory review ~~loans~~ of ~~$1.0 million~~ atFifth ~~December 31, 2001~~Third. The ~~Bank~~written ~~had~~agreement ~~one~~outlines ~~large~~a ~~relationship~~series of ~~$4.7~~steps to ~~million~~address ~~that~~and ~~was~~strengthen ~~placed~~Fifth onThird’s ~~non-accrual~~risk ~~during~~management ~~the~~processes ~~third~~and ~~quarter of 2002.~~internal ~~Management~~controls. ~~feels~~These ~~the~~steps ~~Bank~~include ~~has~~independent ~~adequate~~third ~~collateral~~party onreviews ~~this loan relationship~~ and the ~~does~~submission ~~not~~of ~~expect~~written toplans ~~sustain~~in a ~~loss.~~number Atof ~~September 30,~~areas. ~~2002,~~These ~~the~~areas ~~Bank~~include ~~had loans~~Fifth ~~that~~Third’s ~~were~~management, ~~specifically~~corporate ~~classified~~governance, asinternal ~~impaired~~audit, ~~of approximately $14.7 million~~account ~~compared~~reconciliation toprocedures ~~$7.0 million~~and ~~at December 31~~policies, ~~2001.~~information ~~The~~technology, ~~allowance~~and ~~for loan losses~~strategic planning.

On March 27, 2003, the Company entered into Amendment No. 3 to the Agreement to extend the termination date of the Agreement to June 30, 2004. In this amendment, Fifth Third agreed to amend the exchange ratio in the merger to provide that the Company’s shareholders would receive Fifth Third common stock valued at a fixed price of $31.00 per share of Franklin common stock. In addition, the Company’s shareholders would receive the benefit of any increase in the book value per share (excluding certain items as defined in the amendment) of the Company’s common stock from March 31, 2003 through the most recent quarter end prior to closing. In the event that the Board of Governors of the Federal Reserve System has not granted regulatory approval for the merger on or before May 31, 2004, the Company has the right to terminate the Agreement and to receive a termination fee of $27 million from Fifth Third.

~~related~~The toclosing ~~impaired loans~~of ~~was~~the ~~$712,000~~transaction atis ~~September 30,~~subject ~~2002~~to ~~compared~~the toapproval ~~$714,000~~of atthe ~~December 31,~~Company’s ~~2001~~shareholders and normal regulatory approvals. The ~~average~~terms ~~carrying~~of ~~value~~the ofAgreement ~~impaired~~and the ~~loans~~amendments ~~was~~thereto ~~approximately~~are ~~$7.0 million~~more ~~for~~fully described in the ~~nine~~Company’s Current Reports on Form 8-~~month~~K ~~period~~as ~~ended~~filed ~~September~~with the Securities and Exchange Commission on July 3025, 2002. ~~Interest~~(which ~~income~~report also contains a copy of ~~approximately~~ ~~$59~~the Affiliation Agreement),~~000~~ September 10, 2002, December 18, 2002 and ~~$177~~March 27,~~000~~ ~~was~~2003. ~~recognized~~The onabove ~~these~~description ~~impaired~~of ~~loans~~the Agreement ~~during~~and the ~~three~~amendments ~~and~~thereto ~~nine-month~~is ~~periods~~qualified ~~ended~~in ~~September 30~~its entirety by reference to the Agreement and the amendments, ~~2002~~which are attached as exhibits to the Company’s Current Reports on Form 8-K.

AtCritical ~~September 30,~~Accounting ~~2002 the fair value of securities classified as~~Policies ~~available-for-sale exceeded the cost of the securities by $5.8 million. At~~ December 31, 2001 the cost of securities classified as available-for-sale exceeded the fair value of the securities by $157,000. As a result, an unrealized gain net of taxes of $3.5 million and an unrealized loss net of taxes of $94,000 at September 30, 2002 and December 31, 2001, respectively, is included in “Accumulated Other Comprehensive Income” in the stockholders’ equity section of the balance sheet. The unrealized gain is primarily due to economic market conditions for the nine months ended September 30, 2002.

~~Securities~~Various ~~available-for-sale~~elements ~~decreased~~of ~~$10.7 million,~~our oraccounting ~~4.5%~~policies, ~~during~~by ~~the~~their ~~nine months ended September 30~~nature, ~~2002.~~are ~~The~~inherently subject ~~decrease was due~~ to ~~cash~~estimation ~~flow~~techniques, ~~from~~valuation ~~the investment~~assumptions ~~portfolio being reinvested in loan growth~~ and ~~more~~other ~~purchased~~subjective ~~securities~~assessments. ~~placed~~In inparticular, ~~held-to-maturity~~we ~~than~~have inidentified ~~the~~three ~~recent~~policies ~~past. Securities held-to-maturity increased $789~~that,~~000,~~ ~~or 7.7%,~~ due to the ~~purchase of zero~~ ~~coupon~~judgments, ~~agencies~~estimates ~~during~~and ~~the~~assumptions ~~first~~inherent ~~nine~~in ~~months~~those ofpolicies, ~~2002~~are ~~which were classified as~~critical ~~held-~~to~~-maturity~~ ~~instead~~an understanding of ~~available-for-sale~~our asconsolidated ~~such~~financial ~~securities have been historically classified~~statements. ~~Net~~These ~~premises and equipment decreased by $593,000, or~~policies ~~5.6%,~~relate ~~since December 31, 2001 primarily due~~ to ~~depreciation~~the ~~expense~~methodology ~~offset slightly~~for bythe ~~purchases~~determination of ~~equipment.~~our ~~Accrued~~allowance ~~interest~~for ~~receivable~~loan ~~increased~~and ~~$133,000,~~lease ~~or 3.7%~~losses, ~~since December 31, 2001. This increase is due to~~ the ~~combined~~ ~~increase~~valuation of ~~$84.0 million~~our inrepossessed ~~loans~~ and ~~securities~~foreclosed ~~since December 31, 2001, offset partially by lower interest rates. Foreclosed~~ assets ~~decreased $2.5 million,~~and ~~or 81.4%, since December 31, 2001. The decrease is~~ the ~~result of~~ ~~foreclosed~~valuation ~~property sales~~ of ~~$4.5 million~~our ~~offset~~mortgage ~~partially~~servicing ~~by additional foreclosures of $2~~rights.~~0 million.~~

~~Accrued~~The ~~interest~~allowance ~~payable~~for ~~decreased~~loan ~~$338,000,~~losses ~~or 20.3%, since December 31, 2001. The decrease~~ is ~~due~~maintained toat a ~~significant~~level ~~decrease~~which, in ~~interest rates during late~~management’s ~~2001~~judgment, ~~and~~is ~~2002,~~adequate ~~offset~~to ~~partially~~absorb bycredit anlosses ~~increase~~inherent in ~~deposits.~~the ~~Long-term~~loan ~~debt and~~portfolio. ~~other~~The ~~borrowings~~amount ~~increased~~of ~~$10.7 million,~~the orallowance ~~14.0%,~~is ~~since~~based ~~December 31,~~on ~~2001~~management’s ~~due to~~evaluation ~~temporary federal funds purchased~~ of ~~$11.0 million, offset partially by~~ the ~~Company’s~~collectibility ~~repayment~~ of athe ~~note~~loan toportfolio, aincluding ~~correspondent~~the ~~bank~~nature onof athe ~~branch facility.~~portfolio, ~~Other~~credit ~~liabilities~~concentrations, ~~increased~~trends ~~$2.2 million,~~in orhistorical ~~123.7%~~loss experience, ~~since~~specific ~~December 2001~~impaired ~~primarily~~loans, ~~due~~and toeconomic ~~an increase of $2~~conditions.~~3 million~~ inAllowances ~~deferred~~for ~~taxes~~impaired ~~related~~loans toare generally ~~unrealized~~determined ~~holding~~based ~~gains~~ on ~~securities~~collateral ~~held~~values ~~as available-for-sale. Stockholders’ equity increased $11.0 million,~~ or ~~30.9%,~~the ~~from~~present ~~December 31,~~value ~~2001 to~~of ~~September 30,~~estimated ~~2002~~cash flows. ~~The~~A ~~increase~~loan is ~~primarily~~considered ~~attributable~~impaired towhen ~~$8.4 million in~~management ~~net~~has ~~income~~determined ~~and~~it ~~a $3.6 million increase in other accumulated comprehensive~~is ~~income,~~possible ~~offset~~that ~~partially~~all byamounts ~~$1.3 million in dividends declared. Unearned compensation of $192,000 was also recorded~~ due according to the ~~issuance~~contractual ofterms ~~restricted stock. The restricted stock was issued as part~~ of the ~~Company’s Key Employee~~loan ~~Restricted~~agreement ~~Stock~~will ~~Plan~~not ~~and~~be ~~vests~~collected. ~~over~~The aallowance ~~period~~is ofincreased ~~four~~by ~~years.~~a ~~The~~provision ~~unearned~~for ~~compensation~~loan islosses, ~~being~~which ~~amortized~~is oncharged ato ~~straight-line~~expense ~~basis~~and ~~over~~reduced ~~the~~by ~~four~~charge-~~year vesting~~offs, ~~period~~net of ~~the restricted stock~~ recoveries.

~~Liquidity~~Repossessed and ~~Capital~~foreclosed ~~Resources~~assets are acquired through, or in lieu of, loan foreclosure and are held for sale and initially recorded at fair value at the date of foreclosure, thereby establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by independent appraisers and/or management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Gains and losses from the sale of these assets are included in other income or other expense as appropriate. Any expenses to maintain such assets and changes in the valuation allowance, if any, are included in other expenses.

~~Management~~Servicing ~~continuously~~assets ~~monitors~~on ~~the~~loans ~~Bank’s~~sold ~~liquidity,~~are ~~and~~measured ~~strives~~by toallocating ~~maintain an asset/liability mix that provides~~ the ~~highest~~previous ~~possible net interest margin~~carrying ~~without~~amount ~~taking~~between ~~undue~~the ~~risk~~assets ~~with~~sold ~~regard~~and tothe ~~asset~~retained ~~quality~~interests orbased ~~liquidity.~~on ~~Liquidity~~their ~~management~~relative ~~involves~~fair ~~meeting~~values at the ~~funds~~date ~~flow requirements~~ of ~~customers~~transfer. ~~who~~Our ~~may withdraw~~mortgage ~~funds~~servicing onrights ~~deposit~~are related ~~or have need~~ to ~~obtain~~in-house ~~funds~~originations toserviced ~~meet~~for ~~their credit needs~~others. ~~Banks~~The ininitial ~~general~~amount recorded ~~must~~as ~~maintain~~mortgage ~~adequate~~servicing ~~cash~~rights ~~balances~~is toessentially ~~meet~~the ~~daily~~difference ~~cash flow~~between ~~requirements as well as satisfy~~ the amount ~~reserves~~that ~~required~~can bybe ~~applicable regulations.~~realized ~~The~~when ~~cash~~loans ~~balances held~~ are ~~one~~sold, ~~source~~with ofservicing ~~liquidity.~~released, ~~Other sources~~as ofcompared ~~liquidity~~to ~~are~~loans ~~provided~~sold, bywith ~~the~~servicing ~~investment~~retained. ~~portfolio,~~Mortgage ~~federal~~servicing ~~funds~~rights ~~purchased,~~are ~~Federal~~amortized ~~Home~~in ~~Loan~~proportion ~~Bank advances~~to, ~~sales~~and ofover ~~loan~~the ~~participations~~period of, ~~loan~~estimated ~~payments,~~net servicing ~~brokered~~revenues. ~~and~~Impairment ~~public~~of ~~funds~~mortgage ~~deposits~~servicing ~~and~~rights ~~the~~is ~~Company’s~~assessed ~~ability~~based toon ~~borrow funds,~~the asfair ~~well~~value asof ~~issue~~those ~~new capital~~rights.

These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 1 to the Consolidated Financial Statements included in the Company’s 2002 Annual Report on Form 10-K. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

Financial Condition

Total assets increased slightly by $1 million, or 0.1%, since December 31, 2002, to a total of $892.3 million at June 30, 2003. The increase in assets is primarily due to a slight increase in deposits by $737,000. Total deposits were $759.1 million at June 30, 2003 an increase of 0.1% since December 31, 2002. The Bank’s growth in noninterest-bearing deposits has been strong during the first half of 2003 with a $31.7 million, or

~~Management believes that liquidity is at an adequate level with cash and due from banks of $27~~40.~~1 million at September 30~~0%, ~~2002.~~increase ~~Loans~~since ~~and securities scheduled to mature within one year exceeded $297.8~~December ~~million at September 30~~31, ~~2002,~~ ~~which should provide further liquidity~~2002. InThis ~~addition,~~increase ~~approximately $225.6 million of securities are classified as available-for-sale and could be sold to help meet liquidity needs should they arise. The Company~~ has abeen ~~line~~offset ofby ~~credit of $10.0 million with~~ a ~~lending~~decrease ~~institution and the Bank is approved to borrow up to $10.0 million~~ in ~~funds from the Federal Home Loan Bank through overnight~~interest-bearing ~~advances~~deposits ~~and $65.0 million in federal funds lines to assist with capital and liquidity needs. The Company had $2.3 million in borrowings against its line~~ of ~~credit~~ ~~and the Bank had~~ $~~11.0 million in federal funds purchased at September~~ 30~~, 2002~~. ~~In February and August, 1998 the Bank entered into long term convertible Federal Home Loan Bank advances with a ten year maturity and a one year call option totaling $6.0~~1 million. ~~During~~or ~~the fourth quarter of 1999, these advances converted to variable rate advances, which reprice quarterly based on 90-day LIBOR~~4. As part of the leverage program, during the third quarter of 2000 the Bank entered into three long-term convertible Federal Home Loan Bank advances. One advance of $25.0 million has a ten year maturity with a three year call option. The other two advances totaling $27.0 million have a five year maturity with a one year call option. After the three and one year call options, these advances may be converted by the Federal Home Loan Bank from a fixed to a variable rate. The Bank has the right to repay the advances on the date of conversion to a variable rate without penalty. The Bank has $2.1 million outstanding in repurchase agreements to further develop its relationship with customers. The Bank has approximately $118.6 ~~million~~% ~~in brokered~~since ~~deposits at September~~December 3031, 2002 ~~to help fund strong loan demand~~. ~~The~~ ~~majority of these brokered deposits are $100,000 or less, but they are~~ ~~generally considered to be more volatile than the Bank’s core deposit base.~~

~~Approximately~~The Bank’s loan demand has slowed slightly as demonstrated by the decrease in gross loans of $8013.04 million, inor ~~loan~~2.4%, ~~commitments~~since ~~are~~December 31, ~~expected~~2002. toThe ~~be funded~~allowance ~~within~~for ~~the~~loan ~~next~~losses ~~six~~increased ~~months~~$345,000, or 6.0%, ~~Approximately~~since December 31, 2002, to $366.9 1 million, or approximately 1.12% of ~~these~~total ~~commitments~~loans, at June 30, 2003. The Company ~~are~~continues to see growth in construction and commercial real estate loans, which carry a higher reserve factor. Management believes that the ~~mortgage~~level of ~~banking~~the ~~segment~~allowance for loan losses is adequate at June 30, 2003. ~~Furthermore~~Management reviews in detail the level of the allowance for loan losses on a quarterly basis. The allowance is below the Bank’s peer group average as a percentage of loans, however the Bank’s ~~has~~past ~~approximately~~due loans, at 1.55% of total loans at June 30, 2003, have historically been below peer group average. At June 30, 2003, the Bank had non-accrual loans of $752.4 million compared to non-accrual loans of $5.2 million at December 31, 2002. The Bank has one large relationship of ~~other~~$3.8 million ~~loan~~that ~~commitments,~~was ~~primarily~~placed ~~unused~~on ~~lines~~non-accrual ~~and~~status ~~letters~~during the third quarter of 2002. ~~credit~~Of this amount, ~~which~~approximately ~~may~~$819,000 oris ~~may~~specifically ~~not~~reserved befor in ~~funded.~~the ~~Commitments~~allowance ~~may~~for beloan ~~funded~~losses. byAssets ~~core~~were orrepossessed that ~~brokered~~collateralized ~~deposits,~~remaining ~~cashflow~~debt and were reclassified from loans to repossessed and foreclosed assets on the consolidated ~~securities~~balance ~~portfolio~~sheet orat ~~other~~June 30, ~~funding~~2003. Subsequent to the ~~sources~~repossession ~~which~~date, during the second quarter of 2003, the Bank established ~~maintains~~a valuation allowance on these assets for the amount of $2.4 million. The ~~mortgage~~valuation ~~banking~~allowance ~~segment~~represents a write down in the value of the assets based on information obtained by management from an independent third party. Management believes it has adequately valued these assets as of June 30, 2003. At June 30, 2003, the Bank had loans that were specifically classified as impaired of approximately $4614.70 million compared to $19.2 million inat ~~commitments~~December 31, to2002. ~~sell~~The allowance for loan losses related to impaired loans was $1.4 million at ~~September~~June 30, 2003 compared to $698,000 at December 31, 2002. The average carrying value of impaired loans was approximately $11.0 million for the six-month period ended June 30, 2003. Interest income of approximately $196,000 was recognized on these impaired loans during the six-month period ended June 30, 2003.

AsAt ~~discussed~~June 30, in2003 ~~Note~~the Efair tovalue of ~~the~~investment ~~Consolidated~~securities ~~Financial~~classified ~~Statements~~as ~~included~~available-for-sale ~~herein,~~exceeded ~~in August 2000,~~ the ~~Company~~cost ~~completed~~of the ~~sale~~securities ofby $164.04 million. ofAt December 31, 2002 the ~~Trust~~fair ~~Preferred~~value ~~Securities.~~of ~~The~~securities ~~Company~~classified ~~received~~as ~~net~~available-for-sale ~~proceeds~~exceeded the cost of the securities by $154.25 million ~~which~~. itAs ~~used~~a toresult, ~~repay~~an ~~approximately~~unrealized gain net of taxes of $52.07 million ofand ~~indebtedness~~$2.8 million onat ~~its~~June 30, ~~line of~~2003 ~~credit~~and December 31, ~~purchase~~2002, respectively, ~~investment~~is ~~securities~~included asin ~~part~~“Accumulated ofOther aComprehensive ~~leverage~~Income” ~~program~~in tothe ~~offset~~stockholders’ equity section of the ~~interest~~balance ~~expense~~sheet. ~~associated~~The ~~with~~unrealized gain is primarily due to economic market conditions causing the ~~Trust~~Bank’s ~~Preferred~~securities ~~Securities~~to ~~and~~be ~~for~~valued ~~general~~above ~~corporate~~current ~~purposes~~market values.

~~Management~~Securities ~~monitors~~available-for-sale increased $28.4 million, or 11.0%, during the ~~Company’s~~six months ~~asset~~ended ~~and~~June 30, ~~liability~~2003. ~~positions~~The inincrease ~~order~~was due to ~~maintain~~ aexcess ~~balance~~funds ~~between~~being ~~rate-~~invested in ~~sensitive~~the ~~assets~~investment ~~and~~portfolio ~~rate-sensitive liabilities~~due ~~and~~to atslower loan growth during the ~~same~~first ~~time~~half ~~maintain~~of 2003 ~~sufficient~~and ~~liquid~~proceeds ~~assets~~from securities called within the held-to-maturity ~~meet~~portfolio being ~~expected~~reinvested ~~liquidity~~as ~~needs~~available-for-sale securities. ~~Management~~Securities ~~believes~~held-to-maturity ~~that~~decreased ~~the~~$4.3 million, ~~Company’s~~or ~~liquidity~~52.4%, ~~is adequate~~due atto ~~September 30,~~zero ~~2002~~coupon ~~and~~agency ~~that~~securities ~~liquidity~~being ~~will~~called ~~remain~~during the ~~adequate~~first ~~over~~and ~~future~~second ~~periods~~quarters of 2003. ~~Other~~Net ~~than~~premises asand ~~set~~equipment ~~forth~~decreased ~~above~~by $533,000 ~~there~~or ~~are~~5.5%, ~~no known~~since ~~trends~~December 31, ~~commitments,~~2002 ~~events~~primarily ordue ~~uncertainties~~to ~~that~~depreciation expense. ~~will~~Accrued ~~result~~interest inreceivable decreased $59,000, or ~~are~~1.6%, since December ~~reasonably~~31, ~~likely~~2002. toThis ~~result~~decrease inis due to the ~~Company’s~~combined ~~liquidity~~increase ~~increasing~~of or$10.9 million ~~decreasing~~ in loans ~~any~~and ~~material~~securities ~~way.~~since ~~The~~December 31, ~~Company~~2002, isoffset ~~not~~by ~~aware~~significantly oflower interest ~~any~~rates. ~~current~~Repossessed ~~recommendations~~and ~~by the~~foreclosed ~~regulatory~~assets ~~authorities~~increased $555,000, ~~which~~or if35.7%, since ~~they~~December 31, ~~were~~2002. toThe beincrease ~~implemented,~~is ~~would~~primarily ~~have~~due ato $3.0 million of ~~material~~assets ~~adverse~~repossessed ~~effect~~from onone ~~the~~large ~~Company’s~~borrowing ~~liquidity,~~relationship ~~capital~~as ~~resources~~described orabove ~~results~~less ofthe ~~operations~~$2.5 million valuation allowance related to these assets.

~~Net~~Accrued ~~cash~~interest ~~flow~~payable ~~provided~~increased by$324,000, ~~operating~~or ~~activities~~21.9%, ~~was~~since ~~$8.3~~December ~~million~~31, ~~for~~2002. The ~~the~~increase ~~first nine~~is ~~months~~due to the timing of ~~2002.~~interest ~~The~~payments ~~sale~~on certificates of deposits. ~~loans~~Long-term ~~exceeded~~debt ~~loans~~and ~~originated~~other ~~for~~borrowings ~~sale~~decreased by $21.5 million, ~~for~~or ~~the~~1.9%, since ~~nine months ended September~~December 3031, 2002. ~~The majority of this change in cash flow is~~ due to ~~slightly~~the ~~less~~Company’s ~~loan~~$1.5 million ~~originations~~repayment ason ~~compared~~its toline ~~the sale~~ of ~~loans~~credit into ~~the~~a ~~mortgage~~correspondent ~~banking~~bank. ~~segment~~Other ~~during~~liabilities ~~the~~decreased ~~nine~~$3.9 million, ~~months ended~~or ~~September~~62.8%, since December 3031, 2002. The ~~increase~~decrease inis ~~cash~~due ~~flow~~to ~~was~~federal ~~partially~~and ~~offset~~state ~~by an~~tax ~~increase~~payments made in ~~other~~the ~~assets~~second quarter of ~~$3.8 million~~2003 and the settlement of a ~~decrease~~purchased investment security in ~~other~~the ~~liabilities~~first quarter of 2003. Stockholders’ equity increased $~~132~~5.4 million,~~000~~ ~~for~~or 11.1%, ~~the~~from ~~nine~~December 31, ~~months~~2002 ~~ended~~to ~~September~~June 30, ~~2002~~2003. The increase is primarily attributable to $4.0 million in net income offset partially by a $147,000

~~Net~~decrease ~~cash~~in ~~used~~other inaccumulated ~~investing~~comprehensive ~~activities~~income ~~was~~and $~~76.3 million~~960,000 ~~for~~in ~~the nine months~~dividends ~~ended~~declared. ~~September 30,~~Stockholders’ ~~2002,~~equity ~~which~~also ~~was~~increased ~~largely~~ due to ~~the~~a ~~banking segment~~$2.5 million ~~The~~ increase in common stock resulting from the ~~change~~exercise inof ~~net~~stock ~~loans~~options. ~~was~~Unearned compensation of $~~96.6 million~~120,000 ~~for~~is due to the ~~first~~issuance ~~nine~~of ~~months~~restricted ofstock in 2002. The ~~cash~~restricted ~~used~~stock inwas ~~investing~~issued ~~activities~~as ~~was~~part ~~offset~~of ~~partially~~the byCompany’s ~~a decrease~~Key inEmployee ~~the~~Restricted ~~net~~Stock ~~investment~~Plan and ~~portfolio~~vests over a period of ~~$17~~four years.~~9 million~~ ~~and~~The ~~proceeds~~unearned ~~from~~compensation ~~the~~is being ~~sale~~amortized ofon ~~foreclosed~~a ~~assets~~straight-line ofbasis ~~$4.5 million~~over ~~for~~ the ~~nine~~four-year ~~months~~vesting ~~ended~~period ~~September~~of the ~~30,~~restricted ~~2002~~stock.

~~Net~~Liquidity cash provided by financing activities was $71.5 million for the first nine months of 2002. The increase in cash flow is primarily due to an increase in deposits of $64.8 million in the first nine months of 2002 and anCapital ~~increase of~~Resources ~~$10.7 million in other borrowings offset partially by a decrease in repurchase~~ ~~agreements of $3.0 million and $1.3 million of dividends paid.~~

~~Equity~~Management ~~capital~~continuously ~~exceeded~~monitors ~~regulatory~~the ~~requirements~~Bank’s ~~at September 30~~liquidity, ~~2002,~~and atstrives 7to maintain an asset/liability mix that provides the highest possible net interest margin without taking undue risk with regard to asset quality or liquidity.1% Liquidity management involves meeting the funds flow requirements of ~~average~~customers ~~assets~~who may withdraw funds on deposit or have a need to obtain funds to meet their credit needs. Banks in general must maintain adequate cash balances to meet daily cash flow requirements as well as satisfy the reserves required by applicable regulations. The ~~Company’s~~cash ~~and~~balances held are one source of liquidity. Other sources of liquidity are provided by the investment portfolio, federal funds purchased, Federal Home Loan Bank’s ~~minimum~~advances, ~~capital~~sales ~~requirements~~of loan participations, loan payments, brokered and ~~compliance~~public ~~with~~funds deposits and the ~~same~~Company’s ~~are~~ability ~~shown~~to inborrow ~~the~~funds, as ~~following~~well ~~table~~as issue new capital.

	Leverage Capital						Tier 1 Capital						Total Risk-Based Capital
	Regulatory						Regulatory						Regulatory
	Minimum			Actual			Minimum			Actual			Minimum			Actual
Company		3.0	%		7.1	%		4.0	%		10.0	%		8.0	%		11.3	%
Bank		3.0	%		7.0	%		4.0	%		9.8	%		8.0	%		11.1	%

Management believes that liquidity is at an adequate level with cash and due from banks of $35.4 million at June 30, 2003. Loans and securities scheduled to mature within one year exceeded $266.8 million at June 30, 2003, which should provide further liquidity. In addition, approximately $286.4 million of securities are classified as available-for-sale and could be sold to help meet liquidity needs should they arise. The Company has a line of credit of $5.0 million with a lending institution and the Bank is approved to borrow up to $10.0 million in funds from the Federal Home Loan Bank through overnight advances and $72.5 million in federal funds lines to assist with capital and liquidity needs. The Company had $900,000 in borrowings against its line of credit and the Bank had $0 in federal funds purchased at June 30, 2003. In February and August, 1998 the Bank entered into long term convertible Federal Home Loan Bank advances with a ten year maturity and a one year call option totaling $6.0 million. During the fourth quarter of 1999, these advances converted to variable rate advances, which reprice quarterly based on 90-day LIBOR. During the third quarter of 2000 the Bank entered into three long-term convertible Federal Home Loan Bank advances. One advance of $25.0 million has a ten year maturity with a three year call option. The other two advances totaling $27.0 million have a five year maturity with a one year call option. After the three and one year call options, these advances may be converted by the Federal Home Loan Bank from a fixed to a variable rate. The Bank has the right to repay the advances on the date of conversion to a variable rate without penalty. The Bank has $200,000 outstanding in repurchase agreements to further develop its relationship with customers. The Bank has approximately $82.4 million in brokered deposits at June 30, 2003. The majority of these brokered deposits are $100,000 or less, but they are generally considered to be more volatile than the Bank’s core deposit base.

~~Results~~Approximately $76.0 million in loan commitments are expected to be funded within the next six months. Approximately $35.1 million of ~~Operations~~these commitments are in the mortgage banking segment. Furthermore, the Bank has approximately $99.6 million of other loan commitments, primarily unused lines and letters of credit, which may or may not be funded. Commitments may be funded by core or brokered deposits, cashflow from the securities portfolio or other funding sources which the Bank maintains. The mortgage banking segment has $42.2 million in commitments to sell loans at June 30, 2003.

~~The~~Management ~~Company~~monitors ~~had~~the ~~net~~Company’s ~~income~~asset ofand ~~$3.3 million~~liability positions in ~~the~~order ~~third~~to maintain ~~quarter~~a balance between rate-sensitive assets and ~~$8.4~~rate-sensitive ~~million~~liabilities ~~for~~and at the ~~first~~same ~~nine~~time ~~months~~maintain ofsufficient ~~2002~~liquid ~~compared~~assets to ~~net~~meet expected ~~income~~liquidity ~~of $1~~needs.~~8 million~~ ~~and~~Management ~~$4.6 million~~believes ~~for~~that the ~~same~~Company’s ~~periods~~liquidity inis adequate ~~2001.~~at ~~Net~~June 30, ~~income~~2003 ~~for~~and ~~the~~that ~~third quarter~~liquidity ~~and~~will ~~nine~~remain ~~months~~adequate ~~ended~~over ~~September 30,~~future periods. ~~2002~~Other ~~increased~~than ~~$1.4 million,~~as ~~or 77.3%,~~set ~~and~~forth ~~$3.8 million~~above, orthere ~~81.0%,~~are ~~respectively.~~no known trends,

Total interest income decreased $14,000, or 0.1%, in the three months ended September 30, 2002 and increased $334,000, or 0.9%, for the nine months ended September 30, 2002 compared to the same periods in 2001. Total interest expense decreased $2.2 million, or 32.8%, for the three months ended September 30, 2002 and $8.0 million, or 37.2% for the nine months ended September 30, 2002 compared to the same periods in 2001. The increase in total interest income is primarily attributable to the increase in average earning assets of $127.9 million, or 21.7%, for the first nine months of 2002 compared to 2001, offset by a significant decrease in interest rates. The increase in total interest income is primarily due to the banking segment. The decrease in total interest expense is primarily due to the significant decrease in interest rates during late 2001 offset by an increase in average interest-bearing liabilities of $129.6 million, or 21.6%, at September 30, 2002 as compared to the same period in 2001. The banking segment continues to experience strong deposit rate competition. The Company had a net interest margin of 4.34% for the third quarter of 2002 and 4.42% for the nine months ended September 30, 2002 compared to 3.86% and 3.54%, respectively, for the same periods in 2001. The increase in net interest margin is due to significant decreases in short-term interest rates. As short-term interest rates decrease, a significant portion of the Bank’s loan portfolio reprices immediately. The Bank currently has a relatively short-term certificate of deposit portfolio which has supported the net interest margin in the declining rate environment.

~~The provision for loan losses was $760~~commitments,~~000~~ ~~and~~events ~~$360,000~~or ~~for~~uncertainties ~~the~~that ~~three~~will ~~months ended~~result ~~September 30,~~in ~~2002~~or ~~and~~are ~~2001,~~reasonably ~~respectively.~~likely ~~The year-~~to~~-date~~ ~~provision is~~result ~~$2.2 million for the nine months ended September 30, 2002 as compared to $950,000 for the same period~~ in ~~2001. While~~ the ~~Bank~~Company’s ~~asset quality~~liquidity ~~remains~~increasing ~~good,~~or ~~increases~~decreasing in ~~the~~any ~~provision~~material ~~for~~way. ~~loan losses continue to be~~The ~~needed~~Company asis anot ~~result~~aware of ~~growth~~any incurrent ~~the~~recommendations ~~Bank’s~~by ~~loan~~the ~~portfolio.~~regulatory ~~Net charge-offs were $1.1 million~~authorities, orwhich ~~.22%,~~if ofthey ~~average~~were ~~loans outstanding at September 30, 2002 compared~~ to ~~net charge-offs of $75,000, or .02%, of average loans outstanding~~be ~~at September 30~~implemented, ~~2001.~~would ~~The~~have ~~Bank had~~ a ~~$905,000~~material ~~problem~~adverse ~~loan~~effect ~~relationship~~on ~~which resulted in a portion of~~ the ~~increase~~Company’s ~~in the provision for loan losses. The~~liquidity, ~~Bank~~capital ~~charged-off~~resources ~~the~~or ~~$905,000~~results of ~~loans during the first nine months of 2002~~operations.

~~Total~~Net ~~other~~cash ~~income~~flow ~~was~~provided ~~$3.2 million~~by inoperating ~~the~~activities ~~third~~was ~~quarter of 2002, an increase of~~ $13.46 million, ~~or 75.7%, from $1.8 million~~ for the ~~same period in 2001. The~~first ~~increase~~six ~~was~~months ~~largely attributable to an increase~~ of ~~$458,000, or 66~~2003.~~8%,~~ ~~in mortgage~~The ~~banking~~proceeds ~~activities~~from ~~and~~sale ~~an increase~~ of ~~$657,000~~loans inexceeded ~~the~~loans ~~gain~~originated onfor ~~the~~ sale of ~~mortgage loans. Total other income of~~ by $74.~~2 million~~1 for the ~~nine~~six months ended ~~September~~ June 30, ~~2002 increased $1~~2003.~~2 million,~~ orThe ~~19.8%,~~majority ~~from~~of ~~$6.0 million~~this ~~from~~change ~~the~~in ~~same~~cash ~~period~~flow inis ~~2001.~~due ~~The~~to ~~increase~~less isloan ~~primarily~~originations ~~due~~as compared to ~~increases~~the sale of ~~$566,000,~~loans orin ~~25.6%,~~the in mortgage banking ~~activities~~segment ~~and~~during ~~a $801,000, or 100.0% increase in~~ the ~~gain~~ onsix ~~the~~months ~~sale~~ended ofJune 30, ~~mortgage loans~~2003. The increase ~~is partially offset by a decrease~~ in ~~the~~cash ~~gain~~flow onis ~~sale~~also ofdue ~~investment~~to ~~securities~~net ~~of 494,000, or 45.5%. Mortgage servicing rights~~ income ~~contributed $1.4 million and $554,000~~ for the ~~nine~~ six months ended ~~September~~ June 30, ~~2002~~2003 ~~and~~of ~~2001,~~$4 million. ~~respectively,~~These toincreases ~~the~~are ~~total income~~partially ~~for~~offset ~~the~~by ~~mortgage~~an ~~banking segment. The~~ increase in other ~~the~~assets ~~gain on the sale~~ of ~~mortgage~~$5.1 million ~~loans~~and ~~is partially attributable to~~ a ~~$478,000~~decrease ~~positive~~in ~~fair~~other ~~value adjustment~~liabilities ~~on mortgage loan commitments resulting from the adoption~~ of ~~DIG~~$3.9 ~~Issue~~million ~~No. C13~~for ~~during~~ the ~~quarter~~six months ended ~~September~~June 30, ~~2002~~2003.

~~Total~~Net ~~other~~cash ~~expenses~~provided ~~increased~~by ~~$980,000,~~investing oractivities ~~20.9%,~~was ~~during the third quarter of 2002 as compared to the same period in 2001. Total other expenses increased~~ $2.79 million, ~~or 19.3%,~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2002 as compared to the same period in 2001. Salaries and employee benefits increased $1.2 million~~2003, orwhich ~~15.3%,~~was ~~primarily~~largely due to the ~~hiring of additional lending personnel in the~~ banking segment. ~~Salaries~~The ~~and employee benefits expense for~~decrease ~~the~~in ~~mortgage banking segment was $1.5 million for~~ the ~~nine~~change ~~months~~in ~~ended September 30,~~net ~~2002~~loans ~~compared~~was to $19.12 million for the ~~same period in 2001. The increase is attributable to an increase in commission expense from $431,000 in the~~ first ~~nine~~six months of ~~2001 to $630,000 in the first nine months of 2002 due~~2003. toFederal ~~the~~funds ~~increase~~sold inalso ~~mortgage~~decreased ~~loan~~by ~~originations and an increase in support staff areas. Mortgage banking expenses increased~~ $~~289,000, or 36~~17.7%, million. ~~from~~The ~~the~~cash ~~first nine~~provided ~~months of 2001 to the first nine months of 2002 primarily due to increases~~by ininvesting ~~mortgage~~activities ~~correspondent~~was ~~pricing~~offset ~~and~~partially ~~mortgage~~by ~~servicing~~an ~~rights amortization related to the~~ increase in ~~loan~~the ~~originations.~~net ~~Foreclosed asset expense~~investment ~~increased~~portfolio of $~~800,000~~24 million for the ~~nine~~six months ended ~~September~~June 30, ~~2002 as compared to the same period in 2001~~2003. ~~The increase is due to a $746,000 valuation allowance~~ ~~on a piece of foreclosed property. During the third quarter of 2002, the~~ Company recorded $360,000 of merger expenses related to the pending merger with Fifth Third Bancorp. The merger expenses were recognized for investment banking, attorney and accounting fees. Other expenses have increased as a result of the overall growth of the banking segment.

~~Accounting~~Net ~~Pronouncements~~cash provided by financing activities was $838,000 for the first six months of 2003. The increase in cash flow is primarily due to a slight increase in deposits of $737,000 in the first six months of 2003 and an increase in common stock from the exercise of stock options of $2.5 million, offset partially by an increase in other borrowings of $1.5 million and dividends paid of $937,000.

InEquity ~~June~~capital ~~2001,~~exceeded ~~the~~regulatory ~~FASB~~requirements ~~issued~~at ~~SFAS No.~~June ~~141~~30, ~~Business Combinations~~2003, ~~and~~at ~~SFAS No~~7. ~~142,~~6% ~~Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after September 30, 2001 to be accounted for using the purchase method~~ of ~~accounting. It also specifies the types of acquired~~ ~~intangible~~average assets. ~~that~~The ~~are~~Company’s ~~required to be recognized~~ and ~~reported~~the ~~separately from~~Bank’s ~~goodwill.~~minimum ~~SFAS~~capital ~~No. 142~~requirements ~~requires that goodwill~~ and ~~certain other~~ ~~intangibles~~compliance ~~no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 is required to be applied starting~~ with ~~fiscal years~~the ~~beginning~~same ~~after~~are ~~December 15,~~shown ~~2001, with early application permitted~~ in ~~certain~~ ~~circumstances. The adoption of SFAS Nos. 141 and 142 did not have a significant effect on~~ the ~~financial~~following ~~position or results of operations of the Company~~table.


	Leverage Capital						Tier 1 Capital						Total Risk-Based Capital

	Regulatory						Regulatory						Regulatory
	Minimum			Actual			Minimum			Actual			Minimum			Actual

Company		3.0	%		7.6	%		4.0	%		11.1	%		8.0	%		12.1	%
Bank		3.0	%		7.1	%		4.0	%		10.2	%		8.0	%		11.6	%

Results of Operations

The Company had net income of $1.1 million in the second quarter and $4.0 million for the first six months of 2003 compared to net income of $2.5 million and $5.1 for the same periods in 2002. Net income for the second quarter and six months ended June 30, 2003 decreased $1.4 million, or 56.8% and $1.1 million, or 22.4%, respectively. Net income per basic and diluted share was $0.13 and $0.12, respectively, for the second quarter of 2003 compared to $0.32 and $0.28 for the second quarter of 2002. Net income per basic and diluted share was $0.48 and $0.44, respectively, for the six months ended June 30, 2003 compared to $0.65 and $0.58 for the six months ended June 30, 2002.

Total interest income decreased $989,000, or 7.8%, in the three months ended June 30, 2003 and $1.6 million or 6.3% for the six months ended June 30, 2003 compared to the same periods in 2002. Total interest expense decreased $557,000, or 12.4%, for the three months ended June 30, 2003 and $1.1 million or 12.1% for the six months ended June 30, 2003 compared to the same periods in 2002. The decrease in total interest income is primarily attributable to significantly lower interest rates offset partially by an increase in average earning assets of $110.9 million, or 15.4%, for the six months ended June 30 of 2003 compared to 2002. The decrease in total interest income is primarily due to the banking segment. The decrease in total interest expense is primarily due

Into ~~June~~the ~~2001,~~decrease ~~the~~in ~~FASB~~interest ~~issued~~rates ~~SFAS~~offset ~~No. 143,~~by ~~Accounting~~an ~~for~~increase ~~Asset~~in ~~Retirement~~average ~~Obligations.~~interest-bearing ~~SFAS~~deposits Noof $73.6 ~~143~~million, ~~requires~~or ~~entities~~12.7%, tofor ~~record~~ the six ~~fair~~months ~~value~~ended ofJune 30, a2003 as ~~liability~~compared ~~for~~to anthe ~~asset~~same ~~retirement~~period ~~obligation~~ in ~~the~~2002. ~~period~~The inbanking ~~which~~segment itcontinues isto ~~incurred~~experience ~~and~~strong ~~requires~~deposit ~~that~~rate ~~the~~competition. ~~amount~~The ~~recorded~~Company ashad a ~~liability~~net beinterest margin ~~capitalized~~of ~~by increasing~~3.74% for the ~~carrying~~second ~~amount~~quarter of ~~the~~2003 ~~related~~and ~~long-lived asset~~3.75% ~~Subsequent~~for tothe six months ~~initial~~ended ~~measurement~~June 30, ~~the~~2003 ~~liability~~compared isto ~~accreted~~4.49% toand 4.46% for the ~~ultimate~~same ~~amount anticipated~~periods toin be2002. The ~~paid,~~decrease ~~and~~in isnet ~~also~~interest ~~adjusted~~margin ~~for~~is ~~revisions~~due to ~~the~~loans ~~timing~~repricing orfaster ~~amount~~than ofdeposits ~~estimated~~that ~~cash~~have ~~flows.~~previously ~~The~~repriced ~~capitalized~~at ~~cost~~lower isinterest ~~depreciated~~rates. ~~over the~~As ~~useful~~short-term ~~life~~interest rates decrease, a significant portion of the ~~related~~Bank’s ~~asset~~loan portfolio reprices immediately. ~~Upon~~The ~~settlement~~Bank currently has a relatively short-term certificate of deposit portfolio which has supported the ~~liability,~~net aninterest ~~entity~~margin in ~~either~~the ~~settles~~declining rate environment, but with the ~~obligation~~extended ~~for~~low ~~its~~rate ~~recorded~~environment, loan ~~amount~~repricings orare ~~incurs~~occurring at a ~~gain~~faster orrate ~~loss on~~than ~~settlement.~~repricing ~~SFAS~~of Nodeposits. ~~143~~ In addition, the Bank is ~~required~~receiving toa belarge ~~adopted~~amount ~~for~~of ~~fiscal~~cash ~~years beginning~~flow ~~after~~in ~~September 15,~~the investment ~~2002,~~portfolio ~~with~~due ~~earlier~~to ~~application~~mortgage ~~encouraged.~~backed ~~The Company~~securities ~~has~~prepaying ~~not~~much ~~yet~~faster ~~determined~~as interest ~~the~~rates ~~impact,~~decline. ifThis ~~any,~~cash ~~the~~flow ~~adoption~~is ofbeing ~~SFAS~~reinvested ~~No. 143~~into ~~will~~securities ~~have~~at lower onyields, ~~its~~causing ~~financial~~a ~~position~~decline ~~and~~in ~~results~~the ofnet ~~operations~~interest margin.

InThe ~~August~~provision ~~2001,~~for ~~the~~loan ~~FASB~~losses ~~issued~~was ~~SFAS No. 144~~$485,000 ~~Accounting~~and $800,000 for the ~~Impairment~~three ormonths ~~Disposal~~ended ofJune 30, ~~Long-Lived~~2003 ~~Assets.~~and ~~This~~2002, ~~statement~~respectively. ~~supersedes~~The ~~SFAS~~provision Nowas $1.4 ~~121, Accounting~~million for the ~~Impairment~~six ofmonths ~~Long-Lived~~ended ~~Assets~~June 30, ~~and~~2003 ~~for~~as ~~Long-Lived~~compared ~~Assets~~ to $1.5 million for the same Beperiod ~~Disposed~~in Of2002. ~~SFAS~~The NoBank’s asset quality remains strong. ~~144~~ ~~retains~~Net ~~the~~charge-offs ~~fundamental~~were $1.1 million ~~provisions~~or 0.19%, of ~~SFAS~~average ~~No. 121~~loans ~~for~~outstanding ~~(i)~~at June ~~recognition~~30, ~~and~~2003 ~~measurement~~compared to net charge-offs of ~~the~~$747,000, ~~impairment~~or 0.16%, of ~~long-lived~~average ~~assets~~loans outstanding at June 30, to2002. beApproximately ~~held~~$819,000 ~~and~~of ~~used;~~the ~~and~~provision ~~(ii) measurement~~for ofloan losses for the ~~impairment~~first six months of ~~long-lived assets~~2003, related to bea ~~disposed~~single loan relationship of bythe ~~sale.~~Bank which ~~SFAS~~has ~~No. 144~~been isfully ~~effective~~reserved for. ~~fiscal~~For ~~years beginning~~the ~~after~~first ~~December 15,~~six ~~2001.~~months ~~The~~of ~~adoption~~2002 the ofprovision ~~SFAS~~for ~~No. 144~~loan ~~did~~losses ~~not~~included ~~have~~approximately $905,000 from a ~~significant~~problem ~~effect~~loan onrelationship ~~the~~that ~~financial~~was ~~position~~subsequently orcharged ~~results~~off ofin ~~operations of the Company~~2002.

InTotal ~~December~~other ~~2001,~~income ~~the~~was ~~American~~$3.4 million ~~Institute~~for ofthe ~~Certified~~second ~~Public~~quarter ~~Accountants (“AICPA”)~~of ~~issued~~2003, ~~Statement~~an increase of ~~Position~~$1.4 million, ~~(“SOP”)~~or ~~01-6~~72.8%, ~~Accounting~~from by$2.0 million ~~Certain Entities~~for ~~(Including~~the ~~Entities~~same ~~With~~period ~~Trade~~in ~~Receivables)~~2002. The ~~That~~increase ~~Lend~~was tolargely orattributable ~~Finance~~to ~~the~~an ~~Activities~~increase of ~~Others.~~$549,000, ~~SOP~~or ~~01-6~~67.4%, ~~clarifies~~in ~~accounting~~mortgage ~~and~~banking ~~financial~~activities ~~reporting~~and ~~practices~~an ~~for~~increase ~~lending~~of ~~and finance activities~~$423,000 ~~eliminates~~in ~~distinctions~~the ~~between~~gain ~~what~~on ~~constitutes~~the ~~a finance company~~sale ~~and~~of ~~financing~~mortgage ~~activities~~loans. ~~and~~Gain ~~conforms~~on ~~differences~~sale ~~among~~of ~~the~~investment ~~accounting~~securities ~~and~~increased $550,000. ~~financial~~Total ~~reporting~~other ~~guidance~~income ~~provided~~of in$6.5 million ~~various~~for ~~AICPA~~the ~~Audit~~six ~~and~~months ~~Accounting Guides.~~ended ~~The~~June 30, ~~objective~~2003 increased of$2.5 million ~~SOP~~or ~~01-6~~65.2% isfrom to$3.9 million ~~improve~~from the ~~consistency~~same period in ~~accounting~~2002. ~~and~~The ~~reporting~~increase byis ~~banks,~~attributed ~~savings~~to ~~institutions,~~an ~~credit~~increase ~~unions,~~in ~~finance companies,~~ mortgage ~~companies~~banking ~~and certain~~ activities of ~~insurance companies~~ $1.1 million ~~SOP~~and ~~01-6~~an ~~is effective~~increase ~~for~~in ~~annual~~gains ~~and~~on ~~interim~~sale ~~financial~~of ~~statements~~mortgage ~~issued~~loans ~~for~~and ~~fiscal years~~investment ~~beginning~~securities ~~after~~of ~~December 15~~$863,000 ~~2001.~~and ~~The~~$846,000, ~~Company~~respectively. ~~adopted~~Mortgage ~~SOP~~servicing ~~01-6~~rights income oncontributed ~~January~~ $1~~, 2002~~.6 million ~~The~~for ~~adoption~~the ofsix ~~SOP~~months ~~01-6~~ended ~~did~~June 30, ~~not~~2003 ~~change~~to ~~any of~~ the ~~Company’s accounting~~ ~~policies,~~total ~~however~~income ~~certain~~for ~~additional~~the ~~financial~~mortgage ~~statement~~banking ~~disclosures were required~~segment. ~~Such~~The ~~disclosures~~increase ~~have been included~~ in the ~~notes~~gain toon the ~~consolidated~~ ~~financial~~sale ~~statements as~~ of ~~and~~mortgage ~~for~~loans ~~the~~is ~~three~~partially ~~and~~attributable ~~nine~~to ~~months~~a ~~ended~~$68,000 ~~September~~positive fair ~~30,~~value ~~2002~~adjustment on mortgage loan commitments.

InTotal ~~July~~other expenses increased $3.5 million, ~~2002~~or 63.4%, during the ~~FASB~~second quarter ~~issued~~of ~~SFAS~~2003 Noas compared to the same period in 2002. Total other expenses increased $3.8 ~~146~~million, ~~Accounting~~or 35.5%, for ~~Costs~~the ~~Associated~~six months ended June 30, 2003 as ~~with~~compared ~~Exit~~to orthe ~~Disposal~~same ~~Activities~~period in 2002. ~~SFAS~~Mortgage Nobanking expenses increased $1. ~~146~~3 million ~~requires~~for ~~entities~~the second quarter of 2003 as compared to ~~recognize costs~~the ~~associated~~second ~~with~~quarter ~~exit~~2002, primarily ordue ~~disposal~~to ~~activities~~a ~~when~~$937,000 ~~they~~impairment ~~are~~adjustment ~~incurred~~recorded ~~rather~~for mortgage ~~than~~servicing atrights. ~~the~~As ~~date~~long-term ofmortgage arates ~~commitment~~have todeclined, prepayment speeds on mortgages have increased, resulting in an ~~exit~~impairment orof ~~disposal~~the ~~plan.~~mortgage servicing ~~SFAS~~rights Noportfolio. ~~146~~ Increases in mortgage correspondent pricing and ~~replaces~~mortgage ~~previous~~servicing ~~accounting~~rights ~~guidance~~amortization ~~provided~~also bycontributed ~~Emerging~~to ~~Issues~~the ~~Task~~increase ~~Force~~in mortgage ~~(EITF) Issue~~banking Noexpenses. ~~94-3,~~ ~~Liability~~Repossessed ~~Recognition~~and ~~for~~foreclosed ~~Certain~~assets ~~Employee~~expense ~~Termination~~increased $1.9 ~~Benefits~~million ~~and~~for ~~Other~~the ~~Costs~~second toquarter ~~Exit~~2003 anas ~~Activity~~compared ~~(including~~to ~~Certain~~the ~~Costs~~second ~~Incurred~~quarter 2002. inThe increase is primarily attributable to a ~~Restructuring)~~$2.4 million valuation allowance, recorded ~~which~~during ~~required~~the ~~entities~~second quarter 2003, on several pieces of repossessed assets related to ~~recognize~~a ~~costs~~single ~~associated~~customer ~~with~~relationship and a ~~exit~~$40,000 orvaluation ~~disposal~~allowance, ~~activities~~recorded atduring the ~~date~~second ofquarter 2003, on a ~~commitment~~piece toof anforeclosed ~~exit~~property. orSalaries ~~disposal~~and ~~plan.~~employee ~~SFAS~~benefits Noincreased $90,000, or 3. ~~146~~1%. The increase is ~~effective~~attributable ~~for~~to an ~~exit~~increase orin ~~disposal~~mortgage ~~activities~~commission ~~initiated after~~expense ~~December 31~~from $170,000 in the second quarter of 2002. ~~The~~to ~~Company~~$389,000 ~~has~~in ~~not~~the ~~yet~~second ~~determined~~quarter of 2003 due to the ~~impact,~~increase ifin ~~any~~mortgage loan originations. During the second quarter of 2003, the ~~adoption~~Company recorded $10,000 of ~~SFAS~~merger Noexpenses related to the pending merger with Fifth Third Bancorp. ~~146~~ ~~will~~The ~~have~~merger onexpenses ~~its~~were ~~financial~~recognized ~~position~~for investment banking, attorney and accounting fees. Other expenses have increased as a result of the ~~results~~overall growth of ~~operations~~the banking segment.

In April, 2002, the FASB issued implementation guidance related to Derivatives Implementation Group (DIG) Issue No. C13, When a Loan Commitment Is Included in the Scope of Statement 133. DIG Issue No. C13 requires loan commitments that relate to the origination or acquisition of mortgage loans that will be held for resale be accounted for as derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The adoption of DIG Issue No. C13 on July 1, 2002 was not material to the Company’s consolidated financial statements at that date. A pre-tax gain of approximately $478,000 is included in results of operations for the third quarter of 2002 representing the fair value of loan commitments as of September 30, 2002.

InAccounting ~~October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain~~Pronouncements ~~Financial Institutions. SFAS No. 147 addresses the financial accounting and~~ ~~reporting for the acquisition of all or part of a financial institution and the~~ accounting for the impairment or disposal of acquired long-term customer relationship intangible assets. SFAS No. 147 is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The Company does not believe the adoption of SFAS No. 147 will have an impact on the financial position or results of operations of the Company, as management does not anticipate acquiring any financial institutions.

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on the Company’s consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and did not have a material impact on the Company’s consolidated financial position or results of operations as of and for the quarter and six months ended June 30, 2003.

In November 2002, the FASB issued Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. This interpretation requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that obligation. This interpretation is intended to improve the comparability of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration and guarantees issued without separately identified consideration. The initial recognition and measurement provisions of FIN No. 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The interpretation’s disclosure requirements were effective for the Company as of December 31, 2002. Significant guarantees that have been entered into by the Company at June 30, 2003 and December 31, 2002 are disclosed in Note H to the consolidated financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. As the Company has elected not to change to the fair value based method of accounting for stock-based employee compensation, the adoption of SFAS No. 148 did not have an impact on the Company’s consolidated financial position or results of operations.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN No. 46 addresses consolidation by business enterprises of variable interest entities that have certain characteristics. This Interpretation applies immediately to variable interest entities created in January 31, 2003 and to variable

interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of the provisions of FIN No. 46 related to variable interest entities created in January 31, 2003, or after that date, did not have an impact on the Company’s consolidated financial position or results of operations. The Company is in the process of evaluating the impact that the adoption of the Provision of FIN No. 46 related to variable interest entities created before February 1, 2003 would have on the Company’s trust preferred securities currently reported with long-term debt and other borrowings on its consolidated statement of financial position.

In April 2003, the FASB issued SFAS No. 149, Amendment to Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption on April 1, 2003 of the components of SFAS No. 149 which address SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 did not have a material impact on the Company’s consolidated interim financial position and results of operations. The adoption of the remaining components of SFAS No. 149 is not anticipated to have a material impact on the Company’s consolidated financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The adoption of SFAS No. 150 is not anticipated to have a material impact on the Company’s consolidated financial position or results of operations.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain statements in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “estimate,” “anticipate,” believe,” “target,” “plan,” “project,” or “continue” or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management’s plans and current analyses of the Company, its business and the industry as a whole. These forward looking statements are subject to risks and uncertainties, including, but not limited to the pending merger with Fifth Third Bancorp, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect, the Company’s financial performance and could cause actual results for fiscal ~~2002~~2003 and beyond to differ materially from those expressed or implied in such forward-looking statements. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s financial performance is subject to risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest-earning assets and the amount of interest-bearing liabilities subject to repricing over a specified period and the amount of change in individual interest rates. The liquidity and maturity structure of the Company’s assets and liabilities are important to the maintenance of acceptable net interest income levels. An increasing interest rate environment negatively impacts earnings as the Company’s rate sensitive liabilities generally reprice faster than its rate sensitive assets. Conversely, in a decreasing interest rate environment, earnings are positively impacted. This potential asset/liability mismatch in pricing is referred to as “gap” and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap of 1.0 means that assets and liabilities are perfectly matched as to repricing within a specific time period and interest rate movements will not affect net interest margin, assuming all other factors hold constant. Management has specified gap guidelines for a one-year time horizon between 0.7 and 1.3. At ~~September~~June 30, ~~2002~~2003, the Company had a gap ratio of 1.of 0.8 for the one-year period ending ~~September~~June 30, ~~2003~~2004.

A 200 basis point decrease in the general level of interest rates spread evenly during the next twelve months is estimated to cause aan ~~decrease~~increase in net interest income of $~~2.2 million~~198,000 as compared to net interest income if interest rates ~~were~~ were unchanged during the next twelve months. In comparison, a 200 basis point increase in the general level of interest rates spread evenly during the next twelve months is estimated to cause ana ~~increase~~decrease in net interest income of $~~988~~198,000, as compared to net interest income if rates were unchanged during the next twelve months.

As discussed above, this level of variation is within the Company’s acceptable limits. This simulation analysis assumed that savings and checking interest rates had a low correlation to changes in market rates of interest and that certain asset prepayments changed as refinancing incentives evolved. Further, in the event of a change in such magnitude in interest rates, the Company’s asset and liability management committee would likely take actions to further mitigate its exposure to the change. However, given the uncertainty of specific conditions and corresponding actions, which would be required, the analysis assumed no change in the Company’s asset/liability composition.

20ITEM 4 – CONTROLS AND PROCEDURES

~~Table~~ Management has developed and implemented a policy and procedures for reviewing disclosure controls and procedures and internal controls on a quarterly basis. On July 28, 2003 (the evaluation date related to this quarterly report on Form 10-Q for the quarterly period ended June 30, 2003) management, including the Company’s principal executive and financial officers, evaluated the effectiveness of ~~Contents~~the design and operation of disclosure controls and procedures, and, based on its evaluation, the Company’s principal executive and financial officers have concluded that these controls and procedures are operating effectively. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of management’s evaluation. Management noted no significant deficiencies in the design or operation of the Company’s internal controls and the Company’s auditors were so advised.

ITEM 4 — CONTROLS AND PROCEDURES

Management has developed and implemented a policy and procedures for reviewing disclosure controls and procedures and internal controls on a quarterly basis. On October 31, 2002 (the evaluation date related to this quarterly report on Form 10-Q for the quarterly period ended September 30, 2002) management, including the Company’s principal executive and financial officers, evaluated the effectiveness of the design and operation of disclosure controls and procedures, and, based on its evaluation, our principal executive and financial officer have concluded that these controls and procedures are operating effectively. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of management’s evaluation. Management noted no significant deficiencies in the design or operation of the Company’s internal controls and the Company’s auditors were so advised.

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accumulated and communicated to management, including the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

2122

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved in various legal proceedings in the normal course of business. On August 24, 2000, Jerrold S. Pressman filed a complaint in the U.S. ~~District~~ District Court for the Middle District of Tennessee, against Franklin National Bank and Gordon E. Inman, Chairman of the Board of the Company and the Bank, ~~alleging~~ alleging breach of contract, tortious interference with contract, fraud, and ~~civil~~ civil conspiracy in connection with the denial of a loan to a potential ~~borrower~~ borrower involved in a real estate transaction. The Bank and Mr. Inman filed ~~their~~ their answers in this matter on September 18, 2000, and a motion for Summary ~~Judgment~~ Judgment on October 10, 2000. The Court denied the Bank’s motion for Summary Judgment on February 15, 2001. On July 27, 2001, the Bank and Mr. Inman filed a ~~second~~ second motion for Summary Judgment. The Court granted in part and denied in part the Bank and Mr. Inman’s motion for Summary Judgment on October 5, 2001. The case was set for trial to begin on March 5, 2002; however, on February 22, 2002, the Court, on ~~it’s~~its own Motion, continued the trial until September 10, 2002. Mr. Pressman’s amended complaint seeks compensatory damages in an amount not to exceed $20 million and punitive damages in an amount not to exceed $40 ~~million~~ million from each defendant. On September 3, 2002, the Court granted Mr. Pressman’s motion to Continue Trial and set February 25, 2003, to begin the trial. A bench trial on the merits of the case was held between February 25 and March 7, 2003. ~~The~~On April 30, 2003, the United States District Judge issued an ~~Bank~~Order in which a judgment was entered for the Defendants Franklin National Bank and Mr. Inman ~~deny~~on all of Mr. Pressman’s claims. On May 2, 2003, Mr. Pressman filed a Notice of Appeal to the ~~allegations~~United ~~and~~States ~~will~~Court ~~vigorously~~of ~~defend~~Appeals for the Sixth ~~action~~Circuit. ~~Management~~A ~~further~~Proof ~~believes~~Brief ~~that~~of ~~the~~Appellee ~~claims~~Franklin ~~alleged~~National byBank ~~Mr. Pressman~~will ~~are~~be timely filed ~~frivolous~~with ~~and~~the ~~without~~Court. ~~merit~~No ~~and~~provision has been made in the ~~chances~~accompanying consolidated financial statements for ~~recovery~~the byultimate ~~Mr. Pressman~~resolution ~~are remote~~of this matter.

OnExcept ~~September 1,~~as ~~2000,~~set ~~Highland~~forth ~~Capital~~above, ~~Inc.~~there ~~filed~~are ano ~~complaint~~material inpending ~~the~~legal ~~U.S. District~~proceedings ~~Court for the Middle District of Tennessee, against Franklin National~~to ~~Bank~~which ~~alleging that~~ the ~~Bank~~Company ~~required~~or ~~Highland Capital, Inc. to purchase stock in Franklin Financial Corporation,~~ the Bank’s ~~holding~~is ~~parent holding company, in conjunction with Highland Capital, Inc.’s efforts to obtain~~ a ~~loan~~party ~~from~~or ~~the Bank in violation~~ of ~~12 U.S.C. § 1972,~~ which ~~prohibits~~any ~~certain~~of ~~tying~~their properties ~~arrangements.~~are ~~Highland~~subject; ~~Capital,~~nor ~~Inc.~~are isthere ~~seeking~~material anproceedings ~~unspecified~~known ~~amount of damages in an amount not~~ to ~~exceed $2 million, plus attorney’s fees and costs. The bank filed an answer in~~ the ~~matter~~Company onto ~~September 19, 2000. On July 20, 2001,~~be ~~the~~contemplated ~~Bank~~by ~~filed~~any agovernmental ~~motion~~authority; ~~for~~nor ~~Summary~~are ~~Judgment.~~there Onmaterial ~~November 19, 2001, the~~proceedings ~~Magistrate~~known ~~Judge~~ to ~~whom~~ the ~~case~~Company, ~~has~~pending ~~been~~or ~~assigned~~contemplated, ~~issued~~in awhich ~~report~~any ~~regarding the~~director, ~~Bank’s motion for Summary Judgment recommending that the Motion be granted~~officer, ~~and~~or ~~the~~affiliate ~~complaint~~or beany ~~dismissed.~~principal Onsecurity ~~March 21,~~holder ~~2002,~~of the ~~Court granted the Bank’s motion for Summary Judgment and dismissed Highland Capital~~Company, ~~Inc.’s~~or ~~case~~any ~~with~~associate ~~prejudice.~~of Onany ~~April 12,~~of ~~2002,~~the ~~Highland~~foregoing ~~Capital,~~is ~~Inc. filed~~ a ~~Notice~~party ofor ~~Appeal to~~has ~~the~~an ~~United~~interest ~~States~~adverse ~~Court~~to ~~of Appeals for~~ the ~~Sixth~~Company ~~Circuit. On July 10, 2002,~~or the Bank ~~responded with the filing of Proof Brief of Appellee Franklin National Bank~~.

~~Except~~Item 4. asSubmission ~~set forth above, there are no material pending legal proceedings to which the Company or the Bank is a party or~~ of ~~which any of their properties~~Matters ~~are subject; nor are there material proceedings known~~ to ~~the~~a ~~Company~~Vote to be contemplated by any governmental authority; nor are there material proceedings known to the Company, pending or contemplated, in which any director, officer, or affiliate or any principle security holder of ~~the~~Security ~~Company, or any associate~~Holders ~~of any of the foregoing is a party or has an interest adverse to the Company or~~ ~~the Bank.~~

22The 2003 Annual Meeting of Shareholders of the Company was held on May 27, 2003. At the meeting the following persons were elected as directors of the Company to serve for a term of one year and until their successors are elected and qualified: James W. Cross, IV, Robert C. Fisher, Gordon E. Inman, D. Wilson Overton, Edward M. Richey, Edward P. Silva, and Melody J. Smiley.

The results of voting with respect to the election of the directors were as follows:


	Votes		Votes
	FOR		WITHHELD

James W. Cross, IV		7,653,466		45,969
Robert C. Fisher		7,662,266		37,169
Gordon E. Inman		7,645,020		54,413
D. Wilson Overton		7,653,566		45,869
Edward M. Richey		7,662,266		37,169
Edward P. Silva		7,662,266		37,169
Melody J. Smiley		7,653,566		45,869

No other matters were presented or voted for at the Annual Meeting.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

Exhibit No.		Description of Exhibit
99.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)		Reports on Form 8-K.
		On July 25, 2002 the Company filed a Form 8-K outlining the terms of the Affiliation Agreement between the Company and Fifth Third Bancorp.
		On September 10, 2002 the Company filed a Form 8-K regarding an amendment to the Affiliation Agreement between the Company and Fifth Third Bancorp.

	(b)		Reports on Form 8-K.

			On April 25, 2003, the Company filed a form 8-K regarding the press release announcing the Company’s results for the three months ended March 31, 2003 and its financial condition as of March 31, 2003.

2324

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FRANKLIN FINANCIAL CORPORATION
Dated: November 12, 2002	By:	/s/ Gordon E. Inman
		Gordon E. Inman, President and Chief Executive Officer (principal executive officer)
Dated: November 12, 2002	By:	/s/ Lisa L. Musgrove
		Lisa L. Musgrove, Senior Vice President and Chief Financial Officer(principal financial officer)

FRANKLIN FINANCIAL CORPORATION


Dated: July 31, 2003	By:	/s/ Gordon E. Inman

	Gordon E. Inman, President and Chief Executive Officer (principal executive officer)

Dated: July 31, 2003	By:	/s/ Lisa L. Musgrove

	Lisa L. Musgrove, Senior Vice President and Chief Financial Officer (principal financial officer)

CERTIFICATIONS

I, Gordon E. Inman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Franklin Financial Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarter report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002 /s/ Gordon E. Inman Gordon E. Inman President and Chief Executive Officer

CERTIFICATIONS

I, Lisa L. Musgrove, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Franklin Financial Corporation;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarter report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 12, 2002 /s/ Lisa L. Musgrove Lisa L. Musgrove Senior Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Description of Exhibit
99.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Filing Compare · FIFTH THIRD BANK /TN/