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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002

Commission File No. 0-24133

FRANKLIN FINANCIAL CORPORATION

A Tennessee Corporation
(IRS Employer Identification No. 62-1376024)
230 Public Square
Franklin, Tennessee 37064
(615) 790-2265

Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:

NONE

Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:

Common Stock, no par value per share

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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]      No   [   ]

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained in this form, and disclosure will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   [X]

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

The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (3,285,955 shares) on June 28, 2002, the last
business day of the registrants most recently completed second fiscal quarter,
was approximately $83,857,572 based on the closing price of the registrants
common stock as reported on the NASDAQ National Market on June 28, 2002. For
the purposes of this response, officers, directors and holders of 5% or more of
the registrants common stock are considered the affiliates of the registrant
at that date.

The number of shares outstanding of the registrants common stock, as of March
15, 2003: 8,274,507 shares of no par value common stock.





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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive proxy statement to be delivered to
shareholders in connection with the 2003 Annual Meeting of Shareholders are
incorporated by reference to Items 10, 11, 12 and 13 of this Report. In the
event the Registrants definitive proxy statement is not filed with the SEC
prior to April 30, 2003, such information will be filed as an amendment to this
report on Form 10-K.





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TABLE OF CONTENTS



|                                     |  |  |  |  |  |  |  | 
|------------------------------------ |  |  |  |  |  |  |  | 
|PART I                              
|PART II                             
|PART III                            
|SIGNATURES                          
|CERTIFICATIONS                      
|EXHIBIT INDEX                       
|SUBSIDIARIES OF THE REGISTRANT      
|CONSENT OF D&T LLP                  
|Section 906 Certification of the CEO
|Section 906 Certification of the CFO



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PART I

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

Certain statements in this Annual Report on Form 10-K 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, our ability to complete our acquisition with Fifth Third Bancorp,
economic conditions, competition, interest rate sensitivity and exposure to
regulatory and legislative changes. The above factors, in some cases, have
affected, and in the future could affect, the Companys financial performance
and could cause actual results for fiscal 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 1. Business.

General

Franklin Financial Corporation (the Company) is a registered financial
holding company under the Gramm-Leach-Bliley Financial Services Modernization
Act, and owns 100% of the outstanding capital stock of Franklin National Bank,
a national banking association headquartered in Franklin, Tennessee (the
Bank). The Company was incorporated under the laws of the State of Tennessee
on December 27, 1988, as a mechanism to enhance the Banks ability to serve its
future customers requirements for financial services. The holding company
structure provides flexibility for expansion of the Companys banking business
through the acquisition of other financial institutions and the provision of
additional banking-related services which the traditional commercial bank may
not provide under present laws.

Recent Developments

On July 23,
2002, the Company entered into a definitive Affiliation Agreement
(the Agreement) which provides for the acquisition of the
Company by Fifth Third Bancorp, and 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 polices, 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 value 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) 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.

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 and incorporated by
reference into this Annual Report on Form 10-K.

Subsidiaries

Franklin National Bank.The Bank commenced business operations on December
1, 1989 in a permanent facility located at 230 Public Square, Franklin,
Tennessee 37064. The approximately 12,000 square foot facility is being leased
from Gordon E. Inman, the Chairman, President and Chief Executive
Officer of the Company. The Bank has
eight full service branches: one located in the Williamson Square Shopping
Center, which opened in April 1994; one located in Spring Hill, Tennessee,
which opened in January 1995; one located in Brentwood, Tennessee, which opened
in April 1995; one located in Fairview, Tennessee, which opened in May 1997;
one located in the Cool Springs area of Franklin, which opened in May 2000; one
located in the Fieldstone Farms area of Franklin, which opened in June 2000;
one in Green Hills, Tennessee, which opened in January 2001; and one in
downtown Nashville, Tennessee, which opened in February 2001. The Bank also
leases 9,000, 4,000 and 3,000 square foot facilities from Mr. Inman, which
house its mortgage banking subsidiary, financial services subsidiary and
insurance subsidiary sales functions.

The Bank is a full service commercial bank, without trust powers. The Bank
offers a full range of interest bearing and non-interest bearing accounts;
including commercial and retail checking accounts, negotiable orders of
withdrawal (NOW) accounts, money market accounts, individual retirement
accounts, regular interest bearing statement savings accounts, certificates of
deposit, commercial loans, real estate loans, commercial and consumer lines of
credit, letters of credit, mortgage loans, home equity

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loans and consumer/installment loans. In addition, the Bank provides such
consumer services as travelers checks, cashiers checks, Mastercard and Visa
accounts, safe deposit boxes, direct deposit services, wire transfer services,
cash management services, debit cards, automatic teller machines, an internet
banking product and a 24-hour telephone inquiry system.

Insurance Agency.In August 1996, the Bank opened an insurance
subsidiary, Franklin Financial Insurance. The insurance subsidiary sells
property, business and life insurance and provides products and services to
both bank and nonbank customers. A large portion of its sales are generated by
referrals from bank employees. Bank employees are trained to recognize
cross-selling opportunities for insurance products. Management of the agency
has 56 years of combined experience in the insurance industry. The insurance
subsidiary has four full-time and sales agents.

Securities Company.Franklin Financial Securities commenced operations in
October 1997. The securities subsidiary offers financial planning and
securities brokerage services through Fifth Third Securities. Similar to the
insurance subsidiary, the securities subsidiary receives referrals from
Franklin National Bank employees. The securities subsidiary currently has two
licensed brokers. The securities subsidiary was formed to respond to
competition from other financial service companies that offer similar services.
By offering these securities products and services, Franklin Financial
believes it can gain a greater share of the customers business and have better
opportunities for revenue generation.

Mortgage Company.Franklin Financial Mortgage opened in December 1997 to
originate and service mortgage loans. Since the Banks inception, we have
focused on real estate lending. The mortgage subsidiary intends to capitalize
on this lending expertise. The mortgage subsidiary primarily originates
conforming residential mortgages that are then sold to certain other mortgage
companies and government entities such as Freddie Mac on a service-retained
basis. The mortgage subsidiary has offices in Williamson and Hamilton Counties
in Tennessee. There are approximately 31 employees of the mortgage subsidiary.

Market Area and Competition

The primary service area for the Bank encompasses Williamson, Maury and
Davidson Counties in Tennessee. There are 62 banking offices within the primary
service area of the Bank. Most of these offices are affiliated with major bank
holding companies.

The Bank competes with existing area financial institutions other than
commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and
other business entities, which have recently been invading the traditional
banking markets. Due to the rapid growth of the Banks market area, it is
anticipated that additional competition will continue from new entrants to the
market.

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Distribution of Assets, Liabilities and Stockholders Equity

The following is a presentation of the average consolidated balance sheet
of the Company for the years ended December 31, 2002, 2001 and 2000. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities.

AVERAGE CONSOLIDATED ASSETS

|                                           |                      |   |                         |         |      |   |         |         |  |   |         |         | 
|------------------------------------------ | -------------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                           |                      |   | Year Ended December 31,
|                                           |                      |   |                        
|                                           |                      |   | 2002                    |         | 2001 |   | 2000   
|                                           |                      |   |                         |         |      |   |        
|                                           |                      |   | (In thousands)         
|Cash and due from banks                    |                      | $ | 20,277                  |         |      | $ | 14,180  |         |  | $ | 11,583  |        
|                                           |                      |   |                         |         |      |   |         |         |  |   |         |        
|Securities                                 |                      |   | 249,553                 |         |      |   | 240,560 |         |  |   | 173,327 |        
|Federal funds sold and reverse repurchases |                      |   | 10,963                  |         |      |   | 6,695   |         |  |   | 3,679   |        
|Gross loans                                |                      |   | 497,217                 |         |      |   | 377,714 |         |  |   | 296,251 |        
|                                           |                      |   |                         |         |      |   |         |         |  |   |         |        
|                                           | Total earning assets |   |                         | 757,733 |      |   |         | 624,969 |  |   |         | 473,257 | 
|                                           |                      |   |                         |         |      |   |         |         |  |   |         |        
|Other assets                               |                      |   | 16,938                  |         |      |   | 15,371  |         |  |   | 19,124  |        
|                                           |                      |   |                         |         |      |   |         |         |  |   |         |        
|                                           | Total assets         |   | $                       | 794,948 |      |   | $       | 654,519 |  |   | $       | 503,964 | 
|                                           |                      |   |                         |         |      |   |         |         |  |   |         |        

AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS EQUITY

|                              |                                            |   |                         |         |      |   |         |         |  |   |         |         | 
|----------------------------- | ------------------------------------------ | - | ----------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                                            |   | Year Ended December 31,
|                              |                                            |   |                        
|                              |                                            |   | 2002                    |         | 2001 |   | 2000   
|                              |                                            |   |                         |         |      |   |        
|                              |                                            |   | (In thousands)         
|Non interest-bearing deposits |                                            | $ | 57,321                  |         |      | $ | 40,558  |         |  | $ | 34,053  |        
|NOW deposits, including MMDA  |                                            |   | 204,486                 |         |      |   | 146,412 |         |  |   | 109,897 |        
|Savings deposits              |                                            |   | 21,690                  |         |      |   | 14,500  |         |  |   | 12,500  |        
|Time deposits                 |                                            |   | 381,871                 |         |      |   | 335,137 |         |  |   | 271,161 |        
|Repurchase agreements         |                                            |   | 1,554                   |         |      |   | 1,733   |         |  |   | 1,629   |        
|Other borrowings              |                                            |   | 82,557                  |         |      |   | 78,409  |         |  |   | 47,532  |        
|Other liabilities             |                                            |   | 3,763                   |         |      |   | 4,167   |         |  |   | 3,004   |        
|                              |                                            |   |                         |         |      |   |         |         |  |   |         |        
|                              | Total liabilities                          |   |                         | 753,242 |      |   |         | 620,916 |  |   |         | 479,776 | 
|                              |                                            |   |                         |         |      |   |         |         |  |   |         |        
|Stockholders equity          |                                            |   | 41,705                  |         |      |   | 33,603  |         |  |   | 24,188  |        
|                              |                                            |   |                         |         |      |   |         |         |  |   |         |        
|                              | Total liabilities and stockholders equity |   | $                       | 794,948 |      |   | $       | 654,619 |  |   | $       | 503,964 | 
|                              |                                            |   |                         |         |      |   |         |         |  |   |         |        

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Interest Rates and Interest Differential

The following is a presentation of an analysis of the net interest
earnings of the Company for the periods indicated with respect to each major
category of interest-earning asset and each major category of interest-bearing
liability:

|                                           |                      |        |                              |         |          |       |         |        |     |  |      |      |   |  |  |      |  
|------------------------------------------ | -------------------- | ------ | ---------------------------- | ------- | -------- | ----- | ------- | ------ | --- |  | ---- | ---- | - |  |  | ---- | -
|                                           |                      |        | Year Ended December 31, 2002
|                                           |                      |        |                             
|                                           |                      |        | Average                      |         | Interest |       | Average |        | Net
|Assets                                     |                      | Amount |                              | Earned  |          | Yield |         | Yield 
|                                           |                      |        |                              |         |          |       |         |       
|                                           |                      |        | (Dollars in thousands)      
|Securities                                 |                      | $      | 249,553                      |         |          | $     | 15,011  | (3)    |     |  | 6.02 | %    |   |  |  |     
|Federal funds sold and reverse repurchases |                      |        | 10,963                       |         |          |       | 144     |        |     |  | 1.31 |      |   |  |  |     
|Gross loans                                |                      |        | 497,217                      | (1)     |          |       | 35,468  | (2)    |     |  | 7.13 |      |   |  |  |     
|                                           |                      |        |                              |         |          |       |         |        |     |  |      |      |   |  |  |     
|                                           | Total earning assets |        | $                            | 757,733 |          |       | $       | 50,623 |     |  |      | 6.68 | % |  |  | 4.30 | %
|                                           |                      |        |                              |         |          |       |         |        |     |  |      |      |   |  |  |     

|                             |                                    |        |                        |         |          |           |         |        |  |  |      |      |  
|---------------------------- | ---------------------------------- | ------ | ---------------------- | ------- | -------- | --------- | ------- | ------ |  |  | ---- | ---- | -
|                             |                                    |        | Average                |         | Interest |           | Average
|Liabilities                  |                                    | Amount |                        | Paid    |          | Rate Paid
|                             |                                    |        |                        |         |          |          
|                             |                                    |        | (Dollars in thousands)
|NOW deposits, including MMDA |                                    | $      | 204,486                |         |          | $         | 2,454   |        |  |  | 1.20 | %   
|Savings deposits             |                                    |        | 21,690                 |         |          |           | 227     |        |  |  | 1.05 |     
|Time deposits                |                                    |        | 381,871                |         |          |           | 10,811  |        |  |  | 2.83 |     
|Other borrowings             |                                    |        | 84,111                 |         |          |           | 4,528   |        |  |  | 5.38 |     
|                             |                                    |        |                        |         |          |           |         |        |  |  |      |     
|                             | Total interest-bearing liabilities |        | $                      | 692,158 |          |           | $       | 18,020 |  |  |      | 2.60 | %
|                             |                                    |        |                        |         |          |           |         |        |  |  |      |     



---

|(1) |  | Includes non-accrual loans of $2,127.                                           
|--- |  | --------------------------------------------------------------------------------
|   
|(2) |  | Interest earned on net loans includes $2,602 in loan fees and
loan service fees.
|   
|(3) |  | Includes interest earned on tax-exempt securities of $1,004.                    

|                                           |                      |        |                              |         |          |       |                        |        |     |  |      |      |   |  |  |      |  
|------------------------------------------ | -------------------- | ------ | ---------------------------- | ------- | -------- | ----- | ---------------------- | ------ | --- |  | ---- | ---- | - |  |  | ---- | -
|                                           |                      |        | Year Ended December 31, 2001
|                                           |                      |        |                             
|                                           |                      |        | Average                      |         | Interest |       | Average                |        | Net
|Assets                                     |                      | Amount |                              | Earned  |          | Yield |                        | Yield 
|                                           |                      |        |                              |         |          |       |                        |       
|                                           |                      |        |                              |         |          |       | (Dollars in thousands) |        |     |  |     
|Securities                                 |                      | $      | 240,560                      |         |          | $     | 15,791                 | (3)    |     |  | 6.56 | %    |   |  |  |     
|Federal funds sold and reverse repurchases |                      |        | 6,695                        |         |          |       | 286                    |        |     |  | 4.27 |      |   |  |  |     
|Gross loans                                |                      |        | 377,714                      | (1)     |          |       | 34,068                 | (2)    |     |  | 9.02 |      |   |  |  |     
|                                           |                      |        |                              |         |          |       |                        |        |     |  |      |      |   |  |  |     
|                                           | Total earning assets |        | $                            | 624,969 |          |       | $                      | 50,145 |     |  |      | 8.02 | % |  |  | 3.69 | %
|                                           |                      |        |                              |         |          |       |                        |        |     |  |      |      |   |  |  |     

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|                             |                                    |        |                        |         |          |           |         |        |  |  |      |      |  
|---------------------------- | ---------------------------------- | ------ | ---------------------- | ------- | -------- | --------- | ------- | ------ |  |  | ---- | ---- | -
|                             |                                    |        | Average                |         | Interest |           | Average
|Liabilities                  |                                    | Amount |                        | Paid    |          | Rate Paid
|                             |                                    |        |                        |         |          |          
|                             |                                    |        | (Dollars in thousands)
|NOW deposits, including MMDA |                                    | $      | 146,412                |         |          | $         | 4,437   |        |  |  | 3.03 | %   
|Savings deposits             |                                    |        | 14,500                 |         |          |           | 271     |        |  |  | 1.87 |     
|Other time deposits          |                                    |        | 335,137                |         |          |           | 17,275  |        |  |  | 5.15 |     
|Other borrowings             |                                    |        | 80,142                 |         |          |           | 5,123   |        |  |  | 6.39 |     
|                             |                                    |        |                        |         |          |           |         |        |  |  |      |     
|                             | Total interest-bearing liabilities |        | $                      | 576,191 |          |           | $       | 27,106 |  |  |      | 4.70 | %
|                             |                                    |        |                        |         |          |           |         |        |  |  |      |     



---

|(1) |  | Includes non-accrual loans of $682.                                             
|--- |  | --------------------------------------------------------------------------------
|   
|(2) |  | Interest earned on net loans includes $2,471 in loan fees and
loan service fees.
|   
|(3) |  | Includes interest earned on tax-exempt securities of $713.                      

|                                           |                      |        |                              |         |          |       |         |        |     |  |       |      |   |  |  |      |  
|------------------------------------------ | -------------------- | ------ | ---------------------------- | ------- | -------- | ----- | ------- | ------ | --- |  | ----- | ---- | - |  |  | ---- | -
|                                           |                      |        | Year Ended December 31, 2000
|                                           |                      |        |                             
|                                           |                      |        | Average                      |         | Interest |       | Average |        | Net
|Assets                                     |                      | Amount |                              | Earned  |          | Yield |         | Yield 
|                                           |                      |        |                              |         |          |       |         |       
|                                           |                      |        | (Dollars in thousands)      
|Securities                                 |                      | $      | 173,327                      |         |          | $     | 11,811  | (3)    |     |  | 6.81  | %    |   |  |  |     
|Federal funds sold and reverse repurchases |                      |        | 3,679                        |         |          |       | 246     |        |     |  | 6.69  |      |   |  |  |     
|Gross loans                                |                      |        | 296,251                      | (1)     |          |       | 31,167  | (2)    |     |  | 10.52 |      |   |  |  |     
|                                           |                      |        |                              |         |          |       |         |        |     |  |       |      |   |  |  |     
|                                           | Total earning assets |        | $                            | 473,257 |          |       | $       | 43,224 |     |  |       | 9.13 | % |  |  | 3.65 | %
|                                           |                      |        |                              |         |          |       |         |        |     |  |       |      |   |  |  |     

|                             |                                    |        |                        |         |          |           |         |        |  |  |      |      |  
|---------------------------- | ---------------------------------- | ------ | ---------------------- | ------- | -------- | --------- | ------- | ------ |  |  | ---- | ---- | -
|                             |                                    |        | Average                |         | Interest |           | Average
|Liabilities                  |                                    | Amount |                        | Paid    |          | Rate Paid
|                             |                                    |        |                        |         |          |          
|                             |                                    |        | (Dollars in thousands)
|NOW deposits, including MMDA |                                    | $      | 109,897                |         |          | $         | 5,157   |        |  |  | 4.69 | %   
|Savings deposits             |                                    |        | 12,500                 |         |          |           | 324     |        |  |  | 2.59 |     
|Other time deposits          |                                    |        | 271,161                |         |          |           | 16,927  |        |  |  | 6.24 |     
|Other borrowings             |                                    |        | 49,161                 |         |          |           | 3,519   |        |  |  | 7.16 |     
|                             |                                    |        |                        |         |          |           |         |        |  |  |      |     
|                             | Total interest-bearing liabilities |        | $                      | 442,719 |          |           | $       | 25,927 |  |  |      | 5.86 | %
|                             |                                    |        |                        |         |          |           |         |        |  |  |      |     



---

|(1) |  | Includes non-accrual loans of $ 0.                                              
|--- |  | --------------------------------------------------------------------------------
|   
|(2) |  | Interest earned on net loans includes $2,399 in loan fees and
loan service fees.
|   
|(3) |  | Includes interest earned on tax-exempt securities of $1,043.                    

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Rate/Volume Analysis of Net Interest Income

The effect on interest income, interest expense and net interest income in
the periods indicated, of changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period. The effect of a change in rate has been determined by applying
the average balance in the earlier period to the change in average rate in the
later period, as compared with the earlier period. Changes resulting from
average balance/rate variances have been determined by applying the change in
average balance to the change in average rate in the later period, as compared
with the earlier period. The changes attributable to the combined impact of
balance and rate have all been allocated to the changes due to volume.

|                              |  |                              |       |      |  |       |         |   |  |   |        |  
|----------------------------- |  | ---------------------------- | ----- | ---- |  | ----- | ------- | - |  | - | ------ | -
|                              |  | Year Ended December 31, 2002 |       |      |  |      
|                              |  | compared with                |       |      |  |      
|                              |  | Year Ended December 31, 2001 |       |      |  |      
|                              |  | Increase (decrease) due to:  |       |      |  |      
|                              |  |                              |       |      |  |      
|                              |  | Volume                       |       | Rate |  | Total
|                              |  |                              |       |      |  |      
|                              |  | (In thousands)              
|Interest earned on:           |  |                              |       |      |  |       |         |   |  |   |        |  
|Securities                    |  | $                            | 541   |      |  | $     | (1,321  | ) |  | $ | (780   | )
|Federal funds sold            |  |                              | 56    |      |  |       | (198    | ) |  |   | (142   | )
|Net loans                     |  |                              | 8,524 |      |  |       | (7,124  | ) |  |   | 1,400  |  
|                              |  |                              |       |      |  |       |         |   |  |   |        |  
|Total earning assets          |  |                              | 9,121 |      |  |       | (8,643  | ) |  |   | 478    |  
|                              |  |                              |       |      |  |       |         |   |  |   |        |  
|Interest paid on:             |  |                              |       |      |  |       |         |   |  |   |        |  
|NOW deposits, including MMDA  |  |                              | 697   |      |  |       | (2,680  | ) |  |   | (1,983 | )
|Savings deposits              |  |                              | 75    |      |  |       | (119    | ) |  |   | (44    | )
|Time deposits                 |  |                              | 1,323 |      |  |       | (7,787  | ) |  |   | (6,464 | )
|Other borrowings              |  |                              | 214   |      |  |       | (809    | ) |  |   | (595   | )
|                              |  |                              |       |      |  |       |         |   |  |   |        |  
|Total interest expense        |  |                              | 2,309 |      |  |       | (11,395 | ) |  |   | (9,086 | )
|                              |  |                              |       |      |  |       |         |   |  |   |        |  
|Change in net
interest income |  | $                            | 6,812 |      |  | $     | 2,752   |   |  | $ | 9,564  |  
|                              |  |                              |       |      |  |       |         |   |  |   |        |  

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|                              |  |                              |        |      |  |       |        |   |  |   |       |  
|----------------------------- |  | ---------------------------- | ------ | ---- |  | ----- | ------ | - |  | - | ----- | -
|                              |  | Year Ended December 31, 2001 |        |      |  |      
|                              |  | compared with                |        |      |  |      
|                              |  | Year Ended December 31, 2000 |        |      |  |      
|                              |  | Increase (decrease) due to:  |        |      |  |      
|                              |  |                              |        |      |  |      
|                              |  | Volume                       |        | Rate |  | Total
|                              |  |                              |        |      |  |      
|                              |  | (In thousands)              
|Interest earned on:           |  |                              |        |      |  |       |        |   |  |   |       |  
|Securities                    |  | $                            | 4,413  |      |  | $     | (433   | ) |  | $ | 3,980 |  
|Federal funds sold            |  |                              | 129    |      |  |       | (89    | ) |  |   | 40    |  
|Net loans                     |  |                              | 7,101  |      |  |       | (4,200 | ) |  |   | 2,901 |  
|                              |  |                              |        |      |  |       |        |   |  |   |       |  
|Total earning assets          |  |                              | 11,643 |      |  |       | (4,722 | ) |  |   | 6,921 |  
|                              |  |                              |        |      |  |       |        |   |  |   |       |  
|Interest paid on:             |  |                              |        |      |  |       |        |   |  |   |       |  
|NOW deposits, including MMDA  |  |                              | 1,107  |      |  |       | (1,828 | ) |  |   | (721  | )
|Savings deposits              |  |                              | 38     |      |  |       | (90    | ) |  |   | (52   | )
|Time deposits                 |  |                              | 3,297  |      |  |       | (2,949 | ) |  |   | 348   |  
|Other borrowings              |  |                              | 1,979  |      |  |       | (375   | ) |  |   | 1,604 |  
|                              |  |                              |        |      |  |       |        |   |  |   |       |  
|Total interest expense        |  |                              | 6,421  |      |  |       | (5,242 | ) |  |   | 1,179 |  
|                              |  |                              |        |      |  |       |        |   |  |   |       |  
|Change in net
interest income |  | $                            | 5,222  |      |  | $     | 520    |   |  | $ | 5,742 |  
|                              |  |                              |        |      |  |       |        |   |  |   |       |  

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Deposits

The Bank offers a full range of interest bearing and non-interest bearing
accounts, including commercial and retail checking accounts, negotiable order
of withdrawal (NOW) accounts, money market accounts, individual retirement
accounts, regular interest bearing statement savings accounts and certificates
of deposit with fixed and variable rates and a range of maturity date options.
The sources of deposits are residents, businesses and employees of businesses
within the Banks market area, obtained through the personal solicitation of
the Banks officers and directors, direct mail solicitation and advertisements
published in the local media. The Bank pays competitive interest rates on time
and savings deposits up to the maximum permitted by law or regulation. In
addition, the Bank has implemented a service charge fee schedule competitive
with other financial institutions in the Banks market area, covering such
matters as maintenance fees on checking accounts, per item processing fees on
checking accounts, returned check charges and the like.

The following tables present, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:

Year Ended
December 31, 2002

|                                     |  |                        |         |                   |  |                |      |  
|------------------------------------ |  | ---------------------- | ------- | ----------------- |  | -------------- | ---- | -
|Deposit Category                     |  | Average Amount         |         | Average Rate Paid
|                                     |  |                        |         |                  
|                                     |  | (Dollars in thousands)
|Non interest-bearing
demand deposits |  | $                      | 57,321  |                   |  | Not Applicable
|NOW deposits, including MMDA         |  | $                      | 204,486 |                   |  |                | 1.20 | %
|Savings deposits                     |  | $                      | 21,690  |                   |  |                | 1.05 | %
|Time deposits                        |  | $                      | 381,871 |                   |  |                | 2.83 | %

Year Ended
December 31, 2001

|                                     |  |                        |         |                   |  |                |      |  
|------------------------------------ |  | ---------------------- | ------- | ----------------- |  | -------------- | ---- | -
|Deposit Category                     |  | Average Amount         |         | Average Rate Paid
|                                     |  |                        |         |                  
|                                     |  | (Dollars in thousands)
|Non interest-bearing
demand deposits |  | $                      | 40,558  |                   |  | Not Applicable
|NOW deposits, including MMDA         |  | $                      | 146,412 |                   |  |                | 3.03 | %
|Savings deposits                     |  | $                      | 14,500  |                   |  |                | 1.87 | %
|Time deposits                        |  | $                      | 335,137 |                   |  |                | 5.15 | %

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Year Ended
December 31, 2000

|                                     |  |                        |         |                   |  |                |      |  
|------------------------------------ |  | ---------------------- | ------- | ----------------- |  | -------------- | ---- | -
|Deposit Category                     |  | Average Amount         |         | Average Rate Paid
|                                     |  |                        |         |                  
|                                     |  | (Dollars in thousands)
|Non interest-bearing
demand deposits |  | $                      | 34,053  |                   |  | Not Applicable
|NOW deposits, including MMDA         |  | $                      | 109,897 |                   |  |                | 4.69 | %
|Savings deposits                     |  | $                      | 12,500  |                   |  |                | 2.59 | %
|Time deposits                        |  | $                      | 271,161 |                   |  |                | 6.24 | %

The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities at December 31, 2002:

|                 |       |   |         |         | 
|---------------- | ----- | - | ------- | ------- | 
|Time             |       |   |         |        
|Certificates     |       |   |         |        
|of Deposit       |       |   |         |        
|                 |       |   |         |        
|(In thousands)   |       |   |         |        
|3 months or less |       | $ | 153,562 |        
|3-6 months       |       |   | 32,425  |        
|6-12 months      |       |   | 29,916  |        
|Over 12 months   |       |   | 52,066  |        
|                 |       |   |         |        
|                 | Total |   | $       | 267,969 | 
|                 |       |   |         |        

Loan Portfolio

The Bank engages in a full complement of lending activities, including
commercial, consumer/installment and real estate loans.

Commercial lending is directed principally towards businesses whose
demands or funds fall within the Banks legal lending limits and which are
potential deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers, and obtained for a
variety of business purposes. Particular emphasis is placed on loans to small
and medium-sized businesses. The Banks real estate loans consist of
residential and commercial first and second mortgage loans, as well as real
estate construction loans and real estate acquisition and development loans.

The Banks consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including education
and automobile loans to individuals and pre-approved lines of credit.

At December 31, 2002, loans within four broad categories exceeded 10% of
total loans: single family residential real estate loans ($126,693,000 or 23%
of total loans), commercial real estate loans ($165,565,000 or 30% of total
loans), commercial and industrial loans ($57,635,000 or 10% of total loans) and
residential construction loans ($83,681,000 or 15% of total loans). Management
believes that

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there is material borrower diversification within the single family
residential real estate, commercial and commercial real estate loan categories.
The vast majority of these loans are secured by properties located in the
primary services area of the Bank (Williamson County and surrounding counties).

The following table
presents various categories of loans, including loans held
for sale, contained in the Banks loan portfolio for the periods indicated and
the total amount of all loans for such period:

|                                       |                                    |             |         |              |         |      |         |        |         |      |         |                |         |   |         |        |         |   |         |        |         | 
|-------------------------------------- | ---------------------------------- | ----------- | ------- | ------------ | ------- | ---- | ------- | ------ | ------- | ---- | ------- | -------------- | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                       |                                    |             |         | December 31,
|                                       |                                    |             |         |             
|Type of Loan                           |                                    | 2002        |         | 2001         |         | 2000 |         | 1999   |         | 1998
|                                       |                                    |             |         |              |         |      |         |        |         |     
|                                       |                                    |             |         |              |         |      |         |        |         |      |         | (In thousands) |         |   |         |        |         |   |         |       
|Domestic:                              |                                    |             |         |              |         |      |         |        |         |      |         |                |         |   |         |        |         |   |         |       
|Commercial, financial
and agricultural |                                    | $           | 121,663 |              |         | $    | 109,470 |        |         | $    | 93,618  |                |         | $ | 82,288  |        |         | $ | 60,418  |       
|Real estate-construction               |                                    |             | 83,681  |              |         |      | 71,210  |        |         |      | 58,518  |                |         |   | 38,982  |        |         |   | 29,335  |       
|Real estate-mortgage                   |                                    |             | 332,281 |              |         |      | 241,795 |        |         |      | 159,439 |                |         |   | 130,483 |        |         |   | 132,327 |       
|Consumer loans                         |                                    |             | 21,031  |              |         |      | 20,878  |        |         |      | 20,703  |                |         |   | 19,670  |        |         |   | 18,006  |       
|                                       |                                    |             |         |              |         |      |         |        |         |      |         |                |         |   |         |        |         |   |         |       
|                                       |                                    | Total loans |         |              | 558,656 |      |         |        | 443,353 |      |         |                | 332,278 |   |         |        | 271,423 |   |         |        | 240,086 | 
|Less: deferred loan fees               |                                    |             | (961    | )            |         |      | (764    | )      |         |      | (549    | )              |         |   | (512    | )      |         |   | (516    | )     
|                                       | Allowance for possible
loan losses |             |         | (5,761       | )       |      |         | (4,269 | )       |      |         | (3,025         | )       |   |         | (2,480 | )       |   |         | (2,194 | )      
|                                       |                                    |             |         |              |         |      |         |        |         |      |         |                |         |   |         |        |         |   |         |       
|Total (net of allowance)               |                                    | $           | 551,934 |              |         | $    | 438,320 |        |         | $    | 328,704 |                |         | $ | 268,431 |        |         | $ | 237,376 |       
|                                       |                                    |             |         |              |         |      |         |        |         |      |         |                |         |   |         |        |         |   |         |       

The following is a presentation of an analysis of maturities of loans as
of December 31, 2002:

|                                       |  |              |         |                |  |                |         |       |  |   |        |  |  |   |         | 
|-------------------------------------- |  | ------------ | ------- | -------------- |  | -------------- | ------- | ----- |  | - | ------ |  |  | - | ------- | 
|                                       |  | Due in 1     |         | Due after 1 to |  | Due After      |         |       |  |  
|Type of Loan                           |  | year or less |         | 5 Years        |  | 5 Years        |         | Total
|                                       |  |              |         |                |  |                |         |      
|                                       |  |              |         |                |  | (In thousands) |         |       |  |   |        |  |  |  
|Commercial, financial
and agricultural |  | $            | 78,657  |                |  | $              | 40,947  |       |  | $ | 2,059  |  |  | $ | 121,663 | 
|Real estate-construction               |  |              | 77,600  |                |  |                | 6,081   |       |  |   |       |  |  |   | 83,681  | 
|Real estate-mortgage                   |  |              | 130,513 |                |  |                | 165,280 |       |  |   | 36,488 |  |  |   | 332,281 | 
|Consumer loans                         |  |              | 11,657  |                |  |                | 9,374   |       |  |   |       |  |  |   | 21,031  | 
|                                       |  |              |         |                |  |                |         |       |  |   |        |  |  |   |         | 
|Total                                  |  | $            | 298,427 |                |  | $              | 221,682 |       |  | $ | 38,547 |  |  | $ | 558,656 | 
|                                       |  |              |         |                |  |                |         |       |  |   |        |  |  |   |         | 

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The following is a presentation of an analysis of sensitivities of loans
to changes in interest rates as of December 31, 2002 (dollars in thousands):

|                                                         |  |   |         | 
|-------------------------------------------------------- |  | - | ------- | 
|Loans due after 1 year with
Predetermined interest rates |  | $ | 212,560 | 
|Loans due after 1 year with
Floating interest rates      |  | $ | 47,669  | 

The following table presents information regarding non-accrual, past due
and restructured loans at the dates indicated (dollars in thousands):

|                                                                                                       |        |  |              |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |     | 
|------------------------------------------------------------------------------------------------------ | ------ |  | ------------ | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | --- |  |  | - | --- | 
|                                                                                                       |        |  | December 31,
|                                                                                                       |        |  |             
|                                                                                                       |        |  | 2002         |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                                                                                       |        |  |              |       |      |  |      |       |      |  |     
|Loans accounted for on a
non-accrual basis:                                                            |        |  |              |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |    
|                                                                                                       | Number |  |              | 50    |      |  |      | 3     |      |  |      | 0     |  |  |   | 0   |  |  |   | 0   | 
|                                                                                                       | Amount |  | $            | 5,218 |      |  | $    | 1,023 |      |  | $    |      |  |  | $ |    |  |  | $ |    | 
|Accruing loans which are
contractually past due 90
days or more as to principal
and interest payments: |        |  |              |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |    
|                                                                                                       | Number |  |              | 46    |      |  |      | 7     |      |  |      | 26    |  |  |   | 4   |  |  |   | 4   | 
|                                                                                                       | Amount |  | $            | 2,459 |      |  | $    | 245   |      |  | $    | 1,986 |  |  | $ | 769 |  |  | $ | 195 | 
|Loans defined as troubled
debt restructurings:                                                       |        |  |              |       |      |  |      |       |      |  |      |       |  |  |   |     |  |  |   |    
|                                                                                                       | Number |  |              | 1     |      |  |      | 1     |      |  |      | 0     |  |  |   | 0   |  |  |   | 0   | 
|                                                                                                       | Amount |  | $            | 157   |      |  | $    | 160   |      |  | $    |      |  |  | $ |    |  |  | $ |    | 

As of December 31, 2002, there were no loans classified by the regulators
as doubtful, substandard or special mention that have not been disclosed in the
above table, which (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.

Accrual of interest is discontinued on a loan when management of the Bank
determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful.

Additional interest income of approximately $175,000 and $14,000 would
have been recorded in the years ended December 31, 2002 and 2001, respectively,
if all loans accounted for on a non-accrual basis had been current in
accordance with their original terms.

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As of December 31, 2002, management has identified other possible credit
problems as follows (in thousands):

|                |  |   |        | 
|--------------- |  | - | ------ | 
|Special mention |  | $ | 7,136  | 
|Substandard     |  |   | 18,583 | 
|Doubtful        |  |   | 578    | 
|Loss            |  |   |       | 
|                |  |   |        | 
|Total           |  | $ | 26,297 | 
|                |  |   |        | 

These loans are performing loans but are classified due to payment
history, decline in the borrowers financial position or decline in collateral
value. Loans categorized as special mention are currently protected but are
potentially weak. These loans constitute an undue and unwarranted credit risk
but not to the point of justifying a classification of substandard. Loans
classified as substandard are inadequately protected by the current net worth
and paying capacity of the obligor or the value of the collateral pledged, if
any. Loans so classified must have a well-defined weakness or weakness that
jeopardizes the liquidation of the debt. Loans classified as doubtful have
all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Loans classified as loss are considered
uncollectible and of such little value that their continuance as bankable
assets is not warranted. Management has provided specific allocations of the
allowance for possible loan losses of $698,000 relating to such loans. There
are no other loans which are not disclosed above, but where known information
about possible credit problems of borrowers causes management to have doubts as
to the ability of such borrowers to comply with the present loan repayment
terms.

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Summary of Loan Loss Experience

An analysis of the Banks loss experience is furnished in the following
table for the year indicated, as well as a breakdown of the allowance for
possible loan losses:

|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |     | 
|--------------------------------------------------------------------------------------- | ----------------- | - | ------------------------ | ----- | ---- | - | ----- | --- | ---- | - | ----- | --- |  | - | ----- | -- |  | - | ----- | --- | 
|                                                                                        |                   |   | Years Ended December 31,
|                                                                                        |                   |   |                         
|                                                                                        |                   |   | 2002                     |       | 2001 |   | 2000  |     | 1999 |   | 1998 
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |      
|                                                                                        |                   |   | (Dollars in thousands)  
|Balance at beginning
of year                                                            |                   | $ | 4,269                    |       |      | $ | 3,025 |     |      | $ | 2,480 |     |  | $ | 2,194 |    |  | $ | 1,828 |    
|Charge-offs:                                                                            |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Commercial, financial & Agricultural                                                    |                   |   | 1,058                    |       |      |   | 274   |     |      |   | 31    |     |  |   | 25    |    |  |   | 112   |    
|Consumer loans                                                                          |                   |   | 168                      |       |      |   | 86    |     |      |   | 157   |     |  |   | 66    |    |  |   | 47    |    
|Real estate-mortgage                                                                    |                   |   | 4                        |       |      |   |      |     |      |   |      |     |  |   |      |    |  |   |      |    
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|                                                                                        | Total charge-offs |   |                          | 1,230 |      |   |       | 360 |      |   |       | 188 |  |   |       | 91 |  |   |       | 159 | 
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Recoveries:                                                                             |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Commercial, financial & Agricultural                                                    |                   |   | 29                       |       |      |   | 2     |     |      |   | 19    |     |  |   | 9     |    |  |   | 2     |    
|Consumer loans                                                                          |                   |   | 28                       |       |      |   | 27    |     |      |   | 27    |     |  |   | 18    |    |  |   | 8     |    
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|                                                                                        | Total recoveries  |   |                          | 57    |      |   |       | 29  |      |   |       | 46  |  |   |       | 27 |  |   |       | 10  | 
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Net charge-offs                                                                         |                   |   | (1,173                   | )     |      |   | (331  | )   |      |   | (142  | )   |  |   | (64   | )  |  |   | (149  | )  
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Additions charged to operations                                                         |                   |   | 2,665                    |       |      |   | 1,575 |     |      |   | 687   |     |  |   | 350   |    |  |   | 515   |    
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Balance at end of year                                                                  |                   | $ | 5,761                    |       |      | $ | 4,269 |     |      | $ | 3,025 |     |  | $ | 2,480 |    |  | $ | 2,194 |    
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    
|Ratio of net charge-offs during the
period to average loans
outstanding during the year |                   |   | 24                       | %     |      |   | .09   | %   |      |   | .05   | %   |  |   | .02   | %  |  |   | .07   | %  
|                                                                                        |                   |   |                          |       |      |   |       |     |      |   |       |     |  |   |       |    |  |   |       |    

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The allocation of the allowance for loan losses by loan category at
December 31 for each of the years indicated is presented below, along with
percentage of loans in each category to total loans:

|                                       |                      |                |                            |       |                        |     |         |      |        |      |         |       |        |     |         |      |        |      |         |       |        |     |         |      |     |      |       |     |     |     |       |      |     |      |       |     |     |     |       |      |     |      | 
|-------------------------------------- | -------------------- | -------------- | -------------------------- | ----- | ---------------------- | --- | ------- | ---- | ------ | ---- | ------- | ----- | ------ | --- | ------- | ---- | ------ | ---- | ------- | ----- | ------ | --- | ------- | ---- | --- | ---- | ----- | --- | --- | --- | ----- | ---- | --- | ---- | ----- | --- | --- | --- | ----- | ---- | --- | ---- | 
|                                       |                      |                |                            |       | 2002                   |     | 2001    |      | 2000   |      | 1999    |       | 1998  
|                                       |                      |                |                            |       |                        |     |         |      |        |      |         |       |       
|                                       |                      |                |                            |       | Amount                 |     | Percent |      | Amount |      | Percent |       | Amount |     | Percent |      | Amount |      | Percent |       | Amount |     | Percent
|                                       |                      |                |                            |       |                        |     |         |      |        |      |         |       |        |     |         |      |        |      |         |       |        |     |        
|                                       |                      |                |                            |       | (Dollars in Thousands)
|Commercial, financial
and agricultural |                      | $              | 3,248                      |       |                        |     | 21.8    | %    |        | $    | 1,485   |       |        |     | 24.7    | %    |        | $    | 999     |       |        |     | 28.2    | %    |     | $    | 882   |     |     |     | 30.3  | %    |     | $    | 686   |     |     |     | 25.2  | %   
|                                       |                      |                | Real estate -
construction |       |                        | 701 |         |      |        | 15.0 |         |       |        | 560 |         |      |        | 16.1 |         |       |        | 612 |         |      |     | 17.6 |       |     |     | 449 |       |      |     | 14.4 |       |     |     | 352 |       |      |     | 12.2 | 
|                                       | Real estate-mortgage |                |                            | 1,455 |                        |     |         | 59.4 |        |      |         | 1,908 |        |     |         | 54.5 |        |      |         | 1,107 |        |     |         | 48.0 |     |      |       | 886 |     |     |       | 48.1 |     |      |       | 840 |     |     |       | 55.1 |    
|                                       |                      | Consumer loans |                            |       | 360                    |     |         |      | 3.8    |      |         |       | 325    |     |         |      | 4.7    |      |         |       | 280    |     |         |      | 6.2 |      |       |     | 255 |     |       |      | 7.2 |      |       |     | 211 |     |       |      | 7.5 |     
|Unallocated                            |                      |                | (3                         | )     |                        |     | N/A     |      |        |      | (9      | )     |        |     | N/A     |      |        |      | 27      |       |        |     | N/A     |      |     |      | 8     |     |     |     | N/A   |      |     |      | 105   |     |     |     | N/A   |     
|                                       |                      |                |                            |       |                        |     |         |      |        |      |         |       |        |     |         |      |        |      |         |       |        |     |         |      |     |      |       |     |     |     |       |      |     |      |       |     |     |     |       |     
|Total                                  |                      | $              | 5,761                      |       |                        |     | 100.0   | %    |        | $    | 4,269   |       |        |     | 100.0   | %    |        | $    | 3,025   |       |        |     | 100.0   | %    |     | $    | 2,480 |     |     |     | 100.0 | %    |     | $    | 2,194 |     |     |     | 100.0 | %   
|                                       |                      |                |                            |       |                        |     |         |      |        |      |         |       |        |     |         |      |        |      |         |       |        |     |         |      |     |      |       |     |     |     |       |      |     |      |       |     |     |     |       |     

Loan Loss Reserve

In considering the adequacy of the Banks allowance for possible loan
losses, management has focused on the fact that as of
December 31, 2002, 22% of
outstanding loans are in the category of commercial loans. Commercial loans are
generally considered by management as having greater risk than other categories
of loans in the Banks loan portfolio. However, approximately 87% of these
commercial loans at December 31, 2002 were made on a secured basis. Management
believes that the secured condition of the preponderant portion of its
commercial loan portfolio greatly reduces the risk of loss inherently present
in commercial loans.

The Banks consumer loan portfolio is also well secured. The majority
of the Banks consumer loans were secured by collateral primarily consisting
of automobiles, boats and other personal property. Management believes that
these loans involve less risk than other categories of loans.

As of December 31, 2002, real estate mortgage loans constituted 59% of
outstanding loans. Approximately $126,693,000, or 38%, of this category
represents first mortgage residential real estate mortgages where the amount of
the original loan generally does not exceed 80% of the appraised value of the
collateral. While the national real estate market has declined due to current
economic factors, the Banks market area has seen a softening in real
estate, but not as significant a decline as on the national level. The Bank
does not anticipate losses in relation to the decline in the real estate
market. The remaining portion of this category consists primarily of commercial
real estate loans. Risk of loss for these loans is generally higher than
residential loans. Therefore, management has allocated a significant portion of
the allowance for loan losses to this category.

The Banks Board of Directors monitors the loan portfolio quarterly to
enable it to evaluate the adequacy of the allowance for loan losses. The loans
are rated and the allowance established based on the assigned rating. The
provision for loan losses charged to operating expenses is based on this
established allowance. Factors considered by the Board in rating the loans
include delinquent loans,

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underlying collateral value, payment history and local and general
economic conditions affecting collectibility.

As part of the continual rating process,
    individual loans are assigned a credit risk rating based on
    their credit quality, which is subject to change as conditions
    warrant. Any changes in those risk assessments as determined by
    regulatory examiners or the Companys internal credit
    review function are also considered. Management considers
    certain loans with weaker credit risk grades to be individually
    impaired and measures such impairment based upon available cash
    flows or the value of the collateral. Allowance or reserve
    levels are estimated for all other credit risk rated loans in
    the portfolio based on their assigned credit risk grade, type of
    loan and other matters related to credit risk. In estimating
    reserve levels, the Company aggregates certain credit risk rated
    loans into pools of similar credits and reviews the historical
    loss experience associated with these pools as additional
    criteria to allocate the allowance to each category.

Management uses the information developed from
the procedures described above in evaluating and rating the loan
portfolio. This continual rating process is used to monitor the
credit quality of the loan portfolio and to assist management in
determining the appropriate levels of the allowance for loan
losses.

Management considers the allowance for loan
losses adequate to cover the estimated losses inherent in the
Companys loan portfolio as of the date of the financial
statements. Management believes it has established the allowance
in accordance with accounting principles generally accepted in
the United States of America and in consideration of the current
economic environment. While management uses the best information
available to make evaluations, future additions to the allowance
may be necessary based on changes in economic and other
conditions. Additionally, various regulatory agencies, as an
integral part of their examination process, periodically review
the Companys allowances for loan losses. Such agencies may
require the recognition of adjustments to the allowances based
on their judgments of information available to them at the time
of their examinations.

Impaired loans are measured based on the present
value of expected future cash flows discounted at the
loans effective interest rate or, as a practical matter,
at the loans observable market value or fair value of the
collateral if the loan is collateral dependent. Most of the
loans measured by fair value of the underlying collateral are
commercial loans, while others consists of small balance
homogenous loans and are measured collectively. The Company
classifies a loan as impaired when, based on current information
and events, management believes it is probable that all amounts
due according to the contractual terms of the loan agreement
will not be collected. At December 31, 2002 and 2001, the
recorded investment in loans that were considered to be impaired
was approximately $19.2 million and $10.4 million,
respectively. The average recorded balance of impaired loans
during 2002 and 2001 was $12.8 million and $7.0 million,
respectively. The related specific allocation of the allowance
for loan losses for these loans was approximately $698,000 and
$714,000 at December 31, 2002 and 2001, respectively. For
the years ended December 31, 2002, 2001 and 2000, the
Company recognized interest income on those impaired loans of
approximately $800,000, $804,000 and $350,000, respectively.

General economic trends greatly affect loan
losses, and no assurances can be made that further charges to
the loan loss allowance may not be significant in relation to
the amount provided during a particular period or that further
evaluation of the loan portfolio based on conditions then
prevailing may not require sizable additions to the allowance,
thus necessitating similarly sizable charges to operations. The
allowance for loan losses was 1.03%, 0.96% and 0.91% of loans
outstanding at December 31, 2002, 2001 and 2000,
respectively, which was consistent with managements
assessment of the credit quality of the loan portfolio. The
ratios of net charge-offs during the year to average loans
outstanding during the period were 0.24%, 0.09% and 0.05% at
December 31, 2002, 2001 and 2000, respectively. Management
believes these ratios reflect managements conservative
lending and effective efforts to recover credit losses.
Primarily because of one problem loan relationship, charge-offs
in 2002 totaled approximately $1,230,000, significantly higher
than the approximately $360,000 charged off in 2001 and the
approximately $188,000 charged off in 2000. Approximately
$905,000 of the 2002 charge-offs related to this problem loan
relationship.

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Investments

As of December 31, 2002, investment securities, including mortgage-backed
securities, comprised approximately 29% of the Banks assets. The Bank invests
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States, other taxable securities and in
certain obligations of states and municipalities. The majority of the
mortgage-backed securities are instruments of U.S. Government agencies. In
addition, the Bank enters into Federal Funds transactions with its principal
correspondent banks, and acts as a net seller of such funds. The sale of
Federal Funds amounts to a short-term loan from the Bank to another bank. Since
the Bank has been in a taxable position for the past several years and expects
to be in a taxable position in the future, more tax exempt securities have been
purchased.

The following tables present, for the periods indicated, the carrying
amount of the Banks investment securities, including mortgage-backed
securities, separated by those available-for-sale and those held-to-maturity.
The Bank does not currently maintain a trading portfolio.

|           |                     |                                                      |                  |       |         |              |         |      |         |        |         |   |         |       |         | 
|---------- | ------------------- | ---------------------------------------------------- | ---------------- | ----- | ------- | ------------ | ------- | ---- | ------- | ------ | ------- | - | ------- | ----- | ------- | 
|           |                     |                                                      |                  |       |         | December 31,
|           |                     |                                                      |                  |       |         |             
|           |                     |                                                      |                  |       |         | 2002         |         | 2001 |         | 2000  
|           |                     |                                                      |                  |       |         |              |         |      |         |       
|Investment |                     |                                                      |                  |       |         |              |         |      |         |        |         |  
|Category   |                     |                                                      |                  |       |         |              |         |      |         |        |         |  
|           | Available-for-sale: |                                                      |                  |       |         |              |         |      |         |        |         |   |        
|           |                     | Obligations of U.S. Treasury and other U.S. Agencies |                  | $     | 33,023  |              |         | $    | 30,696  |        |         | $ | 43,622  |      
|           |                     | Obligations of States and Political
Subdivisions     |                  |       | 22,940  |              |         |      | 16,577  |        |         |   | 23,766  |      
|           |                     | Mortgage-backed securities                           |                  |       | 189,647 |              |         |      | 176,340 |        |         |   | 144,758 |      
|           |                     |                                                      | Other securities |       |         | 12,361       |         |      |         | 12,691 |         |   |         | 8,884 |        
|           |                     |                                                      |                  |       |         |              |         |      |         |        |         |  
|           |                     |                                                      |                  | Total |         | $            | 257,971 |      |         | $      | 236,304 |   |         | $     | 221,030 | 
|           |                     |                                                      |                  |       |         |              |         |      |         |        |         |  

|           |                   |                                                      |                  |       |       |              |       |      |       |      |        |   |       |   |       | 
|---------- | ----------------- | ---------------------------------------------------- | ---------------- | ----- | ----- | ------------ | ----- | ---- | ----- | ---- | ------ | - | ----- | - | ----- | 
|           |                   |                                                      |                  |       |       | December 31,
|           |                   |                                                      |                  |       |       |             
|           |                   |                                                      |                  |       |       | 2002         |       | 2001 |       | 2000
|           |                   |                                                      |                  |       |       |              |       |      |       |     
|Investment |                   |                                                      |                  |       |       |              |       |      |       |      |        |  
|Category   |                   |                                                      |                  |       |       |              |       |      |       |      |        |  
|           | Held-to-maturity: |                                                      |                  |       |       |              |       |      |       |      |        |   |      
|           |                   | Obligations of U.S. Treasury and other U.S. Agencies |                  | $     | 4,111 |              |       | $    | 7,095 |      |        | $ |      |  
|           |                   | Obligations of States and Political
Subdivisions     |                  |       | 3,932 |              |       |      | 2,800 |      |        |   | 2,733 |  
|           |                   | Mortgage-backed securities                           |                  |       | 185   |              |       |      | 282   |      |        |   | 328   |  
|           |                   |                                                      | Other securities |       |       |             |       |      |       |     |        |   |       |  |      
|           |                   |                                                      |                  |       |       |              |       |      |       |      |        |  
|           |                   |                                                      |                  | Total |       | $            | 8,228 |      |       | $    | 10,177 |   |       | $ | 3,061 | 
|           |                   |                                                      |                  |       |       |              |       |      |       |      |        |  

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The following tables indicate for the year ended December 31, 2002, the
amount of investments due in (i) one year or less, (ii) one to five years,
(iii) five to ten years, and (iv) over ten years:

|                    |                                                       |                       |                          |           |                        |                  |  |      |      |      |  
|------------------- | ----------------------------------------------------- | --------------------- | ------------------------ | --------- | ---------------------- | ---------------- |  | ---- | ---- | ---- | -
|Investment          |                                                       |                       |                          |           |                        | Weighted Average
|Category            |                                                       | Amount                |                          | Yield (1)
|                    |                                                       |                       |                          |          
|                    |                                                       |                       |                          |           | (Dollars in thousands)
|Available-for-sale: |                                                       |                       |                          |           |                        |                  |  |     
|                    | Obligations of U.S. Treasury and
other U.S. Agencies: |                       |                          |           |                        |                  |  |      |     
|                    |                                                       | Less than 1 Yr        |                          | $         | 25,000                 |                  |  |      | 1.04 | %   
|                    |                                                       | Over 1 through 5 Yrs  |                          |           | 1,135                  |                  |  |      | 4.13 |     
|                    |                                                       | Over 5 through 10 Yrs |                          |           |                       |                  |  |      |     |     
|                    |                                                       | Over 10 Yrs           |                          |           | 6,889                  |                  |  |      | 7.22 |     
|                    | Obligations of States and Political
Subdivisions:     |                       |                          |           |                        |                  |  |      |     
|                    |                                                       | Less than 1 Yr        |                          | $         |                       |                  |  |      |     | %   
|                    |                                                       | Over 1 through 5 Yrs  |                          |           | 100                    |                  |  |      | 7.34 |     
|                    |                                                       | Over 5 through 10 Yrs |                          |           | 2,228                  |                  |  |      | 6.58 |     
|                    |                                                       | Over 10 Yrs           |                          |           | 20,611                 |                  |  |      | 7.03 |     
|                    | Other Securities:                                     |                       |                          |           |                        |                  |  |      |     
|                    |                                                       | Less than 1 Yr        |                          | $         | 1,025                  |                  |  |      | 8.37 | %   
|                    |                                                       | Over 1 through 5 Yrs  |                          |           | 988                    |                  |  |      | 6.70 |     
|                    |                                                       | Over 5 through 10 Yrs |                          |           | 2,566                  |                  |  |      | 7.86 |     
|                    |                                                       | Over 10 Yrs           |                          |           | 7,782                  |                  |  |      | 7.07 |     
|                    | Mortgage-backed securities                            |                       |                          | 189,647   |                        |                  |  | 5.27 |     
|                    |                                                       |                       |                          |           |                        |                  |  |     
|                    |                                                       |                       | Total available-for-sale |           | $                      | 257,971          |  |      |      | 5.15 | %
|                    |                                                       |                       |                          |           |                        |                  |  |     



---

|(1) |  | The Company has invested in tax exempt obligations. Yields are presented
based on adjusted cost basis of securities available-for-sale. Yields
based on carrying value would be lower since fair value exceeds adjusted
cost. Yields on tax exempt obligations have been computed on a tax
equivalent basis. Income from tax exempt obligations is exempt from
federal income tax only, therefore only the federal statutory rate of 34%
has been used to compute the tax equivalent yield.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                  |                                                       |                       |                        |           |                        |                  |  |      |      |      |  
|----------------- | ----------------------------------------------------- | --------------------- | ---------------------- | --------- | ---------------------- | ---------------- |  | ---- | ---- | ---- | -
|Investment        |                                                       |                       |                        |           |                        | Weighted Average
|Category          |                                                       | Amount                |                        | Yield (1)
|                  |                                                       |                       |                        |          
|                  |                                                       |                       |                        |           | (Dollars in thousands)
|Held-to-maturity: |                                                       |                       |                        |           |                        |                  |  |     
|                  | Obligations of U.S. Treasury and
other U.S. Agencies: |                       |                        |           |                        |                  |  |      |     
|                  |                                                       | Over 10 Yrs           |                        | $         | 4,111                  |                  |  |      | 7.29 | %   
|                  | Obligations of States and Political
Subdivisions:     |                       |                        |           |                        |                  |  |      |     
|                  |                                                       | Less than I Yr        |                        |           | 75                     |                  |  |      | 8.30 |     
|                  |                                                       | Over 1 through 5 Yrs  |                        |           | 1,225                  |                  |  |      | 7.43 |     
|                  |                                                       | Over 5 through 10 Yrs |                        |           | 2,348                  |                  |  |      | 0.87 |     
|                  |                                                       | Over 10 Yrs           |                        |           | 284                    |                  |  |      | 8.64 |     
|                  | Mortgage-backed securities                            |                       |                        | 185       |                        |                  |  | 7.85 |     
|                  |                                                       |                       |                        |           |                        |                  |  |     
|                  |                                                       |                       | Total held-to-maturity |           | $                      | 8,228            |  |      |      | 5.55 | %
|                  |                                                       |                       |                        |           |                        |                  |  |     



---

|(1) |  | The Company has invested in tax exempt obligations. Yields on tax exempt
obligations have been computed on a tax equivalent basis. Income from tax
exempt obligations is exempt from federal income tax only, therefore only
the federal statutory rate of 34% has been used to compute the tax
equivalent yield.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selected Financial Ratios

Selected financial ratios for the periods indicated are as follows:

|                                       |  |                          |       |      |  |      |       |   |  |  |       |  
|-------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                       |  | Years Ended December 31,
|                                       |  |                         
|                                       |  | 2002                     |       | 2001 |  | 2000
|                                       |  |                          |       |      |  |     
|Return on average assets               |  |                          | 1.39  | %    |  |      | 1.06  | % |  |  | .94   | %
|Return on average equity               |  |                          | 26.58 | %    |  |      | 20.55 | % |  |  | 19.59 | %
|Average equity to average
assets ratio |  |                          | 5.25  | %    |  |      | 5.13  | % |  |  | 4.80  | %
|Dividend payout ratio                  |  |                          | 17.54 | %    |  |      | 25.60 | % |  |  | 35.53 | %

Asset/Liability Management

It is the objective of the Bank to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan, investment, borrowing and capital policies. Certain
of the officers of the Bank are responsible for monitoring policies and
procedures that are designed to ensure acceptable composition of the
asset/liability mix, stability and leverage of all sources of funds while
adhering to prudent banking practices. It is the overall philosophy of
management to support asset growth primarily through growth of core deposits,
which include deposits of all categories made by individuals, partnerships and
corporations. Management of the Bank seeks to invest the largest portion of the
Banks assets in commercial, consumer and real estate loans.

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The Banks asset/liability mix is monitored on a daily basis with a
quarterly report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to the Banks Board of Directors. The
objective of this policy is to control interest-sensitive assets and
liabilities so as to minimize the impact of substantial movements in interest
rates on the Banks earnings.

During the third quarter of 2000, the Company purchased approximately
$82.0 million of investment securities in a leverage program to gain immediate
income benefits and offset interest expense of the Trust Preferred Securities
offering which was completed in August 2000. This leverage program was funded
through proceeds of $16 million from the Trust Preferred Securities, $52.0 million of Federal
Home Loan Bank advances and brokered certificates of deposit. The objectives of
the leverage program are to realize a 120 basis point spread between investment
yields and borrowings, to utilize cash flow from the investments purchased to
help fund future loan demand and to limit interest rate shock exposure in the up 100
basis point rate shock scenario. (See Managements
Discussion and Analysis of Financial Condition and Results of
Operation  Liquidity and Capital Resources.)

Correspondent Banking

Correspondent banking involves the providing of services by one bank to
another bank which cannot provide that service for itself from an economic or
practical standpoint. The Bank purchases correspondent services offered by
larger banks, including check collections, purchase of Federal Funds, security
safekeeping, investment services, coin and currency supplies, overline and
liquidity loan participations and sales of loans to or participations with
correspondent banks.

Data Processing

The Bank has in-house data processing which provides a full range of data
processing services including an automated general ledger, deposit accounting,
commercial, real estate and installment lending data processing and central
information file (CIF). The Bank has an ATM (automated teller machine)
processing agreement with Intercept Systems, Inc.

Facilities

The Bank subleases a two-story commercial facility (approximately 12,000
square feet) located in Franklin, Tennessee from the Company, which houses the
Banks main office. The facility includes a main banking floor with 6 teller
stations and 10 offices, and has an ATM and 3 drive-in lanes. The second floor
of the facility consists of the marketing department, the call center, 4
executive offices and the compliance, loan review and internal audit offices.
The Company leases these facilities from Gordon E. Inman, the
Chairman, President and Chief Executive Officer of the Company.

The Williamson Square branch is located in a 5,000 sq. foot commercial
building located on Highway 96 West at the Williamson Square Shopping Center in
Franklin. The branch banking floor includes 5 teller stations and 6 offices,
and has an ATM and 3 drive-in lanes.

The Spring Hill branch is located in a 2,700 sq. foot building in Spring
Hill, Tennessee. The branch includes 4 offices and 3 teller stations, 2
drive-in lanes and an ATM.

The Brentwood branch is located in a 4,900 sq. foot leased building in
Brentwood, Tennessee. The branch has 6 offices, 4 teller stations, 4 drive-in
lanes and an ATM. This branch was relocated to this new facility in February
2000.

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##### Table of Contents



The Fairview branch is located in a 5,000 sq. foot building in Fairview,
Tennessee. The branch includes 4 offices, 4 teller stations, 3 drive-in lanes
and an ATM.

The Cool Springs branch is located in a 4,900 square foot building in the
Cool Springs area of Franklin, Tennessee. The branch includes 9 offices, 5
teller stations, 4 drive-in lanes and an ATM.

The Fieldstone Farms branch is located in a 4,900 square foot building in
the Fieldstone Farms area of Franklin, Tennessee. The branch includes 9
offices, 5 teller stations, 4 drive-in lanes and an ATM.

The Green Hills branch is located in a 5,000 square foot building in
Davidson County, Tennessee. The branch includes 6 offices, 5 teller stations, 2
drive-in lanes and an ATM.

The Fourth and Union branch is located in a 6,900 square foot facility in
downtown Nashville, Tennessee. The branch includes 12 offices, 6 teller
stations and an ATM.

The Bank leases facilities at five separate locations in Franklin which
house the financial services subsidiary, mortgage banking subsidiary, insurance
subsidiary, data processing, operations, human resources and administrative
functions. The Company leases all but one of these facilities from
Mr. Inman.

The Bank is leasing an office suite in Chattanooga, Tennessee which houses
mortgage loan origination offices.

Employees

The Company presently employs 215 persons on a full-time basis, including
72 officers. The Company will hire additional persons as needed, including
additional tellers and financial service representatives.

Monetary Policies

The results of operations of the Bank are affected by credit policies of
monetary authorities, particularly the Federal Reserve Board. The instruments
of monetary policy employed by the Federal Reserve Board include open market
operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, changes in reserve requirements against member bank
deposits and limitations on interest rates which member banks may pay on time
and savings deposits. In view of changing conditions in the national economy
and in the money markets, as well as the effect of action by monetary and
fiscal authorities, including the Federal Reserve Board, no prediction can be
made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of the Bank.

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Supervision and Regulation

Banking Activities and Financial Holding Company Regulation

The Company and the Bank operate in a highly regulated environment, and
their business activities are governed by statute, regulation and
administrative policies. The business activities of the Company and the Bank
are closely supervised by a number of regulatory agencies, including the
Federal Reserve Board, the Office of the Comptroller of the Currency (OCC)
and the Federal Deposit Insurance Corporation (FDIC). In December 2000, the Company
received approval from the Federal Reserve Board to become a financial holding company which
allows the Company to engage in a wider variety of financial activities.

The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act of 1956, which requires every bank holding company to
obtain the prior approval of the Federal Reserve Board before acquiring more
than 5% of the voting shares of any bank or all or substantially all of the
assets of any bank, and before merging or consolidating with another bank
holding company. The Federal Reserve Board (pursuant to regulation and
published policy statements) has maintained that a bank holding company must
serve as a source of financial strength to its subsidiary banks. In adhering to
the Federal Reserve Board policy, the Company may be required to provide
financial support to the Bank at a time when, absent such Federal Reserve Board
policy, the Company may not deem it advisable to provide such assistance.

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994, the Company or any other bank holding company may acquire a bank located
in a state other than the state in which the company is located, subject to
certain deposit percentage and other restrictions. The legislation also
provides that, unless an individual state has elected to prohibit out-of-state
banks from operating interstate branches within its territory, adequately
capitalized and managed bank holding companies may consolidate their multistate
bank operations into a single bank subsidiary and branch interstate through
acquisitions.

As a national bank, the Bank is subject to the supervision of the OCC and,
to a limited extent, the FDIC and the Federal Reserve Board. The Bank is also
subject to state banking and usury laws restricting the amount of interest
which may be charged in making loans or other extensions of credit. In
addition, the Bank, as a subsidiary of the Company, is subject to restrictions
under federal law when dealing with the Company and its other affiliates. These
restrictions apply to extensions of credit to an affiliate, investments in the
securities of an affiliate and the purchase of assets from an affiliate.

Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face
amount. In addition, a national bank may grant loans and extensions of credit
to such person up to an additional 10% of its unimpaired capital and surplus,
provided that each loan or extension of credit is fully secured by readily
marketable collateral having a market value, determined by reliable and
continuously available price quotations, at least equal to the amount of funds
outstanding. Loans and extensions of credit may exceed the general lending
limit if they qualify under one of several exceptions. Such exceptions include
certain loans or extensions of credit arising from the discount of commercial
or business paper, the purchase of bankers acceptances, loans secured by
documents of title, loans secured by U.S. obligations and loans to or
guaranteed by the federal government, and loans or extensions of credit which
have the approval of the OCC and which are made to a financial institution or
to any agent in charge of the business and property of a financial institution.

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Gramm-Leach-Bliley

The Gramm-Leach-Bliley Act, also known as the Financial Services
Modernization Act of 1999 (GLBA), enacted in 1999, enables bank holding
companies to acquire insurance companies and securities firms and effectively
repeals depression-era laws that prohibited the affiliation of banks and these
other financial services entities under a single holding company. Bank holding
companies, and other types of financial services entities, may elect to become
financial holding companies under the new law allowing them to offer virtually
any type of financial service, or services incident to financial services,
including banking, securities underwriting, merchant banking and insurance
(both underwriting and agency services). As stated above, the Company has registered
with the Federal Reserve Board as a financial
holding company. The new financial services authorized by the GLBA also
may be engaged in by a financial subsidiary of a national or state bank, with
the exception of insurance or annuity underwriting, insurance company portfolio
investments, real estate investment and development, and merchant banking, all
of which must be conducted under the financial holding company.

The GLBA establishes a system of functional regulation, under which the
Federal Reserve Board regulates the banking activities of financial holding
companies and other federal banking regulators regulate banks financial
subsidiaries. The SEC regulates securities activities of financial holding
companies and state insurance regulators regulate their insurance activities.
The GLBA also provides new protections against the transfer and use by
financial institutions of consumers non-public, personal information.

The implementation of the GLBA increases competition in the financial
services sector by allowing many different entities, including banks and bank
holding companies, to affiliate and/or to merge with other financial services
entities and cross-sell their financial products in order to better serve their
current and prospective customers.

Capital Adequacy Requirements

Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in the risk profiles of various banking organizations.
The capital adequacy guidelines issued by the Federal Reserve Board are applied
to bank holding companies, on a consolidated basis, with the banks owned by the
holding company, as well as to state member banks. The OCCs risk capital
guidelines apply directly to any national bank regardless of whether it is a
subsidiary of a bank holding company. Both agencies requirements (which are
substantially similar), provide that banking organizations must have capital
equivalent to at least 8.0% of risk-weighted assets. The risk weights assigned
to assets are based primarily on credit risks. Depending upon the risk level of
a particular asset, it is assigned to a risk category.

For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category, while a risk weight
of 50% is assigned to loans secured by owner-occupied one-to-four family
residential mortgages, provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk
weight assigned to that category to determine the weighted values, which are
then added together to determine total risk-weighted assets.

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The Federal Reserve Board and the OCC have also implemented minimum
capital leverage ratios to be used in tandem with the risk-based guidelines in
assessing the overall capital adequacy of banks and bank holding companies.
Under these rules, banking institutions must maintain a ratio of at least 3.0%
Tier 1 capital to total weighted risk assets (net of goodwill, certain
intangible assets, and certain deferred tax assets). Tier 1 capital includes
common shareholders equity, noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.

Both the risk-based capital guidelines and the leverage ratio are minimum
requirements. They are applicable to all banking institutions unless the
applicable regulating authority determines that different minimum capital
ratios are appropriate for a particular institution based upon its
circumstances. Institutions operating at or near these ratios are expected to
have well-diversified risks, excellent control systems, high asset quality,
high liquidity, good earnings, rated composite 1 under the CAMELS rating system
of banks or the BOPEC rating system of bank holding companies and in general
must be considered strong banking organizations. The OCC requires that all but
the most highly-rated banks and all banks with high levels of risk or
experiencing or anticipating significant growth maintain ratios of at least
4.0% Tier 1 capital to total assets. The Federal Reserve Board also requires
bank holding companies without a BOPEC-1 rating to maintain a ratio of at least
4.0% Tier 1 capital to total assets; furthermore, banking organizations with
supervisory, financial, operational, or managerial weaknesses, as well as
organizations that are anticipating or experiencing significant growth, are
expected to maintain capital ratios well above the 3.0% and 4.0% minimum
levels.

The FDIC has also adopted a rule substantially similar to that issued by
the Federal Reserve Board, that establishes a minimum leverage ratio of 3.0%
and provides that FDIC-regulated banks with anything less than a CAMELS-1
rating must maintain a ratio of at least 4.0%. In addition, the FDIC rule
specifies that a depository institution operating with less than the applicable
minimum leverage capital requirement will be deemed to be operating in an
unsafe and unsound manner unless the institution is in compliance with a plan,
submitted to and approved by the FDIC, to increase the ratio to an appropriate
level. Finally, the FDIC requires any insured depository institution with a
leverage ratio of less than 2.0% to enter into and be in compliance with a
written agreement between it and the FDIC (or the primary regulator, with the
FDIC as a party to the agreement). Such an agreement should contemplate
immediate efforts to acquire the capital required to increase the ratio to an
appropriate level. Institutions that fail to enter into or maintain compliance
with such an agreement will be subject to enforcement action by the FDIC.

The OCCs guidelines provide that intangible assets are generally deducted
from Tier 1 capital in calculating a banks risk-based capital ratio. However,
certain intangible assets which meet specified criteria (qualifying
intangibles) are retained as a part of Tier 1 capital. The OCC has modified
the list of qualifying intangibles, currently including only purchased credit
card relationships and mortgage and non-mortgage servicing assets, whether
originated or purchased and excluding any interest-only strips receivable
related thereto. The OCC has amended its guidelines to increase the limitation
on such qualifying intangibles from 50% to 100% of Tier 1 capital, of which no
more than 25% may consist of purchased credit card relationships and
non-mortgage servicing assets.

The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include provisions regarding a banks exposure to
declines in the economic value of its capital due to changes in interest rates
to ensure that the guidelines take adequate account of interest rate risk.
Interest rate risk is the adverse effect that changes in market interest rates
may have on a banks financial condition and is inherent to the business of
banking. The exposure of a banks economic value generally represents the
change in the present value of its assets, less the change in the value of its
liabilities, plus

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the change in the value of its interest rate off-balance sheet contracts.
Concurrently, the agencies issued a joint policy statement to bankers,
effective June 26, 1996, to provide guidance on sound practices for managing
interest rate risk. In the policy statement, the agencies emphasize the
necessity of adequate oversight by a banks Board of Directors and senior
management and of a comprehensive risk management process. The policy statement
also describes the critical factors affecting the agencies evaluations of a
banks interest rate risk when making a determination of capital adequacy. The
agencies risk assessment approach used to evaluate a banks capital adequacy
for interest rate risk relies on a combination of quantitative and qualitative
factors. Banks that are found to have high levels of exposure and/or weak
management practices will be directed by the agencies to take corrective
action.

The OCC, the Federal Reserve Board and the FDIC have added a provision to
the risk-based capital guidelines that supplements and modifies the usual
risk-based capital calculations to ensure that institutions with significant
exposure to market risk maintain adequate capital to support that exposure.
Market risk is the potential loss to an institution resulting from changes in
market prices. The modifications are intended to address two types of market
risk: general market risk, which includes changes in general interest rates,
equity prices, exchange rates, or commodity prices, and specific market risk,
which includes particular risks faced by the individual institution, such as
event and default risks. The provision defines a new category of capital, Tier
3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provisions
requirements to any institution for which application of the new standard is
deemed necessary or appropriate for safe banking practices. For institutions to
which the modifications apply, Tier 3 capital may not be included in the
calculation rendering the 8.0% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator of the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institutions trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, covered institutions must
backtest, comparing the actual net trading profit or loss for each of its
most recent 250 days against the corresponding measures generated by the
statutory model. Once per quarter, the institution must identify the number of
times the actual net trading loss exceeded the corresponding measure and must
then apply a statutory multiplication factor based on that number for the next
quarters capital charge for market risk.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
FDICIA), provided a number of reforms relating to the safety and soundness of
the deposit insurance system, supervision of domestic and foreign depository
institutions and improvement of accounting standards. One element of the FDICIA
provides for the development of a regulatory monitoring system requiring prompt
action on the part of banking regulators with regard to certain classes of
undercapitalized institutions. The FDICIA created five capital categories
(well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) which are
defined in the FDICIA and are used to determine the severity of corrective
action the appropriate regulator may take in the event an institution reaches a
given level of undercapitalization. For example, an institution which becomes
undercapitalized must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institutions
compliance. Before a capital restoration plan will be approved, any entity
controlling a bank (i.e., a holding company) must guarantee compliance with the
plan until the institution has been adequately capitalized for four consecutive
calendar quarters. The liability of the holding company is

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limited to the lesser of five percent of the institutions total assets or
the amount which is necessary to bring the institution into compliance with all
capital standards. In addition, undercapitalized institutions will be
restricted from paying management fees, dividends and other capital
distributions, will be subject to certain asset growth restrictions and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business.

As an institutions capital levels decline, the extent of action to be
taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.

The OCC, the Federal Reserve Board and the FDIC have established
regulations which, among other things, prescribe the capital thresholds for
each of the five capital categories established by the FDICIA. The following
table reflects the capital thresholds:

| |                                   |  |                  |    |                   |  |                |   |   |  |   |   |     
| | --------------------------------- |  | ---------------- | -- | ----------------- |  | -------------- | - | - |  | - | - | ----
| |                                   |  | Total Risk-Based |    | Tier 1 Risk-Based |  | Tier 1        
| |                                   |  | Capital Ratio    |    | Capital Ratio     |  | Leverage Ratio
| |                                   |  |                  |    |                   |  |               
| | Well capitalized(1)               |  | >                | 10 | %                 |  | >              | 6 | % |  | > | 5 | %   
| |                                   |  |                  |    |                   |  |                |   |   |  |   |  
| | Adequately Capitalized(1)         |  | >                | 8  | %                 |  | >              | 4 | % |  | > | 4 | %(2)
| |                                   |  |                  |    |                   |  |                |   |   |  |   |  
| | Undercapitalized(4)               |  | <                | 8  | %                 |  | <              | 4 | % |  | < | 4 | %(3)
| |                                   |  |                  |    |                   |  |                |   |   |  |   |  
| | Significantly Undercapitalized(4) |  | <                | 6  | %                 |  | <              | 3 | % |  | < | 3 | %   
| |                                   |  |                  |    |                   |  |                |   |   |  |   |  
| | Critically Undercapitalized       |  |                  |   |                   |  |                |  |   |  | < | 2 | %(5)



---

|(1) |  | An institution must meet all three minimums.                                                                             
|--- |  | -------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | >3% for composite 1-rated institutions, subject to appropriate federal
banking agency guidelines.                        
|   
|(3) |  | <3% for composite 1-rated institutions, subject to appropriate
federal banking agency guidelines.                        
|   
|(4) |  | An institution falls into this category if it is below the specified
capital level for any of the three capital measures.
|   
|(5) |  | Ratio of tangible equity to total assets.                                                                                

In addition, the Federal Reserve Board, the OCC and the FDIC have adopted
regulations, pursuant to the FDICIA, defining operational and managerial
standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and

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benefits. Both the capital standards and the safety and soundness
standards which the FDICIA seeks to implement are designed to bolster and
protect the deposit insurance fund.

Sarbanes-Oxley Act of 2002.

On July 30, 2002, the Sarbanes-Oxley Act of 2002
(the Sarbanes-Oxley Act) was enacted to address
corporate and accounting fraud. The Sarbanes-Oxley Act establishes a new accounting oversight
board that will enforce auditing standards and restricts the scope of services
that accounting firms may provide to their public company audit clients. Among
other things, it also (i) requires chief executive officers and chief financial
officers to certify to the accuracy of periodic reports filed with the
Securities and Exchange Commission (the SEC); (ii) imposes new disclosure
requirements regarding internal controls, off-balance-sheet transactions, and
pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for
reporting of insider transactions and periodic disclosures by certain public
companies; and (iv) requires companies to disclose whether or not they have
adopted a code of ethics for senior financial officers and whether the audit
committee includes at least one audit committee financial expert.

The Sarbanes-Oxley Act requires the SEC, based on certain enumerated factors, to
regularly and systematically review corporate filings. To deter wrongdoing,
the Sarbanes-Oxley Act, (i) subjects bonuses issued to top executives to disgorgement if a
restatement of a companys financial statements was due to corporate
misconduct; (ii) prohibits an officer or director misleading or coercing an
auditor; (iii) prohibits insider trades during pension fund blackout periods;
(iv) imposes new criminal penalties for fraud and other wrongful acts; and (v)
extends the period during which certain securities fraud lawsuits can be
brought against a company or its officers.

Reporting Requirements

As a national bank, the Bank is subject to examination and review by the
OCC. These examinations are typically completed on-site at least every eighteen
months and the Bank is subject to off-site review upon request. The OCC, at
will, can access quarterly reports of condition, as well as such additional
reports as may be required by the national banking laws.

As a financial holding company, the Company is required to file with the
Federal Reserve Board an annual report of its operations at the end of each
fiscal year and such additional information as the Federal Reserve Board may
require. The Federal Reserve Board may also make
examinations of the Company and each of its subsidiaries.

The scope of regulation and permissible activities of the Company and the
Bank are subject to change by future federal and state legislation. In
addition, regulators sometimes require higher capital levels on a case-by-case
basis based on such factors as the risk characteristics or management of a
particular institution. The Company and the Bank are not aware of any
attributes of their operating plan that would cause regulators to impose higher
requirements.

Available Information

The Company maintains a website at www.franklinnetbranch.com. Beginning
with the filing of this annual report on Form 10-K, the Company will make
available free of charge its annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K on its website as soon as practicable
after such reports are filed with the SEC. The Companys common
stock is traded on the Nasdaq National Market under the symbol FNFN.

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Item 2. Properties.

Main Office

On January 5, 1989, the organizers of the Company entered into an
agreement with Gordon E. Inman, the Chairman, President and Chief
Executive Officer of the Company, to
lease a two-story commercial building to house the Banks main office. Additional
space in this building was leased by the Company from Mr. Inman in May 1991 and
in June 1993. The two floors contain an aggregate of approximately 12,000
square feet. The building is situated on approximately one-tenth acre located
at 230 Public Square, Franklin, Tennessee 37064. On May 1, 1997 the Company
amended the original lease to include a 9,300 square foot building adjacent to
the current facility. The building, Franklin Financial Center, is located at
216 East Main Street, Franklin, Tennessee 37064. On April 6,
1998, the Company
again amended the original lease to include a 4,000 square foot building, which
backs up to the original property. This building, which houses the Banks
mortgage operations and facilities department, is located at 110 3rd Avenue,
Franklin, TN 37064. On January 5, 1989, the organizers of the Company also
entered into a ground lease with Mr. Inman for the lease of approximately .05
acres located adjacent to the proposed bank office. The Company is using this
parcel to accommodate the Banks drive-in teller and bank window facility. Both
leases provide for a term of 20 years, with three five-year renewal options,
with the lease terms commencing on May 15, 1989. The current monthly rental
under these leases total $39,933. The Company is subleasing the permanent
facility and the adjacent parcel to the Bank at a rate, which includes
reimbursement to the Company for payment of rent, taxes, insurance, repairs and
maintenance of the properties.

Spring Hill Branch

In May 1991, the Bank acquired a 3,000 square foot office building in
Spring Hill, Tennessee from Mr. Inman at a purchase price of $305,000. This
facility houses the Banks Spring Hill branch.

Williamson Square Branch

In November 1993, the Bank entered into a 15 year lease with an unrelated
third party for a commercial building in the Williamson Square Shopping Center
on Highway 96E in Franklin, Tennessee. This facility houses the Banks
Williamson Square branch. In January 1997, the Company purchased this property
for $980,000.

Brentwood Branch

In July 1994, the Bank entered into a long-term lease with an unrelated
third party for a commercial building in Brentwood, Tennessee. This facility
housed the Banks Brentwood branch from April 1995 until February 2000. A new
4,900 square foot branch office was constructed and opened in
February 2000. It is leased from an unrelated third party
with monthly lease payments of $10,294

Fairview Branch

In January 1997, the Bank purchased a parcel of land in Fairview,
Tennessee at a purchase price of $140,000. The Bank opened a branch office in a
mobile unit at this site in the second quarter of 1997. The Bank constructed a
5,000 sq. foot permanent facility at this location which opened in the second
quarter of 1998.

Cool Springs Branch

In October 1998, the Company purchased a parcel of land in the Cool
Springs area of Franklin for $650,000. In May 2000, the Company completed
construction and opened a 4,900 square foot branch facility.

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Fieldstone Farms Branch

In July 1999, the Company purchased a parcel of land in the Fieldstone
Farms area of Franklin for $740,000. In June 2000, the Company completed
construction and opened a 4,900 square foot branch facility.

Green Hills Branch

In July 2000, the Bank assumed a lease with an unrelated third party on a
5,000 square foot facility in the Green Hills area of Davidson County. The
branch facility opened in January 2001. The monthly lease payments are $9,749.

Fourth and Union Branch

In January 2001, the Bank leased from an unrelated third party a 6,900
square foot facility at the corner of Fourth Street and Union Street in
downtown Nashville. The branch facility opened in February 2001 with monthly
lease payments of $15,214.

Administrative Offices

In December 1993, the Bank entered into a six and one-half year lease with
Mr. Inman for office/warehouse space on Main Street in Franklin, Tennessee.
This lease was amended in January 1996 to include an additional 3,000 square
feet. The lease was amended in September 1998 to extend the term of the lease
to fifteen and one-half years. In August 1999, the lease was further amended to
include an additional 2,600 square feet. The lease, as amended, covers
approximately 9,600 square feet and, provides for monthly payments to Mr. Inman
of $10,171. The office space houses back office functions for the Bank,
including data processing, check and document imaging, bookkeeping, and
accounting.

The Bank also leases a building from Mr. Inman, the Home Loan Center,
which houses its mortgage origination functions. The lease provides for
monthly payments to Mr. Inman of approximately $4,446.

The Bank is leasing an office building from an unrelated third party in
downtown Franklin which houses the Human Resources department and a training
facility. The monthly lease payments are approximately $3,026.

Item 3. Legal Proceedings.

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, tortuous interference with contract, fraud, and
civil conspiracy in connection with the denial of a loan to a potential
borrower involved in a real estate transaction. The 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 its own Motion, continued the trial until September 10,
2002. Mr. Pressmans amended complaint seeks compensatory damages in an amount
not to exceed $20

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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. The
case is currently under advisement and a decision is expected within the next
60 to 90 days from the conclusion of the trial. Management and
legal counsel believe the Bank's defenses have factual and legal
merit and each was supported by competent and admissible evidence.
The Company believes it should prevail on the merits of the case. No
provision has been made in the accompanying consolidated financial
statements for the ultimate resolution of this matter.

On September 1, 2000, Highland Capital, Inc. filed a complaint in the U.S.
District Court for the Middle District of Tennessee, against Franklin National
Bank alleging that the Bank required Highland Capital, Inc. to purchase stock
in Franklin Financial Corporation, the Banks holding parent holding company,
in conjunction with Highland Capital, Inc.s efforts to obtain a loan from the
Bank in violation of 12 U.S.C. § 1972, which prohibits certain tying
arrangements. Highland Capital, Inc. is seeking an unspecified amount of
damages in an amount not to exceed $2 million, plus attorneys fees and costs.
The bank filed an answer in the matter on September 19, 2000. On July 20, 2001,
the Bank filed a motion for Summary Judgment. On November 19, 2001, the
Magistrate Judge to whom the case has been assigned, issued a report regarding
the Banks motion for Summary Judgment recommending that the Motion be granted
and the complaint be dismissed. On March 21, 2002, the Court granted the Banks
motion for Summary Judgment and dismissed Highland Capital, Inc.s case with
prejudice. On April 12, 2002, Highland Capital, Inc. filed a Notice of Appeal
to the United States Court of Appeals for the Sixth Circuit. On July 10, 2002,
the Bank responded with the filing of a Proof Brief of Appellee Franklin National
Bank. No provision has been made in the accompanying consolidated
financial statements for the ultimate resolution of this matter.

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 principle 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.

No matter was submitted during the fourth quarter ended December 31, 2002
to a vote of security holders of the Company.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Market Information and Dividends. The Companys common stock began trading
on the NASDAQ National Market under the symbol FNFN in May 2001. From
November 2000 until May 2001 the Companys common stock was traded on the
Over-the-Counter Bulletin Board. Prior to this time, the Companys common stock
was quoted in the Pink Sheets, an inter-broker quotation medium and no
organized trading market existed. The market for the Companys common stock
must be characterized as a limited market due to its relatively low trading
volume and analyst coverage. These quotations also reflect inter-dealer prices
without retail mark-ups, mark-downs, or commissions and may not necessarily
represent actual transactions. The Company has paid a quarterly cash dividend
to its shareholders over the past two fiscal years as set forth in the table
below.

DividendsHigh
        
        Low
        
        PaidFiscal year ended December 31, 2002First Quarter
        
        $
        22.37
        
        
        $
        15.50
        
        
        $
        .055Second Quarter
        
        $
        29.22
        
        
        $
        21.60
        
        
        $
        .055Third Quarter
        
        $
        28.00
        
        
        $
        23.62
        
        
        $
        .055Fourth Quarter
        
        $
        25.50
        
        
        $
        21.37
        
        
        $
        .055Fiscal year ended December 31, 2001First Quarter
        
        $
        11.75
        
        
        $
        9.75
        
        
        $
        .0525Second Quarter
        
        $
        11.39
        
        
        $
        9.75
        
        
        $
        .0525Third Quarter
        
        $
        15.37
        
        
        $
        11.11
        
        
        $
        .0525Fourth Quarter
        
        $
        16.00
        
        
        $
        12.88
        
        
        $
        .0525


Holders of Common Stock. As of March 15, 2003, the approximate number of
holders of record of the Companys common stock was 922.

The Bank is restricted in its ability to pay dividends under the national
banking laws and by regulations of the OCC. Pursuant to 12 U.S.C. § 56, a
national bank may not pay dividends from its capital. All dividends must be
paid out, of undivided profits, subject to other applicable provisions of law.
Payments of dividends out of undivided profits is further limited by 12 U.S.C.
§ 60(a), which prohibits a bank from declaring a dividend on its shares of
common stock until its surplus equals its shared capital, unless there has been
transferred to surplus not less than 1/10 of the Banks net income of the
preceding two consecutive half year periods (in the case of an annual
dividend). Pursuant to 12 U.S.C. § 60(b), the approval of the OCC is required
if the total of all dividends declared by the Bank in any calendar year exceeds
the total of its net income for that year combined with its retained net income
for the preceding two years, less any required transfers to surplus.

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Recent Sales of Unregistered Securities.

There were no sales of unregistered securities during the fourth quarter of 2002.

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Item 6. Selected Financial Data.

At or for the Year Ended December 31,2002
        
        2001
        
        2000
        
        1999
        
        1998(Dollars in thousands)EarningsInterest income
        
        $
        50,623
        
        
        $
        50,144
        
        
        $
        43,224
        
        
        $
        30,691
        
        
        $
        26,438Interest expense
        
        
        18,020
        
        
        
        27,106
        
        
        
        25,927
        
        
        
        15,185
        
        
        
        13,142Net interest income
        
        
        32,603
        
        
        
        23,038
        
        
        
        17,298
        
        
        
        15,506
        
        
        
        13,296Provision for loan losses
        
        
        2,665
        
        
        
        1,575
        
        
        
        687
        
        
        
        350
        
        
        
        515Other income
        
        
        10,613
        
        
        
        8,432
        
        
        
        4,935
        
        
        
        4,665
        
        
        
        5,124Other expense
        
        
        22,869
        
        
        
        19,062
        
        
        
        14,457
        
        
        
        13,006
        
        
        
        10,251Net income
        
        
        11,085
        
        
        
        6,907
        
        
        
        4,739
        
        
        
        4,470
        
        
        
        4,886Net income per share (basic)
        
        $
        1.40
        
        
        $
        .88
        
        
        $
        .61
        
        
        $
        .58
        
        
        $
        .69Net income per share (diluted)
        
        $
        1.27
        
        
        $
        .83
        
        
        $
        .57
        
        
        $
        .54
        
        
        $
        .62Average BalancesAssets
        
        $
        794,948
        
        
        $
        654,519
        
        
        $
        503,964
        
        
        $
        373,901
        
        
        $
        308,287Deposits
        
        
        665,368
        
        
        
        536,607
        
        
        
        427,611
        
        
        
        333,840
        
        
        
        273,863Loans, net
        
        
        497,217
        
        
        
        377,714
        
        
        
        296,251
        
        
        
        256,206
        
        
        
        214,792Earning assets
        
        
        757,733
        
        
        
        624,969
        
        
        
        473,257
        
        
        
        350,377
        
        
        
        288,447Shareholders equity
        
        
        41,705
        
        
        
        33,603
        
        
        
        24,188
        
        
        
        23,250
        
        
        
        21,271Balance Sheet DataAssets
        
        $
        891,233
        
        
        $
        735,851
        
        
        $
        604,946
        
        
        $
        430,400
        
        
        $
        349,867Deposits
        
        
        758,372
        
        
        
        617,251
        
        
        
        491,980
        
        
        
        383,857
        
        
        
        312,397Loans, net
        
        
        532,502
        
        
        
        417,789
        
        
        
        318,921
        
        
        
        257,284
        
        
        
        213,734Earning assets
        
        
        846,930
        
        
        
        693,030
        
        
        
        569,985
        
        
        
        403,057
        
        
        
        326,473Long-term obligations
        
        
        74,000
        
        
        
        74,681
        
        
        
        74,708
        
        
        
        6,722
        
        
        
        6,744Shareholders equity
        
        
        48,548
        
        
        
        35,410
        
        
        
        30,730
        
        
        
        22,859
        
        
        
        23,589Book value per share
        
        
        6.09
        
        
        
        4.51
        
        
        
        3.94
        
        
        
        2.94
        
        
        
        3.08Dividends per share
        
        
        .22275
        
        
        
        .2125
        
        
        
        .2025
        
        
        
        .17
        
        
        
        .04Diluted shares outstanding (weighted)
        
        
        8,754
        
        
        
        8,352
        
        
        
        8,357
        
        
        
        8,322
        
        
        
        7,889Key RatiosReturn on average assets
        
        
        1.39
        %
        
        
        1.06
        %
        
        
        0.94
        %
        
        
        1.20
        %
        
        
        1.59
        %Return on average shareholders equity
        
        
        26.58
        %
        
        
        20.55
        %
        
        
        19.59
        %
        
        
        19.23
        %
        
        
        22.97
        %Shareholders equity to total assets
        
        
        5.45
        %
        
        
        5.13
        %
        
        
        5.08
        %
        
        
        5.31
        %
        
        
        6.74
        %


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Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operation

Details regarding the Companys financial performance are presented in the
following discussion, which should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere herein.

General

Franklin
National Bank represents virtually all of the assets of Franklin
Financial Corporation. The Bank, headquartered in Franklin, Tennessee, was
opened in December of 1989 and continues to experience substantial growth. The
Bank has nine full service branches located throughout Williamson, Davidson and
Maury Counties. In August 1996, the Bank opened an insurance subsidiary,
Franklin Financial Insurance. In October 1997, the Bank opened a
securities subsidiary, Franklin Financial Securities. The securities
subsidiary offers financial planning and securities brokerage services through
Fifth Third Securities. In December 1997, the Bank began operating its mortgage
division as a separate subsidiary, Franklin Financial Mortgage. Also in January
1998, the mortgage subsidiary began a wholesale mortgage operation and in
August 1998, opened a retail mortgage origination office in Chattanooga,
Tennessee. Franklin Financial Mortgage originates, sells and services mortgage
loans. In June 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.

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 two policies that,
due to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of our consolidated financial statements. These
policies relate to the methodology for the determination of our allowance for loan
and lease losses and to 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.

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

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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 Note 1 to the consolidated financial statements included
herein. We believe that the judgments, estimates and assumptions used in the
preparation of our consolidated financial statements are appropriate given the
factual circumstances at the time. However, given the sensitivity of our
consolidated financial statements to these critical accounting policies, the
use of other judgments, estimates and assumptions could result in actual
results differing from those estimates.

Liquidity and Capital Resources

General. The Company maintains its liquidity through the management of
its assets and liabilities. The Company strives to maintain an asset/liability
mix that provides the highest possible net interest margin without taking undue
risk with regard to asset quality or liquidity. Liquidity management involves
meeting the funds flow requirements of customers who may withdraw funds on
deposit or have need to obtain funds to meet their credit needs. Banks in
general must maintain adequate cash balances to meet daily cash flow
requirements as well as satisfy reserves required by applicable regulations.
The cash balances held are one source of liquidity. Other sources are provided
by the investment portfolio, federal funds purchased, Federal Home Loan Bank
advances, sale of loan participations, loan payments, brokered and public funds
deposits and the Companys ability to borrow funds as well as issue new
capital.

Management believes liquidity is at an adequate level with cash and due
from banks of $28.1 million at December 31, 2002. Loans and securities
scheduled to mature within one year exceeded $298.8 million at December 31,
2002, which should provide further liquidity. In addition, approximately $257.9
million of securities are classified as available for sale to help meet
liquidity needs should they arise. Based on the current interest rate
environment, the Bank anticipates $95.0 million in cash flow from its
investment portfolio over the next year as a source of liquidity to help fund
loan demand. The Company has a line of credit of $5.0 million with a lending
institution and the Bank is approved to borrow up to $10.0 million in funds
from the Federal Home Loan Bank and $65.0 million in federal funds lines to
assist with capital and liquidity needs. At December 31, 2002, the Company had
$2.4 million in borrowings against its line of credit and the Bank had no
federal funds purchased outstanding. The line of credit with the
lending institution includes financial covenants requiring a (i) minimum
loan loss reserve to non-performing assets ratio, (ii) minimum
loan loss reserve to total loans, (iii) maximum ratio of
non-performing loans to total loans, (iv) minimum return on
average assets and (v) minimum tangible shareholders
equity. The Company was in violation of the loan loss allowance to
non-performing assets covenant at December 31, 2002, which was
subsequently waived by the leading institution.

In February and August 1998, the Bank entered into long-term convertible
Federal Home Loan Bank advances with a ten-year maturity and one-year call
option totaling $6.0 million. During the fourth quarter of 1999 these advances
converted to variable rate advances, which reprice quarterly based on LIBOR.

On July 17, 2000 and August 11, 2000 the Company completed the sale of
$11.0 million and $5.0 million, respectively, of trust preferred
securities (the Trust Preferred Securities). The Company received net proceeds of $15.2 million from the
offering, which it used to repay approximately $5.0 million of indebtedness
under its line of credit, purchase investments as part of a leverage program to
offset the interest expense associated with the Trust Preferred Securities and
for general corporate purposes, including capital investments in the Bank. The
Trust Preferred Securities pay cumulative cash distributions accumulating from
the date of issuance at an annual rate of three-month LIBOR plus 3.50% of the
liquidation amount of $1,000 per preferred security on
January 15, April 15, July 15 and October 15 of
each year. The Trust Preferred Securities have a thirty-year
maturity and may be redeemed by the Company beginning in July 2005 or
upon the

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occurrence of certain other conditions. Subject to certain limitations, the
Trust Preferred Securities qualify as Tier 1 capital and are carried in Other
Borrowings on the Companys Balance Sheet. The Company purchased approximately
$81.3 million of investment securities in a leverage program to gain immediate
income benefits and offset interest expense of the Trust Preferred Securities.
This leverage program was funded through proceeds from the offering of the
Trust Preferred Securities, $52.0 million of Federal Home Loan Bank advances
and brokered certificates of deposit. The objectives of the leverage program
are to realize a 120 basis point spread between investment yields and
borrowings, to utilize cash flow from the investments purchased to help fund
future loan demand and to limit interest rate shock exposure in the up 100
basis point rate shock scenario. As part of the leverage program to offset
interest expense associated with the Trust Preferred Securities offering,
during the third quarter of 2000, the Bank entered into three long-term
convertible Federal Home Loan Bank advances. One advance of $25.0 million has a
ten-year maturity with a three-year call option. The other two advances
totaling $27.0 million have a five-year maturity with a one-year call option.
After the three and one-year call options, these advances may be converted by
the FHLB from a fixed rate to a variable rate. The Bank has $200,000
outstanding in repurchase agreements to further develop its relationship with a
customer. The Bank had approximately $100.1 million in brokered deposits at
December 31, 2002 to help fund strong loan demand. The majority of these
deposits are $100,000 or less, but they are generally considered to be more
volatile than the Banks core deposit base.

Approximately $59.8 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $86.9
million of other loan commitments, primarily unused lines and letters of
credit, which may or may not be funded.

Capital Expenditures. Other than expenditures relating to the normal
course of business, the Company does not have any significant capital expenditures planned
for 2003.

Management monitors the Companys asset and liability positions in order
to maintain a balance between rate sensitive assets and rate sensitive
liabilities and at the same time maintain sufficient liquid assets to meet
expected liquidity needs. Management believes that the Companys liquidity is
adequate at December 31, 2002. Other than as set forth above, there are no
trends, demands, commitments, events or uncertainties that will result in or
are reasonably likely to result in the Companys liquidity increasing or
decreasing in any material way. The Company is not aware of any current
recommendations by the regulatory authorities which if they were to be
implemented would have a material effect on the Companys liquidity, capital
resources, or results of operations.

Cash Flows. Net cash flow provided by operating activities was $14.8
million in 2002. Proceeds from the sale of loans exceeded loans originated for
sale by $4.8 million in 2002. The majority of this loan origination volume is
due to the increase in loans originated in the mortgage banking segment.
Accrued interest payable decreased $183,000 and other assets
increased $6.0
million creating additional uses of funds by operating activities. The use of
cash flow is offset by net income of $11.2 million and an increase in other
liabilities of $2.7 million.

Net cash used in investing activities was $147.1 million in 2002, which
was largely due to the banking segment. The increase in the change in net loans
was $120.2 million in 2002. The net change in the investment portfolio also
increased $12.0 million in 2002. Growth in the investment portfolio has slowed
due to cashflow from the investment portfolio being redeployed to loan
portfolio fundings. This liquidity shift was one of the strategic objectives of
the leverage program related to the Trust Preferred Securities offering in 2000
as previously discussed. The use of cash flow in investing activities is also
attributed to an increase in federal funds of $18.9 million.

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Net cash provided by financing activities was $136.7 million in 2002. The
increase in cash flow is primarily due to an increase in deposits of $141.1
million in 2002. Cash provided by financing activities is offset partially by
$1.7 million of dividends paid and a decrease in repurchase agreements of $3.0
million.

Interest Rate Sensitivity. The following is an analysis of rate sensitive
assets and liabilities as of December 31, 2002:

0-3 mos.
        
        3-12 mos.
        
        1-5 yrs.
        
        5 or more yrs.
        
        TotalSecurities
        
        $
        35,904
        
        
        $
        32,271
        
        
        $
        149,271
        
        
        $
        52,867
        
        
        $
        270,313Loans
        
        
        323,735
        
        
        
        39,530
        
        
        
        183,006
        
        
        
        11,425
        
        
        
        557,696Federal funds sold
        
        
        18,922
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        18,922Total rate sensitive assets
        
        
        378,561
        
        
        
        71,801
        
        
        
        332,277
        
        
        
        64,292
        
        
        
        846,931NOW deposits
        
        
        69,096
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        69,096Savings deposits
        
        
        231,846
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        231,846Time deposits
        
        
        207,504
        
        
        
        115,760
        
        
        
        55,659
        
        
        
        
        
        
        
        378,923Repurchase agreements
        
        
        100
        
        
        
        
        
        
        
        100
        
        
        
        
        
        
        
        200Other borrowings
        
        
        24,381
        
        
        
        
        
        
        
        
        
        
        
        52,000
        
        
        
        76,381Total rate sensitive
Liabilities
        
        
        532,927
        
        
        
        115,760
        
        
        
        55,759
        
        
        
        52,000
        
        
        
        756,446Excess (deficiency) of rate
sensitive assets less
rate sensitive liabilities
        
        $
        (154,366
        )
        
        $
        (43,959
        )
        
        $
        276,518
        
        
        $
        12,292
        
        
        $
        90,485Excess (deficiency) as a
percentage of earning
assets
        
        
        (18.2
        )%
        
        
        (5.2
        )%
        
        
        32.6
        %
        
        
        1.5
        %
        
        
        10.7
        %Cumulative excess
(deficiency)
        
        $
        (154,366
        )
        
        $
        (198,325
        )
        
        $
        78,193
        
        
        $
        90,485
        
        
        $
        90,485Cumulative excess
(deficiency) as a
percentage of earnings
assets
        
        
        (18.2
        )%
        
        
        (23.4
        )%
        
        
        9.2
        %
        
        
        10.7
        %
        
        
        10.7
        %


As indicated in the preceding table, the negative gap in the 0-3 month and
3-12 month categories between rate sensitive assets and rate sensitive
liabilities would allow the Company to reprice its liabilities faster than its
assets in a falling rate environment which should have a positive effect on
earnings. However, in an increasing interest rate environment, the Company may
experience a short-term decrease in earnings. The above table has been prepared
based on principal payment due dates, contractual maturity dates or repricing
intervals on variable rate instruments. With regard to mortgage-backed
securities, the estimated prepayment date is used. Actual payments on
mortgage-backed securities are received monthly and therefore should occur
earlier than the contractual maturity date.

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<
P align="left">Capital Adequacy. Stockholders equity at
December 31, 2002, was $48.5
million or 5.5% of total assets compared to $35.4 million or 4.8% of total
assets at December 31, 2001. See Note 15 to the consolidated financial
statements. As set forth in the following table, equity capital of the Company
and the Bank exceeded regulatory requirements as of December 31, 2002:

MinimumFor Capital
        
        For Well
        
        CompanyAdequacy
        
        Capitalized
        
        Consolidated
        
        BanksPurposes
        
        Category
        
        Actual
        
        ActualLeverage ratio
        
        
        4.00
        %
        
        
        5.00
        %
        
        
        7.1
        %
        
        
        6.8
        %Tier 1 risk-based ratio
        
        
        4.00
        %
        
        
        6.00
        %
        
        
        10.1
        %
        
        
        9.6
        %Total risk-based ratio
        
        
        8.00
        %
        
        
        10.00
        %
        
        
        11.1
        %
        
        
        10.9
        %


Financial Condition

Total
assets have grown $155.4 million, or 21.1%, since December 31, 2001
to a total of $891.2 million at December 31, 2002. The growth during 2002 has
been funded by a $141.1 million increase in deposits and net income of $11.2
million. Total deposits were $758.4 million at December 31, 2002.

The Company continues to experience excellent loan demand as demonstrated
by the growth in net loans of $114.7 million, or 27.5%, since December 31,
2001. The allowance for loan losses increased $1.5 million, or 34.9%, from the
level at December 31, 2001, to a total of $5.8 million or approximately 1.03%
of total loans. The increase in the allowance for loan losses is primarily the
result of growth in the loan portfolio as opposed to significant deterioration
in credit quality. The Company has seen significant growth in construction and
commercial real estate loans, which carry a higher reserve factor. Management
believes that the level in the allowance for loan losses is adequate at
December 31, 2002. Management reviews in detail the level of the allowance for
loan losses on a quarterly basis. In addition, during 2001 the Company hired an
internal loan review analyst. This internal position allows for more frequent
and a higher volume of loan review. The allowance is below the Banks peer
group average as a percentage of loans, however the Banks past due loans, at
2.11% of total loans at December 31, 2002, have historically been below peer
group average. Past due loans are higher than usual at
December 31, 2002, due to the recessionary economy and two
large loan relationships being place on nonaccrual.
At December 31, 2002, the Bank had non-accrual loans of $5.2
million compared to non-accrual loans of $1.0 million at December 31, 2001. The
Bank had one large relationship of $4.7 million that was placed on non-accrual
status during the third quarter of 2002. Management feels the Bank has adequate
collateral on this loan relationship and does not expect to experience a loss. At
December 31, 2002, the Bank had loans that were specifically classified as
impaired of approximately $19.2 million compared to $10.4 million at December
31, 2001. The specific allocations of the allowance for loan losses related to impaired loans was $698,000
at December 31, 2002 compared to $714,000 at December 31, 2001. The average
carrying value of impaired loans was approximately $12.8 million for the year
ended December 31, 2002. Interest income of approximately $800,000 was
recognized on these impaired loans during the year ended December 31, 2002.
Loans held-for-sale decreased $1.1 million, or 5.4%, since December 31, 2001.
Loans held-for-sale are carried at fair value.

At December 31, 2002 the fair value of securities classified as
available-for-sale exceeded the cost of the securities by $4.5 million. At
December 31, 2001, cost of the securities classified as

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available-for-sale
exceeded the fair value of securities by $157,000. As a result, unrealized
(loss) gain net of taxes of $2.8 million and $(94,000) for the years ended
December 31, 2002 and 2001, respectively, is included in Other Comprehensive
Income in the stockholders equity section of the balance sheet. The change in
unrealized gain (loss) is due to economic market conditions and slight
decreases in long-term interest rates during late 2002. See Notes 1 and 3 to
the consolidated financial statements.

Available-for-sale securities increased $21.7 million, or 9.2%, during
2002 due to overall Bank growth. Held-to-maturity securities decreased $2.0
million, or 19.2%, due to security calls within the held-to-maturity category.
Premises and equipment decreased $855,000, or 8.1%, during 2002 primarily due
to depreciation expense offset partially by costs related to software and
equipment costs related to the implementation of a document imaging system.
Accrued interest receivable increased $94,000, or 2.6%, during 2002 due to
increases of $134.8 million in the Banks loan and securities portfolios offset
by continuing decreases in interest rates in 2002. Foreclosed assets decreased
$1.5 million in 2002. Accrued interest payable decreased $183,000, or 11.0%,
during 2002. The decrease is due to the continuing decreases in interest rates
during 2002 offset partially by increases in interest-bearing deposits of
$115.5 million in 2002. Stockholders equity increased
$13.1 million, or 37.1%
from December 31, 2001 to December 31, 2002. The increase in stockholders
equity is primarily attributable to $11.1 million in net income and a $2.9
million increase in other comprehensive income offset slightly by $1.7 million in
dividends declared.

Results of Operations

Fiscal 2002 Compared with Fiscal 2001

The
Company had net income of $11.1 million in 2002 compared to $6.9
million in 2001. The Company had income before taxes of $17.7 million in 2002,
representing a 63.2% increase from the $10.8 million recorded in 2001.

Total interest income increased $478,000, or 1.0%, in 2002 as compared to
2001, while total interest expense decreased $9.1 million, or 33.5%, in 2002 as
compared to 2001. The increase in total interest income is attributable to an
increase in average earning assets of $132.8 million, or 21.2%, in 2002, offset
significantly by a decrease in rates. A large portion of the Banks loans are
variable rate which causes interest income to decrease faster in a declining
rate environment. The increase in total interest income is primarily due to the
banking segment. The decrease in interest expense is attributable to decreases
in interest rates offset by an increase in average interest bearing liabilities
of $116.0 million, or 20.1%, in 2002. The Banks deposits are relatively short
term in nature, which allows them to reprice faster than our rate
sensitive assets. In a decreasing rate
environment, as in 2002, this asset/liability structure was
significantly favorable as
deposits were repricing which help to offset the variable rate loan repricing.
This short-term deposit portfolio has significantly increased the net interest margin in the
declining rate environment as net yield increased from 3.69% in 2001 to 4.30%
in 2002.

The provision for loan losses was $2.7 million in 2002 as compared to $1.6
million in 2001. While asset quality remains good, increases in the provision
for loan losses have been necessary due to growth in the Banks loan portfolio and as previously
discussed, the Banks impaired loans have increased primarily
due to the recessionary economy and one large problem loan
relationship.
Net charge-offs were $1.2 million or .24% of average loans outstanding in 2002,
as compared to $331,000, or .09%, of average loans outstanding in 2001. The
Bank had a $905,000 problem loan relationship which resulted in a portion of
the increase in the provision for loan losses. The Bank charged-off the
$905,000 of loans related to this relationship during the first nine months of 2002.

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Total other income of $10.6 million in 2002 increased $2.2 million, or
25.9%, from 2001. The increase was largely attributable to an increase of $1.1
million, or 30.6%, in loan origination fees related to the mortgage banking
segment. The increase was also attributable to a $343,000, or 13.8%, increase
in service charges on deposit accounts at the Bank and an $876,000 gain on sale
of mortgage loans in the mortgage banking segment. Mortgage servicing rights
income contributed $2.6 million and $1.2 million in 2002 and 2001,
respectively, to the total income of the mortgage banking segment. The increase
in service charges on deposit accounts is the result of continued strong growth
in new deposit accounts. The gain on sale of mortgage loans resulted from the
ability to pool mortgage loans to attain better pricing opportunities. Income
from the Banks securities subsidiary increased $79,000, or 20.6%, to $456,000
in 2002 as compared to $378,000 in 2001.

Total
other expenses increased $3.8 million, or 20.0%, during 2002 as
compared to 2001. Salaries and employee benefits increased $1.9 million, or
18.5%, primarily due to a $369,000 increase in commissions in the mortgage banking
segment and a $392,000 increase officer performance incentives being required to be paid in cash in
2002 compared to primarily stock options in previous years due to
certain restrictions in the Companys
Affiliation Agreement with Fifth Third Bancorp regarding option
grants. The Bank had 215 full time
equivalent employees at December 31, 2002 as compared to 233 a year earlier.
Salaries and employee benefits for the mortgage banking segment was $2.3
million in 2002 as compared to $1.6 million in 2001. The increase is primarily
due to an increase in commissions as a result of the increase in mortgage loan
originations. Included in salaries and employee benefits are commissions
related to the mortgage banking segment of $1.1 million in 2002 compared to
$687,000 in 2001. Occupancy expense increased $46,000, or 2.3%, while furniture
and equipment expense decreased $94,000, or 6.6%, from 2001 to 2002. Mortgage
banking segment expenses increased $767,000, or 63.7%, in 2002 as compared to
2001. The increase is primarily due to an increase in mortgage correspondent
loan pricing fees on wholesale loans originated, mortgage servicing
rights impairment and amortization of mortgage
servicing rights. The increase in mortgage servicing rights
impairment of $304,000 resulted from a decrease in long-term mortgage
interest rates, primarily during the fourth quarter of 2002, which
led to higher than anticipated prepayment rates. Loss on the sale of mortgage loans was a realized loss of
$253,000 in 2001 compared to the gain discussed above in 2002. The primary
reasons for the loss was interest rate fluctuations. Foreclosed asset expense
increased to $823,000 in 2002 primarily due to a valuation allowance of
$746,000 established during the second quarter of 2002 on one property. The
Company recognized merger expenses of $407,000 in 2002, which consisted of
accounting, legal and broker fees related to the Companys pending merger with
Fifth Third Bancorp. See Business  Recent
Developments for more information regarding the merger with
Fifth Third Bancorp. Other expenses have increased as a result of the overall
growth of the Bank.

Fiscal 2001 Compared with Fiscal 2000

The Company had net income of $6.9 million in 2001 compared to $4.7
million in 2000. The Company had income before taxes of $10.8 million in 2001,
representing a 52.8% increase from the $7.1 million recorded in 2000.

Total interest income increased $6.9 million, or 16.0%, in 2001 as
compared to 2000, while total interest expense increased $1.2 million, or 4.5%,
in 2001 as compared to 2000. The increase in total interest income is
attributable to an increase in average earning assets of $151.7 million, or
32.1%, in 2001, offset significantly by a decrease in rates. During 2001, the
Federal Reserve Bank lowered interest rates eleven times resulting in the same
reductions in the prime rate, which the Bank primarily uses to price loans. A
large portion of the Banks loans are variable rate which causes interest
income to decrease faster in a rapid declining rate environment. The increase
in total interest income is primarily due to the banking segment. The increase
in interest expense is attributable to an increase in average interest bearing
liabilities of $133.5 million, or 30.2%, in 2001 offset by decreases in
interest rates. The Banks deposits are relatively short term in nature, which
allows them to reprice faster. In a decreasing rate environment, as in 2001,
this asset/liability structure was beneficial as deposits were repricing which
helped to offset the

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variable rate loan repricing. This short-term deposit
portfolio has supported the net interest margin in the declining rate
environment as net yield held steady from 3.65% in 2000 to 3.69% in 2001.

The provision for loan losses was $1.6 million in 2001 as compared to
$687,000 in 2000. While asset quality remains good, increases in the provision
for loan losses have been necessary due to growth in the Banks loan portfolio.
Net charge-offs were $331,000 or .09% of average loans outstanding in 2001, as
compared to $142,000, or .05%, of average loans outstanding in 2000.

Total other income of $8.4 million in 2001 increased $3.5 million, or
70.9%, from 2000. The increase was largely attributable to an increase of $2.0
million, or 131.1%, in loan origination fees related to the mortgage banking
segment. The increase was also attributable to a $521,000, or 26.5%, increase
in service charges on deposit accounts at the Bank and an increase of $1.1
million, or 579%, in the gain on sale of investment securities in the banking
segment. Mortgage servicing rights income contributed $1.2 million and $239,000
in 2001 and 2000, respectively, to the total income of the mortgage banking
segment. The increase in service charges on deposit accounts is the result of
continued strong growth in new deposit accounts. The increase in the gain on
sale of investment securities resulted from gain opportunities taken in the
unstable rate environment of 2001 while conserving yield. Income from the
Banks securities subsidiary decreased $138,000, or 26.7%, to $378,000 in 2001
as compared to $515,000 in 2000. The decrease is due to less transaction volume
because of uncertainty in overall economic conditions.

Total other expenses increased $4.6 million, or 31.9%, during 2001 as
compared to 2000. Salaries and employee benefits increased $2.5 million, or
31.5%, primarily due to the hiring of additional personnel in the banking
segment. The Bank had 233 full time equivalent employees at December 31, 2001
as compared to 198 a year earlier. The additional personnel in the banking
segment is primarily the result of the opening of four new branch locations
over the past two years. Salaries and employee benefits for the mortgage
banking segment was $1.6 million in 2001 as compared to $1.2 million in 2000.
The increase is primarily due to an increase in commissions as a result of the
increase in mortgage loan originations. Included in salaries and employee
benefits are commissions related to the mortgage banking segment of $687,000 in
2001 compared to $188,000 in 2000. Occupancy expense and furniture and
equipment expense increased $365,000, or 21.5%, and $283,000, or 24.7%,
respectively, from 2000 to 2001 primarily due to the opening of the new
facilities and overall Bank growth. Mortgage banking segment expenses increased
$666,000, or 124%, in 2001 as compared to 2000. The increase is primarily due
to an increase in mortgage correspondent loan pricing fees on wholesale loans
originated. Loss on the sale of mortgage loans was a realized loss of $252,000
in 2001 compared to $163,000 in 2000. The primary reasons for the loss are
interest rate fluctuations and the increase in mortgage loan originations.
Other expenses have increased as a result of the overall growth of the Bank.

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Selected Quarterly Financial Data

The following table sets forth certain unaudited quarterly financial data for each of the
last eight quarters of the Company. The information has been derived from unaudited
financial statements that we believe reflect all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of such quarterly financial
information. The operating results for any quarter are not necessarily indicative of the
results to be expected for any future period.

2002Fourth
        
        Third
        
        Second
        
        FirstQuarter
        
        Quarter
        
        Quarter
        
        Quarter(In thousands, except per share data)Interest income
        
        $
        12,667
        
        
        $
        12,749
        
        
        $
        12,729
        
        
        $
        12,478Interest expense
        
        
        4,466
        
        
        
        4,464
        
        
        
        4,485
        
        
        
        4,605Net interest income
        
        
        8,200
        
        
        
        8,285
        
        
        
        8,244
        
        
        
        7,873Provision for loan losses
        
        
        455
        
        
        
        760
        
        
        
        800
        
        
        
        650Income before income taxes
        
        
        4,784
        
        
        
        5,099
        
        
        
        3,805
        
        
        
        3,995Net income
        
        
        2,703
        
        
        
        3,266
        
        
        
        2,506
        
        
        
        2,610Net income per shareBasic
        
        
        0.34
        
        
        
        0.41
        
        
        
        0.32
        
        
        
        0.33Diluted
        
        
        0.32
        
        
        
        0.37
        
        
        
        0.28
        
        
        
        0.30


2001Fourth
        
        Third
        
        Second
        
        FirstQuarter
        
        Quarter
        
        Quarter
        
        Quarter(In thousands, except per share data)Interest
income
        
        $
        12,532
        
        
        $
        12,763
        
        
        $
        12,561
        
        
        $
        12,288Interest expense
        
        
        5,511
        
        
        
        6,646
        
        
        
        7,242
        
        
        
        7,707Net interest income
        
        
        7,021
        
        
        
        6,117
        
        
        
        5,319
        
        
        
        4,581Provision for loan losses
        
        
        625
        
        
        
        360
        
        
        
        310
        
        
        
        280Income before income taxes
        
        
        3,572
        
        
        
        2,916
        
        
        
        2,250
        
        
        
        2,095Net income
        
        
        2,275
        
        
        
        1,842
        
        
        
        1,431
        
        
        
        1,359Net income per shareBasic
        
        
        0.29
        
        
        
        0.24
        
        
        
        0.18
        
        
        
        0.17Diluted
        
        
        0.28
        
        
        
        0.22
        
        
        
        0.17
        
        
        
        0.16


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Accounting Pronouncements

In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations,and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141
requires business combinations initiated after June 30, 2001 to
be accounted for using the purchase method of accounting. It also
specifies the types of acquired intangible assets that are required
to be recognized and reported separately from goodwill. SAFS
No. 142 requires that goodwill and certain other intangibles no
longer be amortized, but instead be tested for impairment at least
annually. SFAS No. 142 is required to be applied starting with
fiscal years beginning after December 15, 2001, with early
application permitted in certain circumstances. The adoption of SFAS
Nos. 141 and 142 did not have a material impact on the
Companys
consolidated financial position or results of operations.

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

In
August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.This statement
supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 for (i) recognition and measurement of the
impairment of long-lived assets to be held and used; and
(ii) measurement of the impairment of long-lived assets to be
disposed of by sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS
No. 144 did not have a material impact on the Company's
consolidated financial position or results of operations.

In
December 2001, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP)
01-6, Accounting by Certain Entities (Including Entities With
Trade Receivables) That Lend to or Finance the Activities of
Others. SOP 01-6 clarifies accounting and financial reporting
practices for lending and finance activities, eliminates distinctions
between what constitutes a finance company and financing activities
and conforms differences among the accounting and financial reporting
guidance provided in various AICPA Audit and Accounting Guides. The
objective of SOP 01-6 is to improve the consistency in accounting and
reporting by banks, savings institutions, credit unions, finance
companies, mortgage companies and certain activities of insurance
companies. SOP 01-6 is effective for annual and interim financial
statements issued for fiscal years beginning after December 15,
2001. The Company adopted SOP 01-6 on January 1, 2002. The
adoption of SOP 01-6 did not have an impact on the Company's
accounting policies; however, certain additional disclosures were
required to be included in the consolidated financial statements.
These additional disclosures have been included in the notes to the
consolidated financial statements at December 31, 2002 and 2001.

In
April, 2002, the FASB issued implementation guidance related to
Derivatives Implementation Group (DIG) Issue No. C13,
When a Loan Commitment Is Included in the Scope of Statement
133.DIG Issue No. C13 requires rate lock commitments on mortgage loans
that are intended to be sold be accounted for as derivative
financial instruments in accordance with SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,as amended. The adoption of DIG Issue No. C13 on
July 1, 2002 did not have a material impact to the
Companys consolidated financial position or results of
operations.

In April
2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13,
and Technical Corrections. SFAS No. 145 amended SFAS
No. 13,  Accounting for Leases,to eliminate an
inconsistency between required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under
changed conditions. The adoption of SFAS No. 145 in 2002 did not
have a material effect on the Company's consolidated financial
position or results of operations.

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

In
October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions.
SFAS No. 147 addresses the financial accounting and reporting for the acquisition of all or part of a
financial institution and the accounting for the impairment or
disposal of acquired long-term customer relationship intangible
assets. SFAS No. 147 is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The adoption
of SFAS No. 147 did not have an impact on the Companys consolidated
financial position or results of operations as the Company did not acquire any
financial institutions.

In November 2002, the FASB issued
Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation
of FASB Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34. This interpretation requires that upon issuance of a guarantee, the entity must recognize
a liability for the fair value of the obligation it assumes under that obligation. This interpretation is intended to improve the comparability
of financial reporting by requiring identical accounting for guarantees issued with separately identified consideration
and guarantees issued without separately identified consideration. The initial recognition and
measurement provision of FIN no. 45 are to be applied
prospectively to guarantees issued or modified after December 31, 2002. The interpretations disclosure requirements
are effective for the Company as of December 31, 2002. Significant guarantees that have been entered into by the
Company are disclosed in Note 8 to the consolidated financial statements.

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

In
January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities. FIN No. 46 addresses consolidation by business enterprises of variable interest entities
that have certain characteristics. This Interpretation applies immediately to variable interest entities created in January
31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year beginning after June 15, 2003 to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has not yet determined the impact,
if any, the adoption of FIN No. 46 will have on its consolidated financial position and results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Companys financial performance is subject to risk from interest rate
fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-bearing
liabilities subject to repricing over a specified period and the amount of
change in individual interest rates. The liquidity and maturity structure of
the Companys assets and liabilities are important to the maintenance of
acceptable net interest income levels. An increasing interest rate environment
negatively impacts earnings as the Companys rate-sensitive liabilities
generally reprice faster than its rate-sensitive assets. Conversely, in a
decreasing interest rate environment, earnings are positively impacted. This
potential asset/liability mismatch in pricing is referred to as gap and is
measured as rate sensitive assets divided by rate sensitive liabilities for a
defined time period. A gap of 1.0 means that assets and liabilities are
perfectly matched as to repricing within a specific time period and interest
rate movements will not affect net interest margin, assuming all other factors
hold constant. Management has specified gap guidelines for a one-year time
horizon of between .7 and 1.3. At December 31, 2002, the Company had a gap
ratio of .8 for the one-year period ending December 31, 2003. Thus, over the
next twelve months, slightly more rate-sensitive liabilities will reprice than
rate-sensitive assets.

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A 200 basis point decrease in interest rates spread evenly during 2003 is
estimated to cause an increase in net interest income of $240,000 as compared
to net interest income if interest rates were unchanged during 2003. In
comparison, a 200 basis point increase in interest rates spread evenly during
2003 is estimated to cause a decrease in net interest income of $240,000 as
compared to net interest income if rates were unchanged during 2003. This level
of variation is within the Companys acceptable limits. This simulation
analysis assumes that savings and checking interest rates have a low
correlation to changes in market rates of interest and that certain asset
prepayments change as refinancing incentives evolve. The analysis takes into
account the call features of certain investment securities based on the 200
basis point rate shock scenario. Further, in the event of a change of 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 assumes no change
in the Companys asset/liability composition.

Item 8. Financial Statements and Supplementary Data.

The following financial statements are filed with this report:Independent Auditors Report-Deloitte & Touche LLPConsolidated Balance Sheets  December 31, 2002 and 2001Consolidated Statements of Income  Years ended December 31, 2002, 2001 and 2000Consolidated Statements of Changes in Stockholders Equity  Years ended December 31, 2002, 2001 and 2000Consolidated Statements of Cash Flows  Years ended December 31, 2002, 2001 and 2000Notes to Consolidated Financial Statements


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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of
Franklin Financial Corporation and Subsidiaries
Franklin, Tennessee

We have audited the accompanying consolidated balance sheets of Franklin
Financial Corporation and Subsidiaries (the Company) as of December 31, 2002
and 2001, and the related consolidated statements of income, changes in
stockholders equity, and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

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

As discussed in Note 8, the Company and its Chairman are defendants in
litigation currently pending in federal court.

DELOITTE & TOUCHE LLP

Nashville, Tennessee
March 27, 2003

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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |             |             | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                                               |                                                                                                                                                 | 2002                       |             | 2001       
|                                                                               |                                                                                                                                                 |                            |             |            
|ASSETS                                                                         |                                                                                                                                                 |                            |             |            
|Cash and cash equivalents (Notes 1 and 2)                                      |                                                                                                                                                 | $                          | 28,061,479  |             |             | $ | 23,664,888  |            
|Federal funds sold                                                             |                                                                                                                                                 |                            | 18,922,000  |             |             |   |            |            
|Investment securities available-for-sale, at fair value (Notes 1 and 3)        |                                                                                                                                                 |                            | 68,324,701  |             |             |   | 59,964,081  |            
|Mortgage-backed securities available-for-sale, at fair value (Notes 1 and 3)   |                                                                                                                                                 |                            | 189,646,719 |             |             |   | 176,340,113 |            
|Investment securities held-to-maturity, at amortized cost (Notes 1 and 3)      |                                                                                                                                                 |                            | 8,043,095   |             |             |   | 9,916,337   |            
|Mortgage-backed securities held-to-maturity, at amortized cost (Notes 1 and 3) |                                                                                                                                                 |                            | 185,468     |             |             |   | 269,911     |            
|Federal Home Loan and Federal Reserve Bank stock                               |                                                                                                                                                 |                            | 4,113,200   |             |             |   | 3,950,800   |            
|Loans held for sale (Notes 1 and 4)                                            |                                                                                                                                                 |                            | 19,431,829  |             |             |   | 20,530,498  |            
|Loans (Notes 1 and 4)                                                          |                                                                                                                                                 |                            | 538,263,372 |             |             |   | 422,058,045 |            
|Allowance for loan losses (Notes 1, 4 and 5)                                   |                                                                                                                                                 |                            | (5,761,101  | )           |             |   | (4,269,071  | )          
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|                                                                               |                                                                                                                                                 | Net loans                  |             |             | 532,502,271 |   |             |             | 417,788,974 | 
|Premises and equipment, net (Notes 1 and 9)                                    |                                                                                                                                                 |                            | 9,690,515   |             |             |   | 10,545,321  |            
|Accrued interest receivable                                                    |                                                                                                                                                 |                            | 3,713,438   |             |             |   | 3,619,446   |            
|Mortgage servicing rights, net (Notes 1 and 7)                                 |                                                                                                                                                 |                            | 3,748,642   |             |             |   | 2,254,279   |            
|Foreclosed assets (Notes 1 and 6)                                              |                                                                                                                                                 |                            | 1,555,000   |             |             |   | 3,036,706   |            
|Other assets (Notes 4 and 13)                                                  |                                                                                                                                                 |                            | 3,294,560   |             |             |   | 3,970,024   |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|TOTAL                                                                          |                                                                                                                                                 | $                          | 891,232,917 |             |             | $ | 735,851,378 |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                           |                                                                                                                                                 |                            |             |             |             |   |             |            
|DEPOSITS (Note 10):                                                            |                                                                                                                                                 |                            |             |             |             |   |             |            
|                                                                               | Noninterest-bearing                                                                                                                             |                            | $           | 78,506,426  |             |   | $           | 52,852,177  |            
|                                                                               | Interest-bearing                                                                                                                                |                            |             | 679,865,311 |             |   |             | 564,398,898 |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|                                                                               |                                                                                                                                                 | Total deposits             |             |             | 758,371,737 |   |             |             | 617,251,075 | 
|Repurchase agreements (Note 1)                                                 |                                                                                                                                                 |                            | 200,000     |             |             |   | 3,200,000   |            
|Long-term debt and other borrowings (Note 11)                                  |                                                                                                                                                 |                            | 76,381,494  |             |             |   | 76,568,565  |            
|Accrued interest payable                                                       |                                                                                                                                                 |                            | 1,478,173   |             |             |   | 1,661,010   |            
|Other liabilities (Note 13)                                                    |                                                                                                                                                 |                            | 6,253,348   |             |             |   | 1,761,041   |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|                                                                               |                                                                                                                                                 | Total liabilities          |             |             | 842,684,752 |   |             |             | 700,441,691 | 
|COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)                                 |                                                                                                                                                 |                            |             |             |             |   |             |            
|STOCKHOLDERS EQUITY (Notes 1, 14 and 15):                                     |                                                                                                                                                 |                            |             |             |             |   |             |            
|                                                                               | Common stock, no par value  authorized, 500,000,000 shares; issued, 7,968,022 and
7,843,241 shares at December 31, 2002 and 2001, respectively |                            |             | 12,658,702  |             |   |             | 11,596,758  |            
|                                                                               | Retained earnings                                                                                                                               |                            |             | 33,229,064  |             |   |             | 23,907,374  |            
|                                                                               | Accumulated other comprehensive income (loss), net of tax                                                                                       |                            |             | 2,807,332   |             |   |             | (94,445     | )          
|                                                                               | Unearned compensation related to outstanding restricted stock awards                                                                            |                            |             | (146,933    | )           |   |             |            |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|                                                                               |                                                                                                                                                 | Total stockholders equity |             |             | 48,548,165  |   |             |             | 35,409,687  | 
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            
|TOTAL                                                                          |                                                                                                                                                 | $                          | 891,232,917 |             |             | $ | 735,851,378 |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |   |             |            

See notes to consolidated financial statements.

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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |            |            | 
|--------------------------------------------------- | ------------------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                    |                                                         |                        |            | 2002       |            | 2001 |            | 2000      
|                                                    |                                                         |                        |            |            |            |      |            |           
|INTEREST INCOME:                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Interest and fees on loans                              |                        | $          | 35,467,954 |            |      | $          | 34,067,746 |            |   | $          | 31,167,353 |           
|                                                    | Taxable securities                                      |                        |            | 14,006,665 |            |      |            | 15,078,451 |            |   |            | 10,768,075 |           
|                                                    | Tax-exempt securities                                   |                        |            | 1,004,354  |            |      |            | 712,890    |            |   |            | 1,042,534  |           
|                                                    | Federal funds sold                                      |                        |            | 143,930    |            |      |            | 285,592    |            |   |            | 246,448    |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total interest income  |            |            | 50,622,903 |      |            |            | 50,144,679 |   |            |            | 43,224,410 | 
|INTEREST EXPENSE:                                   |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Certificates of deposit over $100,000                   |                        |            | 5,546,807  |            |      |            | 10,294,209 |            |   |            | 8,654,439  |           
|                                                    | Other deposits                                          |                        |            | 7,944,632  |            |      |            | 11,689,496 |            |   |            | 13,753,905 |           
|                                                    | Federal Home Loan Bank advances                         |                        |            | 3,400,886  |            |      |            | 3,551,725  |            |   |            | 1,617,597  |           
|                                                    | Other borrowed funds                                    |                        |            | 1,127,389  |            |      |            | 1,570,862  |            |   |            | 1,900,800  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total interest expense |            |            | 18,019,714 |      |            |            | 27,106,292 |   |            |            | 25,926,741 | 
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INTEREST INCOME                                 |                                                         |                        | 32,603,189 |            |            |      | 23,038,387 |            |            |   | 17,297,669 |           
|PROVISION FOR LOAN LOSSES (Note 5)                  |                                                         |                        | 2,665,000  |            |            |      | 1,575,000  |            |            |   | 686,992    |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |                                                         |                        | 29,938,189 |            |            |      | 21,463,387 |            |            |   | 16,610,677 |           
|OTHER INCOME:                                       |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Service charges on deposit accounts                     |                        |            | 2,834,865  |            |      |            | 2,491,975  |            |   |            | 1,970,498  |           
|                                                    | Mortgage banking activities                             |                        |            | 4,546,507  |            |      |            | 3,482,375  |            |   |            | 1,506,685  |           
|                                                    | Gain on sale of investment securities                   |                        |            | 1,227,378  |            |      |            | 1,282,587  |            |   |            | 188,952    |           
|                                                    | Gain on sale of mortgage loans                          |                        |            | 876,313    |            |      |            |           |            |   |            |           |           
|                                                    | Other service charges, commissions and fees             |                        |            | 671,385    |            |      |            | 797,901    |            |   |            | 753,742    |           
|                                                    | Commissions on sale of annuities and brokerage activity |                        |            | 456,405    |            |      |            | 377,659    |            |   |            | 515,495    |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total other income     |            |            | 10,612,853 |      |            |            | 8,432,497  |   |            |            | 4,935,372  | 
|OTHER EXPENSES:                                     |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Salaries and employee benefits (Note 17)                |                        |            | 12,455,544 |            |      |            | 10,506,797 |            |   |            | 7,991,135  |           
|                                                    | Occupancy (Notes 9 and 12)                              |                        |            | 2,107,176  |            |      |            | 2,060,786  |            |   |            | 1,695,658  |           
|                                                    | Mortgage banking                                        |                        |            | 1,970,159  |            |      |            | 1,203,309  |            |   |            | 537,191    |           
|                                                    | Furniture and equipment                                 |                        |            | 1,334,415  |            |      |            | 1,427,952  |            |   |            | 1,144,885  |           
|                                                    | Foreclosed assets, net                                  |                        |            | 823,453    |            |      |            |           |            |   |            |           |           
|                                                    | Communications and supplies                             |                        |            | 604,856    |            |      |            | 631,668    |            |   |            | 527,890    |           
|                                                    | Advertising and marketing                               |                        |            | 419,071    |            |      |            | 444,047    |            |   |            | 382,349    |           
|                                                    | Merger expenses                                         |                        |            | 407,160    |            |      |            |           |            |   |            |           |           
|                                                    | FDIC and regulatory assessments                         |                        |            | 271,627    |            |      |            | 230,095    |            |   |            | 193,467    |           
|                                                    | Loss on sale of mortgage loans                          |                        |            |           |            |      |            | 252,722    |            |   |            | 163,842    |           
|                                                    | Other (Note 6)                                          |                        |            | 2,475,068  |            |      |            | 2,305,014  |            |   |            | 1,820,572  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total other expenses   |            |            | 22,868,529 |      |            |            | 19,062,390 |   |            |            | 14,456,989 | 
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|INCOME BEFORE INCOME TAXES                          |                                                         |                        | 17,682,513 |            |            |      | 10,833,494 |            |            |   | 7,089,060  |           
|PROVISION FOR INCOME TAXES (Note 13)                |                                                         |                        | 6,597,420  |            |            |      | 3,926,407  |            |            |   | 2,350,426  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INCOME                                          |                                                         | $                      | 11,085,093 |            |            | $    | 6,907,087  |            |            | $ | 4,738,634  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INCOME PER SHARE (Notes 1 and 16):              |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Basic                                                   |                        | $          | 1.40       |            |      | $          | 0.88       |            |   | $          | 0.61       |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Diluted                                                 |                        | $          | 1.27       |            |      | $          | 0.83       |            |   | $          | 0.57       |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|WEIGHTED AVERAGE SHARES OUTSTANDING (Note 16):      |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Basic                                                   |                        |            | 7,905,657  |            |      |            | 7,816,634  |            |   |            | 7,789,844  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Diluted                                                 |                        |            | 8,753,802  |            |      |            | 8,352,068  |            |   |            | 8,357,434  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           

See notes to consolidated financial statements.

47



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##### Table of Contents



FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  |  | 
|------------------------------------------------------ | --------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | - | ------------ | - | ------------- |  | ------------- | - | ------------------- | ---------- | ------------- | --------- | ------------ | ---------- | ---------------- | - | ---------- | - |  | - | -------- | - |  | - | ---------- | ---------- |  |  | 
|                                                       |                                         |                                                                                             |                                                                                           |   | Common Stock |   |               |  |               |   |                     |            |               |           | Accumulated  |            | Unamortized Cost |   |            |   | 
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   | Comprehensive |  | Retained      |   | Other Comprehensive |            | Of Restricted |           |              |            |                 
|                                                       |                                         |                                                                                             |                                                                                           |   | Shares       |   | Amount        |  | Income (Loss) |   | Earnings            |            | Income (Loss) |           | Stock Awards |            | Total           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                 
|BALANCE, JANUARY 1, 2000                               |                                         |                                                                                             | 31,052,683                                                                                |   |              | $ | 11,344,844    |  |               |   |                     |            |               | $         | 15,502,311   |            |                  | $ | (3,987,797 | ) |  |   |          |   |  | $ | 22,859,358 |           
|Comprehensive income:                                  |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|                                                       | Net income                              |                                                                                             |                                                                                           |   |              |   |               |  |               |   | $                   | 4,738,634  |               |           |              | 4,738,634  |                  |   |            |   |  |   |          |   |  |   |            | 4,738,634  | 
|                                                       | Other comprehensive income, net of tax: |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |            | 
|                                                       |                                         | Unrealized holding gains on securities arising during the year
(net of tax of $3,122,495)   |                                                                                           |   |              |   |               |  |               |   |                     |            | 4,693,279     |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  | 
|                                                       |                                         | Less: Reclassification adjustment for gains included in net income
(net of tax of $71,802)  |                                                                                           |   |              |   |               |  |               |   |                     |            | (117,150      | )         |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  | 
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Other comprehensive income                             |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   | 4,576,129           |            |               |           |              |            |                  |   | 4,576,129  |   |  |   |          |   |  |   | 4,576,129  |           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Comprehensive income                                   |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               | $ | 9,314,763           |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|One-for-four reverse stock split                       |                                         |                                                                                             | (23,289,613                                                                               | ) |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Exercise of stock options and issuance of common stock |                                         |                                                                                             | 36,861                                                                                    |   |              |   | 110,706       |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   | 110,706    |           
|Tax benefit of stock options exercised                 |                                         |                                                                                             |                                                                                           |   |              |   | 23,167        |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   | 23,167     |           
|Cash dividend declared; $0.15 per share                |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           | (1,168,121   | )          |                  |   |            |   |  |   |          |   |  |   | (1,168,121 | )         
|Cash dividend declared; $0.0525 per share              |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           | (409,697     | )          |                  |   |            |   |  |   |          |   |  |   | (409,697   | )         
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|BALANCE, DECEMBER 31, 2000                             |                                         |                                                                                             | 7,799,931                                                                                 |   |              |   | 11,478,717    |  |               |   |                     |            |               |           | 18,663,127   |            |                  |   | 588,332    |   |  |   |          |   |  |   | 30,730,176 |           
|Comprehensive income:                                  |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|                                                       | Net income                              |                                                                                             |                                                                                           |   |              |   |               |  |               |   | $                   | 6,907,087  |               |           |              | 6,907,087  |                  |   |            |   |  |   |          |   |  |   |            | 6,907,087  | 
|                                                       | Other comprehensive income, net of tax: |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |            | 
|                                                       |                                         |                                                                                             | Unrealized holding gains on securities arising during the year
(net of tax of $74,951)    |   |              |   |               |  |               |   |                     |            |               | 112,427   |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  |  | 
|                                                       |                                         | Less: Reclassification adjustment for gains included in net income
(net of tax of $487,383) |                                                                                           |   |              |   |               |  |               |   |                     |            | (795,204      | )         |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  | 
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Other comprehensive income                             |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   | (682,777            | )          |               |           |              |            |                  |   | (682,777   | ) |  |   |          |   |  |   | (682,777   | )         
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Comprehensive income                                   |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               | $ | 6,224,310           |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Exercise of stock options and issuance of common stock |                                         |                                                                                             | 43,310                                                                                    |   |              |   | 108,605       |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   | 108,605    |           
|Tax benefit of stock options exercised                 |                                         |                                                                                             |                                                                                           |   |              |   | 9,436         |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   | 9,436      |           
|Cash dividend declared; $0.1575 per share              |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           | (1,231,513   | )          |                  |   |            |   |  |   |          |   |  |   | (1,231,513 | )         
|Cash dividend declared; $0.055 per share               |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           | (431,327     | )          |                  |   |            |   |  |   |          |   |  |   | (431,327   | )         
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|BALANCE, DECEMBER 31, 2001                             |                                         |                                                                                             | 7,843,241                                                                                 |   |              |   | 11,596,758    |  |               |   |                     |            |               |           | 23,907,374   |            |                  |   | (94,445    | ) |  |   |          |   |  |   | 35,409,687 |           
|Comprehensive income:                                  |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|                                                       | Net income                              |                                                                                             |                                                                                           |   |              |   |               |  |               |   | $                   | 11,085,093 |               |           |              | 11,085,093 |                  |   |            |   |  |   |          |   |  |   |            | 11,085,093 | 
|                                                       | Other comprehensive income, net of tax: |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |            | 
|                                                       |                                         |                                                                                             | Unrealized holding gains on securities arising during the year
(net of tax of $1,312,105) |   |              |   |               |  |               |   |                     |            |               | 2,140,803 |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  |  | 
|                                                       |                                         | Less: Reclassification adjustment for gains included in net income
(net of tax of $466,404) |                                                                                           |   |              |   |               |  |               |   |                     |            | 760,974       |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |            |  | 
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Other comprehensive income                             |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   | 2,901,777           |            |               |           |              |            |                  |   | 2,901,777  |   |  |   |          |   |  |   | 2,901,777  |           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Comprehensive income                                   |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               | $ | 13,986,870          |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|Exercise of stock options and issuance of common stock |                                         |                                                                                             | 113,586                                                                                   |   |              |   | 483,943       |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   | 483,943    |           
|Tax benefit of stock options exercised                 |                                         |                                                                                             |                                                                                           |   |              |   | 382,091       |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   | 382,091    |           
|Issue of restricted stock                              |                                         |                                                                                             | 11,195                                                                                    |   |              |   | 195,910       |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  | $ | (195,910 | ) |  |   |            |           
|Amortization of restricted stock                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   | 48,977   |   |  |   | 48,977     |           
|Cash dividend declared; $0.228 per share               |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           | (1,763,403   | )          |                  |   |            |   |  |   |          |   |  |   | (1,763,403 | )         
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           
|BALANCE, DECEMBER 31, 2002                             |                                         |                                                                                             | 7,968,022                                                                                 |   |              | $ | 12,658,702    |  |               |   |                     |            |               | $         | 33,229,064   |            |                  | $ | 2,807,332  |   |  | $ | (146,933 | ) |  | $ | 48,548,165 |           
|                                                       |                                         |                                                                                             |                                                                                           |   |              |   |               |  |               |   |                     |            |               |           |              |            |                  |   |            |   |  |   |          |   |  |   |            |           

See notes to consolidated financial statements.

48



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##### Table of Contents



FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |              |             |              |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | ------------ | ------------ | ------------ | ---------- | ------------ | ------------ | ------------ | ---------- | ------------ | ----------- | ------------ | -
|                                                   |                                                                                             |                                                    |                                                     |              | 2002         |              | 2001       |              | 2000        
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |             
|CASH FLOWS FROM OPERATING ACTIVITIES:              |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   | Net income                                                                                  |                                                    | $                                                   | 11,085,093   |              |              | $          | 6,907,088    |              |              | $          | 4,738,634    |            
|                                                   | Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |                                                    |                                                     |              |              |              |            |              |              |              |            |              |            
|                                                   |                                                                                             | Depreciation, amortization and accretion           |                                                     |              | 522,346      |              |            |              | 331,198      |              |            |              | (162,247    | )           
|                                                   |                                                                                             | Provision for loan losses                          |                                                     |              | 2,665,000    |              |            |              | 1,575,000    |              |            |              | 686,992     |             
|                                                   |                                                                                             | Decrease (increase) in deferred income taxes       |                                                     |              | 94,485       |              |            |              | (175,053     | )            |            |              | (416,352    | )           
|                                                   |                                                                                             | Loans originated for sale                          |                                                     |              | (206,165,613 | )            |            |              | (146,482,562 | )            |            |              | (44,769,799 | )           
|                                                   |                                                                                             | Proceeds from sale of loans                        |                                                     |              | 210,652,839  |              |            |              | 135,552,372  |              |            |              | 47,063,217  |             
|                                                   |                                                                                             | Gain on sale of investment securities              |                                                     |              | (1,227,378   | )            |            |              | (1,282,587   | )            |            |              | (188,952    | )           
|                                                   |                                                                                             | (Gain) loss on sale of loans                       |                                                     |              | (571,414     | )            |            |              | 182,447      |              |            |              | 154,730     |             
|                                                   |                                                                                             | Loss (gain) on sale of premises and equipment, net |                                                     |              | 100,546      |              |            |              | (8,088       | )            |            |              | (17,266     | )           
|                                                   |                                                                                             | Loss (gain) on sale of foreclosed assets           |                                                     |              | 823,453      |              |            |              | (3,084       | )            |            |              | (6,608      | )           
|                                                   |                                                                                             | (Increase) decrease in accrued interest receivable |                                                     |              | (93,992      | )            |            |              | 518,221      |              |            |              | (1,323,493  | )           
|                                                   |                                                                                             | (Decrease) increase in accrued interest payable    |                                                     |              | (182,837     | )            |            |              | (1,469,779   | )            |            |              | 1,808,960   |             
|                                                   |                                                                                             | Increase in other liabilities                      |                                                     |              | 2,684,659    |              |            |              | 690,770      |              |            |              | 255,076     |             
|                                                   |                                                                                             | Increase in other assets                           |                                                     |              | (5,994,752   | )            |            |              | (5,254,557   | )            |            |              | (1,214,342  | )           
|                                                   |                                                                                             | Tax benefit of stock options exercised             |                                                     |              | 382,091      |              |            |              | 9,436        |              |            |              | 23,167      |             
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   |                                                                                             |                                                    | Net cash provided by (used in) operating activities |              |              | 14,774,526   |            |              |              | (8,909,178   | )          |              |             | 6,631,717    |  
|CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   | (Increase) decrease in federal funds sold                                                   |                                                    |                                                     | (18,922,000  | )            |              |            | 10,438,000   |              |              |            | (10,438,000  | )          
|                                                   | Proceeds from sales of securities available-for-sale                                        |                                                    |                                                     | 82,350,507   |              |              |            | 170,154,035  |              |              |            | 99,974,164   |            
|                                                   | Proceeds from maturities of securities available-for-sale                                   |                                                    |                                                     | 90,655,059   |              |              |            | 64,621,336   |              |              |            | 18,547,821   |            
|                                                   | Proceeds from maturities of securities held-to-maturity                                     |                                                    |                                                     | 6,679,095    |              |              |            | 70,352       |              |              |            | 135,191      |            
|                                                   | Purchases of securities available-for-sale                                                  |                                                    |                                                     | (187,742,612 | )            |              |            | (248,525,309 | )            |              |            | (202,823,583 | )          
|                                                   | Purchases of securities held-to-maturity                                                    |                                                    |                                                     | (4,113,220   | )            |              |            | (7,133,260   | )            |              |            |             |            
|                                                   | Purchases of Federal Home Loan and Federal Reserve Bank stock                               |                                                    |                                                     | (162,400     | )            |              |            | (223,300     | )            |              |            | (2,119,500   | )          
|                                                   | Net increase in loans                                                                       |                                                    |                                                     | (120,195,440 | )            |              |            | (100,443,064 | )            |              |            | (63,407,708  | )          
|                                                   | Proceeds from sale of foreclosed assets                                                     |                                                    |                                                     | 4,818,479    |              |              |            | 48,084       |              |              |            | 582,484      |            
|                                                   | Purchases of premises and equipment, net                                                    |                                                    |                                                     | (477,337     | )            |              |            | (1,076,665   | )            |              |            | (3,036,476   | )          
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   |                                                                                             |                                                    | Net cash used in investing activities               |              |              | (147,109,869 | )          |              |              | (112,069,791 | )          |              |             | (162,585,607 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   | Increase in deposits                                                                        |                                                    |                                                     | 141,120,662  |              |              |            | 125,271,292  |              |              |            | 108,122,744  |            
|                                                   | (Decrease) increase in repurchase agreements                                                |                                                    |                                                     | (3,000,000   | )            |              |            | 1,679,064    |              |              |            | (900,000     | )          
|                                                   | (Decrease) increase in other borrowings                                                     |                                                    |                                                     | (187,071     | )            |              |            | 250,283      |              |              |            | 57,266,669   |            
|                                                   | Dividends paid                                                                              |                                                    |                                                     | (1,734,577   | )            |              |            | (1,641,212   | )            |              |            | (1,556,410   | )          
|                                                   | Net proceeds from issuance of common stock                                                  |                                                    |                                                     | 532,920      |              |              |            | 108,605      |              |              |            | 110,706      |            
|                                                   | Debt issue costs                                                                            |                                                    |                                                     |             |              |              |            |             |              |              |            | (814,733     | )          
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   |                                                                                             |                                                    | Net cash provided by financing activities           |              |              | 136,731,934  |            |              |              | 125,668,032  |            |              |             | 162,228,976  |  
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|NET INCREASE IN CASH AND CASH EQUIVALENTS          |                                                                                             |                                                    | 4,396,591                                           |              |              |              | 4,689,063  |              |              |              | 6,275,086  |             
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR       |                                                                                             |                                                    | 23,664,888                                          |              |              |              | 18,975,825 |              |              |              | 12,700,739 |             
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|CASH AND CASH EQUIVALENTS, END OF YEAR             |                                                                                             | $                                                  | 28,061,479                                          |              |              | $            | 23,664,888 |              |              | $            | 18,975,825 |             
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   | Cash paid during the year for income taxes                                                  |                                                    | $                                                   | 6,517,833    |              |              | $          | 4,248,627    |              |              | $          | 2,935,500    |            
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             
|                                                   | Cash paid during the year for interest                                                      |                                                    | $                                                   | 18,202,642   |              |              | $          | 28,576,071   |              |              | $          | 24,117,781   |            
|                                                   |                                                                                             |                                                    |                                                     |              |              |              |            |              |              |              |            |             

See notes to consolidated financial statements.

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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accounting policies of Franklin Financial Corporation and Subsidiaries
(the Company) conform to accounting principles generally accepted in the
United States of America and to general practices within the banking
industry. The Company was incorporated on December 27, 1988 for the purpose
of becoming a bank holding company. On December 20, 2001, the Company
became a registered financial holding company under the Gramm-Leach-Bliley
Financial Services Modernization Act. The Companys subsidiary bank opened
for business on December 1, 1989.                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Consolidated Subsidiaries- The consolidated financial statements include
the accounts of the Companys wholly owned subsidiaries, Franklin National
Bank (the Bank), Franklin Financial Insurance and Franklin Capital Trust
I. The Bank has three subsidiaries, Hometown Loan Company (inactive),
Franklin Financial Mortgage and Franklin Financial Securities. Significant
intercompany transactions and balances have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Operating Segments The Company manages its business in two primary
reporting segments, the Bank and Franklin Financial Mortgage (FFM) (see
Note 20).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Use of Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used when
accounting for available-for-sale investment securities, the allowance for
loan losses, loans held for sale, mortgage servicing rights, mortgage rate
lock commitments, depreciation of premises and equipment, foreclosed assets,
provision for income taxes and deferred tax valuation allowances.                                                                                              
|  
|   |  | Cash and Cash Equivalents- include cash on hand and amounts due from banks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Investment and Mortgage-Backed Securities- Securities are classified into
three categories: held-to-maturity, available-for-sale and trading.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Securities classified as held-to-maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Company has the
positive intent and ability to hold these securities to maturity.
Securities classified as available-for-sale may be sold in response to
changes in interest rates, liquidity needs and for other purposes.
Available-for-sale securities are carried at fair value and include all debt
and equity securities not classified as held-to-maturity or trading. The
fair value of available-for-sale securities is based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable securities. Trading
securities are those held principally for the purpose of selling in the near
future and are carried at fair value. The Company does not currently
maintain a trading portfolio.
|  
|   |  | Unrealized holding gains and losses from available-for-sale securities are
excluded from earnings and reported, net of any income tax effect, in
accumulated other comprehensive income (loss). Realized                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |  | gains and losses for securities classified as either available-for-sale or
held-to-maturity are reported in earnings based on the adjusted cost of the
specific security sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Loans- Loans are stated at the principal amount outstanding. Deferred loan
fees and the allowance for loan losses are recorded as reductions of loans.
Loan origination and commitment fees in excess of certain related costs are
deferred and amortized as an adjustment of the related loans yield over the
contractual life of the loan. Interest income on loans is computed based on
the outstanding loan balance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Loans are generally placed on nonaccrual status when payment of principal or
interest is delinquent for 90 days or more. Loan delinquencies are
determined based upon their contractual terms. When interest accruals are
discontinued, interest accrued and not collected in the current year is
reversed and interest accrued and not collected from prior years is charged
to the allowance for loan losses. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further loss
is remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on nonaccrual
loans is recognized only to the extent of interest payments received. Loans
are returned to accrual status when all delinquent principal and interest
payments have been made.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | 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, application of loss factors based on risk ratings by type of
loan, 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 specific allowance may be assigned
to impaired loans if the difference between the collateral values or the
present value of estimated cash flows and the contractual amount due exceeds
the amount included in the allowance for loan losses resulting from the
application of the applicable loss factor based on the impaired loans risk
rating. 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.
|
| |  | Capitalization of the allocated cost of commercial servicing rights is based
on their relative fair value and occurs when the underlying loans are sold.
The Companys commercial servicing rights are related to certain commercial
loans originated and sold with servicing retained and are reflected in other
assets in the accompanying consolidated balance sheets. For purposes of
measuring impairment, the servicing rights are stratified based on the
predominant risk characteristics of loan type and loan term. The amount of
impairment recognized, if any, is the amount by which the capitalized
mortgage servicing rights for a stratum exceed their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Loans Held for Sale- Loans held for sale are carried at the lower of
aggregate cost or market value. Adjustments to reflect market value and
realized gains and losses upon ultimate sale of the loans are classified in
gain (loss) on sale of mortgage loans in the accompanying consolidated
statements of income. Market value is determined based upon quoted market
prices in the secondary market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |  | Derivative Financial Instruments- All derivative financial instruments held
or issued by the Company are for purposes other than trading. Covered call
options are recorded at fair value while the contracts are open with fees
received recognized into income in the period the option expires. Such
instruments are entered into by the Company as hedges against exposure to
interest rate risk. The maximum term of such covered call options used by
the Company is 30 days. The Company had no such covered call options or
other derivative financial instruments outstanding on December 31, 2002 or
2001. Rate lock commitments on mortgage loans intended to be sold are
considered to be derivatives and are recorded at fair value in other assets
in the accompanying consolidated balance sheets. The changes in fair value
of these rate lock commitments are recorded in gain on sale of mortgage
loans in the accompanying consolidated statements of income. Rate lock
commitments expose the Company to interest rate risk, which the Company
manages by entering into forward sales contracts which are also recorded at
fair value with changes in fair value recorded in gain on sale of mortgage
loans.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Mortgage Banking Activities- The Company originates, purchases and sells
residential mortgage loans. Generally, such loans are sold at origination.
Any loans held for sale are carried at the lower of cost or market value in
the aggregate with respect to the entire portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Capitalization of the allocated cost of mortgage servicing rights is based
on their relative fair value and occurs when the underlying loans are sold.
The Companys mortgage servicing rights are related to in-house originations
serviced for others.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | 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. For
purposes of measuring impairment, the servicing rights are stratified based
on the predominant risk characteristics of loan type and loan term. The
amount of impairment recognized, if any, is the amount by which the
capitalized mortgage servicing rights for a stratum exceed their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Premises and Equipment, Net- Premises and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method, based on the estimated useful lives of the
respective assets. Estimated useful lives are 30 to 40 years for buildings
and 3 to 7 years for furniture and equipment. Leasehold improvements are
amortized over the shorter of their estimated useful life or the lease term
on a straight-line basis. Accelerated depreciation methods are used for tax
purposes. Net gains or losses from the sale of premises and equipment are
included in other income or other expenses, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Foreclosed Assets- Assets acquired through, or in lieu of, loan foreclosure
are held for sale and are 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
foreclosed assets are included in other income, and expenses to maintain
such assets and changes in the valuation allowance, if any, are included in
other expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Income Taxes- The Company files a consolidated tax return. Income taxes
are allocated to members of the consolidated group on a separate return
basis. Provisions for income taxes are based on amounts reported in the
consolidated statements of income (after exclusion of non-taxable income
such as interest on state and municipal securities) and include changes in
deferred income taxes. Deferred taxes are computed using the asset and
liability approach. The tax effects of differences between the tax and
financial accounting basis of assets and liabilities are reflected in the
consolidated balance sheets at the tax rates expected to be in effect when
the differences reverse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |  | Securities Sold Under Agreements to Repurchase- Securities sold under
agreements to repurchase are treated as collateralized financing
transactions and are recorded at the amounts at which the securities will
subsequently be repurchased. It is the Companys policy to maintain
collateral with a market value equal to or in excess of the principal amount
borrowed under repurchase agreements. The Company monitors the market value
of the underlying securities which collateralize the related liability on
repurchase agreements, including accrued interest, and provides additional
collateral when considered appropriate.                                                                                                                                                                                                                                                                                                                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Earnings Per Share- Basic earnings per share is computed by dividing net
income by the weighted-average number of shares outstanding during the year.
Diluted earnings per share is computed by dividing net income by the
weighted-average number of shares outstanding during the year plus
additional potentially dilutive shares calculated for stock options and
warrants using the treasury stock method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Stock-Based Compensation At December 31, 2002, the Company has three
stock-based employee compensation plans, which are described more fully in
Note 14. 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 Employeeand related interpretations.
The Company calculates compensation expense on the restricted stock plan as
the difference between the market price of the underlying stock on the date
of the grant and the purchase price, if any, and recognizes such amount on a
straight-line basis over the restriction period in which the restricted
stock is earned by the recipient. No stock-based employee compensation cost
is reflected in net income for the Companys two stock option plans, as all
options granted under those plans had an exercise price equal to the 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 No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                        |                                                                                                                                             |             |           |            |      |      |           |            |      |   |           |           |      | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ---------- | ---- | ---- | --------- | ---------- | ---- | - | --------- | --------- | ---- | 
|                                        |                                                                                                                                             |             |           | 2002       |      | 2001 |           | 2000      
|                                        |                                                                                                                                             |             |           |            |      |      |           |           
|Net earnings available to stockholders: |                                                                                                                                             |             |           |            |      |      |           |            |      |   |           |          
|                                        | As reported                                                                                                                                 |             | $         | 11,085,093 |      |      | $         | 6,907,087  |      |   |           | 4,738,634 |     
|                                        | Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects |             |           | (1,865,700 | )    |      |           | (1,038,666 | )    |   |           | (444,578  | )   
|                                        |                                                                                                                                             |             |           |            |      |      |           |            |      |   |           |          
|Pro forma                               |                                                                                                                                             | $           | 9,219,393 |            |      | $    | 5,868,421 |            |      | $ | 4,294,056 |          
|                                        |                                                                                                                                             |             |           |            |      |      |           |            |      |   |           |          
|Basic earnings per share                |                                                                                                                                             |             |           |            |      |      |           |            |      |   |           |          
|                                        |                                                                                                                                             | As reported |           | $          | 1.40 |      |           | $          | 0.88 |   |           | $         | 0.61 | 
|                                        |                                                                                                                                             | Pro forma   |           |            | 1.17 |      |           |            | 0.75 |   |           |           | 0.55 | 
|Diluted earnings per share available to |                                                                                                                                             |             |           |            |      |      |           |            |      |   |           |          
|                                        | stockholders:                                                                                                                               |             |           |            |      |      |           |            |      |   |           |           |     
|                                        |                                                                                                                                             | As reported |           | $          | 1.27 |      |           | $          | 0.83 |   |           | $         | 0.57 | 
|                                        |                                                                                                                                             | Pro forma   |           |            | 1.05 |      |           |            | 0.70 |   |           |           | 0.51 | 

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| |  | 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:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              |  |             |  |             |  |            
|----------------------------- |  | ----------- |  | ----------- |  | -----------
|                              |  | 2002        |  | 2001        |  | 2000       
|                              |  |             |  |             |  |            
|Dividend yield                |  | 1.8%        |  | 1.7%        |  | 1.5%       
|Expected volatility           |  | 42%         |  | 33%         |  | 52%        
|Risk-free interest rate range |  | 3.5 to 3.9% |  | 4.8 to 5.1% |  | 5.1 to 5.2%
|Expected life                 |  | 7-10 years  |  | 7-10 years  |  | 7-10 years 



| |  | The weighted-average fair value of options, calculated using the
Black-Scholes option pricing model, granted during 2002, 2001 and 2000 is
$6.61, $4.11 and $7.61 per share, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Comprehensive Income- Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial
information that is not recognized in the calculation of net income, such as
unrealized gains and losses on available-for-sale securities. It includes
all changes in equity during a period except those resulting from
investments by owners and distributions to owners.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Recent Accounting Pronouncements- In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method
of accounting. It also specifies the types of acquired intangible assets
that are required to be recognized and reported separately from goodwill.
SFAS No. 142 requires that goodwill and certain other intangibles no longer
be amortized, but instead be tested for impairment at least annually. SFAS
No. 142 is required to be applied starting with fiscal years beginning after
December 15, 2001, with early application permitted in certain
circumstances. The adoption of SFAS Nos. 141 and 142 did not have a
material impact on the Companys consolidated financial position or results
of operations.                                                                                   
|
| |  | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and requires that the amount recorded as a liability be capitalized
by increasing the carrying amount of the related long-lived asset.
Subsequent to initial measurement, the liability is accreted to the ultimate
amount anticipated to be paid, and is also adjusted for revisions to the
timing or amount of estimated cash flows. The capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss. SFAS No. 143 is required to be adopted for
fiscal years beginning after June 15, 2002, with earlier application
encouraged. The Company has not yet determined the impact, if any, the
adoption of SFAS No. 143 will have on its consolidated financial position or
results of operations.
|
| |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 for (i) recognition and measurement of the impairment of long-lived
assets to be held and used; and (ii) measurement of the impairment of
long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The adoption of SFAS No.
144 did not have a material impact on the Companys consolidated financial
position or results of operations.                                                                                                                                                                                                                                                                                                                                                    

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| |  | In December 2001, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 01-6, Accounting by Certain
Entities (Including Entities With Trade Receivables) That Lend to or Finance
the Activities of Others.SOP 01-6 clarifies accounting and financial
reporting practices for lending and finance activities, eliminates
distinctions between what constitutes a finance company and financing
activities and conforms differences among the accounting and financial
reporting guidance provided in various AICPA Audit and Accounting Guides.
The objective of SOP 01-6 is to improve the consistency in accounting and
reporting by banks, savings institutions, credit unions, finance companies,
mortgage companies and certain activities of insurance companies. SOP 01-6
is effective for annual and interim financial statements issued for fiscal
years beginning after December 15, 2001. The Company adopted SOP 01-6 on
January 1, 2002. The adoption of SOP 01-6 did not have an impact on the
Companys accounting policies; however, certain additional disclosures were
required to be included in the consolidated financial statements. These
additional disclosures have been included in the notes to the consolidated
financial statements at December 31, 2002 and 2001.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In April 2002, the FASB issued implementation guidance related to
Derivatives Implementation Group (DIG) Issue No. C13, When a Loan
Commitment Is Included in the Scope of Statement 133. DIG Issue No. C13
requires rate lock commitments on mortgage loans that are intended to be
sold be accounted for as derivative financial instruments in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended. The adoption of DIG Issue No. C13 on July 1, 2002 did not have
a material impact to the Companys consolidated financial position or
results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 amended SFAS No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of SFAS
No. 145 in 2002 did not have a material effect on the Companys consolidated
financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002 and is not anticipated to have
a material impact on the Companys consolidated financial position or
results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions. SFAS No. 147 addresses the financial accounting and
reporting for the acquisition of all or part of a financial institution and
the accounting for the impairment or disposal of acquired long-term customer
relationship intangible assets. SFAS No. 147 is effective for acquisitions
for which the date of acquisition is on or after October 1, 2002. The
adoption of SFAS No. 147 did not have an impact on the Companys
consolidated financial position or results of operations as the Company did
not acquire any financial institutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

55



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|   |  | Interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB
Interpretation No. 34. This interpretation requires that upon issuance of a
guarantee, the entity must recognize a liability for the fair value of the
obligation it assumes under that obligation. This interpretation is
intended to improve the comparability of financial reporting by requiring
identical accounting for guarantees issued with separately identified
consideration and guarantees issued without separately identified
consideration. The initial recognition and measurement provision of FIN No.
45 are to be applied prospectively to guarantees issued or modified after
December 31, 2002. The interpretations disclosure requirements are
effective for the Company as of December 31, 2002. Significant guarantees
that have been entered into by the Company are disclosed in Note 8 to the
consolidated financial statements.                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement
No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for annual and interim periods beginning after December
15, 2002. As the Company has elected not to change to the fair value based
method of accounting for stock-based employee compensation, the adoption of
SFAS No. 148 will not have an impact on the Companys consolidated financial
position or results of operations. The Company has included the disclosures
in accordance with SFAS No. 148 above under Stock-Based Compensation.
|  
|   |  | In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities.FIN No. 46 addresses consolidation by business
enterprises of variable interest entities that have certain characteristics.
This Interpretation applies immediately to variable interest entities
created in January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first
fiscal year beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company has not yet determined the impact, if any,
the adoption of FIN No. 46 will have on its consolidated financial position
and results of operations.                                                                                                                                                                                                                                                                                                                                                                                     
|  
|2. |  | RESTRICTED CASH BALANCES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Bank is required to maintain reserves, in the form of cash and deposits,
with the Federal Reserve Bank against its deposit liabilities. Aggregate
reserves of approximately $5,474,000 and $3,390,000 were maintained to
satisfy federal regulatory requirements at December 31, 2002 and 2001,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|3. |  | INVESTMENT AND MORTGAGE-BACKED SECURITIES                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The following tables reflect the amortized cost and estimated fair values of
debt, equity and mortgage-backed securities held at December 31, 2002 and
2001.

|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 
|----------------------------------------------- |  | --------- | ----------- | ---------- |  | ---------- | --------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                                                |  | 2002     
|                                                |  |          
|                                                |  |           |             |            |  | Gross      |           | Gross |  |   |            |  
|                                                |  | Amortized |             | Unrealized |  | Unrealized |           | Fair 
|Available-for-Sale                              |  | Cost      |             | Gains      |  | Losses     |           | Value
|                                                |  |           |             |            |  |            |           |      
|U.S. Treasury obligations                       |  | $         | 1,071,298   |            |  | $          | 63,392    |       |  | $ |           |   |  | $ | 1,134,690   | 
|Obligations of U.S
government agencies          |  |           | 31,782,407  |            |  |            | 109,391   |       |  |   | (2,438     | ) |  |   | 31,889,360  | 
|Obligations of state and
political subdivisions |  |           | 22,343,596  |            |  |            | 650,971   |       |  |   | (54,699    | ) |  |   | 22,939,868  | 
|Corporate bonds                                 |  |           | 12,614,397  |            |  |            | 681,366   |       |  |   | (934,980   | ) |  |   | 12,360,783  | 
|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 
|Investment securities                           |  |           | 67,811,698  |            |  |            | 1,505,120 |       |  |   | (992,117   | ) |  |   | 68,324,701  | 
|Mortgage-backed securities                      |  |           | 185,610,492 |            |  |            | 4,091,401 |       |  |   | (55,174    | ) |  |   | 189,646,719 | 
|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 
|Total available-for-sale                        |  | $         | 253,422,190 |            |  | $          | 5,596,521 |       |  | $ | (1,047,291 | ) |  | $ | 257,971,420 | 
|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 

|                                                |  |           |           |            |  |            |         |       |  |   |         |   |  |   |           | 
|----------------------------------------------- |  | --------- | --------- | ---------- |  | ---------- | ------- | ----- |  | - | ------- | - |  | - | --------- | 
|                                                |  | 2002     
|                                                |  |          
|                                                |  |           |           |            |  | Gross      |         | Gross |  |   |         |  
|                                                |  | Amortized |           | Unrealized |  | Unrealized |         | Fair 
|Held-to-Maturity                                |  | Cost      |           | Gains      |  | Losses     |         | Value
|                                                |  |           |           |            |  |            |         |      
|Obligations of U.S
government agencies          |  | $         | 4,111,185 |            |  | $          | 20,434  |       |  | $ | (7,760  | ) |  | $ | 4,123,859 | 
|Obligations of state and
political subdivisions |  |           | 3,931,910 |            |  |            | 108,385 |       |  |   | (26,969 | ) |  |   | 4,013,326 | 
|                                                |  |           |           |            |  |            |         |       |  |   |         |   |  |   |           | 
|Investment securities                           |  |           | 8,043,095 |            |  |            | 128,819 |       |  |   | (34,729 | ) |  |   | 8,137,185 | 
|Mortgage-backed securities                      |  |           | 185,468   |            |  |            | 12,784  |       |  |   |        |   |  |   | 198,252   | 
|                                                |  |           |           |            |  |            |         |       |  |   |         |   |  |   |           | 
|Total held-to-maturity                          |  | $         | 8,228,563 |            |  | $          | 141,603 |       |  | $ | (34,729 | ) |  | $ | 8,335,437 | 
|                                                |  |           |           |            |  |            |         |       |  |   |         |   |  |   |           | 

57



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|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 
|----------------------------------------------- |  | --------- | ----------- | ---------- |  | ---------- | --------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                                                |  | 2001     
|                                                |  |          
|                                                |  |           |             |            |  | Gross      |           | Gross |  |   |            |  
|                                                |  | Amortized |             | Unrealized |  | Unrealized |           | Fair 
|Available-for-Sale                              |  | Cost      |             | Gains      |  | Losses     |           | Value
|                                                |  |           |             |            |  |            |           |      
|U.S. Treasury obligations                       |  | $         | 4,365,125   |            |  | $          | 4,767     |       |  | $ | (125,128   | ) |  | $ | 4,244,764   | 
|Obligations of U.S
government agencies          |  |           | 26,464,914  |            |  |            | 262,054   |       |  |   | (275,633   | ) |  |   | 26,451,335  | 
|Obligations of state and
political subdivisions |  |           | 17,144,619  |            |  |            | 75,689    |       |  |   | (643,691   | ) |  |   | 16,576,617  | 
|Corporate bonds                                 |  |           | 12,979,861  |            |  |            | 153,432   |       |  |   | (441,928   | ) |  |   | 12,691,365  | 
|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 
|Investment securities                           |  |           | 60,954,519  |            |  |            | 495,942   |       |  |   | (1,486,380 | ) |  |   | 59,964,081  | 
|Mortgage-backed securities                      |  |           | 175,507,088 |            |  |            | 1,856,685 |       |  |   | (1,023,660 | ) |  |   | 176,340,113 | 
|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 
|Total available-for-sale                        |  | $         | 236,461,607 |            |  | $          | 2,352,627 |       |  | $ | (2,510,040 | ) |  | $ | 236,304,194 | 
|                                                |  |           |             |            |  |            |           |       |  |   |            |   |  |   |             | 

|                                                |  |           |            |            |  |            |        |       |  |   |         |   |  |   |            | 
|----------------------------------------------- |  | --------- | ---------- | ---------- |  | ---------- | ------ | ----- |  | - | ------- | - |  | - | ---------- | 
|                                                |  | 2001     
|                                                |  |          
|                                                |  |           |            |            |  | Gross      |        | Gross |  |   |         |  
|                                                |  | Amortized |            | Unrealized |  | Unrealized |        | Fair 
|Held-to-Maturity                                |  | Cost      |            | Gains      |  | Losses     |        | Value
|                                                |  |           |            |            |  |            |        |      
|Obligations of U.S
government agencies          |  | $         | 7,189,925  |            |  | $          | 127    |       |  | $ | (95,406 | ) |  | $ | 7,094,646  | 
|Obligations of state and
political subdivisions |  |           | 2,726,412  |            |  |            | 73,228 |       |  |   |        |   |  |   | 2,799,640  | 
|                                                |  |           |            |            |  |            |        |       |  |   |         |   |  |   |            | 
|Investment securities                           |  |           | 9,916,337  |            |  |            | 73,355 |       |  |   | (95,406 | ) |  |   | 9,894,286  | 
|Mortgage-backed securities                      |  |           | 269,911    |            |  |            | 11,868 |       |  |   | (38     | ) |  |   | 281,741    | 
|                                                |  |           |            |            |  |            |        |       |  |   |         |   |  |   |            | 
|Total held-to-maturity                          |  | $         | 10,186,248 |            |  | $          | 85,223 |       |  | $ | (95,444 | ) |  | $ | 10,176,027 | 
|                                                |  |           |            |            |  |            |        |       |  |   |         |   |  |   |            | 



| |  | Gross gains of $1,276,425, $1,433,560 and $250,263 and gross losses of
$49,047, $150,973, and $61,311 were realized on sales of securities
available for sale in 2002, 2001 and 2000, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | The amortized cost and fair value of debt and equity securities at December
31, 2002, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 
|-------------------------- |  | ------------------ | ----------- | ---------------- |  | ---- | ----------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                           |  | Available-for-Sale |             | Held-to-Maturity
|                           |  |                    |             |                 
|                           |  | Amortized          |             |                  |  |      |             | Amortized  |  |   |           | 
|                           |  | Cost               |             | Fair Value       |  | Cost |             | Fair Value
|Due in one year or less    |  | $                  | 25,993,893  |                  |  | $    | 26,025,330  |            |  | $ | 75,000    |  |  | $ | 75,008    | 
|Due one to five years      |  |                    | 1,093,040   |                  |  |      | 1,088,000   |            |  |   | 1,225,016 |  |  |   | 1,293,029 | 
|Due five to ten years      |  |                    | 5,587,846   |                  |  |      | 5,928,876   |            |  |   | 2,348,049 |  |  |   | 2,340,905 | 
|Due after ten years        |  |                    | 35,136,919  |                  |  |      | 35,282,495  |            |  |   | 4,395,030 |  |  |   | 4,428,243 | 
|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 
|                           |  |                    | 67,811,698  |                  |  |      | 68,324,701  |            |  |   | 8,043,095 |  |  |   | 8,137,185 | 
|Mortgage-backed securities |  |                    | 185,610,492 |                  |  |      | 189,646,719 |            |  |   | 185,468   |  |  |   | 198,252   | 
|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 
|                           |  | $                  | 253,422,190 |                  |  | $    | 257,971,420 |            |  | $ | 8,228,563 |  |  | $ | 8,335,437 | 
|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 



| |  | Fair value of securities is established based on current market prices of
similar securities as of the approximate dates indicated. Securities
carried at $190,046,454 and $184,359,905 at December 31, 2002 and 2001,
respectively, were pledged to secure deposits and for other purposes.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table reflects securities pledged at December 31, 2002 and
2001. Securities carried at $182,860,963 and $161,243,936 at December 31,
2002 and 2001, respectively, serve as collateral to secure public funds
deposits, respectively.                                          

|                                              |       |   |             |             |      |   |             |             | 
|--------------------------------------------- | ----- | - | ----------- | ----------- | ---- | - | ----------- | ----------- | 
|                                              |       |   | 2002        |             | 2001
|                                              |       |   |             |             |     
|Investment securities available-for-sale      |       | $ | 20,660,906  |             |      | $ | 32,330,044  |            
|Investment securities held-to-maturity        |       |   | 3,389,580   |             |      |   | 3,830,030   |            
|Mortgage-backed securities available-for-sale |       |   | 165,995,968 |             |      |   | 148,199,831 |            
|                                              |       |   |             |             |      |   |             |            
|                                              | Total |   | $           | 190,046,454 |      |   | $           | 184,359,905 | 
|                                              |       |   |             |             |      |   |             |            



|   |  | At December 31, 2002 and 2001, the Company did not hold investment
securities of any single issuer, other than obligations of the U.S. Treasury
and other U.S. government agencies, whose aggregate book value exceeded ten
percent of stockholders equity.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | LOANS                                                                                                                                                                                                                                                       
|  
|   |  | Loans at December 31, 2002 and 2001 are summarized as follows:                                                                                                                                                                                              

|                                       |  |      |             |      |  |   |             |  
|-------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                       |  | 2002 |             | 2001
|                                       |  |      |             |     
|Commercial, financial and agricultural |  | $    | 121,662,948 |      |  | $ | 109,469,927 |  
|Real estate  construction             |  |      | 83,680,734  |      |  |   | 71,209,803  |  
|Real estate  mortgage                 |  |      | 332,281,076 |      |  |   | 241,795,430 |  
|Consumer                               |  |      | 21,031,222  |      |  |   | 20,877,548  |  
|                                       |  |      |             |      |  |   |             |  
|                                       |  |      | 558,655,980 |      |  |   | 443,352,708 |  
|Deferred loan fees                     |  |      | (960,779    | )    |  |   | (764,165    | )
|Allowance for loan losses              |  |      | (5,761,101  | )    |  |   | (4,269,071  | )
|                                       |  |      |             |      |  |   |             |  
|Total loans                            |  | $    | 551,934,100 |      |  | $ | 438,319,472 |  
|                                       |  |      |             |      |  |   |             |  

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| |  | The following is a summary of information pertaining to nonaccrual loans and
loans past due 90 days or more still accruing interest at December 31, 2002
and 2001:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                      |  |      |           |      |  |   |           | 
|----------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                                                      |  | 2002 |           | 2001
|                                                                                                      |  |      |           |     
|Loans accounted for on a nonaccrual basis                                                             |  | $    | 5,218,087 |      |  | $ | 1,022,892 | 
|                                                                                                      |  |      |           |      |  |   |           | 
|Accruing loans which are contractually past due 90 days
or more as to principal and interest payments |  | $    | 2,459,069 |      |  | $ | 245,238   | 
|                                                                                                      |  |      |           |      |  |   |           | 



| |  | Direct and indirect loans to officers and directors during 2002 and 2001 are
as follows:
| |  | ----------------------------------------------------------------------------------------

|                             |                        |   |           |            |      |   |           |            |  
|---------------------------- | ---------------------- | - | --------- | ---------- | ---- | - | --------- | ---------- | -
|                             |                        |   | 2002      |            | 2001
|                             |                        |   |           |            |     
|Balance at beginning of year |                        | $ | 978,074   |            |      | $ | 2,756,084 |           
|                             | New loan disbursements |   |           | 4,149,214  |      |   |           | 696,743    |  
|                             | Repayments             |   |           | (2,472,324 | )    |   |           | (2,474,753 | )
|                             |                        |   |           |            |      |   |           |           
|Balance at end of year       |                        | $ | 2,654,964 |            |      | $ | 978,074   |           
|                             |                        |   |           |            |      |   |           |           



|   |  | In addition, there were approximately $1,716,293 and $466,205 of undisbursed
loan commitments to such parties at December 31, 2002 and 2001,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Commercial servicing rights totaled $266,542 and $232,216 at December 31,
2002 and 2001, respectively. Commercial servicing rights in the amount of
$34,326, $5,578 and $11,493 were capitalized during 2002, 2001 and 2000,
respectively. Amortization of the servicing rights amounted to $33,439,
$29,386 and $41,513 during 2002, 2001 and 2000, respectively. Accumulated
amortization of commercial servicing rights was $154,763 and $121,324 at
December 31, 2002 and 2001, respectively. In the opinion of
management, a valuation allowance against net commercial servicing
rights at December 31, 2002 and 2001 was not considered necessary.
|  
|5. |  | ALLOWANCE FOR LOAN LOSSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | Transactions in the allowance for loan losses were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                           |  |      |            |      |  |      |           |   |  |   |           |  
|------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                           |  | 2002 |            | 2001 |  | 2000
|                                           |  |      |            |      |  |     
|Balance  beginning of period              |  | $    | 4,269,071  |      |  | $    | 3,025,138 |   |  | $ | 2,479,619 |  
|Provisions charged to operating expense    |  |      | 2,665,000  |      |  |      | 1,575,000 |   |  |   | 686,992   |  
|Loans charged off                          |  |      | (1,229,874 | )    |  |      | (361,293  | ) |  |   | (187,927  | )
|Recoveries on loans previously charged off |  |      | 56,904     |      |  |      | 30,226    |   |  |   | 46,454    |  
|                                           |  |      |            |      |  |      |           |   |  |   |           |  
|Balance  end of period                    |  | $    | 5,761,101  |      |  | $    | 4,269,071 |   |  | $ | 3,025,138 |  
|                                           |  |      |            |      |  |      |           |   |  |   |           |  

60



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| |  | The following is a summary of information pertaining to loans specifically
classified as impaired at December 31, 2002 and 2001 and for each of the
three years in the period ended December 31, 2002:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                             |                      |   |            |            |      |   |           |            | 
|------------------------------------------------------------ | -------------------- | - | ---------- | ---------- | ---- | - | --------- | ---------- | 
|                                                             |                      |   | 2002       |            | 2001
|                                                             |                      |   |            |            |     
|Impaired loans without a specific allowance for loan losses  |                      | $ | 16,011,541 |            |      | $ | 670,242   |           
|Impaired loans with a specific allowance for loan losses     |                      |   | 3,156,367  |            |      |   | 9,725,663 |           
|                                                             |                      |   |            |            |      |   |           |           
|                                                             | Total impaired loans |   | $          | 19,167,908 |      |   | $         | 10,395,905 | 
|                                                             |                      |   |            |            |      |   |           |           
|Specific allowance for loan losses related to impaired loans |                      | $ | 698,088    |            |      | $ | 714,058   |           
|                                                             |                      |   |            |            |      |   |           |           

|                                             |  |      |            |      |  |      |           |  |  |   |           | 
|-------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                             |  | 2002 |            | 2001 |  | 2000
|                                             |  |      |            |      |  |     
|Average investment in impaired loans         |  | $    | 12,810,056 |      |  | $    | 7,049,953 |  |  | $ | 2,851,659 | 
|                                             |  |      |            |      |  |      |           |  |  |   |           | 
|Interest income recognized on impaired loans |  | $    | 800,441    |      |  | $    | 804,155   |  |  | $ | 350,405   | 
|                                             |  |      |            |      |  |      |           |  |  |   |           | 



|6. |  | FORECLOSED ASSETS                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Foreclosed assets are presented net of any allowance for losses. In the
opinion of management, at December 31, 2002 and 2001, an allowance for
losses related to foreclosed assets was not considered necessary.
|  
|   |  | Expenses (income) applicable to foreclosed assets for each of the three
years in the period ended December 31, 2002 include the following:                                                                      

|                                 |  |      |         |      |  |      |        |   |  |   |        |  
|-------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                 |  | 2002 |         | 2001 |  | 2000
|                                 |  |      |         |      |  |     
|Net gain on sales of real estate |  | $    | (9,284  | )    |  | $    | (3,084 | ) |  | $ | (6,608 | )
|Provision for losses             |  |      | 745,694 |      |  |      |       |   |  |   |       |  
|Operating expenses               |  |      | 77,759  |      |  |      | 6,614  |   |  |   | 16,531 |  
|                                 |  |      |         |      |  |      |        |   |  |   |        |  
|Total                            |  | $    | 814,169 |      |  | $    | 3,530  |   |  | $ | 9,923  |  
|                                 |  |      |         |      |  |      |        |   |  |   |        |  



|7. |  | MORTGAGE BANKING                                                                                                                                                                                                                                                      
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The unpaid principal balances of mortgage loans serviced for others were
approximately $287,591,000 and $163,485,000 at December 31, 2002 and 2001,
respectively.                                                                                                     
|  
|   |  | Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $3,327,000
and $2,939,000 at December 31, 2002 and 2001, respectively.                                                             
|  
|   |  | The Banks mortgage banking subsidiary has net worth requirements with the
U.S. Department of Housing and Urban Development and the Federal Home Loan
Mortgage Corporation of $250,000. These net worth requirements have been
exceeded at December 31, 2002 and 2001.

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

|                              |                       |   |           |           |      |   |           |           |   |   |           |          |  
|----------------------------- | --------------------- | - | --------- | --------- | ---- | - | --------- | --------- | - | - | --------- | -------- | -
|                              |                       |   | 2002      |           | 2001 |   | 2000     
|                              |                       |   |           |           |      |   |          
|Balance  beginning of period |                       | $ | 2,254,279 |           |      | $ | 1,480,561 |           |   | $ | 1,584,579 |         
|                              | Amounts capitalized   |   |           | 2,632,864 |      |   |           | 1,236,616 |   |   |           | 239,029  |  
|                              | Amortization expense  |   |           | (834,282  | )    |   |           | (462,898  | ) |   |           | (343,047 | )
|                              | Impairment adjustment |   |           | (304,219  | )    |   |           |          |   |   |           |         |  
|                              |                       |   |           |           |      |   |           |           |   |   |           |         
|Balance  end of period       |                       | $ | 3,748,642 |           |      | $ | 2,254,279 |           |   | $ | 1,480,561 |         
|                              |                       |   |           |           |      |   |           |           |   |   |           |         



| |  | Accumulated amortization of mortgage servicing rights was $2,224,371,
$1,390,089 and $927,230 at December 31, 2002, 2001 and 2000, respectively.                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002, the weighted-average amortization period of mortgage
servicing rights was 5.2 years. Projected amortization expense for the
gross carrying value of mortgage servicing rights at December 31, 2002 is
estimated to be as follows for the next 5 years:

|     |  |   |           | 
|---- |  | - | --------- | 
|2003 |  | $ | 1,209,023 | 
|2004 |  |   | 1,047,026 | 
|2005 |  |   | 774,194   | 
|2006 |  |   | 349,175   | 
|2007 |  |   | 200,307   | 



|   |  | Managements estimate of the valuation allowance against the net mortgage
servicing rights was $304,219 at December 31, 2002. In the opinion of
management, a valuation allowance against the net mortgage servicing rights
at December 31, 2001 was not considered necessary.                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|8. |  | OTHER FINANCIAL INSTRUMENTS, COMMITMENTS, GUARANTEES AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Other Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit, standby letters
of credit, and commitments to sell mortgage loans. Those instruments
involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the consolidated balance sheets. The
contractual or notional amounts of those instruments reflect the extent of
involvement the Bank has in those particular financial instruments.
|  
|   |  | The Banks exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
credit card commitments and standby letters of credit is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as it does
for on-balance sheet instruments. The Company controls the risks related to
such commitments through credit approvals, limits and monitoring procedures.                                                                                                                                
|  
|   |  | The Bank writes covered call options on U.S. Treasury Securities, which are
contracts for delayed delivery of securities in which the Bank agrees to
make delivery at a specified future date of a specified                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |  | instrument at a specified price or yield. Risks arise from the possible
inability of counterparties to meet the terms of their contracts and from
movements in securities values and interest rates. The Bank uses such
contracts in connection with its asset/liability management program in
improving yield and managing interest rate exposure arising out of
non-trading assets and liabilities. There were no outstanding covered call
options at December 31, 2002 and 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Bank enters into commitments to make loans whereby the interest rate on
the loan is set prior to funding (rate lock commitments). Rate lock
commitments on mortgage loans that are intended to be sold are considered to
be derivatives. Therefore, they recorded at fair value in other assets in
the accompanying consolidated balance sheets with changes in fair value
recorded in gain on sale of mortgage loans in the accompanying consolidated
statements of income. In measuring the fair value of rate lock commitments,
the amount of the expected servicing rights is included in the valuation.
This value is calculated using the same methodologies as are used to value
the Banks mortgage servicing rights, adjusted using an anticipated fall out
factor for loan commitments that will never be funded. This policy of
recognizing value of the derivative has the effect of recognizing the gain
from mortgage loans before the loans are sold. Rate lock commitments expose
the Bank to interest rate risk. The Bank manages that risk by entering into
forward sales contracts which are also recorded at fair value with changes
in fair value reported in gain on sale of mortgage loans. The notional
amount of rate lock commitments outstanding at December 31, 2002 and 2001
were $23,425,195 and $8,150,995, respectively. The notional amount of
forward sales contracts outstanding at December 31, 2002 and 2001 were
$34,069,732 and $24,603,645, respectively. At December 31, 2002, the fair
value of net rate lock and forward sales commitments was $271,148 which is
reflected in other assets in the accompanying balance sheets. Prior to the
adoption of DIG Issue No. C13 in 2002 (see Note 1), the fair value net rate
lock and forward sales commitments was treated as an off-balance sheet
financial instrument.
|
| |  | Commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
will expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customers creditworthiness individually. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on managements credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Credit card commitments include credit card lines to customers extended by a
correspondent bank in which the Bank guarantees the extension of credit.
These commitments also include overdraft protection lines of credit issued
by the Bank to cover potential overdrafts on customer checking accounts.
These commitments are generally unsecured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The following table presents the contractual or notional amount of these
financial instruments whose amounts represent credit risk as of December 31,
2002 and 2001:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

63



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|                             |  |      |             |      |  |   |            | 
|---------------------------- |  | ---- | ----------- | ---- |  | - | ---------- | 
|                             |  | 2002 |             | 2001
|                             |  |      |             |     
|Commitments to extend credit |  | $    | 102,904,596 |      |  | $ | 76,448,873 | 
|Credit card commitments      |  |      | 425,691     |      |  |   | 596,095    | 
|Standby letters of credit    |  |      | 19,971,453  |      |  |   | 9,590,910  | 



| |  | The Bank primarily serves customers located in the Tennessee counties of
Williamson, Maury and Davidson. As such, the majority of the Banks loans,
commitments and stand-by letters of credit have been granted to customers in
that area. Concentration of credit by type of loan is presented in Note 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 December 31, 2002, these
guarantees totaled $79,264,972. No reserve has been established at December
31, 2002 to cover the potential 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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, tortuous interference with contract,
fraud, and civil conspiracy in connection with the denial of a loan to a
potential borrower involved in a real estate transaction. The 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 its 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.
The case is currently under advisement and a decision is expected within 60
to 90 days from the conclusion of the trial. Management under the advice of
legal counsel believes the Banks defenses have factual and legal merit and
each is supported by competent and admissible evidence. The Company
believes it should prevail on the merits of the case. No provision

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|   |  | has been made in the accompanying consolidated financial statements for the
ultimate resolution of this matter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On September 1, 2000, Highland Capital, Inc. filed a complaint in the U.S.
District Court for the Middle District of Tennessee, against Franklin
National Bank alleging that the Bank required Highland Capital, Inc. to
purchase stock in Franklin Financial Corporation, the Banks holding parent
holding company, in conjunction with Highland Capital, Inc.s efforts to
obtain a loan from the Bank in violation of 12 U.S.C. § 1972, which
prohibits certain tying arrangements. Highland Capital, Inc. is seeking an
unspecified amount of damages in an amount not to exceed $2 million, plus
attorneys fees and costs. The bank filed an answer in the matter on
September 19, 2000. On July 20, 2001, the Bank filed a motion for Summary
Judgment. On November 19, 2001, the Magistrate Judge to whom the case has
been assigned, issued a report regarding the Banks motion for Summary
Judgment recommending that the Motion be granted and the complaint be
dismissed. On March 21, 2002, the Court granted the Banks motion for
Summary Judgment and dismissed Highland Capital, Inc.s case with prejudice.
On April 12, 2002, Highland Capital, Inc. filed a Notice of Appeal to the
United States Court of Appeals for the Sixth Circuit. On July 10, 2002, the
Bank responded with the filing of Proof Brief of Appellee Franklin National
Bank. 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 accompanying consolidated
financial statements for the ultimate resolution of these matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|9. |  | PREMISES AND EQUIPMENT, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Premises and equipment at December 31, 2002 and 2001 are summarized as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                               |  |      |            |      |  |   |            |  
|---------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                               |  | 2002 |            | 2001
|                                               |  |      |            |     
|Land                                           |  | $    | 1,822,249  |      |  | $ | 1,822,249  |  
|Buildings                                      |  |      | 4,210,785  |      |  |   | 4,210,785  |  
|Leasehold improvements  buildings             |  |      | 4,087,391  |      |  |   | 4,049,938  |  
|Furniture and equipment                        |  |      | 5,642,081  |      |  |   | 5,613,319  |  
|                                               |  |      |            |      |  |   |            |  
|                                               |  |      | 15,762,506 |      |  |   | 15,696,291 |  
|Less accumulated depreciation and amortization |  |      | (6,071,991 | )    |  |   | (5,150,970 | )
|                                               |  |      |            |      |  |   |            |  
|                                               |  | $    | 9,690,515  |      |  | $ | 10,545,321 |  
|                                               |  |      |            |      |  |   |            |  

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|10. |  | DEPOSITS                                                    
|--- |  | ------------------------------------------------------------
|   
|    |  | A summary of deposits at December 31, 2002 and 2001 follows:

|                                            |  |      |             |      |  |   |             | 
|------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|                                            |  | 2002 |             | 2001
|                                            |  |      |             |     
|Non-interest bearing demand                 |  | $    | 78,506,426  |      |  | $ | 52,852,177  | 
|Interest-bearing demand                     |  |      | 274,800,866 |      |  |   | 181,588,880 | 
|Savings                                     |  |      | 26,140,671  |      |  |   | 16,512,845  | 
|Certificates of deposit of $100,000 or more |  |      | 267,968,619 |      |  |   | 257,426,386 | 
|Other time deposits                         |  |      | 110,955,155 |      |  |   | 108,870,787 | 
|                                            |  |      |             |      |  |   |             | 
|                                            |  | $    | 758,371,737 |      |  | $ | 617,251,075 | 
|                                            |  |      |             |      |  |   |             | 



| |  | At December 31, 2002, the scheduled maturities of certificates of deposits
and other time deposits are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------

|                    |  |   |             | 
|------------------- |  | - | ----------- | 
|2003                |  | $ | 323,144,822 | 
|2004                |  |   | 43,728,793  | 
|2005                |  |   | 6,420,636   | 
|2006                |  |   | 1,754,010   | 
|2007                |  |   | 3,875,513   | 
|2008 and thereafter |  |   |            | 
|                    |  |   |             | 
|                    |  | $ | 378,923,774 | 
|                    |  |   |             | 



|    |  | At December 31, 2002 and 2001, $189,318 and $178,748, respectively, of
demand deposits, overdrafts have been reclassified to loans. At December
31, 2002 and 2001, no deposits have been received on terms other than those
available in the normal course of business.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|11. |  | LONG-TERM DEBT AND OTHER BORROWINGS                                                                                                                                                                                                                                    
|   
|    |  | Long-term debt and other borrowings at December 31, 2002 and 2001 are
summarized as follows:                                                                                                                                                                           

|                                |  |      |            |      |  |   |            | 
|------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                |  | 2002 |            | 2001
|                                |  |      |            |     
|Line of credit                  |  | $    | 2,381,494  |      |  | $ | 1,800,000  | 
|Federal funds                   |  |      |           |      |  |   | 88,000     | 
|Note payable                    |  |      |           |      |  |   | 680,565    | 
|Federal Home Loan Bank advances |  |      | 58,000,000 |      |  |   | 58,000,000 | 
|Trust preferred securities      |  |      | 16,000,000 |      |  |   | 16,000,000 | 
|                                |  |      |            |      |  |   |            | 
|                                |  | $    | 76,381,494 |      |  | $ | 76,568,565 | 
|                                |  |      |            |      |  |   |            | 



| |  | The Company has a $5,000,000 line of credit established with a lending
institution secured by all of the outstanding capital stock of the Bank at
December 31, 2002. Interest floats at 90-day LIBOR plus 200 basis points
(3.42% and 4.4925% at December 31, 2002 and 2001, respectively), and is
payable monthly. The line matures on April 1, 2003. The average balance
outstanding under the line of credit during the years ended December 31,
2002 and 2001 was $2,051,299 and $1,644,000, respectively. The
maximum amount outstanding at any month end under the line of credit during
the years ended December 31, 2002 and 2001 was $2,381,494 and
$1,800,000, respectively. The line of credit with the
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | lending institution includes
financial covenants requiring a (i) minimum loan loss reserve to
non-performing assets ratio, (ii) minimum loan loss reserve to total loans,
(III) maximum ratio of non-performing loans to total loans, (iv) minimum
return on average assets and (v) minimum tangible shareholders equity. The
Company was in violation of the loan loss allowance to non-performing assets
covenant at December 31, 2002, which was subsequently waived by the lending
institution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Bank also has federal funds lines (or the equivalent thereof) with
correspondent banks totaling approximately $65,000,000 at December 31, 2002.
The average balance outstanding under the federal funds lines during the
years ended December 31, 2002 and 2001 was $5,602,605 and $2,067,658,
respectively. The maximum amount outstanding at any month end under the
federal funds lines during the years ended December 31, 2002 and 2001 was
$29,181,000 and $6,405,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The Bank has a $10,000,000 line of credit with the Federal Home Loan Bank
(FHLB) secured by a blanket pledge of 1-4 family residential mortgage
loans. The arrangement is structured such that the carrying value of the
loans pledged amounts to 150% of the principal balance of advances from the
FHLB. At December 31, 2002 and 2001, there were no borrowings under this
line of credit. The average balance outstanding under this line of credit
during the years ended December 31, 2002 and 2001 was $368,493 and $-0-,
respectively. The maximum amount outstanding at any month end under this
line of credit during the years ended December 31, 2002 and 2001 was
$7,500,000 and $0, respectively.                                                                                                                                                                                                                                                                                                                                
|
| |  | The Bank also has outstanding FHLB convertible advances of $27,000,000
maturing in three years and $31,000,000 maturing in five to eight years at
December 31, 2002. The interest rates on $27,000,000 and $25,000,000 of
these advances are fixed (6.15% and 6.46%, respectively, at December 31,
2002) during the first year and are subject to conversion to variable rates
based on LIBOR at the option of the FHLB 1 year and 3 years, respectively,
from the date of the advance and quarterly thereafter. The Company has the
right to repay the advance on the date of conversion to a variable rate
without penalty. The interest rates on the remaining $6,000,000 of these
advances are variable based on LIBOR (1.43% and 2.13% at December 31, 2002
and 2001, respectively). The average balance outstanding of FHLB advances
was $58,000,000 during the years ended December 31, 2002 and 2001. The
maximum amount outstanding at any month end of FHLB advances was $58,000,000
during the years ended December 31, 2002 and 2001.
|
| |  | During 2000, the Company issued $16,000,000 of trust preferred securities
through Franklin Capital Trust I, a Delaware business trust and wholly owned
subsidiary of the Company. These securities pay cumulative cash
distributions at a quarterly variable rate of three-month LIBOR plus 3.50%
of the liquidation amount of $1,000 per preferred security on a quarterly
basis. These securities have a 30-year maturity and may be redeemed by the
Company upon the earlier of five years or the occurrence of certain other
events. Subject to certain limitations, these securities qualify as Tier 1
capital. The average balance outstanding and the maximum amount outstanding
at any month end of trust preferred securities was $16,000,000 during the
years ended December 31, 2002 and 2001.                                                                                                                                                                                                                                        
|
| |  | The Company paid off its note payable with a lending institution in the
amount of $680,565 on January 17, 2002. The note was secured by the
Williamson Square branch building. The average balance outstanding on this
note payable during the years ended December 31, 2002 and 2001
was $29,833 and $696,649, respectively. The maximum amount outstanding at any month
end on this note payable during the years ended December 31, 2002 and 2001
was $0 and $708,282, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |  | The aggregate annual maturities of long-term debt and other borrowings
during the five years ending December 31, 2007 and thereafter are as
follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  |   |            | 
|------------------------ |  | - | ---------- | 
|Year ending December 31, |  |   |            | 
|2003                     |  | $ | 2,381,494  | 
|2004                     |  |   |           | 
|2005                     |  |   | 27,000,000 | 
|2006                     |  |   |           | 
|2007                     |  |   |           | 
|2008 and thereafter      |  |   | 47,000,000 | 
|                         |  |   |            | 
|Total                    |  | $ | 76,381,494 | 
|                         |  |   |            | 



|12. |  | RELATED PARTY AND OTHER LEASES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company has entered into agreements with the Companys Chairman,
President and Chief Executive Officer to lease certain banking facilities.
Increases in lease payments are made annually on property leased from the
chairman based on the increase in the Consumer Price Index during the
previous year. All but one of the leases provides for a term of twenty
years with three, five year renewal options. The remaining lease provides
for a term of six and one half years with four, five year renewal options.
All leases are accounted for as operating leases. Net rent expense paid to
the chairman amounted to $657,465 in 2002, $643,393 in 2001, and $618,995 in
2000. Rent expense paid to unrelated parties amounted to $706,808 in 2002,
$622,992 in 2001, and $396,274 in 2000.
|   
|    |  | Future minimum lease payments, exclusive of any increases related to the
Consumer Price Index, under these leases as of December 31, 2002 are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                    |  |         |           |        |  |       |           |  |  |   |           | 
|------------------- |  | ------- | --------- | ------ |  | ----- | --------- |  |  | - | --------- | 
|                    |  | Related |           |        |  |       |           |  |  |  
|                    |  | Party   |           | Others |  | Total
|                    |  |         |           |        |  |      
|2003                |  | $       | 662,226   |        |  | $     | 638,344   |  |  | $ | 1,300,570 | 
|2004                |  |         | 662,226   |        |  |       | 589,978   |  |  |   | 1,252,204 | 
|2005                |  |         | 662,226   |        |  |       | 472,796   |  |  |   | 1,135,022 | 
|2006                |  |         | 662,226   |        |  |       | 461,203   |  |  |   | 1,123,429 | 
|2007                |  |         | 662,226   |        |  |       | 337,095   |  |  |   | 999,321   | 
|2008 and thereafter |  |         | 965,746   |        |  |       | 961,113   |  |  |   | 1,926,859 | 
|                    |  |         |           |        |  |       |           |  |  |   |           | 
|Total               |  | $       | 4,276,876 |        |  | $     | 3,460,529 |  |  | $ | 7,737,405 | 
|                    |  |         |           |        |  |       |           |  |  |   |           | 

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|13. |  | INCOME TAXES                          
|--- |  | --------------------------------------
|   
|    |  | Income taxes consist of the following:

|                   |         |                                  |           |           |           |      |           |           |           |   |           |           |           |  
|------------------ | ------- | -------------------------------- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|                   |         |                                  |           | 2002      |           | 2001 |           | 2000     
|                   |         |                                  |           |           |           |      |           |          
|Current:           |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   | Federal |                                  | $         | 5,332,219 |           |      | $         | 3,406,939 |           |   | $         | 2,208,275 |          
|                   | State   |                                  |           | 1,170,715 |           |      |           | 694,521   |           |   |           | 558,503   |          
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   |         | Total current expense            |           |           | 6,502,934 |      |           |           | 4,101,460 |   |           |           | 2,766,778 |  
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|Deferred:          |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   | Federal |                                  |           | 84,688    |           |      |           | (148,207  | )         |   |           | (350,543  | )        
|                   | State   |                                  |           | 9,798     |           |      |           | (26,846   | )         |   |           | (65,809   | )        
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   |         | Total deferred expense (benefit) |           |           | 94,486    |      |           |           | (175,053  | ) |           |           | (416,352  | )
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|Total income taxes |         | $                                | 6,597,420 |           |           | $    | 3,926,407 |           |           | $ | 2,350,426 |          
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          



| |  | Net deferred income tax assets and liabilities are included in other assets
and other liabilities, respectively, on the consolidated balance sheets.
Significant temporary differences between tax and financial reporting that
give rise to net deferred tax (liabilities) assets at December 31, 2002 and
2001 are as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   |                                                         |                                |            |            |            |      |         |           |            |  
|---------------------------------- | ------------------------------------------------------- | ------------------------------ | ---------- | ---------- | ---------- | ---- | ------- | --------- | ---------- | -
|                                   |                                                         |                                |            | 2002       |            | 2001
|                                   |                                                         |                                |            |            |            |     
|Deferred tax assets:               |                                                         |                                |            |            |            |      |         |          
|                                   | Allowance for loan losses                               |                                | $          | 2,205,914  |            |      | $       | 1,595,811 |           
|                                   | Unrealized loss on securities available-for-sale        |                                |            |           |            |      |         | 62,966    |           
|                                   | Other                                                   |                                |            | 108,226    |            |      |         | 20,692    |           
|                                   |                                                         |                                |            |            |            |      |         |          
|                                   |                                                         | Total deferred tax assets      |            |            | 2,314,140  |      |         |           | 1,679,469  |  
|                                   |                                                         |                                |            |            |            |      |         |          
|Deferred tax liabilities:          |                                                         |                                |            |            |            |      |         |          
|                                   | Unrealized gain on securities available-for-sale        |                                |            | (1,741,900 | )          |      |         |          |           
|                                   | Mortgage servicing rights                               |                                |            | (1,478,223 | )          |      |         | (897,819  | )         
|                                   | FHLB stock dividends                                    |                                |            | (313,909   | )          |      |         | (249,557  | )         
|                                   | Unrealized gains on mortgage loan rate lock commitments |                                |            | (129,729   | )          |      |         |          |           
|                                   | Other                                                   |                                |            | (19,645    | )          |      |         | (2,009    | )         
|                                   |                                                         |                                |            |            |            |      |         |          
|                                   |                                                         | Total deferred tax liabilities |            |            | (3,683,406 | )    |         |           | (1,149,385 | )
|                                   |                                                         |                                |            |            |            |      |         |          
|Net deferred tax (liability) asset |                                                         | $                              | (1,369,266 | )          |            | $    | 530,084 |          
|                                   |                                                         |                                |            |            |            |      |         |          



| |  | Management believes that a valuation allowance against the deferred tax
assets at December 31, 2002 and 2001 is not considered necessary because it
is more likely than not such amounts will be fully realized.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | A reconciliation of income taxes with the amount of income taxes computed by
applying the federal statutory rate (34%) to pretax income follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |                                                |   |           |          |      |   |           |          |   |   |           |          |  
|-------------------------------------------- | ---------------------------------------------- | - | --------- | -------- | ---- | - | --------- | -------- | - | - | --------- | -------- | -
|                                             |                                                |   | 2002      |          | 2001 |   | 2000     
|                                             |                                                |   |           |          |      |   |          
|Tax expense at statutory rate                |                                                | $ | 6,012,115 |          |      | $ | 3,683,388 |          |   | $ | 2,410,280 |         
|Increase (decrease) in taxes resulting from: |                                                |   |           |          |      |   |           |          |   |   |           |         
|                                             | Tax-exempt income                              |   |           | (337,042 | )    |   |           | (239,608 | ) |   |           | (354,462 | )
|                                             | Federal tax credit                             |   |           | (96,096  | )    |   |           |         |   |   |           |         |  
|                                             | State income taxes, net of federal tax benefit |   |           | 779,140  |      |   |           | 439,199  |   |   |           | 221,689  |  
|                                             | Non-deductible merger costs                    |   |           | 138,434  |      |   |           |         |   |   |           |         |  
|                                             | Disallowed interest expense                    |   |           | 29,166   |      |   |           | 43,122   |   |   |           | 88,996   |  
|                                             | Other, net                                     |   |           | 71,703   |      |   |           | 306      |   |   |           | (16,077  | )
|                                             |                                                |   |           |          |      |   |           |          |   |   |           |         
|Total income taxes                           |                                                | $ | 6,597,420 |          |      | $ | 3,926,407 |          |   | $ | 2,350,426 |         
|                                             |                                                |   |           |          |      |   |           |          |   |   |           |         



|14. |  | STOCK BASED COMPENSATION PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Organizers of the Company received warrants in connection with the Companys
initial public offering granting the holders thereof the option to purchase
2,354,304 shares of common stock at $0.31 per share. Additionally, the
Company has a 1990 Stock Option Plan and a 2000 Stock Option Plan (the
Plans) which were adopted by the Companys Board of Directors on April 19,
1990 and April 10, 2000, respectively, authorizing up to 200,000 and
7,500,000 shares, respectively, for employees who are contributing
significantly to the management or operation of the business of the Company
as determined by the Companys Board of Directors or the committee
administering the Plans. The Plans provide for the grant of options at the
discretion of the Board of Directors of the Company or a committee
designated by the Board of Directors to administer the Plans. The option
exercise price must be at least 100% (110% in the case of a holder of 10% or
more of the common stock) of the fair market value of the stock on the date
the option is granted for qualified incentive stock options. There is no
limit with respect to the exercise price for non-qualified stock options.
The options are exercisable by the holder thereof in full at any time prior
to their expiration in accordance with the terms of the Plans. Stock
options granted pursuant to the Plans will expire on or before (1) the date
which is the tenth anniversary of the date the option is granted, or (2) the
date which is the fifth anniversary of the date the option is granted in the
event that the option is granted to a key employee who owns more than 10% of
the total combined voting power of all classes of stock of the Company. All
options granted prior to 1998 were immediately vested. In 1998, 1999, 2000,
2001 and 2002, certain options were granted and will vest evenly over five
years; with the exception of 2002 which vest over four years. In 1996, an
amendment to the 1990 Stock Option Plan increased the number of shares
available for grant to 750,000 shares and provided for the granting of
non-qualified options to eligible employees and directors. The Plans
provide for stock splits which would adjust the options outstanding, the
option prices and the number of shares authorized by the Plans according to
the terms of the stock split. The Company declared a two-for-one stock
split in January, 1998, a four-for-one stock split in March, 1998 and a
one-for-four reverse stock split in August, 2000. Adjusted for these stock
splits, the number of shares authorized under the Plans is currently
4,875,000.
|   
|    |  | All options expire within ten years from the date of grant except for
226,000, 200,000, 50,000, 50,000, 266,666 and 200,000 options issued in
1997, 1998, 1999, 2000, 2001 and 2002, respectively, which expire in 15
years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |  | A summary of the status of the Companys stock option plans for each of the
three years in the period ended December 31, 2002, and the changes during
those years is presented below.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |                   |  |             |           |          |   |          |       | 
|---------------------------------------- | ----------------- |  | ----------- | --------- | -------- | - | -------- | ----- | 
|                                         |                   |  |             |           |          |   | Weighted
|                                         |                   |  |             |           |          |   | Average 
|                                         |                   |  | Shares      |           | Exercise
|                                         |                   |  | Outstanding |           | Price   
|                                         |                   |  |             |           |         
|Options outstanding at January 1, 2000   |                   |  | 1,415,663   |           |          | $ | 6.64     |      
|                                         | Options granted   |  |             | 94,175    |          |   |          | 14.00 | 
|                                         | Options exercised |  |             | (36,706   | )        |   |          | 2.95  | 
|                                         | Options expired   |  |             | (3,500    | )        |   |          | 16.89 | 
|                                         |                   |  |             |           |          |   |          |      
|Options outstanding at December 31, 2000 |                   |  | 1,469,632   |           |          |   | 7.10     |      
|                                         | Options granted   |  |             | 407,266   |          |   |          | 10.25 | 
|                                         | Options exercised |  |             | (42,304   | )        |   |          | 2.26  | 
|                                         |                   |  |             |           |          |   |          |      
|Options outstanding at December 31, 2001 |                   |  | 1,834,594   |           |          |   | 7.74     |      
|                                         | Options granted   |  |             | 496,152   |          |   |          | 15.50 | 
|                                         | Options exercised |  |             | (113,511  | )        |   |          | 4.24  | 
|                                         | Options expired   |  |             | (47,290   | )        |   |          | 15.02 | 
|                                         |                   |  |             |           |          |   |          |      
|Options outstanding at December 31, 2002 |                   |  | 2,169,945   |           |          |   | 9.53     |      
|                                         |                   |  |             |           |          |   |          |      
|Option exercisable at December 31,       |                   |  |             |           |          |   |          |      
|                                         | 2000              |  |             | 1,427,469 |          |   |          | 6.67  | 
|                                         |                   |  |             |           |          |   |          |      
|                                         | 2001              |  |             | 1,727,121 |          |   |          | 7.51  | 
|                                         |                   |  |             |           |          |   |          |      
|                                         | 2002              |  |             | 1,869,019 |          |   |          | 8.75  | 
|                                         |                   |  |             |           |          |   |          |      



| |  | The following table summarizes information about the stock options
outstanding under the Companys Plans at December 31, 2002:
| |  | ------------------------------------------------------------------------------------------------------------------------------

|              |  |             |           |          |  |           |       |             |  |          |       |  |  |          |           |  |  |   |       | 
|------------- |  | ----------- | --------- | -------- |  | --------- | ----- | ----------- |  | -------- | ----- |  |  | -------- | --------- |  |  | - | ----- | 
|              |  |             |           |          |  | Weighted  |       | Weighted    |  |          |       |  |  | Weighted
|Range of      |  |             |           |          |  | Average   |       | Average     |  |          |       |  |  | Average 
|Exercise      |  | Shares      |           | Exercise |  | Remaining |       | Shares      |  | Exercise
|Price         |  | Outstanding |           | Price    |  | Life      |       | Exercisable |  | Price   
|              |  |             |           |          |  |           |       |             |  |         
|$1.38 - $3.00 |  |             | 399,422   |          |  | $         | 2.89  |             |  |          | 2.87  |  |  |          | 399,422   |  |  | $ | 2.89  | 
|3.01 - 4.50   |  |             | 447,150   |          |  |           | 4.50  |             |  |          | 6.49  |  |  |          | 447,150   |  |  |   | 4.50  | 
|4.51 - 11.00  |  |             | 699,442   |          |  |           | 10.57 |             |  |          | 10.07 |  |  |          | 634,206   |  |  |   | 10.59 | 
|11.01 - 14.00 |  |             | 90,800    |          |  |           | 14.00 |             |  |          | 9.75  |  |  |          | 83,570    |  |  |   | 14.00 | 
|14.01 - 23.00 |  |             | 533,131   |          |  |           | 16.62 |             |  |          | 10.90 |  |  |          | 304,671   |  |  |   | 17.36 | 
|              |  |             |           |          |  |           |       |             |  |          |       |  |  |          |           |  |  |   |       | 
|              |  |             | 2,169,945 |          |  |           |       |             |  |          |       |  |  |          | 1,869,019 |  |  |   |       | 
|              |  |             |           |          |  |           |       |             |  |          |       |  |  |          |           |  |  |   |       | 



| |  | On April 17, 2001, the Companys Board of Directors adopted the Franklin
Financial Corporation 2001 Key Employee Restricted Stock Plan (Restricted
Stock Plan). The Restricted Stock Plan provides for the grant of up to an
aggregate of 250,000 restricted shares of the Companys common stock. Under
the
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|    |  | terms of the Restricted Stock Plan, the Companys Board of Directors or
a committee of the Board of Directors may award restricted shares of the
Companys common stock to top executives or key management personnel of the
Company. The shares issued pursuant to the Restricted Stock Plan are
subject to restrictions on transfer and certain other conditions. During
the restriction period, participants are entitled to vote and receive
dividends on such shares, subject to any restrictions that may be placed on
such dividends. In 2002, 13,503 shares of restricted stock were issued
under the Plan.                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|15. |  | CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Substantial restrictions are placed on the Bank with respect to payment of
dividends without prior regulatory approval. The extent of dividends which
may be paid by a national bank is generally limited to retained net profits
for any given year combined with the retained net profits of the two
preceding years. Retained earnings totaling $19,954,201 and $13,244,884 at
December 31, 2002 and December 31, 2001, respectively, were subject to these
restrictions with respect to payment of dividends. Cash dividends are also
restricted, under the Companys line of credit, if the Banks leverage
capital ratio is less than 7%.                                                                                                                                                                                  
|   
|    |  | The Company and the Bank are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Companys consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, specific capital guidelines must be met that
involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative
judgments by regulatory agencies about components, risk weightings and other
factors.
|   
|    |  | Quantitative measures established by regulation to ensure capital adequacy
require that the Company and the Bank maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined in the regulations),
and of Tier I capital (as defined in the regulations) to total average
assets (as defined in the regulations). Management believes, as of December
31, 2002 and 2001, that the Company and the Bank are in compliance with all
capital adequacy requirements they are subject to.                                                                                                                                                                                                                                       
|   
|    |  | As of December 31, 2002, the most recent notification from the regulatory
agencies categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios must be maintained as set forth in the table. There have
been no conditions or events since that notification that would cause
management to believe the Banks category has changed.                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | Actual capital amounts and ratios at December 31, 2002 and 2001, are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|                  |                                        |          |                   |              |                         |      |        |              |   |      |   |              |   |          |   |            |   |  |   |            |   |  |   |            |  
|----------------- | -------------------------------------- | -------- | ----------------- | ------------ | ----------------------- | ---- | ------ | ------------ | - | ---- | - | ------------ | - | -------- | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                  |                                        |          | For capital       |              | under prompt corrective |      |        |              |   |      |   |              |  
|                  |                                        |          | adequacy purposes |              | action provisions       |      | Actual
|                  |                                        |          |                   |              |                         |      |       
|December 31, 2002 |                                        | Franklin |                   |              |                         |      |        | Franklin     |   |      |   |              |   | Franklin |   |            |   | 
|                  |                                        | National |                   |              |                         |      |        | National     |   |      |   |              |   | National |   |            |   | 
|                  |                                        | Bank     |                   | Consolidated |                         | Bank |        | Consolidated |   | Bank |   | Consolidated
|                  |                                        |          |                   |              |                         |      |        |              |   |      |   |             
|Amount:           |                                        |          |                   |              |                         |      |        |              |   |      |   |              |   |          |   |            |   |  |   |            |   |  |   |           
|                  | Tier I to average
assets               |          | $                 | 34,064,678   |                         |      | $      | 34,318,798   |   |      | $ | 42,580,848   |   |          | $ | 42,898,498 |   |  | $ | 57,886,008 |   |  | $ | 60,601,735 |  
|                  | Tier I to risk-
weighted assets        |          |                   | 24,021,208   |                         |      |        | 24,093,200   |   |      |   | 36,031,812   |   |          |   | 36,139,800 |   |  |   | 57,886,008 |   |  |   | 60,601,735 |  
|                  | Total capital to risk-
weighted assets |          |                   | 48,042,416   |                         |      |        | 48,186,400   |   |      |   | 60,053,020   |   |          |   | 60,233,000 |   |  |   | 65,679,619 |   |  |   | 67,115,892 |  
|Ratios:           |                                        |          |                   |              |                         |      |        |              |   |      |   |              |   |          |   |            |   |  |   |            |   |  |   |           
|                  | Tier I to average
assets               |          |                   | 4.0          | %                       |      |        | 4.0          | % |      |   | 5.0          | % |          |   | 5.0        | % |  |   | 6.8        | % |  |   | 7.1        | %
|                  | Tier I to risk-
weighted assets        |          |                   | 4.0          | %                       |      |        | 4.0          | % |      |   | 6.0          | % |          |   | 6.0        | % |  |   | 9.6        | % |  |   | 10.1       | %
|                  | Total capital to risk-
weighted assets |          |                   | 8.0          | %                       |      |        | 8.0          | % |      |   | 10.0         | % |          |   | 10.0       | % |  |   | 10.9       | % |  |   | 11.1       | %

|                  |                                        |          |                   |              |                         |      |        |              |   |      |                        |              |   |          |   |            |   |  |   |            |   |  |   |            |  
|----------------- | -------------------------------------- | -------- | ----------------- | ------------ | ----------------------- | ---- | ------ | ------------ | - | ---- | ---------------------- | ------------ | - | -------- | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                  |                                        |          |                   |              |                         |      |        |              |   |      | To be well capitalized |              |   |          |   |            |   |  |  
|                  |                                        |          | For capital       |              | under prompt corrective |      |        |              |   |      |                        |              |  
|                  |                                        |          | adequacy purposes |              | action provisions       |      | Actual
|                  |                                        |          |                   |              |                         |      |       
|December 31, 2001 |                                        | Franklin |                   |              |                         |      |        | Franklin     |   |      |                        |              |   | Franklin |   |            |   | 
|                  |                                        | National |                   |              |                         |      |        | National     |   |      |                        |              |   | National |   |            |   | 
|                  |                                        | Bank     |                   | Consolidated |                         | Bank |        | Consolidated |   | Bank |                        | Consolidated
|                  |                                        |          |                   |              |                         |      |        |              |   |      |                        |             
|Amount:           |                                        |          |                   |              |                         |      |        |              |   |      |                        |              |   |          |   |            |   |  |   |            |   |  |   |           
|                  | Tier I to average
assets               |          | $                 | 28,011,280   |                         |      | $      | 28,287,080   |   |      | $                      | 35,014,100   |   |          | $ | 35,358,850 |   |  | $ | 47,772,427 |   |  | $ | 47,102,326 |  
|                  | Tier I to risk-
weighted assets        |          |                   | 19,270,348   |                         |      |        | 19,370,588   |   |      |                        | 28,905,522   |   |          |   | 29,055,882 |   |  |   | 47,772,427 |   |  |   | 47,102,326 |  
|                  | Total capital to risk-
weighted assets |          |                   | 38,540,696   |                         |      |        | 38,741,176   |   |      |                        | 48,175,870   |   |          |   | 48,426,470 |   |  |   | 54,074,008 |   |  |   | 55,536,686 |  
|Ratios:           |                                        |          |                   |              |                         |      |        |              |   |      |                        |              |   |          |   |            |   |  |   |            |   |  |   |           
|                  | Tier I to average
assets               |          |                   | 4.0          | %                       |      |        | 4.0          | % |      |                        | 5.0          | % |          |   | 5.0        | % |  |   | 6.8        | % |  |   | 6.7        | %
|                  | Tier I to risk-
weighted assets        |          |                   | 4.0          | %                       |      |        | 4.0          | % |      |                        | 6.0          | % |          |   | 6.0        | % |  |   | 9.9        | % |  |   | 9.7        | %
|                  | Total capital to risk-
weighted assets |          |                   | 8.0          | %                       |      |        | 8.0          | % |      |                        | 10.0         | % |          |   | 10.0       | % |  |   | 11.2       | % |  |   | 11.5       | %



|16. |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In the calculation of basic and diluted earnings per share, net income is
identical. Below is a reconciliation for the three years in the period
ended December 31, 2002, of the difference between basic weighted average
shares outstanding and diluted weighted average shares outstanding.

|                                  |               |  |           |         |      |  |           |         |  |  |           |         | 
|--------------------------------- | ------------- |  | --------- | ------- | ---- |  | --------- | ------- |  |  | --------- | ------- | 
|                                  |               |  | 2002      |         | 2001 |  | 2000     
|                                  |               |  |           |         |      |  |          
|Weighted average shares  basic   |               |  | 7,905,657 |         |      |  | 7,816,634 |         |  |  | 7,789,844 |        
|Effect of dilutive securities:    |               |  |           |         |      |  |           |         |  |  |           |        
|                                  | Stock options |  |           | 848,145 |      |  |           | 535,434 |  |  |           | 567,590 | 
|                                  |               |  |           |         |      |  |           |         |  |  |           |        
|Weighted average shares  diluted |               |  | 8,753,802 |         |      |  | 8,352,068 |         |  |  | 8,357,434 |        
|                                  |               |  |           |         |      |  |           |         |  |  |           |        



| |  | During August 2000, the Company declared a one-for-four reverse stock split
effective October 18, 2000, to shareholders of record on August 25, 2000.
All references to per share and weighted average share information in the
consolidated financial statements reflect this reverse stock split.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|17. |  | EMPLOYEE BENEFITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company has a 401(k) savings plan for all employees who have completed
ninety days of service and are twenty-one years of age or more. The Company
generally matches fifty percent of employee contributions to the plan up to
a maximum of six percent of gross wages. The Companys contributions to the
plan are included in salaries and employee benefits expense on the
consolidated statements of income and amounted to $240,204, $160,645, and
$114,051, in 2002, 2001 and 2000, respectively.
|   
|18. |  | FAIR VALUES OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | The estimated fair values of the Companys financial instruments are as
follows at December 31, 2002 and 2001:                                                                                                                                                                                                                                                                                                                                                                                             

|                         |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |             | 
|------------------------ | ------------------------------------------------ |  | -------- | ----------- | ----- |  | -------- | ----------- | ----- |  | - | ----------- |  |  | - | ----------- | 
|                         |                                                  |  | 2002     |             | 2001 
|                         |                                                  |  |          |             |      
|                         |                                                  |  | Carrying |             | Fair  |  | Carrying |             | Fair 
|                         |                                                  |  | Amount   |             | Value |  | Amount   |             | Value
|                         |                                                  |  |          |             |       |  |          |             |      
|Financial assets:        |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |            
|                         | Cash and cash equivalents                        |  | $        | 28,061,479  |       |  | $        | 28,061,479  |       |  | $ | 23,664,888  |  |  | $ | 23,664,888  | 
|                         | Federal funds sold                               |  |          | 18,922,000  |       |  |          | 18,922,000  |       |  |   |            |  |  |   |            | 
|                         | Securities available-for-sale                    |  |          | 257,971,420 |       |  |          | 257,971,420 |       |  |   | 236,304,194 |  |  |   | 236,304,194 | 
|                         | Securities held-to-maturity                      |  |          | 8,228,563   |       |  |          | 8,335,437   |       |  |   | 10,186,248  |  |  |   | 10,176,027  | 
|                         | Federal Home Loan and Federal
Reserve Bank stock |  |          | 4,113,200   |       |  |          | 4,113,200   |       |  |   | 3,950,800   |  |  |   | 3,950,800   | 
|                         | Loans                                            |  |          | 538,263,372 |       |  |          | 542,273,313 |       |  |   | 422,058,045 |  |  |   | 423,788,692 | 
|                         | Loans held for sale                              |  |          | 19,431,829  |       |  |          | 19,702,977  |       |  |   | 20,530,498  |  |  |   | 20,530,498  | 
|                         | Total servicing rights                           |  |          | 3,860,421   |       |  |          | 3,860,421   |       |  |   | 2,365,171   |  |  |   | 2,724,261   | 
|                         | Accrued interest receivable                      |  |          | 3,713,438   |       |  |          | 3,713,438   |       |  |   | 3,619,446   |  |  |   | 3,619,446   | 
|                         | Rate lock commitments, net                       |  |          | 271,148     |       |  |          | 271,148     |       |  |   |            |  |  |   | 419,049     | 
|Financial liabilities:   |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |            
|                         | Deposits with defined maturities                 |  |          | 378,923,774 |       |  |          | 380,041,682 |       |  |   | 366,297,173 |  |  |   | 368,064,301 | 
|                         | Deposits with undefined maturities               |  |          | 379,447,963 |       |  |          | 379,447,963 |       |  |   | 250,953,902 |  |  |   | 250,953,902 | 
|                         | Other borrowings and repurchase
agreements       |  |          | 76,581,494  |       |  |          | 76,581,494  |       |  |   | 79,768,565  |  |  |   | 79,768,565  | 
|                         | Accrued interest payable                         |  |          | 1,478,173   |       |  |          | 1,478,173   |       |  |   | 1,661,010   |  |  |   | 1,661,010   | 
|Off-balance sheet items: |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |            
|                         | Commitments to extend credit                     |  |          |            |       |  |          | 102,904,596 |       |  |   |            |  |  |   | 76,448,873  | 
|                         | Credit card commitments                          |  |          |            |       |  |          | 425,691     |       |  |   |            |  |  |   | 596,095     | 
|                         | Standby letters of credit                        |  |          |            |       |  |          | 19,971,453  |       |  |   |            |  |  |   | 9,590,910   | 



| |  | The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value. These fair values are provided for disclosure purposes
only and do not impact carrying values of financial statement amounts.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash and Cash Equivalents- The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets fair values,
which includes cash on hand and amounts due from banks.                                                                                         
|
| |  | Federal Funds Sold- The carrying amount for federal funds sold approximates
those assets fair value.                                                                                                                                                                                              
|
| |  | Investment Securities (including mortgage-backed securities)- Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.                        
|
| |  | Federal Home Loan and Federal Reserve Bank stock- The carrying amount for
these securities approximates fair value.                                                                                                                                                                                

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| |  | Loans- For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently offered for loans with similar
terms to borrowers of similar credit quality.        
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Loans Held for Sale Fair values for loans held for sale are based on
quoted market prices in the secondary market.                                                                                                                                                                                                                                   
|
| |  | Servicing Rights- The fair values of mortgage servicing rights and
commercial servicing rights are estimated using discounted cash flows based
on a current market interest rate.                                                                                                                                                                     
|
| |  | Accrued Interest Receivable- The carrying amounts of accrued interest
approximates fair value.                                                                                                                                                                                                                                                        
|
| |  | Rate Lock Commitments, net The fair values of mortgage rate lock
commitments and forward sales contracts are reflected on a net basis and are
estimated based on quoted market prices.                                                                                                                                                               
|
| |  | Deposits with Defined Maturities- The fair value for defined maturity
deposits, primarily certificates of deposit, is calculated by discounting
future cash flows to their present value. Future cash flows, consisting of
principal and interest payments, are discounted using rates offered on
similar instruments based on the remaining maturity.
|
| |  | Deposits with Undefined Maturities- The fair value of undefined maturity
deposits is equal to the carrying value and includes demand deposits,
savings accounts, NOW accounts and money market deposit accounts.                                                                                                                                      
|
| |  | Other Borrowings and Repurchase Agreements- The carrying amounts of other
borrowings and repurchase agreements approximate their fair values.                                                                                                                                                                                                         
|
| |  | Off-Balance Sheet Instruments- Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties credit standings. The fees charged for covered call
options are representative of their fair value.      

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|19. |  | PARENT COMPANY ONLY FINANCIAL INFORMATION                                                                                                                                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Financial information for Franklin Financial Corporation, the parent
company, as of December 31, 2002 and 2001 and for each of the three years in
the period ended December 31, 2002 is as follows:

|                                     |  |      |            |      |  |   |            | 
|------------------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                     |  | 2002 |            | 2001
|                                     |  |      |            |     
|CONDENSED BALANCE SHEETS             |  |      |            |     
|ASSETS                               |  |      |            |      |  |   |            | 
|Cash                                 |  | $    | 69,399     |      |  | $ | 109,244    | 
|Investment in subsidiaries           |  |      | 62,284,408 |      |  |   | 49,160,259 | 
|Other                                |  |      | 9,342,258  |      |  |   | 8,810,515  | 
|                                     |  |      |            |      |  |   |            | 
|TOTAL                                |  | $    | 71,696,065 |      |  | $ | 58,080,018 | 
|                                     |  |      |            |      |  |   |            | 
|LIABILITIES AND STOCKHOLDERS EQUITY |  |      |            |      |  |   |            | 
|Liabilities                          |  | $    | 23,147,900 |      |  | $ | 22,670,331 | 
|Stockholders equity                 |  |      | 48,548,165 |      |  |   | 35,409,687 | 
|                                     |  |      |            |      |  |   |            | 
|TOTAL                                |  | $    | 71,696,065 |      |  | $ | 58,080,018 | 
|                                     |  |      |            |      |  |   |            | 

|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |           | 
|----------------------------------------------------------------------------- | --------------------------------- | ---- | ---------- | --------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                                              |                                   | 2002 |            | 2001      |  | 2000
|                                                                              |                                   |      |            |           |  |     
|CONDENSED STATEMENTS OF INCOME                                                |                                   |      |            |           |  |     
|INCOME:                                                                       |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              | Management fees and rental income |      | $          | 1,289,044 |  |      | $          | 1,206,587 |  |   | $          | 841,357   | 
|                                                                              | Interest income                   |      |            | 111,198   |  |      |            | 182,319   |  |   |            | 149,273   | 
|                                                                              | Other income                      |      |            | 397       |  |      |            |          |  |   |            | 1,318     | 
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              |                                   |      | 1,400,639  |           |  |      | 1,388,906  |           |  |   | 991,948    |          
|EXPENSES:                                                                     |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              | Interest expense                  |      |            | 1,117,904 |  |      |            | 1,609,990 |  |   |            | 1,352,612 | 
|                                                                              | Salaries and employee benefits    |      |            | 548,321   |  |      |            | 502,451   |  |   |            | 371,736   | 
|                                                                              | Other                             |      |            | 1,033,322 |  |      |            | 682,514   |  |   |            | 403,212   | 
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              |                                   |      | 2,699,547  |           |  |      | 2,794,955  |           |  |   | 2,127,560  |          
|LOSS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES |                                   |      | (1,298,908 | )         |  |      | (1,406,049 | )         |  |   | (1,135,612 | )        
|INCOME TAX BENEFIT                                                            |                                   |      | 441,629    |           |  |      | 478,056    |           |  |   | 396,684    |          
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|LOSS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES                  |                                   |      | (857,279   | )         |  |      | (927,993   | )         |  |   | (738,928   | )        
|EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES                              |                                   |      | 11,942,372 |           |  |      | 7,835,080  |           |  |   | 5,477,562  |          
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|NET INCOME                                                                    |                                   | $    | 11,085,093 |           |  | $    | 6,907,087  |           |  | $ | 4,738,634  |          
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          

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|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |           |            |            |            |  
|------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ | ----------------------------------------- | ---------- | ----------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                      |                                                                               | 2002                                       |                                                  | 2001                                      |            | 2000       
|                                      |                                                                               |                                            |                                                  |                                           |            |            
|CONDENSED STATEMENTS OF CASH FLOWS:   |                                                                               |                                            |                                                  |                                           |            |            
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|                                      | Net income                                                                    |                                            | $                                                | 11,085,093                                |            |             | $          | 6,907,087 |            |            | $          | 4,738,634 |           
|                                      | Adjustments to reconcile net income
to net cash used in operating activities: |                                            |                                                  |                                           |            |             |            |           |            |            |            |           |           
|                                      |                                                                               |                                            | Depreciation and amortization                    |                                           |            | 105,791     |            |           |            | 78,428     |            |           |            | 52,091     |           
|                                      |                                                                               |                                            | Equity in undistributed earnings of subsidiaries |                                           |            | (11,942,372 | )          |           |            | (7,835,080 | )          |           |            | (5,477,562 | )         
|                                      |                                                                               |                                            | Increase in other assets                         |                                           |            | (637,534    | )          |           |            | (742,258   | )          |           |            | (1,951,707 | )         
|                                      |                                                                               |                                            | (Decrease) increase in other liabilities         |                                           |            | (41,988     | )          |           |            | 78,684     |            |           |            | (193,446   | )         
|                                      |                                                                               |                                            | Tax benefit of stock options exercised           |                                           |            | 382,091     |            |           |            | 9,436      |            |           |            | 23,167     |           
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|                                      |                                                                               |                                            |                                                  | Net cash used in operating activities     |            |             | (1,048,919 | )         |            |            | (1,503,703 | )         |            |            | (2,808,823 | )
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|                                      |                                                                               | Purchase of premises and equipment         |                                                  |                                           |           |             |            |           |           |            |            |           | (2,073,599 | )         
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|                                      |                                                                               |                                            |                                                  | Net cash used in investing activities     |            |             |           |           |            |            |           |           |            |            | (2,073,599 | )
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|                                      |                                                                               | Dividends paid                             |                                                  |                                           | (1,734,577 | )           |            |           | (1,641,212 | )          |            |           | (1,556,410 | )         
|                                      |                                                                               | Dividends received from subsidiary         |                                                  |                                           | 1,720,000  |             |            |           | 2,155,000  |            |            |           | 1,435,000  |           
|                                      |                                                                               | Net proceeds from issuance of common stock |                                                  |                                           | 532,920    |             |            |           | 108,605    |            |            |           | 110,706    |           
|                                      |                                                                               | Purchase of subsidiaries stock             |                                                  |                                           |           |             |            |           | (525,000   | )          |            |           | (5,525,000 | )         
|                                      |                                                                               | Proceeds from borrowings, net              |                                                  |                                           | 490,731    |             |            |           | 97,495     |            |            |           | 12,504,386 |           
|                                      |                                                                               | Debt issue costs                           |                                                  |                                           |           |             |            |           |           |            |            |           | (814,733   | )         
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|                                      |                                                                               |                                            |                                                  | Net cash provided by financing activities |            |             | 1,009,074  |           |            |            | 194,888    |           |            |            | 6,153,949  |  
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|NET (DECREASE) INCREASE IN CASH       |                                                                               |                                            | (39,845                                          | )                                         |            |             | (1,308,815 | )         |            |            | 1,271,527  |          
|CASH AT BEGINNING OF YEAR             |                                                                               |                                            | 109,244                                          |                                           |            |             | 1,418,059  |           |            |            | 146,532    |          
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          
|CASH AT END OF YEAR                   |                                                                               | $                                          | 69,399                                           |                                           |            | $           | 109,244    |           |            | $          | 1,418,059  |          
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |           |            |            |            |          



|20. |  | SEGMENT REPORTING                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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 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, Nashville, Franklin, Fairview
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 into income and amortizes these rights over the estimated lives of
the associated loans. Its primary revenue is other income, but it also
reports interest income earned on warehouse balances waiting for funding.
The                              

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| |  | 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.                                                                                                                                                                                                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | All Other consists of the Banks insurance and securities subsidiaries and
the bank holding company operations which do not meet the quantitative
threshold for separate disclosure. The revenue earned by the insurance and
securities subsidiaries is reported in other income in the consolidated
financial statements and the revenue earned by the bank holding company
consists of intercompany transactions that are eliminated in consolidation.                                         
|
| |  | No transactions with a single customer contributed 10% or more of the
Companys total revenue. The accounting policies for each segment are the
same as those used by the Company. The segments include overhead
allocations and intercompany transactions that were recorded at estimated
market prices. All intercompany transactions have been eliminated to
determine the consolidated balances. The results of the two reportable
segments of the Company are included in the following table.

|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |            |            | 
|---------------------------------------- | --------------------- | ------------ | ----------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | ----------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                         |                       |              |             | 2002      
|                                         |                       |              |             |           
|                                         |                       |              |             |            |            |         |            | Mortgage  |           |              |            |              |            |   |             |             |             |   |             |           
|                                         |                       |              |             | Bank       |            | Banking |            | All Other |           | Eliminations |            | Consolidated
|                                         |                       |              |             |            |            |         |            |           |           |              |            |             
|Total interest income                    |                       | $            | 49,806,034  |            |            | $       | 981,641    |           |           | $            | 2,704,448  |              |            | $ | (2,869,220  | )           |             | $ | 50,622,903  |           
|Total interest expense                   |                       |              | 17,177,780  |            |            |         | 182,561    |           |           |              | 1,991,154  |              |            |   | (1,331,781  | )           |             |   | 18,019,714  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Net interest income                      |                       |              | 32,628,254  |            |            |         | 799,080    |           |           |              | 713,294    |              |            |   | (1,537,439  | )           |             |   | 32,603,189  |           
|Provision for loan losses                |                       |              | 2,665,000   |            |            |         |           |           |           |              |           |              |            |   |            |             |             |   | 2,665,000   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Net interest income after provision      |                       |              | 29,963,254  |            |            |         | 799,080    |           |           |              | 713,294    |              |            |   | (1,537,439  | )           |             |   | 29,938,189  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Total other income                       |                       |              | 4,426,263   |            |            |         | 5,420,911  |           |           |              | 12,277,096 |              |            |   | (11,511,417 | )           |             |   | 10,612,853  |           
|Total other expense                      |                       |              | 16,781,990  |            |            |         | 4,818,917  |           |           |              | 2,556,666  |              |            |   | (1,289,044  | )           |             |   | 22,868,529  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Income before taxes                      |                       |              | 17,607,527  |            |            |         | 1,401,074  |           |           |              | 10,433,724 |              |            |   | (11,759,812 | )           |             |   | 17,682,513  |           
|Provision for income taxes               |                       |              | 6,654,653   |            |            |         | 452,737    |           |           |              | (509,970   | )            |            |   |            |             |             |   | 6,597,420   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Net income                               |                       | $            | 10,952,874  |            |            | $       | 948,337    |           |           | $            | 10,943,694 |              |            | $ | (11,759,812 | )           |             | $ | 11,085,093  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Other significant items                  |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Total assets                             |                       | $            | 863,836,242 |            |            | $       | 25,053,168 |           |           | $            | 89,006,618 |              |            | $ | (86,663,111 | )           |             | $ | 891,232,917 |           
|Depreciation, amortization and accretion |                       |              | (495,380    | )          |            |         | 884,012    |           |           |              | 133,714    |              |            |   |            |             |             |   | 522,346     |           
|Revenues from external customers         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|                                         | Total interest income |              |             | 49,641,262 |            |         |            | 981,641   |           |              |            |             |            |   |             |            |             |   |             | 50,622,903 |           
|                                         | Total other income    |              |             | 4,426,263  |            |         |            | 5,420,911 |           |              |            | 765,679      |            |   |             |            |             |   |             | 10,612,853 |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|                                         |                       | Total income |             | $          | 54,067,525 |         |            | $         | 6,402,552 |              |            | $            | 765,679    |   |             | $           |            |   |             | $          | 61,235,756 | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|Revenues from affiliates                 |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|                                         | Total interest income |              | $           | 164,772    |            |         | $          |          |           |              | $          | 2,704,448    |            |   | $           | (2,869,220  | )           |   | $           |           |           
|                                         | Total other income    |              |             |           |            |         |            |          |           |              |            | 11,511,417   |            |   |             | (11,511,417 | )           |   |             |           |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           
|                                         |                       | Total income |             | $          | 164,772    |         |            | $         |          |              |            | $            | 14,215,865 |   |             | $           | (14,380,637 | ) |             | $          |           | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           

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|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |            |            | 
|---------------------------------------- | --------------------- | ------------ | ----------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | ---------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                         |                       |              |             | 2001      
|                                         |                       |              |             |           
|                                         |                       |              |             |            |            |         |            | Mortgage  |           |              |            |              |            |   |             |            |             |   |             |           
|                                         |                       |              |             | Bank       |            | Banking |            | All Other |           | Eliminations |            | Consolidated
|                                         |                       |              |             |            |            |         |            |           |           |              |            |             
|Total interest income                    |                       | $            | 49,337,165  |            |            | $       | 1,009,166  |           |           | $            | 3,604,315  |              |            | $ | (3,805,967  | )          |             | $ | 50,144,679  |           
|Total interest expense                   |                       |              | 25,880,273  |            |            |         | 424,950    |           |           |              | 2,876,986  |              |            |   | (2,075,917  | )          |             |   | 27,106,292  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Net interest income                      |                       |              | 23,456,892  |            |            |         | 584,216    |           |           |              | 727,329    |              |            |   | (1,730,050  | )          |             |   | 23,038,387  |           
|Provision for loan losses                |                       |              | 1,575,000   |            |            |         |           |           |           |              |           |              |            |   |            |            |             |   | 1,575,000   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Net interest income after provision      |                       |              | 21,881,892  |            |            |         | 584,216    |           |           |              | 727,329    |              |            |   | (1,730,050  | )          |             |   | 21,463,387  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Total other income                       |                       |              | 4,244,675   |            |            |         | 3,487,316  |           |           |              | 7,587,174  |              |            |   | (6,886,668  | )          |             |   | 8,432,497   |           
|Total other expense                      |                       |              | 14,553,017  |            |            |         | 3,589,535  |           |           |              | 2,126,425  |              |            |   | (1,206,587  | )          |             |   | 19,062,390  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Income before taxes                      |                       |              | 11,573,550  |            |            |         | 481,997    |           |           |              | 6,188,078  |              |            |   | (7,410,131  | )          |             |   | 10,833,494  |           
|Provision for income taxes               |                       |              | 4,346,171   |            |            |         | 140,217    |           |           |              | (559,981   | )            |            |   |            |            |             |   | 3,926,407   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Net income                               |                       | $            | 7,227,379   |            |            | $       | 341,780    |           |           | $            | 6,748,059  |              |            | $ | (7,410,131  | )          |             | $ | 6,907,087   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Other significant items                  |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Total assets                             |                       | $            | 709,094,271 |            |            | $       | 23,747,374 |           |           | $            | 75,236,902 |              |            | $ | (72,227,169 | )          |             | $ | 735,851,378 |           
|Depreciation, amortization and accretion |                       |              | (341,364    | )          |            |         | 530,916    |           |           |              | 141,645    |              |            |   |            |            |             |   | 331,197     |           
|Revenues from external customers         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         | Total interest income |              |             | 49,135,513 |            |         |            | 1,009,166 |           |              |            |             |            |   |             |           |             |   |             | 50,144,679 |           
|                                         | Total other income    |              |             | 4,244,675  |            |         |            | 3,487,316 |           |              |            | 700,506      |            |   |             |           |             |   |             | 8,432,497  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         |                       | Total income |             | $          | 53,380,188 |         |            | $         | 4,496,482 |              |            | $            | 700,506    |   |             | $          |            |   |             | $          | 58,577,176 | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Revenues from affiliates                 |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         | Total interest income |              | $           | 201,652    |            |         | $          |          |           |              | $          | 3,604,315    |            |   | $           | (3,805,967 | )           |   | $           |           |           
|                                         | Total other income    |              |             |           |            |         |            |          |           |              |            | 6,886,668    |            |   |             | (6,886,668 | )           |   |             |           |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         |                       | Total income |             | $          | 201,652    |         |            | $         |           |              |            | $            | 10,490,983 |   |             | $          | (10,692,635 | ) |             | $          |           | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           

|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |            |            | 
|---------------------------------------- | --------------------- | ------------ | ----------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | --------- | - | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                         |                       |              |             | 2000      
|                                         |                       |              |             |           
|                                         |                       |              |             |            |            |         |            | Mortgage  |           |              |            |              |           |   |             |            |            |   |             |           
|                                         |                       |              |             | Bank       |            | Banking |            | All Other |           | Eliminations |            | Consolidated
|                                         |                       |              |             |            |            |         |            |           |           |              |            |             
|Total interest income                    |                       | $            | 42,512,733  |            |            | $       | 873,592    |           |           | $            | 2,315,571  |              |           | $ | (2,477,486  | )          |            | $ | 43,224,410  |           
|Total interest expense                   |                       |              | 24,376,577  |            |            |         | 508,740    |           |           |              | 2,083,910  |              |           |   | (1,042,486  | )          |            |   | 25,926,741  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Net interest income                      |                       |              | 18,136,156  |            |            |         | 364,852    |           |           |              | 231,661    |              |           |   | (1,435,000  | )          |            |   | 17,297,669  |           
|Provision for loan losses                |                       |              | 700,000     |            |            |         |           |           |           |              |           |              |           |   | (13,008     | )          |            |   | 686,992     |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Net interest income after provision      |                       |              | 17,436,156  |            |            |         | 364,852    |           |           |              | 231,661    |              |           |   | (1,421,992  | )          |            |   | 16,610,677  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Total other income                       |                       |              | 2,533,761   |            |            |         | 1,506,685  |           |           |              | 5,765,776  |              |           |   | (4,870,850  | )          |            |   | 4,935,372   |           
|Total other expense                      |                       |              | 11,265,041  |            |            |         | 2,380,581  |           |           |              | 1,652,724  |              |           |   | (841,357    | )          |            |   | 14,456,989  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Income before taxes                      |                       |              | 8,704,876   |            |            |         | (509,044   | )         |           |              | 4,344,713  |              |           |   | (5,451,485  | )          |            |   | 7,089,060   |           
|Provision for income taxes               |                       |              | 2,914,831   |            |            |         | (173,075   | )         |           |              | (391,330   | )            |           |   |            |            |            |   | 2,350,426   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Net income                               |                       | $            | 5,790,045   |            |            | $       | (335,969   | )         |           | $            | 4,736,043  |              |           | $ | (5,451,485  | )          |            | $ | 4,738,634   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Other significant items                  |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Total assets                             |                       | $            | 590,470,931 |            |            | $       | 12,763,057 |           |           | $            | 70,111,561 |              |           | $ | (68,399,835 | )          |            | $ | 604,945,714 |           
|Depreciation, amortization and accretion |                       |              | (649,893    | )          |            |         | 415,716    |           |           |              | 71,930     |              |           |   |            |            |            |   | (162,247    | )         
|Revenues from external customers         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|                                         | Total interest income |              |             | 42,350,818 |            |         |            | 873,592   |           |              |            |             |           |   |             |           |            |   |             | 43,224,410 |           
|                                         | Total other income    |              |             | 2,533,761  |            |         |            | 1,506,685 |           |              |            | 894,926      |           |   |             |           |            |   |             | 4,935,372  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|                                         |                       | Total income |             | $          | 44,884,579 |         |            | $         | 2,380,277 |              |            | $            | 894,926   |   |             | $          |           |   |             | $          | 48,159,782 | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|Revenues from affiliates                 |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|                                         | Total interest income |              | $           | 161,915    |            |         | $          |          |           |              | $          | 2,315,571    |           |   | $           | (2,477,486 | )          |   | $           |           |           
|                                         | Total other income    |              |             |           |            |         |            |          |           |              |            | 4,870,850    |           |   |             | (4,870,850 | )          |   |             |           |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           
|                                         |                       | Total income |             | $          | 161,915    |         |            | $         |          |              |            | $            | 7,186,421 |   |             | $          | (7,348,336 | ) |             | $          |           | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |           |   |             |            |            |   |             |           

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|21. |  | DEFINITIVE AFFILIATION AGREEMENT AND SUBSEQUENT EVENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | 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 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.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

There has been no occurrence requiring a response to this item.




PART III

The
information relating to Items 10, 11, 12 (except as set forth below) and 13 of this Report will be
filed as an amendment to this Report on or before April 30, 2003 or the Company
will otherwise have filed a definitive proxy statement involving the election
of directors pursuant to Regulation 14A, which definitive proxy statement will
contain such information.

In
January 2002, the Securities and Exchange Commission adopted new
rules for the disclosure of equity compensation plans. The purpose of
the new rules is to summarize the potential dilution that could occur
from past and future equity grants under all equity compensation
plans. The following provides tabular disclosure of the number of
securities to be issued upon the exercise of outstanding options, the
weighted average exercise price of outstanding options, and the number of
securities remaining available for future issuance under equity
compensation plans. All of the Companys equity compensation
plans have been approved by the Companys shareholders.

|                                                           |  |                |           |                   |  |               |       |  |  |  |         | 
|---------------------------------------------------------- |  | -------------- | --------- | ----------------- |  | ------------- | ----- |  |  |  | ------- | 
|                                                           |  |                |           |                   |  | Number of    
|                                                           |  | Number of      |           |                   |  | securities   
|                                                           |  | securities to  |           |                   |  | remaining    
|                                                           |  | be issued upon |           | Weighted-average  |  | available for
|                                                           |  | exercise of    |           | exercise price of |  | future       
|                                                           |  | outstanding    |           | outstanding       |  | issuance     
|                                                           |  | options,       |           | Options,          |  | under equity 
|                                                           |  | warrants and   |           | warrants and      |  | compensation 
|Plan Category                                              |  | rights         |           | rights            |  | plans        
|                                                           |  |                |           |                   |  |              
|Equity compensation plans approved by security
    holders |  |                |           |                   |  |               |       |  |  |  |         | 
|1990 Incentive Stock Option Plan                           |  |                | 1,313,267 |                   |  |               | 7.26  |  |  |  |        | 
|2000 Incentive Stock Option Plan                           |  |                | 856,678   |                   |  |               | 13.03 |  |  |  | 971,582 | 
|2000 Stock Purchase Plan                                   |  |                |          |                   |  |               |      |  |  |  | 23,196  | 
|2001 Key Employee Restricted Stock Plan                    |  |                |          |                   |  |               |      |  |  |  | 236,497 | 

Item 14. Controls and Procedures.

Management has developed and implemented a policy and procedures for
reviewing disclosure controls and procedures and internal controls on a
quarterly basis. On February 28, 2003 (the evaluation date related to this
annual report on Form 10-K for the year ended December 31, 2002) management,
including the Companys principal executive and financial officers, evaluated
the effectiveness of the design and operation of disclosure controls and
procedures, and, based on its evaluation, our principal executive and financial
officer have concluded that these controls and procedures are operating
effectively. There were no significant changes in the Companys internal
controls or in other factors that could significantly affect these controls
subsequent to the date of managements evaluation. Management noted no
significant deficiencies in the design or operation of the Companys internal
controls and the Companys auditors were so advised.

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

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Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)(1).   Financial Statements and Auditors Report.

The following financial statements are filed with this report:

Independent Auditors Report  Deloitte & Touche LLPConsolidated Balance Sheets  December 31, 2002 and 2001Consolidated Statements of Income  Years ended December 31, 2002, 2001 and 2000Consolidated Statements of Changes in Stockholders Equity  Years ended December 31, 2002, 2001 and 2000Consolidated Statements of Cash Flows  Years ended December 31, 2002, 2001 and 2000Notes to Consolidated Financial Statements


(2)   Financial Statement Schedules.

All financial statement schedules of the Registrant have been omitted as
the required information is inapplicable or the information is presented in the
financial statements or related notes.

(3)   Exhibits. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are denominated by an asterisk
(*) were previously filed as a part of, and are hereby incorporated by
reference from either (i) a Registration Statement on Form S-18 under the
Securities Act of 1933 for the Registrant, Registration No. 33-21232-A
(referred to as S-18), (ii) the Annual Report on Form 10-K for the year ended
December 31, 1989 for the Registrant (referred to as 1989 10-K), (iii) the
Annual Report on Form 10-K for the year ended December 31, 1990 for the
Registrant (referred to as 1990 10-K), (iv) the Annual Report on Form 10-K
for the year ended December 31, 1991 for the Registrant (referred to as 1991
10-K), (v) the Registration Statement on Form S-2 (File No. 33-75678) of the
Registrant (referred to as S-2), (vi) the Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1994 (referred to as 1994 10-QSB), (vii) the
Quarterly Report on Form 10-QSB, the quarter ended June 30, 1995 (referred to
as 1995 10-QSB), (viii) the Annual Report on Form 10-KSB for the year ended
December 31, 1995 (referred to as 1995 10-KSB), (ix) the Annual Report on
Form 10-KSB for the year ended December 31, 1996 (referred to as 1996
10-KSB), (x) the Annual Report on Form 10-KSB for the year ended December 31,
1997 (referred to as 1997 10-KSB), (xi) the Annual Report on Form 10-KSB for
the year ended December 31, 1998 (referred to as 1998 10-KSB), (xii) the
Annual Report on Form 10-K for the year ended December 31, 1999 (referred to as
1999 10-K), (xiii) a Registration Statement on Form S-8 for the Registrant,
Registration No. 333-65359 (referred to as 1998 S-8), (xiv) a Registration
Statement on Form S-2 (File No. 333-38674) of the Registrant (referred to as
2000 S-2), (xv) a Registration Statement on Form S-8 (File No. 333-52928) of
the Registrant (referred to as 2000 S-8), (xvi) the Annual Report on Form
10-K for the year ended December 31, 2000 (referred to as 2000 10-K) (xvii) a Registration Statement on Form S-8 (File No. 333-76134) of the
Registrant (referred to as 2001 S-8). Except as otherwise indicated, the
exhibit number corresponds to the exhibit number in the referenced document.

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Exhibit No.
        
        
        
        
        
        Description of Exhibit*2.1
        
        
        -
        
        
        Affiliation Agreement, dated
as of July 23, 2002, by and among Fifth Third Bancorp, Fifth Third
Financial Corporation and Franklin Financial Corporation (the
Affiliation Agreement) (July 2002 8-K).*2.1.1
        
        
        -
        
        
        Amendment No. 1, dated
September 9, 2002, to the Affiliation Agreement (September 2002 8-K).*2.1.2
        
        
        -
        
        
        Amendment No. 2, dated
December 10, 2002, to the Affiliation Agreement (December 2002 8-K).*2.1.3
        
        
        -
        
        
        Amendment No. 3, dated
March 27, 2003, to the Affiliation Agreement (March 2003 8-K).*3.1
        
        
        -
        
        
        Charter dated
December 27, 1988 (S-18).*3.2
        
        
        -
        
        
        Amended and Restated Charter
dated February 16, 1989 (S-18).*3.2.1
        
        
        -
        
        
        Articles of Amendment dated
May 20, 1997 (1997 10-KSB).*3.2.2
        
        
        -
        
        
        Articles of Amendment dated
May 19, 1998. (1998 10-KSB).*3.2.3
        
        
        -
        
        
        Articles of Amendment dated
October 17, 2000 (2000 10-K).*3.3
        
        
        -
        
        
        By-Laws adopted
December 30, 1988 (S-18).*4.1
        
        
        -
        
        
        Amended and Restated Trust Agreement dated July 17, 2000 among Franklin
Financial Corporation, SunTrust Bank. Wilmington Trust Company and the
Administrative Trustees (2000 10-K).*4.2
        
        
        -
        
        
        Indenture dated July 17, 2000 between Franklin Financial Corporation
and SunTrust Bank (2000 10-K).*4.3
        
        
        -
        
        
        Guarantee Agreement dated July 17, 2000 by and between Franklin Financial
Corporation and SunTrust Bank (2000 10-K).*10.1
        
        
        -
        
        
        Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H. Hardwick, III, Richard E. Herrington,
Gordon E. Inman, D. Wilson Overton, Harold W. Pierce, Edward M. Richey and Edward P. Silva, and Gordon E.
Inman for lease of offices at 230 Public Square, Franklin, Tennessee
(S-18).*10.2
        
        
        -
        
        
        Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H. Hardwick, III, Richard E. Herrington,
Gordon E. Inman, D. Wilson Overton, Harold W. Pierce, Edward M. Richey and Edward P. Silva, and Gordon E.
Inman for lease of land at 216A and 216B East Main Street, Franklin,
Tennessee (S-18).*10.3
        
        
        -
        
        
        2000 Incentive Stock Option
Plan (2000 S-8, Exhibit 10.1).*10.4
        
        
        -
        
        
        2001 Key Employee Restricted
Stock Plan (2001 S-8).*10.8
        
        
        -
        
        
        1990 Incentive Stock Option
Plan of Registrant, (1989 10-K).*10.8.1
        
        
        -
        
        
        Amendment No. 1 to 1990
Incentive Stock Option Plan (1995 10-KSB).*10.10
        
        
        -
        
        
        Second Amendment to Lease Agreement dated December 3, 1990 between Gordon E. Inman and Franklin Financial
Corporation for lease of additional office space in Franklin,
Tennessee (1991 10-K).*10.13
        
        
        -
        
        
        Third amendment to Lease Agreement dated December 3, 1990 between Gordon B. Inman and Franklin Financial
Corporation for lease of additional office space in Franklin,
Tennessee (S-2).


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##### Table of Contents



*10.14
        
        
        
        -
        
        
        Lease Agreement dated December 16, 1993 by and between Gordon E. Inman and Franklin National Bank for lease
of operations center at 334 Main Street, Franklin, Tennessee (S-2).*10.14.1
        
        
        
        -
        
        
        First Amendment to Lease Agreement dated January 16, 1996 by and between Gordon B. Inman and Franklin
National Bank for lease of additional office space in operations
center. (1995 10-KSB).*10.14.2
        
        
        
        -
        
        
        Third Amendment to Lease Agreement dated August 1, 1999 by and between Gordon E. Inman and Franklin National
Bank for lease of additional office space in operations center. (1999
10-K).*10.15
        
        
        
        -
        
        
        Lease Agreement dated August 16, 1993 between CNL Income Fund V. Ltd. and Franklin National Bank for lease of
office space at the Williamson Square Center in Franklin, Tennessee
(S-2).*10.16
        
        
        
        -
        
        
        Agreement for Assignment of Lease, dated July 21, 1994, by and between First Union National Bank of Tennessee
and Franklin National Bank regarding lease of property in Brentwood,
Tennessee (1994 10-QSB).*10. 17
        
        
        
        -
        
        
        Employment Agreement dated
January 1, 2000 by and between Franklin Financial Corporation and Gordon E. Inman.*10.18
        
        
        
        -
        
        
        Fourth amendment to Lease Agreement dated December 3, 1990 between Gordon E. Inman and Franklin Financial
Corporation for lease of additional office space in Franklin,
Tennessee (1997 10-KSB).*10.19
        
        
        
        -
        
        
        Fifth amendment to Lease Agreement dated December 3, 1990 between Gordon E. Inman and Franklin Financial
Corporation for lease of additional office space in Franklin,
Tennessee. (1998 10-KSB).*10.20
        
        
        
        -
        
        
        FNB 2000 Stock Purchase Plan
(S-8, Exhibit 4.1).21.1
        
        
        
        -
        
        
        Subsidiaries of the Registrant23.1
        
        
        
        -
        
        
        Consent of Deloitte &
Touche LLP.99.1
        
        
        
        -
        
        
        Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.99.2
        
        
        
        -
        
        
        Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(b) Reports on Form 8-K. On December 18, 2002 the Company filed a Report
on Form 8-K with respect to Amendment No. 2 to the Affiliation Agreement by and
among the Company, Fifth Third Bancorp (Fifth Third) and Fifth Third
Financial Corporation, a wholly owned subsidiary of Fifth Third.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 15(d) 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 CORPORATIONDate: March 31, 2003
        
        By:
        
        /s/ Gordon E.
InmanGordon E. Inman
Chairman, President and Chief
Executive Officer
(principal executive officer)Date: March 31, 2003
        
        By:
        
        /s/ Lisa L.
MusgroveLisa L. Musgrove
Senior Vice President and Chief
Financial Officer (principal
financial officer)


Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:

Signature
        
        Title
        
        Date/s/ Gordon E.
InmanGordon E. Inman
        
        Chairman of
the Board, President and
Chief Executive Officer
        
        March 31, 2003/s/ James W. Cross, IVJames W. Cross, IV
        
        Director
        
        March 31, 2003/s/ Robert C. FisherRobert C. Fisher
        
        Director
        
        March 31, 2003/s/ Wilson OvertonWilson Overton
        
        Director
        
        March 31, 2003/s/ Melody J. SmileyMelody J. Smiley
        
        Director
        
        March 31, 2003/s/ Edward M. RicheyEdward M. Richey
        
        Director
        
        March 31, 2003/s/ Edward P. SilvaEdward P. Silva
        
        Director
        
        March 31, 2003


85



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##### Table of Contents






CERTIFICATIONS

I, Gordon E. Inman, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Franklin Financial
Corporation;
|-- |  | ----------------------------------------------------------------------------------



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



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



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



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



| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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

Date: March 31, 2003/s/ Gordon E.
InmanGordon E. Inman
Chairman, President and Chief
Executive Officer


86



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##### Table of Contents



CERTIFICATIONS

I, Lisa Musgrove, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Franklin Financial
Corporation;
|-- |  | ----------------------------------------------------------------------------------



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



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



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



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



| | e) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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

Date: March 31, 2003/s/ Lisa MusgroveLisa Musgrove
Senior Vice President and Chief
Financial Officer


87



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##### Table of Contents



FRANKLIN FINANCIAL CORPORATION




EXHIBIT INDEX

Exhibit Number
        
        
        
        Description of Exhibit21.1
        
        -
        
        Subsidiaries of the Registrant23.1
        
        -
        
        Consent of Deloitte & Touche LLP99.1
        
        -
        
        Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.2
        
        -
        
        Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


53