SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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
September 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.)

230 Public Square, Franklin, Tennessee		37064

(Address of principal executive offices)		(Zip Code)

Tennessee		62-1376024
(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~~checkmark ~~mark~~ whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). ~~Yes [X] No [ ]~~

Yes x No o

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			8,~~358~~382,~~123 shares~~621
Class		Outstanding at November 6, 2003	~~Outstanding at July 30, 2003~~

TABLE OF CONTENTS

	PART I. - FINANCIAL INFORMATION
PART I. — FINANCIAL INFORMATION
~~Item I. Financial Statements~~	Item I. Financial Statements
	ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4 — CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EX-31.1 CERTIFICATION
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 CERTIFICATION
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 CERTIFICATIONS
EX-32 SECTION 906 CERTIFICATIONS OF THE CEO & CFO

PART I. -— FINANCIAL INFORMATION

Item I. Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES ~~Consolidated Balance Sheets~~ ~~(Unaudited)~~

				(In thousands)
				June 30,			December 31,
				2003			2002
Assets
Cash and cash equivalents				$	35,431		$	28,061
Federal funds sold					1,270			18,922
Investment securities available-for-sale, at fair value					51,359			68,325
Mortgage-backed securities available-for-sale, at fair value					235,008			189,647
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 $120 at June 30, 2003 and $198 at December 31, 2002					113			185
Federal Home Loan and Federal Reserve Bank stock, restricted					4,340			4,113
Loans held for sale					19,428			19,432
Loans					524,906			538,263
Allowance for loan losses					(6,106	)		(5,761	)
			Loans, net		518,800			532,502
Premises and equipment, net					9,158			9,691
Accrued interest receivable					3,654			3,713
Mortgage servicing rights					3,699			3,749
Repossessed and foreclosed assets, net					2,110			1,555
Other assets					4,098			3,295
			Total assets	$	892,269		$	891,233
Liabilities and Stockholders’ Equity
Liabilities:
	Deposits:
		Noninterest-bearing		$	110,195		$	78,507
		Interest-bearing			648,914			679,865
			Total deposits		759,109			758,372
Repurchase agreements					200			200
Long-term debt and other borrowings					74,900			76,382
Accrued interest payable					1,802			1,478
Other liabilities					2,325			6,253
			Total liabilities		838,336			842,685
Stockholders’ equity:
	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, net of tax				2,660			2,807
	Unearned compensation related to outstanding restricted stock awards				(120	)		(147	)
	Retained earnings				36,242			33,229
			Total stockholders’ equity		53,933			48,548
				$	892,269		$	891,233

Consolidated Balance Sheets

(Unaudited)


					(In thousands)
					September 30,			December 31,
					2003			2002

Assets
Cash and cash equivalents					$	21,668		$	28,061
Federal funds sold						—			18,922
Investment securities available-for-sale, at fair value						65,320			68,325
Mortgage-backed securities available-for-sale, at fair value						222,843			189,647
Investment securities held-to-maturity, fair value $3,871 at September 30, 2003 and $8,137 at December 31, 2002						3,807			8,043
Mortgage-backed securities held-to-maturity, fair value $116 at September 30, 2003 and $198 at December 31, 2002						109			185
Federal Home Loan and Federal Reserve Bank stock, restricted						4,377			4,113
Loans held for sale						5,370			19,432
Loans						536,351			538,263
Allowance for loan losses						(5,478	)		(5,761	)

				Loans, net		530,873			532,502

Premises and equipment, net						8,967			9,691
Accrued interest receivable						3,933			3,713
Mortgage servicing rights						4,999			3,749
Repossessed and foreclosed assets, net						3,833			1,555
Other assets						3,492			3,295

					$	879,591		$	891,233

Liabilities and Stockholders’ Equity
Liabilities:
	Deposits:
			Noninterest-bearing		$	78,285		$	78,507
			Interest-bearing			666,368			679,865

				Total deposits		744,653			758,372
			Repurchase agreements			200			200
			Long-term debt and other borrowings			78,040			76,382
			Accrued interest payable			1,146			1,478
			Other liabilities			721			6,253

				Total liabilities		824,760			842,685

Stockholders’ equity:
	Common stock, No par value. Authorized 500,000,000 shares; issued 8,360,462 and 7,968,022 at September 30, 2003 and December 31, 2002, respectively					15,839			12,659
	Accumulated other comprehensive (loss) gain, net of tax					(75	)		2,807
	Unearned compensation related to outstanding restricted stock awards					(96	)		(147	)
	Retained earnings					39,163			33,229

		Total stockholders’ equity				54,831			48,548

					$	879,591		$	891,233

See Notes to Unaudited Consolidated Financial Statements

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

Three Months Ended

~~Six~~Nine Months Ended

June 30,

September 30,

2003

2002

2003

2002

Interest income:

Interest and fees on loans

8,~~614~~398

89,~~768~~028

1725,~~202~~600

1726,~~133~~161

Taxable securities

2,~~735~~388

3,~~693~~429

58,~~672~~060

710,~~562~~991

Tax-exempt securities

~~365~~527

~~254~~263

~~652~~1,178

~~481~~744

Federal funds sold

164

429

7781

2150

Total interest income

11,~~730~~317

12,~~719~~749

2334,~~603~~919

2537,~~197~~946

Interest expense:

Certificates of deposit over $100,000

1,~~274~~120

1,~~381~~320

23,~~518~~638

24,~~960~~280

Other deposits

1,~~578~~483

12,~~930~~020

34,~~343~~826

35,~~835~~855

Federal Home Loan Bank advances

~~842~~847

~~853~~856

12,~~672~~519

12,~~693~~549

Other borrowed funds

~~234~~217

~~321~~268

~~455~~673

~~602~~870

Total interest expense

3,~~928~~667

4,~~485~~464

711,~~988~~656

913,~~090~~554

Net interest income

7,~~802~~650

8,~~234~~285

1523,~~615~~263

1624,~~107~~392

Provision for loan losses

~~485~~470

~~800~~760

1,~~405~~875

12,~~450~~210

Net interest income after provision for loan losses

7,~~317~~180

7,~~434~~525

1421,~~210~~388

1422,~~657~~182

Other income:

Service charges on deposit accounts

~~709~~777

~~698~~749

12,~~357~~134

12,~~388~~137

Mortgage banking activities

12,~~363~~273

~~814~~1,144

23,~~728~~814

12,~~636~~780

Other service charges, commissions and fees

~~172~~12

~~166~~129

~~331~~343

~~339~~467

Commissions on sale of annuities and brokerage activity

2130

~~130~~113

4878

~~261~~374

Gain on sale of mortgage loans

~~497~~213

74675

~~989~~1,202

~~126~~801

Gain on sale of investment securities

~~632~~339

82428

1,~~009~~348

~~163~~591

Total other income

3,~~394~~644

13,~~964~~238

68,~~462~~919

37,~~913~~150

Other expenses:

Salaries and employee benefits

32,~~033~~962

23,~~943~~042

69,~~167~~129

58,~~812~~854

Occupancy expense

~~527~~553

~~525~~531

1,~~043~~596

1,~~048~~579

Mortgage banking

~~1,672~~681

~~335~~388

21,~~236~~730

~~688~~1,076

Furniture and equipment

~~298~~257

~~347~~330

~~607~~864

~~688~~1,018

Communications and supplies

~~142~~178

~~163~~159

~~292~~470

~~314~~473

Advertising and marketing

9983

99102

~~209~~292

~~205~~307

FDIC and regulatory assessments

7977

6869

~~154~~231

~~133~~202

Repossessed and foreclosed assets, net

~~2,613~~134

~~577~~2

2,~~635~~769

~~803~~805

Merger expenses

10—

—360

Other

~~662~~664

~~535~~681

1,~~236~~899

1,~~079~~759

Total other expenses

95,~~135~~589

5,~~592~~664

1418,~~598~~999

1016,~~770~~433

Income before income taxes

15,~~576~~235

35,~~805~~099

611,~~074~~308

712,~~800~~899

Income taxes

~~494~~1,830

1,~~299~~833

23,~~102~~932

24,~~684~~517

Net income

13,~~082~~405

23,~~506~~266

37,~~972~~376

58,~~116~~382

Net income per share – basic

0.1341

0.3241

0.4889

01.6506

Net income per share - diluted

0.12

0.28

0.44

0.58

Net income per share — diluted

0.37

0.82

0.95

Dividends declared per share

0.05775

0.~~0550~~055

0.~~1155~~17325

0.~~1100~~1650

Weighted average shares outstanding:

Basic

8,~~329~~358

7,~~906~~908

8,~~237~~278

7,~~883~~891

Diluted

9,~~098~~130

8,~~858~~844

89,~~959~~014

8,~~754~~785

See Notes to Unaudited Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION AND ~~SUBSIDIARIES CONSOLIDATED~~SUBSIDIARIESConsolidated ~~STATEMENTS~~Statements OFof ~~CHANGES~~Changes ~~IN STOCKHOLDERS~~in Stockholders’ ~~EQUITY~~Equity(Unaudited and in thousands)

															Accumulated			Unamortized
			Common Stock												Other			Cost of
									Comprehensive			Retained			Comprehensive			Restricted
			Shares			Amount			Income (Loss)			Earnings			Income (Loss)			Stock Awards			Total
BALANCE - JANUARY 1, 2003				7,968			12,659						33,229			2,807			(147	)		48,548
BALANCE – JANUARY 1, 2003				7,968		$	12,659					$	33,229		$	2,807		$	(147	)	$	48,548
Comprehensive income:
Comprehensive Income:
	Net Income									37,~~972~~376			37,~~972~~376									37,~~972~~376
	Other comprehensive income, net of tax:
	Other comprehensive loss, net of tax:
		Unrealized holding losses on securities (net of tax of $474)								(773	)
		Unrealized holding losses on securities (net of tax of $2,281)								(3,718	)
		Less: Reclassification adjustment for gains included in net income (net of $383 tax)								626
		Less: Reclassification adjustment for gains included in net income (net of $512 tax)								836
	Other comprehensive income									(147	)					(147	)					(147	)
	Other comprehensive loss									(2,882	)					(2,882	)					(2,882	)
Comprehensive income									$	34,~~825~~494
Exercise of stock options and issuance of common stock				~~387~~394			2,~~439~~516												27			2,~~466~~516
Tax benefit of stock options exercised							56															56
Amortization of restricted stock																			51			51
Cancellation of restricted stock				(1	)		(3	)											—			(3	)
Tax benefit of stock options exercised							679															679
Cash dividend declared; $.1115 per share													(959	)								(959	)
Cancellation of restricted stock				(2	)		(15	)														(15	)
BALANCE - JUNE 30, 2003				8,354			15,151						36,242			2,660			(120	)		53,933
Cash dividend declared: $0.17325 per share													(1,442	)								(1,442	)
BALANCE – SEPTEMBER 30, 2003				8,360		$	15,839					$	39,163		$	(75	)	$	(96	)	$	54,831

See Notes to Unaudited Consolidated Financial Statements.

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

				(In thousands)
				Six Months Ended
				Nine Months Ended
				June 30,
				September 30,
				2003			2002
Cash flows from operating activities:
Net income	~~Net income~~			$	37,~~972~~376		$	58,~~116~~382
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation, amortization and accretion			23,~~187~~650			~~(89~~55	)
		Provision for loan losses			1,~~405~~875			12,~~450~~210
		Loans originated for sale			(~~143~~205,~~168~~763	)		(70126,~~871~~653	)
		Proceeds from sale of loans			~~147~~224,~~250~~483			82129,~~681~~187
		Gain on sale of investment securities			(1,~~009~~348	)		(~~163~~591	)
		Gain on sale of loans			(~~942~~1,224	)		(~~147~~822	)
		Loss on repossessed and foreclosed assets			2,635			803
		Loss on foreclosed and repossessed assets			2,769			805
		(Gain) loss on sale of premises and equipment			(1	)		16
		(Gain) Loss on sale of premises and equipment			(3	)		98
		Decrease (increase) in accrued interest receivable			59			(139	)
		Increase in accrued interest receivable			(220	)		(133	)
		Increase (decrease) in accrued interest payable			324			(483	)
		Decrease in accrued interest payable			(332	)		(338	)
		Decrease in other liabilities			(43,~~038~~814	)		(~~881~~132	)
		Increase in other assets			(58,~~113~~429	)		(23,~~873~~795	)
		Tax benefit of stock options exercised			56679			—
			Net cash provided by operating activities		319,~~617~~699			148,~~420~~273
Cash flows from investing activities:
	Decrease (increase) in federal funds sold				17,652			(1,386	)
		Increase (decrease) in federal funds sold			18,922			(1,636	)
	~~Proceeds from sale of securities available-for-sale~~	Proceeds from sale of securities available-for-sale			3950,~~444~~817			2965,~~415~~523
	~~Proceeds from maturities of securities available-for-sale~~	Proceeds from maturities of securities available-for-sale			~~102~~147,~~046~~424			2742,~~404~~016
	~~Proceeds from maturities of securities held-to-maturity~~	Proceeds from maturities of securities held-to-maturity			4,~~358~~362			~~653~~3,809
	~~Purchases of securities available-for-sale~~	Purchases of securities available-for-sale			(~~169~~233,~~854~~357	)		(4989,~~676~~287	)
	~~Purchase of securities held-to-maturity~~	Purchase of securities held-to-maturity			—			(4,~~113~~114	)
	~~Purchase of Federal Home Loan and Federal Reserve stock~~	Purchase of Federal Home Loan and Federal Reserve stock			(~~227~~264	)		(79122	)
	Net decrease (increase) in loans				9,161			(63,443	)
		Net increase in loans			(3,680	)		(96,559	)
	Proceeds from sale of repossessed and foreclosed assets				364			2,772
		Proceeds from sale of foreclosed and repossessed assets			771			4,466
	~~Purchases of premises and equipment, net~~	Purchases of premises and equipment, net			(29159	)		(~~192~~430	)
			Net cash provided by (used in) investing activities		2,915			(58,645	)
			Net cash used in investing activities		(15,164	)		(76,334	)
Cash flows from financing activities
Cash flows from financing activities:
	~~Net proceeds from issuance of common stock~~	Net proceeds from issuance of common stock			2,~~519~~553			~~286~~317
	~~Dividends paid~~	Dividends paid			(~~936~~1,420	)		(~~865~~1,300	)
	Increase in deposits				737			35,279
		(Decrease) increase in deposits			(13,719	)		64,779
	~~Decrease in repurchase agreements~~	Decrease in repurchase agreements			—			(13,~~062~~000	)
	(Decrease) increase in other borrowings				(1,482	)		9,733
		Increase in other borrowings			1,658			10,717
			Net cash provided by financing activities		838			43,371
			Net cash (used in) provided by financing activities		(10,928	)		71,513
			Net increase (decrease) in cash and cash equivalents		7,370			(854	)
			Net (decrease) increase in cash and cash equivalents		(6,393	)		3,452
Cash and cash equivalents at beginning of period					28,061			23,665
Cash and cash equivalents at end of period				$	3521,~~431~~668		$	2227,~~811~~117
Cash payments for interest				$	711,~~664~~988		$	1513,~~432~~892
Cash payments for income taxes				$	23,~~803~~951		$	34,~~424~~668

See Notes to Unaudited Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION ~~Notes~~ AND SUBSIDIARIESNotes 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 ~~six~~three and nine-month ~~period~~ periods ended ~~June~~September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 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, 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, 2002. During the ~~six~~nine months ended ~~June~~September 30, 2003, there were no significant changes to those accounting policies.

Stock-based Compensation

At ~~June~~September 30, 2003, the Company has three stock-based employee compensation plans, which are described more fully in Note 14 to the Consolidated Financial 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 calculates compensation expense on ~~the~~its 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 market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of ~~SFAS~~Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended, to stock-based employee compensation. No options were granted during the three and ~~six~~nine months ended ~~June~~September 30, 2003 and during the three months ended ~~June~~September 30, 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

		June 30,
		(In thousands)
		Nine months ended
		September 30		September 30
		2003		2002
Basic earnings per share:
Net earnings available to stockholders:
	As reported	$	~~0.48~~7,376	$	~~0.65~~8,382
	Pro forma		—		0.43
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		(1,508	)
Diluted earnings per share available to stockholders:
Pro forma		$	7,376	$	6,874
	As reported	$	0.44	$	0.58
	Pro forma		—		0.39


		September 30		September 30
		2003		2002
Basic earnings per share:
	As reported	$	0.89	$	1.06
	Pro forma	$	0.89		0.87
Diluted earnings per share available to stockholders:
	As reported	$	0.82	$	0.95
	Pro forma	$	0.82		0.78

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		—		3432	%
Risk-free interest rate range		—		43.535 - 43.873	%
Expected life		—	7-10 years

The weighted-average fair value of options, calculated using the Black-Scholes option pricing model, granted during the ~~six~~nine months ended ~~June~~September 30, 2002 was $65.0636 per share.

NOTE C -— DIVIDENDS

In ~~May~~July 2003, the Company’s Board of Directors declared a $.05775 per share ~~cash~~ cash dividend payable on ~~July~~October 21, 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.

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, Tennessee metropolitan areas. It also purchases wholesale mortgage loans through correspondent relationships with other banks.

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 Months Ended June 30, 2003
						Mortgage
(In thousands)				Bank		Banking			All Other			Eliminations			Consolidated
Total interest income				$	11,517	$	249		$	681		$	(717	)	$	11,730
Total interest expense					3,751		39			434			(296	)		3,928
Net interest income					7,766		210			247			(421	)		7,802
Provision for loan losses					485		—			—			—			485
Net interest income after provision					7,281		210			247			(421	)		7,317
Total other income					1,436		1,859			1,237			(1,138	)		3,394
Total other expense					6,348		2,571			537			(321	)		9,135
Income before taxes					2,369		(502	)		947			(1,238	)		1,576
Provision for income taxes					762		(159	)		(109	)		—			494
Net income (loss)				$	1,607	$	(343	)	$	1,056		$	(1,238	)	$	1,082
Other significant items
	Total assets			$	865,578	$	24,301		$	91,807		$	(89,417	)	$	892,269
	Depreciation, amortization and accretion				828		416			31			—			1,275
Revenues from external customers
	Total interest income			$	11,481	$	249		$	—		$	—		$	11,730
	Total other income				1,436		1,859			99			—			3,394
		Total income		$	12,917	$	2,108		$	99		$	—		$	15,124
Revenues from affiliates
	Total interest income			$	36	$	—		$	681		$	(717	)	$	—
	Total other income				—		—			1,138			(1,138	)		—
		Total income		$	36	$	—		$	1,819		$	(1,855	)	$	—

			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	)	$	—

Three Months Ended September 30, 2003


					Mortgage
(In thousands)			Bank		Banking		All Other			Eliminations			Consolidated

Total interest income			$	11,103	$	248	$	695		$	(729	)	$	11,317
Total interest expense				3,497		35		419			(284	)		3,667

Net interest income				7,606		213		276			(445	)		7,650
Provision for loan losses				470		—		—			—			470

Net interest income after provision				7,136		213		276			(445	)		7,180

Total other income				1,172		2,411		3,481			(3,420	)		3,644
Total other expense				3,942		1,447		522			(322	)		5,589

Income before taxes				4,366		1,177		3,235			(3,543	)		5,235
Provision for income taxes				1,545		400		(115	)		—			1,830

Net income (loss)			$	2,821	$	777	$	3,350		$	(3,543	)	$	3,405

Other significant items
	Total assets		$	853,440	$	23,876	$	92,637		$	(90,362	)	$	879,591
	Depreciation, amortization and accretion			972		458		33			—			1,463
Revenues from external customers
	Total interest income		$	11,069	$	248	$	—		$	—		$	11,317
	Total other income			1,172		2,411		61			—			3,644

		Total income	$	12,241	$	2,659	$	61		$	—		$	14,961

Revenues from affiliates
	Total interest income		$	34	$	—	$	695		$	(729	)	$	—
	Total other income			—		—		3,420			(3,420	)		—

		Total income	$	34	$	—	$	4,115		$	(4,149	)	$	—

			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	)	$	—

Three Months Ended September 30, 2002


						Mortgage
(In thousands)			Bank			Banking		All Other			Eliminations			Consolidated

Total interest income			$	12,550		$	242	$	677		$	(720	)	$	12,749
Total interest expense				4,252			39		501			(328	)		4,464

Net interest income				8,298			203		176			(392	)		8,285
Provision for loan losses				760			—		—			—			760

Net interest income after provision				7,538			203		176			(392	)		7,525

Total other income				1,245			1,823		3,387			(3,217	)		3,238
Total other expense				3,986			1,104		896			(322	)		5,664

Income before taxes				4,797			922		2,667			(3,287	)		5,099
Provision for income taxes				1,742			312		(221	)		—			1,833

Net income (loss)			$	3,055		$	610	$	2,888		$	(3,287	)	$	3,266

Other significant items
	Total assets		$	795,038		$	23,947	$	86,768		$	(84,615	)	$	821,138
	Depreciation, amortization and accretion			(120	)		231		33			—			144
Revenues from external customers
	Total interest income		$	12,507		$	242	$	—		$	—		$	12,749
	Total other income			1,245			1,823		170			—			3,238

		Total income	$	13,752		$	2,065	$	170		$	—		$	15,987

Revenues from affiliates
	Total interest income		$	43		$	—	$	677		$	(720	)	$	—
	Total other income			—			—		3,217			(3,217	)		—

		Total income	$	43		$	—	$	3,894		$	(3,937	)	$	—

			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	)	$	—

Nine Months Ended September 30, 2003

NOTE E – LOANS


					Mortgage
(In thousands)			Bank		Banking		All Other			Eliminations			Consolidated

Total interest income			$	34,304	$	722	$	2,052		$	(2,159	)	$	34,919
Total interest expense				11,115		107		1,305			(871	)		11,656

Net interest income				23,189		615		747			(1,288	)		23,263
Provision for loan losses				1,875		—		—			—			1,875

Net interest income after provision				21,314		615		747			(1,288	)		21,388

Total other income				3,739		4,934		7,713			(7,467	)		8,919
Total other expense				14,196		4,238		1,530			(965	)		18,999

Income before taxes				10,857		1,311		6,930			(7,790	)		11,308
Provision for income taxes				3,780		473		(321	)		—			3,932

Net income (loss)			$	7,077	$	838	$	7,251		$	(7,790	)	$	7,376

Other significant items
	Total assets		$	853,440	$	23,876	$	92,637		$	(90,362	)	$	879,591
	Depreciation, amortization and accretion			2,316		1,237		97			—			3,650
Revenues from external customers
	Total interest income		$	34,197	$	722	$	—		$	—		$	34,919
	Total other income			3,739		4,934		246			—			8,919

		Total income	$	37,936	$	5,656	$	246		$	—		$	43,838

Revenues from affiliates
	Total interest income		$	107	$	—	$	2,052		$	(2,159	)	$	—
	Total other income			—		—		7,467			(7,467	)		—

		Total income	$	107	$	—	$	9,519		$	(9,626	)	$	—

In addition to the disclosures 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.

	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

Nine Months Ended September 30, 2002


						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	)	$	—

NOTE E – LOANS


	September 30,		September 30,		December 31,
	2003		2002		2002

			(in thousands)
Loans accounted for on a non-accrual basis	$	1,662	$	5,204	$	5,218
Accruing loans which are contractually past due 90 days or more as to principal and interest payments		1,270		173		2,459

NOTE F – 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 ~~exceeded~~exceeds this requirement as of ~~June~~ September 30, 2003 and December 31, 2002.

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

		Six Months Ended June 30,
		(In thousands)Nine Months Ended September 30,
		2003			2002
		(In Thousands)
Balance — beginning of period		$	3,749		$	2,254
Balance - beginning of period		$	3,749		$	2,254
	Additions		2,213			1,446
	Additions		1,648			815
	Amortization		(1,213	)		(552	)
	Amortization		(761	)		(333	)
	Impairment adjustment		250			—
	Impairment adjustment		(937	)		—
Balance — end of period		$	4,999		$	3,148
Balance - end of period		$	3,699		$	2,736

Accumulated amortization of mortgage servicing rights was approximately $23,~~985~~438,000 and $2,224,000 at ~~June~~ September 30, 2003 and December 31, 2002, respectively.

At ~~June~~September 30, 2003, the weighted-average amortization period of the Company’s mortgage servicing rights ~~originated in the first six~~ ~~months of 2003~~ was 34.32 years. Projected amortization expense for the gross carrying value of mortgage servicing rights at ~~June~~September 30, 2003 is estimated to be as follows (in thousands):

Remainder of 2003	$	~~885~~614
2004		1,~~599~~828
2005		1,~~391~~276
2006		~~641~~591
2007		~~248~~267
2008		~~114~~183
After 2008		62295
Gross carrying value of mortgage servicing rights	$	45,~~940~~053

NOTE G – DEFINITIVE AFFILIATION AGREEMENT

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

On March 27, 2003, the Company entered into an additional amendment to the affiliation agreement to extend its termination date to June 30, 2004. As consideration for this amendment, Fifth Third agreed to amend the exchange ratio to provide shareholders of the Company shares of Fifth Third common stock valued at a fixed price of $31.00 per share of the Company, plus 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 the closing. Further, in the event that Fifth~~ ~~Third is not granted regulatory approval for the~~

1213

recent quarter end prior to the closing. Further, in the event that Fifth Third is not granted regulatory approval for the merger on or before May 31, 2004, the Company will have the right to terminate the agreement and to receive a termination fee of $27 million from Fifth Third.

NOTE H – CONTINGENCIES AND GUARANTEES

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 and Gordon E. Inman, Chairman of the Board of the Company and the Bank, alleging breach of contract, tortious 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 Bank and Mr. Inman filed their answers in this matter on September 18, 2000, and a motion for Summary 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 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 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 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. On April 30, 2003, the United States District Judge issued an Order in which a judgment was entered for the Defendants Franklin National Bank and Mr. Inman on all of Mr. Pressman’s claims. On May 2, 2003, Mr. Pressman filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. A Proof Brief of Appellee Franklin National Bank will be timely filed with the Court. No provision has been made in the accompanying consolidated financial statements for the ultimate resolution of this matter.

There 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.

Guarantees

In the ordinary course of business, the Company sells mortgage loans without recourse that may have to be subsequently repurchased due to defects that occurred during the origination of the loan. The defects are categorized as documentation errors, underwriting errors, early payment defaults and fraud. When a loan sold to an investor without recourse fails to perform, the investor will typically review the loan to determine whether defects in the origination process occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no commitment to repurchase the loan. The requirement to repurchase the loan or indemnify the investor is generally limited to 90 days from the date the related mortgage loan is sold to the investor. As of ~~June~~September 30, 2003, these guarantees totaled $7460.78 million. No No reserve has been established at ~~June~~September 30, 2003 to cover the potential ~~exposure~~ exposure related to these guarantees as the Company does not believe the ultimate loss related to this exposure is material to the consolidated financial statements.

The Company 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.

1314

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

Overview

The Bank represents virtually all of the assets of the Company. The Bank, located in Franklin, Tennessee, opened in December of 1989 and continues to experience growth. The Bank has nine full service branches. In August 1996, the Bank opened an insurance subsidiary, Franklin Financial Insurance. In October 1997, the Bank opened a financial services subsidiary, Franklin Financial Securities. The financial services subsidiary offers financial planning and securities brokerage services through Legg Mason Financial Partners. In December 1997, the Bank began operating its mortgage division as a separate subsidiary, Franklin Financial Mortgage. In ~~August~~September ~~1998~~2003, the mortgage subsidiary ~~opened~~closed aits retail mortgage origination office in Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells and services wholesale and retail mortgage loans. In September 2000, the Company formed Franklin Capital Trust I, a Delaware business trust and wholly owned subsidiary of the Company, for the purpose of issuing Trust Preferred Securities to the public. In December 2000, the Company received approval from the Federal Reserve Bank to convert from a bank holding company to a financial holding company to allow the Company additional avenues for growth opportunities. In May 2001, the Company’s stock began trading on the NASDAQ National Market under the symbol “FNFN”.

Recent Developments

On July 23, 2002, the Company entered into a definitive ~~Affiliation~~affiliation ~~Agreement~~agreement (the “Agreement”) which 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 original Agreement provided that each shareholder of the Company would receive, on a tax-free basis, between 0.3832 and 0.4039 shares of common stock of Fifth Third for each share of Company common stock owned, 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.

On September 9, 2002 and December 10, 2002, the parties amended the Agreement to extend the deadlines for certain regulatory and other filings by Fifth Third and to extend the termination date for the Agreement to April 1, 2003. The reasons for the delay related to an investigation by various banking regulators and a moratorium imposed by the banking regulators prohibiting acquisitions by Fifth Third, including the pending acquisition of the Company. On March 27, 2003, Fifth Third announced that it entered into a written agreement with the Federal Reserve Bank of Cleveland and the Ohio Department of Commerce, Division of Financial Institutions arising out of the previously discussed regulatory review of Fifth Third. The written agreement outlines a series of steps to address and strengthen Fifth Third’s risk management processes and internal controls. These steps include independent third party reviews and the submission of written plans in a number of areas. These areas include Fifth Third’s management, corporate governance, internal audit, account reconciliation procedures and policies, information technology, and 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.~~

1415

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.

The closing of the transaction is subject to the approval of the Company’s shareholders and normal regulatory approvals. The terms of the Agreement and the amendments thereto are more fully described in the Company’s Current Reports on Form 8-K as filed with the Securities and Exchange Commission on July 25, 2002 (which report also contains a copy of the Affiliation Agreement), September 10, 2002, December 18, 2002 and March 27, 2003. The above description of the Agreement and the amendments thereto is qualified in its entirety by reference to the Agreement and the amendments, which are attached as exhibits to the Company’s Current Reports on Form 8-K.

Critical Accounting Policies

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 three 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 and lease losses, the valuation of our repossessed and foreclosed assets and the valuation of our mortgage servicing rights.

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. 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.

Repossessed and foreclosed 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.

Servicing assets on loans sold are measured by allocating the previous carrying 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, with servicing released, as compared to loans sold, with 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 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~~ the preparation of our consolidated financial statements are appropriate given ~~the~~ 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

40.0%, increase since December 31, 2002. This increase has been offset by a decrease in interest-bearing deposits of $30.1 million or 4.6% since December 31, 2002.

The Bank’s loan demand has slowed slightly as demonstrated by the decrease in gross loans of $13.4 million, or 2.4%, since December 31, 2002. The allowance for loan losses increased $345,000, or 6.0%, since December 31, 2002, to $6.1 million, or approximately 1.12% of total loans, at June 30, 2003. The Company continues to see growth in construction and commercial real estate loans, which carry a higher reserve factor. Management believes that the level of the allowance for loan losses is adequate at June 30, 2003. 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 past 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 $2.4 million compared to non-accrual loans of $5.2 million at December 31, 2002. The Bank has one large relationship of $3.8 million that was placed on non-accrual status during the third quarter of 2002. Of this amount, approximately $819,000 is specifically reserved for in the allowance for loan losses. Assets were repossessed that collateralized remaining debt and were reclassified from loans to repossessed and foreclosed assets on the consolidated balance sheet at June 30, 2003. Subsequent to the repossession date, during the second quarter of 2003, the Bank established a valuation allowance on these assets for the amount of $2.4 million. The valuation allowance 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 $14.0 million compared to $19.2 million at December 31, 2002. The allowance for loan losses related to impaired loans was $1.4 million at 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.

At June 30, 2003 the fair value of investment securities classified as available-for-sale exceeded the cost of the securities by $4.4 million. At December 31, 2002 the fair value of securities classified as available-for-sale exceeded the cost of the securities by $4.5 million. As a result, an unrealized gain net of taxes of $2.7 million and $2.8 million at June 30, 2003 and December 31, 2002, 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 causing the Bank’s securities to be valued above current market values.

Securities available-for-sale increased $28.4 million, or 11.0%, during the six months ended June 30, 2003. The increase was due to excess funds being invested in the investment portfolio due to slower loan growth during the first half of 2003 and proceeds from securities called within the held-to-maturity portfolio being reinvested as available-for-sale securities. Securities held-to-maturity decreased $4.3 million, or 52.4%, due to zero coupon agency securities being called during the first and second quarters of 2003. Net premises and equipment decreased by $533,000 or 5.5%, since December 31, 2002 primarily due to depreciation expense. Accrued interest receivable decreased $59,000, or 1.6%, since December 31, 2002. This decrease is due to the combined increase of $10.9 million in loans and securities since December 31, 2002, offset by significantly lower interest rates. Repossessed and foreclosed assets increased $555,000, or 35.7%, since December 31, 2002. The increase is primarily due to $3.0 million of assets repossessed from one large borrowing relationship as described above less the $2.5 million valuation allowance related to these assets.

Accrued interest payable increased $324,000, or 21.9%, since December 31, 2002. The increase is due to the timing of interest payments on certificates of deposits. Long-term debt and other borrowings decreased $1.5 million, or 1.9%, since December 31, 2002 due to the Company’s $1.5 million repayment on its line of credit to a correspondent bank. Other liabilities decreased $3.9 million, or 62.8%, since December 31, 2002. The decrease is due to federal and state tax payments made in the second quarter of 2003 and the settlement of a purchased investment security in the first quarter of 2003. Stockholders’ equity increased $5.4 million, or 11.1%, from December 31, 2002 to June 30, 2003. The increase is primarily attributable to $4.0 million in net income offset partially by a $147,000

~~decrease~~of ~~in other accumulated comprehensive income and $960,000 in dividends~~our ~~declared.~~consolidated ~~Stockholders’~~financial ~~equity~~statements ~~also increased due~~ to athese ~~$2.5 million~~critical ~~increase~~accounting ~~in common~~policies, ~~stock resulting from~~ the ~~exercise of stock options. Unearned~~ ~~compensation~~use of ~~$120~~other judgments,~~000~~ isestimates ~~due~~and toassumptions ~~the~~could ~~issuance~~result ofin ~~restricted~~material ~~stock~~differences in ~~2002.~~our ~~The~~results ~~restricted stock was issued as part~~ of ~~the~~operations ~~Company’s~~or ~~Key~~financial ~~Employee Restricted Stock Plan and vests over a period of four years~~condition. ~~The unearned compensation is being~~ ~~amortized on a straight-line basis over the four-year vesting period of the~~ ~~restricted stock.~~

~~Liquidity~~Financial ~~and Capital Resources~~Condition

~~Management~~Total ~~continuously~~assets ~~monitors~~decreased ~~the~~$11.6 million, ~~Bank’s~~or ~~liquidity~~1.3%, ~~and~~since ~~strives~~December 31, 2002, to ~~maintain~~a antotal ~~asset/liability~~of ~~mix~~$879.6 million ~~that~~at ~~provides~~September 30, ~~the~~2003. ~~highest~~The ~~possible~~decline ~~net~~in ~~interest~~assets ~~margin~~is ~~without~~primarily ~~taking~~attributable ~~undue risk with regard~~ to ~~asset~~a ~~quality~~decrease orin ~~liquidity.~~loans ~~Liquidity management~~held ~~involves~~for ~~meeting~~sale ~~the funds flow requirements~~ of ~~customers who may~~$14.1 million, ~~withdraw funds on deposit~~ or ~~have~~72.4%, a ~~need~~decrease ~~to obtain funds to meet their credit needs. Banks~~ in ~~general must maintain adequate~~ cash ~~balances~~and ~~to meet daily~~ cash ~~flow~~ ~~requirements~~equivalents ~~as well as satisfy the reserves required by applicable regulations. The cash balances held are one source~~ of ~~liquidity~~$6.4 million, ~~Other~~or ~~sources~~22.8%, ofand ~~liquidity~~a ~~are~~decrease ~~provided~~in ~~by the investment portfolio,~~ federal funds ~~purchased, Federal~~sold ~~Home~~of ~~Loan Bank advances~~$18.9 million, ~~sales~~or of100%. ~~loan~~These ~~participations, loan payments,~~were ~~brokered~~offset ~~and~~by ~~public~~an ~~funds~~increase ~~deposits~~in ~~and~~total ~~the~~investment ~~Company’s~~securities ~~ability~~of ~~to borrow funds~~$25.9 million, as ~~well as issue new capital~~or 9.7%.

~~Management~~The ~~believes~~Bank’s ~~that~~loan ~~liquidity~~demand ishas atslowed anslightly ~~adequate~~as ~~level~~demonstrated ~~with~~by ~~cash~~the ~~and~~decrease ~~due~~in ~~from~~net ~~banks~~loans of $351.46 million, ator ~~June~~0.3%, since December 3031, ~~2003~~2002. ~~Loans~~The ~~and~~allowance ~~securities scheduled to~~for ~~mature~~loan ~~within~~losses ~~one~~reflects ~~year~~a ~~exceeded~~decrease of $~~266~~283,000, or 4.~~8 million~~9%, atsince ~~June~~December 3031, ~~2003~~2002, to ~~which~~$5.5 million, ~~should provide~~or ~~further~~approximately ~~liquidity~~1.01% Inof ~~addition~~total loans, ~~approximately~~at ~~$286.4~~September ~~million~~30, of2003. ~~securities~~The ~~are~~decrease ~~classified~~is asprimarily ~~available-for-sale~~reflective ~~and~~of ~~could~~the beoverall ~~sold~~decrease toin ~~help~~total ~~meet~~loans. ~~liquidity~~Management ~~needs~~believes ~~should~~that ~~they~~the ~~arise.~~level ~~The~~of ~~Company~~the ~~has~~allowance afor ~~line~~loan oflosses ~~credit~~is ~~of $5.0~~adequate ~~million~~at ~~with~~September 30, a2003. ~~lending~~Management ~~institution~~reviews ~~and~~in detail the ~~Bank~~level isof ~~approved~~the toallowance for ~~borrow~~loan uplosses ~~to $10.0 million~~on ina ~~funds~~quarterly ~~from~~basis. ~~the~~The ~~Federal~~allowance ~~Home~~is ~~Loan~~below the Bank’s ~~through overnight~~peer ~~advances~~group ~~and~~average ~~$72.5 million~~as ina ~~federal~~percentage ~~funds~~of ~~lines~~loans, tohowever ~~assist~~the ~~with~~Bank’s ~~capital~~past ~~and liquidity~~due ~~needs~~loans, at 0.82% ~~The~~of ~~Company~~total ~~had~~loans ~~$900~~at September 30,~~000~~ in2003, ~~borrowings~~have ~~against~~historically ~~its~~been ~~line~~below ofpeer ~~credit~~group ~~and~~average. At September 30, 2003, the Bank had non-accrual loans of $01.7 million incompared ~~federal~~to ~~funds~~non-accrual ~~purchased~~loans of $5.2 million at ~~June~~December 3031, ~~2003~~2002. InThe ~~February~~Bank ~~and~~had ~~August,~~one ~~1998~~large ~~the~~relationship ~~Bank~~of ~~entered~~$3.8 million ~~into~~that ~~long~~was ~~term~~placed ~~convertible~~on ~~Federal~~non-accrual ~~Home~~during ~~Loan~~the ~~Bank~~third ~~advances~~quarter ~~with~~of a2002. ~~ten~~Of ~~year~~this ~~maturity~~amount, ~~and~~approximately a$819,000 ~~one~~was charged ~~year~~off ~~call~~to ~~option totaling~~the ~~$6.0 million.~~allowance ~~During~~for loan losses in the ~~fourth~~third quarter of ~~1999,~~2003. Assets ~~these~~were ~~advances converted~~repossessed tothat ~~variable~~collateralized ~~rate~~remaining ~~advances,~~debt ~~which~~and ~~reprice~~were reclassified ~~quarterly~~from ~~based~~loans to repossessed and foreclosed assets on ~~90-day~~the ~~LIBOR.~~consolidated ~~During~~balance sheet in the ~~third~~second quarter of ~~2000~~2003. Subsequent to the ~~Bank~~repossession ~~entered~~date, ~~into~~during ~~three~~the ~~long-term~~second ~~convertible~~quarter ~~Federal~~of ~~Home~~2003, ~~Loan~~the Bank ~~advances.~~established a ~~One~~valuation ~~advance~~allowance on these assets in the amount of $252.04 million. ~~has~~The valuation allowance represents a ~~ten~~write ~~year~~down ~~maturity~~in ~~with~~the avalue ~~three~~of ~~year~~the ~~call option.~~assets ~~The~~based ~~other~~on information ~~two~~obtained ~~advances~~by ~~totaling~~management ~~$27.0 million~~from ~~have~~an aindependent ~~five~~third ~~year~~party. ~~maturity~~Management ~~with~~is ain ~~one~~the ~~year~~process ~~call~~of ~~option.~~selling ~~After~~ the ~~three~~repossessed assets and ~~one~~the ~~year~~valuation allowance ~~call~~has ~~options~~been adjusted appropriately, ~~these advances~~as ~~may~~of beSeptember 30, 2003, ~~converted~~to byapproximately ~~the~~$2.0 million. ~~Federal~~Management ~~Home~~believes ~~Loan~~it ~~Bank~~has adequately ~~from~~valued athese ~~fixed~~assets toas ~~a variable~~of ~~rate~~September 30, 2003. ~~The~~At ~~Bank~~September 30, 2003, ~~has~~ the ~~right~~Bank tohad ~~repay~~loans ~~the~~that ~~advances~~were onspecifically ~~the~~classified ~~date~~as impaired of ~~conversion~~approximately to$16.1 million acompared ~~variable~~to ~~rate~~$19.2 million ~~without~~at ~~penalty~~December 31, 2002. The allowance ~~Bank~~for ~~has~~loan losses related to impaired loans was $~~200~~643,000 ~~outstanding~~ inat ~~repurchase~~September 30, ~~agreements~~2003 compared to ~~further~~$698,000 ~~develop~~at ~~its~~December 31, ~~relationship with customers~~2002. The ~~Bank~~average ~~has~~carrying value of impaired loans was approximately $8217.40 million infor ~~brokered~~the ~~deposits~~nine-month atperiod ~~June~~ended September 30, 2003. ~~The~~Interest ~~majority~~income of ~~these~~approximately ~~brokered deposits are~~ $~~100~~225,000 ~~or less,~~was ~~but~~recognized ~~they~~on ~~are~~these ~~generally~~impaired ~~considered~~loans toduring bethe ~~more~~nine-month ~~volatile~~period ~~than~~ended ~~the Bank’s core~~September ~~deposit~~30, ~~base~~2003.

~~Approximately~~At ~~$76.0~~September ~~million~~30, in2003 ~~loan~~the ~~commitments~~fair ~~are~~value ~~expected~~of tosecurities beclassified ~~funded~~as ~~within~~available-for-sale was less than the ~~next~~cost ~~six~~of ~~months.~~the ~~Approximately~~securities by $35124,000.1 At December ~~million~~31, of2002 ~~these~~the ~~commitments are~~fair invalue ~~the~~of ~~mortgage~~securities ~~banking~~classified ~~segment.~~as ~~Furthermore,~~available-for-sale exceeded the ~~Bank~~cost ~~has~~of ~~approximately~~ the securities by $994.65 million. ofAs ~~other~~a ~~loan commitments~~result, ~~primarily~~an unrealized ~~unused~~loss ~~lines~~net ~~and~~of ~~letters~~taxes of ~~credit~~ $75,000 ~~which~~and ~~may~~an orunrealized ~~may~~gain ~~not~~net beof ~~funded~~taxes of $2.8 million ~~Commitments~~at ~~may~~September 30, be2003 ~~funded~~and byDecember 31, ~~core~~2002, ~~or brokered deposits~~respectively, ~~cashflow~~is included ~~from~~in ~~the~~“Accumulated ~~securities~~Other ~~portfolio~~Comprehensive orIncome” ~~other~~in ~~funding~~the stockholders’ ~~sources~~equity ~~which~~section of the ~~Bank~~balance ~~maintains~~sheet. The ~~mortgage~~change ~~banking~~from ~~segment~~an ~~has~~unrealized ~~$42.2~~gain at ~~million~~December 31, in2002 ~~commitments~~ to ~~sell~~an ~~loans~~unrealized loss at ~~June~~September 30, 2003. is primarily due to the change in economic market conditions during the nine-months ended September 30, 2003.

~~Management~~Securities ~~monitors~~available-for-sale increased $30.2 million, or 11.7%, during the nine ~~Company’s~~months ~~asset~~ended ~~and~~September 30, ~~liability~~2003. ~~positions~~The inincrease ~~order~~was due to excess funds ~~maintain~~being ainvested ~~balance~~in ~~between~~the ~~rate-sensitive~~investment ~~assets~~portfolio ~~and~~due ~~rate-sensitive liabilities~~to ~~and~~slower atloan growth during the first ~~same~~nine ~~time~~months ~~maintain~~of ~~sufficient~~2003 ~~liquid~~and ~~assets~~proceeds from securities called within the held-to-maturity ~~meet~~portfolio ~~expected~~being ~~liquidity~~reinvested ~~needs~~as available-for-sale securities. ~~Management~~Securities held-to-maturity ~~believes~~decreased ~~that~~$4.3 million, ~~the~~or ~~Company’s~~52.4%, ~~liquidity~~due isto zero coupon agency ~~adequate~~securities atbeing ~~June 30,~~called during the first and second quarters of 2003. Net premises and ~~that~~equipment ~~liquidity~~decreased ~~will~~by ~~remain~~$724,000, ~~adequate~~or ~~over~~7.5%, ~~future~~since December ~~periods.~~31, ~~Other~~2002 ~~than~~primarily asdue ~~set~~to ~~forth~~depreciation ~~above,~~expense ~~there~~offset ~~are~~slightly noby ~~known~~purchases ~~trends~~of equipment. Accrued interest receivable increased $220,000,

~~commitments~~or 5.9%, ~~events~~since December 31, or2002. ~~uncertainties~~This ~~that~~increase ~~will~~is ~~result~~due to the increase of $25.9 million in investment orsecurities ~~are~~since ~~reasonably~~December 31, ~~likely~~2002, tooffset ~~result~~by significantly lower ininterest ~~the~~rates. ~~Company’s~~Repossessed ~~liquidity~~and ~~increasing~~foreclosed orassets ~~decreasing~~increased in$2.3 million, ~~any~~or 146.5%, ~~material~~since ~~way~~December 31, 2002. The ~~Company~~ increase is ~~not~~due ~~aware~~to the $2.2 million balance, as of ~~any~~September 30, ~~current~~2003, ~~recommendations~~of byassets ~~the~~repossessed ~~regulatory~~from ~~authorities~~one large borrowing relationship as described above, ~~which~~less ifthe ~~they~~$2.0 million ~~were~~valuation allowance related to ~~be implemented,~~these ~~would~~assets. ~~have~~In aaddition, ~~material~~additional ~~adverse~~real ~~effect~~estate foreclosures onoccurred in the ~~Company’s~~third ~~liquidity,~~quarter 2003 totaling approximately $2.3 ~~capital~~million. ~~resources~~These orforeclosures ~~results~~were partially offset by sales of ~~operations~~foreclosed assets in the third quarter of $351,000.

~~Net~~Total ~~cash~~deposits ~~flow~~decreased ~~provided~~$13.7 million, byor ~~operating~~1.8%, ~~activities~~since ~~was~~December 31, 2002. The decrease is primarily attributable to the $313.65 million ~~for~~decrease ~~the first~~in ~~six~~interest-bearing ~~months~~deposits. Brokered certificates of ~~2003~~deposits have decreased $35.0 million since December 31, 2002. The ~~proceeds~~Company ~~from~~has ~~sale~~been ofable ~~loans~~to ~~exceeded~~let ~~loans~~these certificates ~~originated~~mature ~~for~~and ~~sale~~has bybeen able to partially replace them with increases $4in the core, retail and public funds deposits.1 ~~for~~Accrued ~~the~~interest ~~six~~payable decreased ~~months~~$332,000, ~~ended~~or ~~June~~22.5%, since December 3031, ~~2003~~2002. The ~~majority~~decrease ofis ~~this~~due ~~change~~to the overall decrease in interest-bearing deposits and a significant decrease in ~~cash~~interest ~~flow~~rates isduring 2003. Long-term debt and other borrowings increased $1.7 million, or 2.2%, since December 31, 2002 due to ~~less~~temporary ~~loan~~federal ~~originations~~funds purchased asof ~~compared~~$3.1 million, tooffset partially by the ~~sale~~Company’s $1.5 million repayment of ~~loans~~a innote to a correspondent bank. Other liabilities decreased $5.5 ~~the~~million, ~~mortgage~~or ~~banking~~88.5%, ~~segment~~since December 2002. The decrease is due to federal and state tax payments made during 2003 that exceeded income tax expense recorded for the ~~six~~nine months ended ~~June~~September 30, 2003. The decrease is also ~~increase~~attributable to the settlement of a purchased investment security in ~~cash~~the ~~flow~~first quarter isof ~~also~~2003. ~~due~~In addition, deferred taxes related to ~~net~~unrealized ~~income~~holding gains on securities held as available-for-sale ~~the~~decreased ~~six~~by ~~months~~$1.8 million ~~ended~~from December 31, ~~June~~2002. Stockholders’ equity increased $6.3 million, or 12.9%, from December 31, 2002 to September 30, 2003. ofThe increase is primarily attributable to $7.4 million. ~~These~~in ~~increases~~net ~~are~~income ~~partially~~ offset by ana ~~increase~~decrease of $2.9 million in accumulated other ~~assets~~comprehensive ofincome, and by $5.1.4 million ~~and~~in dividends declared. Stockholders equity also increased due to a ~~decrease~~$3.2 million increase in common ~~other~~stock ~~liabilities~~resulting from the exercise of stock options. Unearned compensation of $396,000 was also recorded due to the issuance of restricted stock.9 The restricted stock was issued as part of the Company’s Key Employee ~~million~~Restricted ~~for~~Stock Plan and vests over a period of four years. The unearned compensation is being amortized on a straight-line basis over the ~~six~~four-year vesting ~~months~~period ~~ended~~of ~~June 30,~~the ~~2003~~restricted stock.

~~Net~~Liquidity ~~cash~~and ~~provided~~Capital ~~by investing activities was $2.9 million for the six months~~Resources ~~ended June 30, 2003, which was largely due to the banking segment. The decrease~~ in the change in net loans was $9.2 million for the first six months of 2003. Federal funds sold also decreased by $17.7 million. The cash provided by investing activities was offset partially by an increase in the net investment portfolio of $24 million for the six months ended June 30, 2003.

~~Net~~Management ~~cash~~continuously ~~provided~~monitors bythe ~~financing~~Bank’s ~~activities~~liquidity, ~~was~~and ~~$838,000~~strives ~~for~~to maintain an asset/liability mix that provides the ~~first~~highest ~~six~~possible ~~months~~net interest margin ofwithout ~~2003~~taking undue risk with regard to asset quality or liquidity. ~~The~~Liquidity management ~~increase~~involves inmeeting ~~cash~~the funds flow isrequirements ~~primarily~~of ~~due~~customers who may withdraw funds on deposit or have need to aobtain ~~slight~~funds ~~increase~~to ~~in deposits~~meet oftheir ~~$737,000~~credit needs. Banks in ~~the~~general ~~first~~must ~~six~~maintain ~~months~~adequate ofcash ~~2003~~balances ~~and~~to anmeet ~~increase~~daily ~~in common~~cash ~~stock~~flow ~~from~~requirements as well as satisfy the ~~exercise~~reserves ofrequired ~~stock~~by ~~options~~applicable regulations. The cash balances held are one source of $2liquidity.~~5 million,~~ ~~offset~~Other ~~partially~~sources of liquidity are provided by anthe investment portfolio, federal funds purchased, ~~increase~~Federal inHome ~~other~~Loan ~~borrowings~~Bank advances, sales of ~~$1.5 million~~loan participations, loan payments, brokered and ~~dividends~~public ~~paid~~funds ofdeposits ~~$937~~and the Company’s ability to borrow funds,~~000~~ as well as issue new capital.

~~Equity~~Management ~~capital~~believes ~~exceeded~~that ~~regulatory~~liquidity ~~requirements~~is at ~~June~~an adequate level with cash and due from banks of $21.7 million at September 30, 2003,. Loans and securities scheduled to mature within one year exceed $269 million at 7September 30, 2003, which should provide further liquidity.6% In addition, approximately $288.2 million of securities are classified as available-for-sale and could be sold to ~~average~~help ~~assets~~meet liquidity needs should they arise. The Company’s has a line of credit of $5.0 million with a lending institution and the Bank’s ~~minimum~~is ~~capital~~approved ~~requirements~~to borrow up to $10.0 million in funds from the Federal Home Loan Bank through overnight advances and $72.5 ~~compliance~~million in federal funds lines to assist with ~~the~~capital ~~same~~and ~~are~~liquidity ~~shown~~needs. The Company had $900,000 in borrowings against its line of credit and the ~~following~~Bank ~~table~~had $3.1 million in federal funds purchased at September 30, 2003. In February and August, 1998 the Bank entered into long term convertible Federal Home Loan Bank advances

	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

towith ~~the~~a ~~decrease~~ten inyear ~~interest~~maturity ~~rates~~and ~~offset~~a byone anyear ~~increase~~call inoption ~~average interest-bearing~~totaling ~~deposits of~~ $~~73.~~6 .0 million~~, or 12~~.~~7%,~~ ~~for~~During the ~~six~~ ~~months~~fourth ~~ended~~quarter ~~June 30~~of 1999, ~~2003~~these ~~as compared~~advances converted to variable ~~the~~rate ~~same~~advances, ~~period~~which inreprice ~~2002.~~quarterly ~~The~~based ~~banking~~on ~~segment~~90-day ~~continues~~LIBOR. toAs part ~~experience~~of ~~strong~~its ~~deposit~~leverage ~~rate~~program, ~~competition.~~during ~~The~~the ~~Company~~third ~~had~~quarter aof ~~net~~2000 ~~interest margin~~the ofBank ~~3.74%~~entered ~~for~~into three ~~the~~long-term ~~second~~convertible ~~quarter~~Federal ofHome ~~2003~~Loan ~~and~~Bank 3advances.~~75%~~ ~~for~~One ~~the~~advance ~~six months~~of ~~ended June~~$25.0 ~~30,~~million ~~2003~~has ~~compared~~a toten ~~4.49%~~year ~~and~~maturity ~~4.46%~~with ~~for~~a ~~the~~three ~~same~~year ~~periods~~call ~~in 2002~~option. The ~~decrease~~other two inadvances ~~net~~totaling ~~interest~~$27.0 million ~~margin~~have isa ~~due~~five toyear ~~loans~~maturity ~~repricing~~with ~~faster than~~a ~~deposits~~one ~~that~~year call ~~have~~option. ~~previously~~After ~~repriced~~the atthree ~~lower~~and ~~interest~~one ~~rates.~~year ~~As short-term~~call ~~interest rates decrease~~options, athese ~~significant~~advances ~~portion~~may ofbe converted by the ~~Bank’s~~Federal ~~loan portfolio~~Home ~~reprices~~Loan ~~immediately. The~~ Bank ~~currently~~from ~~has~~ a ~~relatively~~fixed ~~short-term certificate~~to ofa ~~deposit~~variable ~~portfolio~~rate. ~~which~~The Bank has ~~supported~~ the ~~net~~right ~~interest~~to ~~margin~~repay in the ~~declining~~advances ~~rate~~on ~~environment, but with~~ the ~~extended~~date ~~low~~of ~~rate~~conversion ~~environment, loan~~to ~~repricings are occurring at~~ a variable ~~faster~~ rate ~~than~~without ~~repricing~~penalty. ofThe ~~deposits.~~Bank ~~In addition~~has $200,000 ~~the~~outstanding ~~Bank~~in isrepurchase agreements ~~receiving~~to afurther ~~large~~develop ~~amount~~its ofrelationship ~~cash~~with ~~flow~~customers. inThe ~~the~~Bank has ~~investment~~approximately ~~portfolio~~$65.1 million ~~due~~in tobrokered ~~mortgage~~deposits ~~backed~~at ~~securities~~September 30, ~~prepaying~~2003. ~~much~~The majority ~~faster~~of ~~as interest~~these ~~rates~~brokered ~~decline.~~deposits ~~This~~are ~~cash~~$100,000 ~~flow~~or isless, ~~being~~but ~~reinvested~~they ~~into~~are ~~securities~~generally ~~at lower~~considered ~~yields,~~to ~~causing~~be amore ~~decline~~volatile inthan the ~~net~~Bank’s ~~interest~~core ~~margin~~deposit base.

~~The~~Approximately ~~provision for loan losses was~~ $~~485,000 and $800,000 for the three months ended June~~55.7 ~~30,~~million ~~2003~~in ~~and~~loan ~~2002,~~commitments ~~respectively.~~are ~~The~~expected ~~provision~~to ~~was~~be ~~$1.4 million for~~funded within the next six months. ~~ended~~Approximately ~~June 30, 2003 as compared to~~ $110.5 million ~~for~~of ~~the~~these ~~same~~commitments ~~period~~are in ~~2002.~~the ~~The~~mortgage ~~Bank’s~~banking ~~asset~~segment. ~~quality~~Furthermore, ~~remains~~the ~~strong.~~Bank ~~Net~~has ~~charge-offs were~~approximately $199.19 million ~~or 0.19%,~~ of ~~average~~other ~~loans~~loan ~~outstanding at June 30~~commitments, ~~2003~~primarily ~~compared~~unused ~~to net~~lines ~~charge-offs~~and ofletters ~~$747~~of credit,~~000,~~ orwhich ~~0.16%,~~may ofor ~~average~~may ~~loans~~not ~~outstanding~~be ~~at June 30, 2002~~funded. ~~Approximately~~Commitments ~~$819,000~~may ofbe ~~the~~funded ~~provision~~by ~~for~~core ~~loan losses for the first six~~or ~~months~~brokered ~~of 2003~~deposits, ~~related~~cash toflow afrom ~~single~~the ~~loan~~securities ~~relationship~~portfolio ofor ~~the~~other ~~Bank~~funding sources which ~~has~~the ~~been~~Bank ~~fully reserved for~~maintains. ~~For~~The ~~the~~mortgage ~~first~~banking ~~six~~segment ~~months~~has ~~of 2002~~$8.0 million ~~the~~in ~~provision~~commitments ~~for~~to ~~loan~~sell ~~losses~~loans ~~included~~at ~~approximately $905~~September 30,~~000~~ ~~from a problem loan relationship that was subsequently charged off in 2002~~2003.

~~Total~~Management ~~other~~monitors ~~income was $3.4 million for~~ the ~~second~~Company’s ~~quarter~~asset ofand ~~2003,~~liability anpositions ~~increase of $1.4 million, or 72.8%, from $2.0 million for the same period~~ in ~~2002.~~order ~~The~~to ~~increase~~maintain ~~was~~a ~~largely~~balance ~~attributable~~between torate- ansensitive ~~increase~~assets ofand ~~$549,000, or 67.4%, in~~rate-sensitive ~~mortgage~~liabilities ~~banking activities~~ and anat ~~increase~~the ofsame ~~$423,000~~time inmaintain ~~the~~sufficient ~~gain~~liquid onassets ~~the~~to ~~sale~~meet ofexpected ~~mortgage~~liquidity ~~loans~~needs. ~~Gain~~Management onbelieves ~~sale~~that ofthe ~~investment~~Company’s ~~securities~~liquidity ~~increased $550,000.~~is ~~Total~~adequate ~~other~~at ~~income of $6.5~~September ~~million~~30, ~~for~~2003 ~~the~~and ~~six~~that ~~months~~liquidity ~~ended~~will ~~June 30,~~remain ~~2003~~adequate over ~~increased~~future $2periods.~~5 million~~ orOther ~~65.2%~~than ~~from~~as ~~$3.9 million~~set ~~from~~forth ~~the~~above, ~~same~~there ~~period~~are inno ~~2002.~~known trends, ~~The~~commitments, ~~increase~~events isor ~~attributed~~uncertainties tothat anwill ~~increase~~result in ~~mortgage~~or ~~banking~~are ~~activities of~~reasonably ~~$1.1 million~~likely ~~and~~to anresult ~~increase~~ in ~~gains~~the onCompany’s ~~sale~~liquidity ofincreasing ~~mortgage~~or ~~loans~~decreasing ~~and~~in ~~investment~~any ~~securities~~material ofway. ~~$863,000~~The ~~and~~Company ~~$846,000,~~is ~~respectively.~~not ~~Mortgage~~aware ~~servicing~~of ~~rights income~~any ~~contributed~~current ~~$1.6 million~~recommendations ~~for~~by the regulatory ~~six~~authorities, ~~months~~which ~~ended~~if ~~June 30,~~they ~~2003~~were to ~~the total~~be ~~income~~implemented, ~~for~~would ~~the~~have ~~mortgage~~a material ~~banking~~adverse ~~segment.~~effect ~~The increase in the gain~~ on the ~~sale~~ ofCompany’s ~~mortgage loans is partially attributable to a $68~~liquidity,~~000~~ ~~positive~~capital ~~fair~~resources or ~~value~~results ~~adjustment~~of ~~on mortgage loan commitments~~operations.

~~Total~~Net ~~other~~cash ~~expenses~~flow ~~increased~~provided by operating activities was $319.57 million, orfor ~~63.4%, during~~ the ~~second~~first ~~quarter~~nine months of 2003. asThe ~~compared~~proceeds tofrom the ~~same~~sale ~~period~~of inloans ~~2002.~~exceeded ~~Total~~loans originated ~~other~~for ~~expenses increased~~sale by $318.87 million, ~~or 35.5%,~~ for the ~~six~~nine months ended ~~June~~September 30, 2003. ~~as compared~~The tomajority ~~the~~of ~~same~~this ~~period~~change in ~~2002.~~cash ~~Mortgage~~flow ~~banking~~is ~~expenses~~due ~~increased~~to ~~$1.3 million~~less ~~for~~loan ~~the second quarter of 2003~~ originations as compared to the ~~second~~sale ~~quarter~~of ~~2002, primarily~~loans ~~due~~in tothe ~~a $937,000 impairment adjustment recorded for~~ mortgage ~~servicing~~ ~~rights.~~banking Assegment ~~long-term~~during ~~mortgage rates have declined, prepayment speeds~~the onnine ~~mortgages~~months ~~have~~ended ~~increased~~September 30, ~~resulting in an impairment of the mortgage servicing rights portfolio~~2003. ~~Increases~~The increase in ~~mortgage~~cash ~~correspondent~~flow ~~pricing~~is ~~and mortgage servicing rights amortization~~ also ~~contributed~~due to ~~the increase in mortgage~~ ~~banking~~net ~~expenses.~~income ~~Repossessed and foreclosed assets expense increased $1.9 million~~ for the ~~second~~nine ~~quarter~~months ~~2003~~ended ~~as compared to the second quarter 2002. The increase is primarily attributable to a $2.4 million valuation allowance~~September 30, ~~recorded~~ ~~during the second quarter~~ 2003, ~~on several pieces~~ of ~~repossessed assets related to a single customer relationship and a~~ $~~40,000 valuation allowance, recorded during the second quarter 2003, on a piece of foreclosed property~~7.4 million. ~~Salaries and~~These ~~employee~~increases ~~benefits~~are ~~increased~~partially ~~$90,000,~~offset orby ~~3.1%. The increase is attributable to~~ an increase in ~~mortgage~~other ~~commission~~assets ~~expense~~of ~~from~~ $~~170,000 in the second quarter~~8.4 million ofand ~~2002~~a todecrease ~~$389,000~~ in ~~the~~other ~~second~~liabilities ~~quarter~~ of ~~2003 due to the increase in mortgage loan originations~~$3.8 million ~~During~~for the ~~second~~nine ~~quarter~~months ~~of 2003, the Company~~ended ~~recorded $10~~September 30,~~000~~ ~~of merger expenses related to the pending merger with Fifth Third Bancorp~~2003. ~~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.~~

Net cash used in investing activities was $15.2 million for the nine months ended September 30, 2003, which was largely due to the banking segment. The cash used in investing activities was primarily due to an increase in the net investment portfolio of $30.8 million for the nine months ended September 30, 2003. In addition, the change in net loans reflect an increase of $3.7 million for the first nine months of 2003. These uses of cash for investing activities was partially offset by a decrease in federal funds sold of $18.9 million.

Net cash used in financing activities was $10.9 million for the first nine months of 2003. The decrease in cash flow is primarily due to a decrease in deposits of $13.7 million in the first nine months of 2003 partially offset by an increase in common stock from the exercise of stock options of $2.6 million.

Equity capital exceeded regulatory requirements at September 30, 2003, at 8.1% of average assets. The Company’s and the Bank’s minimum capital requirements and compliance with the same are shown in the following table.

Accounting Pronouncements


	Leverage Capital						Tier 1 Capital						Total Risk-Based Capital

	Regulatory						Regulatory						Regulatory
	Minimum			Actual			Minimum			Actual			Minimum			Actual

Company		3.0	%		8.1	%		4.0	%		11.7	%		8.0	%		12.6	%
Bank		3.0	%		7.3	%		4.0	%		10.8	%		8.0	%		12.0	%

InResults ~~June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement~~ of ~~Financial Accounting Standards (“SFAS”) No. 143, Accounting for~~Operations ~~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.

InThe ~~June~~Company ~~2002,~~had ~~the~~net ~~FASB~~income ~~issued~~of ~~SFAS No~~$3.4 ~~146,~~million ~~Accounting~~in ~~for~~the ~~Costs~~third ~~Associated with~~quarter ~~Exit~~of or2003 ~~Disposal Activities, which is effective for exit or disposal~~and ~~activities initiated after December 31, 2002~~$7. ~~SFAS No.~~4 ~~146~~million ~~addresses financial accounting and reporting~~ for ~~costs~~the ~~associated~~first ~~with~~nine ~~exit~~months orof ~~disposal~~2003 ~~activities and~~compared ~~nullifies~~to ~~Emerging~~net ~~Issues~~income ~~Task~~of ~~Force Issue No~~$3. ~~94-~~3~~, Liability Recognition~~ ~~for~~million ~~Certain Employee Termination Benefits~~ and ~~Other~~$8.4 million ~~Costs~~for tothe ~~Exit~~same anperiods ~~Activity (including Certain Costs Incurred~~ in ~~a Restructuring)~~2002. ~~SFAS~~Net ~~No. 146~~income ~~requires that a liability~~ for athe ~~cost~~third quarter ~~associated~~of ~~with~~2003 anincreased ~~exit~~$139,000, or ~~disposal~~4.3% ~~activity~~compared ~~be recognized~~to ~~when~~ the ~~liability~~third isquarter ~~incurred~~of 2002. ~~SFAS~~Net ~~No. 146~~income ~~is effective~~ for ~~exit or~~the ~~disposal~~nine ~~activities~~months ~~initiated~~ended ~~after December~~September 3130, ~~2002~~2003 ~~and~~decreased ~~did not have a~~$1.0 ~~material~~million, ~~impact on the Company’s consolidated financial position~~ or ~~results~~12.0% ~~of operations~~compared asto ~~of and for~~ the ~~quarter~~nine ~~and six~~ months ended ~~June~~September 30, ~~2003~~2002.

InTotal ~~November~~interest ~~2002~~income decreased $1.4 million, ~~the~~or ~~FASB~~11.2%, ~~issued~~in ~~Interpretation~~the ~~(“FIN”)~~three ~~No.~~months ended September 4530, ~~Guarantor’s Accounting~~2003 and ~~Disclosure~~$3.0 million, ~~Requirements~~or 8.0%, for ~~Guarantees,~~the ~~Including~~nine ~~Indirect~~months ended ~~Guarantees~~September 30, of2003 ~~Indebtedness~~compared ofto ~~Others,~~the ansame ~~Interpretation~~periods ofin ~~FASB~~2002. ~~Statements~~Total ~~No.~~interest expense 5decreased $797,000, 57or ~~and~~17.9%, ~~107~~for ~~and~~the ~~Rescission~~three ofmonths ~~FASB~~ended ~~Interpretation~~September 30, No2003 and $1.9 ~~34.~~million, ~~This interpretation~~or ~~requires~~14.0% ~~that~~for ~~upon~~the ~~issuance~~nine ofmonths aended ~~guarantee~~September 30, ~~the~~2003 ~~entity~~compared ~~must~~to ~~recognize~~the asame ~~liability~~periods ~~for~~in ~~the~~2002. ~~fair~~The ~~value~~decrease ofin ~~the~~total ~~obligation~~interest itincome ~~assumes~~is ~~under~~primarily ~~that~~attributable ~~obligation.~~to ~~This~~significantly ~~interpretation~~lower isinterest ~~intended~~rates tooffset ~~improve~~partially ~~the~~by ~~comparability~~an ofincrease ~~financial~~in ~~reporting~~average byearning ~~requiring~~assets ~~identical~~of ~~accounting~~$97.9 million, or 13.3%, for ~~guarantees~~the ~~issued~~first ~~with~~nine ~~separately~~months ~~identified~~of ~~consideration~~2003 ~~and~~compared ~~guarantees~~to ~~issued~~2002. ~~without~~The decrease in total interest income is ~~separately~~primarily ~~identified~~due ~~consideration~~to the banking segment. The ~~initial~~decrease ~~recognition~~in ~~and~~total ~~measurement~~interest expense is ~~provisions~~primarily ofdue ~~FIN~~to ~~No. 45~~the ~~are~~significant todecrease bein ~~applied~~interest ~~prospectively~~rates tooffset ~~guarantees~~by ~~issued~~an increase in average interest-bearing liabilities of $65.4 million, or ~~modified~~11.0%, for ~~after~~the ~~December~~nine months ended September 3130, 2003 as compared to the same period in 2002. The ~~interpretation’s~~banking ~~disclosure~~segment continues to experience strong deposit rate ~~requirements~~competition. ~~were~~The ~~effective~~Company had a net interest margin of 3.66% for the ~~Company~~third quarter as of ~~December~~2003 and 3.72% for the nine months ended September 3130, 2003 compared to 4.34% and 4.42%, respectively, for the same periods in 2002. The decrease in ~~Significant~~net ~~guarantees~~interest margin is due to significant decreases in short-term interest rates. Loans are repricing faster than deposits that have ~~been~~previously ~~entered~~repriced at ~~into~~lower byinterest rates. As short-term interest rates decrease, a significant portion of the ~~Company~~Bank’s atloan ~~June 30~~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, but with ~~2003~~the ~~and~~extended ~~December 31~~low rate environment, ~~2002~~loan repricings are ~~disclosed~~occurring at a faster rate than repricing of deposits. In addition, the Bank is receiving a large amount of cash flow in ~~Note~~the Hinvestment portfolio due to mortgage-backed securities prepaying much faster as interest rates decline. This cash flow is being reinvested into securities at lower yields, causing a decline in the ~~consolidated~~net ~~financial~~interest ~~statements~~margin.

InThe ~~December~~provision ~~2002,~~for ~~the~~loan ~~FASB~~losses ~~issued~~was ~~SFAS No. 148~~$470,000 ~~Accounting~~and $760,000 for ~~Stock-Based~~the three months ~~Compensation~~ended –September 30, ~~Transition~~2003 and ~~Disclosure~~2002, –respectively. anThe ~~amendment~~year-to-date ofprovision ~~FASB Statement No.~~is ~~123~~$1.9 million ~~SFAS~~for ~~No. 148~~the ~~amends~~nine ~~SFAS~~months ~~No.~~ended September ~~123~~30, ~~Accounting~~2003 ~~for~~as ~~Stock-Based Compensation,~~compared to ~~provide~~$2.2 million ~~alternative methods of transition~~ for athe ~~voluntary change~~same toperiod ~~the~~in ~~fair~~2002. ~~value~~The ~~based~~Bank’s ~~method~~asset ofquality ~~accounting~~remains ~~for~~strong. Net ~~stock~~charge-~~based~~offs ~~employee compensation.~~were ~~In addition~~$2.2 million, ~~SFAS~~or No0. ~~148~~40% ~~amends~~of ~~the~~average ~~disclosure~~loans ~~requirements~~outstanding ofat ~~SFAS No.~~September ~~123~~30, to2003 ~~require~~compared ~~prominent~~to ~~disclosures~~net incharge-offs ~~both~~of ~~annual~~$1.1 million, ~~and~~or ~~interim~~0.22%, of ~~financial~~average ~~statements~~loans ~~about~~outstanding ~~the~~at ~~method~~September 30, of2002. ~~accounting~~Approximately ~~for~~$819,000 ~~stock-based~~of ~~employee~~the ~~compensation~~provision ~~and~~for ~~the~~loan ~~effect~~losses offor the ~~method~~first ~~used~~nine onmonths ~~reported~~of ~~results.~~2003, ~~SFAS~~related ~~No.~~to a ~~148~~single isloan ~~effective~~relationship ~~for~~of ~~annual~~the ~~and~~Bank ~~interim~~which ~~periods~~was ~~beginning~~fully ~~after~~reserved ~~December 15,~~for and ~~2002.~~subsequently Ascharged ~~the~~off ~~Company~~in ~~has~~the ~~elected~~third ~~not~~quarter to2003. ~~change~~For to the ~~fair~~first ~~value~~nine ~~based method~~months of ~~accounting for stock-based employee compensation~~2002, the ~~adoption~~provision offor ~~SFAS~~loan ~~No. 148~~losses ~~did~~included ~~not~~approximately ~~have~~$905,000 anfrom ~~impact~~a problem onloan ~~the~~relationship ~~Company’s~~that ~~consolidated~~was ~~financial~~subsequently ~~position~~charged ~~or results~~off ofin ~~operations~~2002.

InTotal ~~January~~other income was $3.6 million in the third quarter of 2003, ~~the~~an ~~FASB~~increase of ~~issued~~$406,000, ~~FIN~~or No12.5% from $3.2 ~~46,~~million ~~Consolidation~~for ofthe ~~Variable~~same ~~Interest Entities~~period in 2002. ~~FIN~~The increase Nowas largely attributable to an increase of $1.1 46million, ~~addresses~~or ~~consolidation~~98.7%, in mortgage banking activities offset partially by ~~business~~a ~~enterprises~~decrease of $462,000 in the ~~variable~~gain ~~interest~~on ~~entities~~the ~~that~~sale ~~have~~of ~~certain~~mortgage ~~characteristics~~loans. ~~This~~For the third quarter of 2003 a $1.2 ~~Interpretation~~million ~~applies~~recovery ~~immediately~~of toa ~~variable~~previously ~~interest~~recorded ~~entities~~impairment ~~created~~of mortgage servicing rights is included in mortgage banking activities income. Total other income of ~~January~~$8.9 31million for the nine months ended September 30, 2003 ~~and~~increased to$1.8 million, ~~variable~~or 24.7%, from $7.1 million from the

~~interest~~same ~~entities~~period in ~~which~~2002. anThe ~~enterprise~~increase is ~~obtains~~primarily andue ~~interest~~to ~~after~~increases ~~that~~of ~~date~~$1.0 million, ~~It applies in the first fiscal year~~ or ~~interim~~ ~~period beginning after June 15~~37.2%, ~~2003 to variable interest entities~~ in ~~which~~ anmortgage ~~enterprise holds a variable interest that it acquired before February~~banking 1activities, ~~2003.~~a ~~The adoption of the provisions of FIN No. 46 related to variable interest entities created in January 31~~$401, ~~2003~~000, or ~~after~~50.0% ~~that~~increase ~~date,~~in ~~did not~~the ~~have~~gain ~~an impact~~ on the ~~Company’s~~sale ~~consolidated~~of ~~financial position or results~~mortgage ofloans ~~operations.~~and ~~The~~an ~~Company~~increase is in the ~~process~~gain ofon ~~evaluating~~sale ~~the impact that the adoption~~ of ~~the~~investment ~~Provision~~securities of $757,000, ~~FIN~~or No128.1%. 46Mortgage ~~related~~servicing torights ~~variable interest~~income ~~entities~~contributed ~~created~~$2.2 million and ~~before February~~ $1,.4 million ~~2003~~for ~~would have on~~ the ~~Company’s~~ ~~trust~~nine ~~preferred~~months ~~securities~~ended ~~currently~~September 30, ~~reported~~2003 ~~with~~and 2002, ~~long-term~~respectively, ~~debt~~to ~~and~~the ~~other~~total ~~borrowings~~income onfor ~~its~~the ~~consolidated~~mortgage ~~statement~~banking ~~of financial position~~segment.

InTotal ~~April~~other ~~2003~~expenses had a slight decrease of $75,000, or 1.3%, during the third ~~FASB~~quarter ~~issued~~of ~~SFAS~~2003 Noas compared to the same period in 2002. Total other expenses increased $2.6 ~~149~~million, ~~Amendment~~or to15.6%, ~~Statement~~for ~~133~~the onnine months ended September ~~Derivative~~30, ~~Instruments~~2003 ~~and~~as ~~Hedging~~compared ~~Activities.~~to ~~SFAS~~the Nosame period in 2002. ~~149~~ ~~amends~~Mortgage ~~and~~banking expenses ~~clarifies~~increased ~~accounting~~by ~~for~~$293,000 ~~derivative~~or ~~instruments~~75.5%, ~~including~~for ~~certain~~the ~~derivative~~third quarter of 2003 compared to third ~~instruments~~quarter ~~embedded~~of 2002. Increases in ~~other~~mortgage ~~contracts,~~correspondent pricing and ~~for~~mortgage servicing ~~hedging~~rights ~~activities~~amortization ~~under~~contributed ~~SFAS~~to the increase in mortgage banking Noexpenses. ~~133.~~ ~~SFAS~~Mortgage Nobanking expenses increased by $654,000, or 60.8%, for the nine months ended September ~~149~~30, 2003 as compared to the same period in 2002. The increase is ~~applied~~primarily ~~prospectively~~attributable to a combined increase of $836,000 in mortgage correspondent pricing and ismortgage ~~effective~~servicing rights amortization. Repossessed and foreclosed assets expense increased $132,000 for ~~contracts~~the third ~~entered~~quarter ~~into~~of or2003 ~~modified~~as ~~after~~compared ~~June~~to the third quarter of 2002. For the nine months ended September 30, 2003, ~~except~~repossessed ~~for~~and ~~SFAS~~foreclosed Noassets expense increased $2.0 ~~133 implementation~~million ~~issues~~compared ~~that~~to ~~have~~the ~~been~~same ~~effective~~period ~~for~~in ~~fiscal~~2002. ~~quarters~~In ~~that~~the ~~began prior~~second toquarter ~~June 15~~of 2003, ~~2003~~a ~~and~~$2.4 ~~certain~~valuation ~~provisions~~allowance ~~relating~~was recorded on several pieces of repossessed assets related to ~~forward~~a ~~purchases~~single customer relationship and a $40,000 valuation ~~sales~~allowance on ~~securities~~a ~~that~~piece doof ~~not~~foreclosed ~~yet~~property ~~exist~~was recorded. ~~The~~In ~~adoption~~the onthird ~~April 1,~~quarter of 2003 ~~of the~~an ~~components~~additional valuation allowance of ~~SFAS~~$72,000 ~~No. 149~~was ~~which~~recorded ~~address~~on ~~SFAS~~pieces Noof repossessed assets. ~~133~~ ~~implementation~~Salaries ~~issues that~~and ~~have~~employee ~~been~~benefits ~~effective~~decreased $80,000, or 2.6% for ~~fiscal~~the ~~quarters~~third ~~that~~quarter ~~began~~of ~~prior~~2003 compared to ~~June~~third quarter of 2002. For the nine months ended September 1530, 2003, salaries and employee benefits increased ~~did~~$275,000, ~~not~~or ~~have~~3.1%. aThe ~~material~~increase ~~impact~~is onattributable to increases in mortgage commission expense of $388,000 due to the ~~Company’s~~increase ~~consolidated~~in ~~interim~~mortgage ~~financial~~loan ~~position~~originations and ~~results~~accrued officer incentives of ~~operations~~$283,000 for the nine months ended September 30, 2003. ~~The~~In ~~adoption~~the first half of ~~the~~2002, ~~remaining~~officer ~~components~~incentives were ofpaid ~~SFAS~~in ~~No. 149~~Company isstock options and therefore, not ~~anticipated~~recorded as compensation expense. Due to ~~have~~certain arestrictions ~~material~~in ~~impact~~the onCompany’s affiliation Agreement with Fifth Third Bancorp, officer incentives are no longer paid in options but rather are paid in cash, and are therefore expensed in the Company’s consolidated ~~financial~~statements ~~position~~of orincome. ~~results~~These increases are partially offset by a $446,000 decrease in Bank salaries due to the reduction of ~~operations~~overall personnel.

~~In May 2003, the FASB issued SFAS No. 150,~~ Accounting ~~for Certain Financial~~Pronouncements ~~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~~In ~~Harbor~~June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement ~~Under~~of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair ~~Private~~value ~~Securities~~of ~~Litigation~~a ~~Reform~~liability ~~Act~~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. ~~1995~~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 was 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.

~~Certain~~In ~~statements~~June in2002, ~~this Form 10-Q contain “forward-looking statements” within~~ the ~~meaning~~FASB ofissued ~~the~~SFAS ~~Private Securities Litigation Reform Act of 1995~~No. 146, ~~which~~ ~~statements~~Accounting ~~generally~~for ~~can~~Costs ~~be identified by the use of forward-looking~~Associated ~~terminology,~~with ~~such~~Exit asor ~~“may,”~~Disposal ~~“will~~Activities,” ~~“expect,”~~which ~~“estimate,”~~is ~~“anticipate,” believe,”~~effective ~~“target,”~~for ~~“plan,”~~exit ~~“project,”~~ or ~~“continue” or the negatives thereof~~disposal oractivities ~~other~~initiated ~~variations~~after ~~thereon or similar terminology~~December 31, ~~and~~2002. ~~are~~SFAS ~~made~~No. 146 onaddresses ~~the basis~~financial ofaccounting ~~management’s plans~~ and ~~current~~reporting ~~analyses~~for ofcosts ~~the~~associated ~~Company,~~with ~~its~~exit ~~business~~or ~~and~~disposal ~~the~~activities ~~industry~~and asnullifies aEmerging ~~whole.~~Issues ~~These~~Task ~~forward~~Force ~~looking~~Issue ~~statements are subject to risks and uncertainties~~No. 94-3, ~~including,~~Liability ~~but not limited to the pending merger with~~Recognition ~~Fifth~~for ~~Third~~Certain ~~Bancorp,~~Employee ~~economic~~Termination ~~conditions,~~Benefits ~~competition, interest rate sensitivity~~ and ~~exposure~~Other Costs to ~~regulatory~~Exit ~~and~~an ~~legislative changes.~~Activity ~~The~~(including ~~above~~Certain ~~factors,~~Costs Incurred in ~~some~~a ~~cases,~~Restructuring). ~~have~~SFAS ~~affected,~~No. 146 ~~and~~requires that ina ~~the~~liability ~~future~~for ~~could affect,~~a ~~the~~cost ~~Company’s~~associated ~~financial~~with ~~performance~~an ~~and~~exit ~~could~~or ~~cause~~disposal ~~actual~~activity ~~results for~~be ~~fiscal~~recognized ~~2003~~when ~~and~~the ~~beyond~~liability tois ~~differ~~incurred. ~~materially~~SFAS ~~from those expressed or implied in such forward-looking statements~~No. 146 ~~The~~is ~~Company~~effective ~~does~~for ~~not undertake to publicly~~exit ~~update~~ or ~~revise~~disposal ~~its~~activities ~~forward-looking~~initiated ~~statements~~after ~~even~~December 31, if2002 ~~experience~~and ordid ~~future changes make it clear that any projected results expressed or implied therein will~~ not ~~be realized.~~

~~ITEM~~have 3a material –impact ~~QUANTITATIVE~~on ~~AND~~the ~~QUALITATIVE~~Company’s ~~DISCLOSURES~~consolidated ~~ABOUT~~financial ~~MARKET~~position ~~RISK~~or results of operations as of and for the quarter and nine months ended September 30, 2003.

~~The~~In ~~Company’s~~November ~~financial~~2002, ~~performance~~the isFASB ~~subject~~issued toInterpretation ~~risk~~(“FIN”) ~~from~~No. 45, ~~interest rate~~Guarantor’s ~~fluctuations.~~Accounting ~~This~~and ~~interest~~Disclosure ~~rate~~Requirements ~~risk~~for ~~arises~~Guarantees, ~~due~~Including ~~to differences between the~~Indirect ~~amount~~Guarantees of ~~interest-earning~~Indebtedness ~~assets~~of ~~and~~Others, ~~the~~an ~~amount~~Interpretation of ~~interest-bearing liabilities~~FASB ~~subject~~Statements toNo. 5, ~~repricing~~57 ~~over~~and a107 ~~specified period~~ and ~~the~~Rescission ~~amount~~ of ~~change~~ inFASB ~~individual~~Interpretation ~~interest rates~~No. 34. ~~The~~This interpretation ~~liquidity~~requires ~~and~~that ~~maturity~~upon ~~structure~~issuance of ~~the~~ ~~Company’s~~a ~~assets~~guarantee, ~~and liabilities are important to~~ the ~~maintenance~~entity ofmust ~~acceptable~~recognize ~~net~~a ~~interest~~liability ~~income~~for ~~levels.~~the Anfair ~~increasing~~value ~~interest~~of ~~rate environment negatively impacts earnings as~~ the ~~Company’s~~obligation ~~rate~~it ~~sensitive~~assumes ~~liabilities~~under ~~generally~~that ~~reprice faster than its rate sensitive assets~~obligation. ~~Conversely,~~This ininterpretation ~~a decreasing~~is ~~interest~~intended ~~rate~~to ~~environment,~~improve ~~earnings~~the ~~are positively impacted. This~~comparability ~~potential~~of ~~asset/liability~~financial ~~mismatch~~reporting inby ~~pricing~~requiring isidentical ~~referred~~accounting tofor asguarantees ~~“gap” and is~~issued ~~measured~~with asseparately ~~rate~~identified ~~sensitive~~consideration ~~assets~~and ~~divided~~guarantees byissued ~~rate sensitive liabilities for a~~without ~~defined~~separately ~~time~~identified ~~period~~consideration. AThe ~~gap~~initial ofrecognition ~~1.0~~and ~~means~~measurement provisions ~~that~~of ~~assets~~FIN ~~and~~No. 45 ~~liabilities~~ are ~~perfectly~~ ~~matched as~~ to ~~repricing~~be ~~within~~applied aprospectively ~~specific~~to ~~time~~guarantees ~~period and interest~~issued ~~rate~~or ~~movements~~modified ~~will~~after ~~not~~December 31, ~~affect~~2002. ~~net~~The ~~interest~~interpretation’s ~~margin,~~disclosure requirements ~~assuming~~were ~~all~~effective ~~other~~for ~~factors hold~~the ~~constant.~~Company ~~Management~~as ~~has~~of ~~specified~~December 31, ~~gap~~2002. Significant ~~guidelines~~guarantees ~~for~~that ahave ~~one-year~~been ~~time horizon~~entered ~~between~~into ~~0.7~~by ~~and~~the ~~1.3.~~Company Atat ~~June~~ September 30, 2003, ~~the~~and ~~Company~~December 31, ~~had~~2002 aare ~~gap~~disclosed ~~ratio~~in ~~of 0.8~~Note ~~for~~H to the ~~one-year~~consolidated financial ~~period~~statements ~~ending~~included ~~June 30,~~in ~~2004~~this report.

AIn ~~200~~December ~~basis~~2002, ~~point decrease in~~ the ~~general~~FASB ~~level~~issued ofSFAS ~~interest~~No. 148, ~~rates~~Accounting ~~spread~~for ~~evenly~~Stock-Based ~~during~~Compensation ~~the~~– ~~next~~Transition ~~twelve~~and ~~months~~Disclosure is– ~~estimated~~an toamendment ~~cause~~of anFASB ~~increase~~Statement inNo. 123. ~~net~~SFAS ~~interest income~~No. 148 ofamends ~~$198~~SFAS No. 123,~~000~~ asAccounting ~~compared~~for Stock-Based Compensation, to ~~net~~provide ~~interest~~alternative ~~income~~methods ifof ~~interest~~transition ~~rates~~for ~~were~~a voluntary ~~unchanged~~change ~~during~~to the ~~next~~fair ~~twelve~~value ~~months~~based method of accounting for stock-based employee compensation. In ~~comparison~~addition, aSFAS ~~200~~No. 148 ~~basis~~amends ~~point~~the disclosure requirements of ~~increase~~SFAS No. 123 to require prominent disclosures in ~~the~~both ~~general~~annual ~~level~~and interim financial statements about the method of ~~interest~~accounting ~~rates~~for ~~spread~~stock-based ~~evenly~~employee compensation ~~during~~and the ~~next twelve~~effect ~~months~~of the method used on reported results. SFAS No. 148 is ~~estimated~~effective tofor ~~cause~~annual aand ~~decrease~~interim inperiods ~~net~~beginning ~~interest~~after ~~income~~December 15, 2002. ofAs the Company has elected not to change to the fair value based method ~~$198~~of accounting for stock-based employee compensation,~~000,~~ asthe ~~compared~~adoption toof ~~net~~SFAS ~~interest~~No. 148 ~~income~~did ifnot ~~rates~~have ~~were~~an ~~unchanged~~impact ~~during~~on the Company’s consolidated financial position or ~~next~~results ~~twelve~~of ~~months~~operations.

AsIn ~~discussed~~January ~~above~~2003, ~~this~~the ~~level~~FASB ofissued ~~variation~~FIN isNo. 46, ~~within~~Consolidation ~~the~~of ~~Company’s~~Variable ~~acceptable~~Interest ~~limits~~Entities. ~~This~~FIN ~~simulation~~No. 46 ~~analysis~~addresses ~~assumed~~consolidation ~~that~~by ~~savings~~business ~~and~~enterprises ~~checking~~of variable interest entities that have certain characteristics. This ~~rates~~Interpretation ~~had~~applies aimmediately ~~low~~to ~~correlation~~variable interest entities created in January 31, 2003 and to ~~changes~~variable interest entities in ~~market~~which ~~rates~~an ofenterprise obtains an interest ~~and~~after that ~~certain~~ ~~asset~~date. ~~prepayments~~Under ~~changed~~certain ascircumstances, ~~refinancing~~the effective ~~incentives~~date ~~evolved~~of FIN No. 46 ~~Further,~~has been delayed to the first year or interim inperiod ending after December 15, 2003. The adoption of the ~~event~~provisions of aFIN No. 46 ~~change~~related into ~~such~~variable ~~magnitude~~interest entities created in ~~interest~~January 31, ~~rates~~2003, or after that date, did not have an impact on the Company’s ~~asset~~ ~~and~~consolidated ~~liability~~financial position ~~management~~or ~~committee~~results ~~would~~of ~~likely~~operations. ~~take~~The ~~actions~~Company tois ~~further mitigate~~in ~~its~~the ~~exposure~~process toof evaluating the ~~change.~~impact ~~However,~~that ~~given~~the adoption of the ~~uncertainty~~provision of ~~specific~~FIN No. 46 related to variable ~~conditions~~interest ~~and~~entities ~~corresponding~~created ~~actions~~before February 1, ~~which~~2003 would behave ~~required,~~on the ~~analysis~~company’s ~~assumed~~trust nopreferred ~~change~~securities incurrently ~~the~~reported ~~Company’s~~with ~~asset/liability~~long-term ~~composition~~debt and other borrowings on its consolidated statement of financial position.

~~ITEM~~In 4April –2003, ~~CONTROLS~~the ~~AND~~FASB ~~PROCEDURES~~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.

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 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.

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.

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 mandatory redeemable financial instruments of nonpublic entities. The adoption of SFAS No. 150 did not have an 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, 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 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 can negatively impacts earnings as the Company’s rate sensitive liabilities, have in the past, generally repriced faster than its rate sensitive assets. Conversely, in a decreasing interest rate environment, earnings can be 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 30, 2003, the Company had a gap ratio of approximately 1.0 for the one-year period ending September 30, 2004.

A 200 basis point decrease in the general level of interest rates spread evenly during the next twelve months is estimated to cause a increase in net interest income of $706,000 as compared to net interest income if interest rates 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 a decrease in net interest income of $706,000, 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.

ITEM 4 — CONTROLS AND PROCEDURES

Management has developed and implemented a policy and procedures for reviewing disclosure controls and procedures and internal control over financial reporting on a quarterly basis. As of September 30, 2003, 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 their evaluation, our 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 control over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~Except as set forth above, there are no material pending legal proceedings to~~24 ~~which the Company or the Bank is a party or of which any of their properties~~ are subject; nor are there material proceedings known to the Company 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 principal security holder of the Company, or any associate of any of the foregoing is a party or has an interest adverse to the Company or the Bank.

Item 4. Submission of Matters to a Vote of Security Holders

The 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.

Except as 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 are subject; nor are there material proceedings known to the Company 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 principal security holder of the Company, or any associate of any of the foregoing is a party or has an interest adverse to the Company or the Bank.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits.


Exhibit No.		Description of Exhibit

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 ~~April~~July 2528, 2003, the Company ~~filed~~furnished a ~~form~~Form 8-K ~~regarding~~to the Commission in connection with the Company’s press release announcing the Company’s results for the three and six months ended ~~March~~June 3130, 2003 and its financial condition as of ~~March~~June 3130, 2003.

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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


		FRANKLIN FINANCIAL CORPORATION

Dated: November 14, 2003	By:	/s/ Gordon E. Inman

		Gordon E. Inman, President and Chief Executive Officer (Principal Executive Officer)

Dated: November 14, 2003	By:	/s/ Kelly S. Swartz

		Kelly S. Swartz, Vice President and Chief Financial Officer (Principal Financial Officer)

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)

EXHIBIT INDEX


Exhibit No.		Description of Exhibit

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/