##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  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, 2003 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. 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 (3,817,375 shares) on June 30, 2003, the last
business day of the registrants most recently completed second fiscal quarter,
was approximately $114,712,119 based on the closing price of the registrants
common stock as reported on the NASDAQ National Market on June 30, 2003. 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
1, 2004: 8,394,806 shares of no par value common stock. 1




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|                                             |                                                                                              |  |  |  |  |  |  | 
|-------------------------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                      
|                                             | Item 1. Business                                                                            
|                                             | Item 2. Properties                                                                          
|                                             | Item 3. Legal Proceedings                                                                   
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                 
|PART II                                     
|                                             | Item 5. Market for Common Equity and Related Stockholder Matters                            
|                                             | Item 6. Selected Financial Data                                                             
|                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
|                                             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                         
|                                             | Item 8. Financial Statements and Supplementary Data                                         
|                                             | CONSOLIDATED BALANCE SHEETS                                                                 
|                                             | CONSOLIDATED STATEMENTS OF INCOME                                                           
|                                             | CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY                                  
|                                             | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                       
|                                             | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                  
|                                             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|                                             | Item 9a. Controls and Procedures                                                            
|PART III                                    
|                                             | Item 10. Directors and Executive Officers of the Registrant                                 
|                                             | Item 11. Executive Compensation                                                             
|                                             | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|                                             | Item 13. Certain Relationships and Related Transactions                                     
|                                             | Item 14. Principal Accountant Fees and Services                                             
|                                             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                   
|SIGNATURES                                  
|EXHIBIT INDEX                               
|EX-14.1 CODE OF ETHICS                      
|EX-21.1 SUBSIDIARIES OF THE REGISTRANT      
|EX-23.1 CONSENT OF DELOITTE & TOUCHE LLP    
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2 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 2004 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, an Ohio corporation (Fifth Third) through the merger
of the Company with and into a wholly owned subsidiary of Fifth Third. The
original Agreement provided that each shareholder of the Company would receive,
on a tax-free basis, between 0.3832 and 0.4039 shares of common stock of Fifth
Third for each share of Company common stock owned, with the exact ratio to be
determined based on the average closing price of the common stock of Fifth
Third for the ten consecutive trading days ending on the fifth trading day
preceding the closing of the merger. On September 9, 2002 and December 10, 2002, the parties amended the
Agreement to extend the deadlines for certain regulatory and other filings by
Fifth Third and to extend the termination date for the Agreement to April 1,
2003. The reasons for the delay related to an investigation by various banking
regulators and a moratorium imposed by the banking regulators prohibiting
acquisitions by Fifth Third, including the pending acquisition of the Company.
On March 27, 2003, Fifth Third announced that it 2




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entered into a written
agreement with the Federal Reserve Bank of Cleveland and the Ohio Department of
Commerce, Division of Financial Institutions arising out of the previously
discussed regulatory review of Fifth Third. The written agreement outlines a
series of steps to address and strengthen Fifth Thirds risk management
processes and internal controls. These steps include independent third party
reviews and the submission of written plans in a number of areas. These areas
include Fifth Thirds management, corporate governance, internal audit, account
reconciliation procedures and policies, information technology, and strategic
planning. On March 27, 2003, the Company entered into Amendment No. 3 to the
Agreement to extend the termination date of the Agreement to June 30, 2004. In
this amendment, Fifth Third agreed to amend the exchange ratio in the merger to
provide that each outstanding share of Franklin Financial common
stock will be exchanged for that number of shares or Fifth Third
common stock equal to (1) the sum of (a) $31.00 and (b) any increase
in the book value per share of Franklin Financial common stock,
excluding certain items, from March 31, 2003 through the end of the
fiscal quarter preceding the effective time of the merger divided by
(2) the average closing price of Fifth Third common stock for the 10
consecutive trading days ending on the fifth day before the effective
date of merger. 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 an additional 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 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 3




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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 sold
property, business and life insurance and provided products and services to
both bank and nonbank customers. Effective November 1, 2003, the Company
ceased operations of the insurance agency and sold all rights, title and
interest of the insurance policies to an independent agency. Securities Company.Franklin Financial Securities commenced operations in
October 1997. The securities subsidiary offers financial planning and
securities brokerage services through Fifth Third Securities. The securities subsidiary receives referrals from
Franklin National Bank employees. The securities subsidiary currently
has one
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, it has 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. 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. 4




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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, 2003, 2002 and 2001. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities. AVERAGE CONSOLIDATED ASSETS Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Cash and due from banks
    
    $
    24,053
    
    
    $
    20,277
    
    
    $
    14,180Securities
    
    
    284,776
    
    
    
    249,553
    
    
    
    240,560Federal funds sold and reverse repurchases
    
    
    7,075
    
    
    
    10,963
    
    
    
    6,695Gross loans
    
    
    546,902
    
    
    
    497,217
    
    
    
    377,714Total earning assets
    
    
    838,753
    
    
    
    757,733
    
    
    
    624,969Other assets
    
    
    17,758
    
    
    
    16,938
    
    
    
    15,371Total assets
    
    $
    880,564
    
    
    $
    794,948
    
    
    $
    654,519
 AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS EQUITY Year Ended December 31,2003
    
    2002
    
    2001(In thousands)Non interest-bearing deposits
    
    $
    80,424
    
    
    $
    57,321
    
    
    $
    40,558NOW deposits, including MMDA
    
    
    266,949
    
    
    
    204,486
    
    
    
    146,412Savings deposits
    
    
    30,465
    
    
    
    21,690
    
    
    
    14,500Time deposits
    
    
    362,394
    
    
    
    381,871
    
    
    
    335,137Repurchase agreements
    
    
    200
    
    
    
    1,554
    
    
    
    1,733Other borrowings
    
    
    84,353
    
    
    
    82,557
    
    
    
    78,409Other liabilities
    
    
    2,493
    
    
    
    3,763
    
    
    
    4,167Total liabilities
    
    
    827,278
    
    
    
    753,242
    
    
    
    620,916Stockholders equity
    
    
    53,286
    
    
    
    41,705
    
    
    
    33,603Total liabilities and stockholders equity
    
    $
    880,564
    
    
    $
    794,948
    
    
    $
    654,519
 5




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##### Table of Contents



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, 2003Average
    
    Interest
    
    Average
    
    NetAssets
    
    Amount
    
    Earned
    
    Yield
    
    Yield(Dollars in thousands)Securities
    
    $
    284,776
    
    
    $
    12,647
    (3)
    
    
    4.44
    %Federal funds sold and reverse repurchases
    
    
    7,075
    
    
    
    81
    
    
    
    1.14Gross loans
    
    
    546,902
    (1)
    
    
    33,806
    (2)
    
    
    6.18Total earning assets
    
    $
    838,753
    
    
    $
    46,534
    
    
    
    5.55
    %
    
    
    3.74
    %
 Average
    
    Interest
    
    AverageLiabilities
    
    Amount
    
    Paid
    
    Rate Paid(Dollars in thousands)NOW deposits, including MMDA
    
    $
    266,949
    
    
    $
    2,489
    
    
    
    0.93
    %Savings deposits
    
    
    30,465
    
    
    
    227
    
    
    
    0.75Time deposits
    
    
    362,394
    
    
    
    8,186
    
    
    
    2.26Other borrowings
    
    
    84,553
    
    
    
    4,302
    
    
    
    5.09Total interest-bearing liabilities
    
    $
    744,361
    
    
    $
    15,204
    
    
    
    2.04
    %
  (1)
    
    Includes non-accrual loans of $3,539.(2)
    
    Interest earned on net loans includes $2,159 in loan fees and
loan service fees.(3)
    
    Includes interest earned on tax-exempt securities of $1,795. Year Ended December 31, 2002Average
    
    Interest
    
    Average
    
    NetAssets
    
    Amount
    
    Earned
    
    Yield
    
    Yield(Dollars in thousands)Securities
    
    $
    249,553
    
    
    $
    15,011
    (3)
    
    
    6.02
    %Federal funds sold and reverse repurchases
    
    
    10,963
    
    
    
    144
    
    
    
    1.31Gross loans
    
    
    497,217
    (1)
    
    
    35,468
    (2)
    
    
    7.13Total earning assets
    
    $
    757,733
    
    
    $
    50,623
    
    
    
    6.68
    %
    
    
    4.30
    %
 6




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##### Table of Contents



Average
    
    Interest
    
    AverageLiabilities
    
    Amount
    
    Paid
    
    Rate Paid(Dollars in thousands)NOW deposits, including MMDA
    
    $
    204,486
    
    
    $
    2,454
    
    
    
    1.20
    %Savings deposits
    
    
    21,690
    
    
    
    227
    
    
    
    1.05Time deposits
    
    
    381,871
    
    
    
    10,811
    
    
    
    2.83Other borrowings
    
    
    84,111
    
    
    
    4,528
    
    
    
    5.38Total 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, 2001Average
    
    Interest
    
    Average
    
    NetAssets
    
    Amount
    
    Earned
    
    Yield
    
    Yield(Dollars in thousands)Securities
    
    $
    240,560
    
    
    $
    15,791
    (3)
    
    
    6.56
    %Federal funds sold and reverse repurchases
    
    
    6,695
    
    
    
    286
    
    
    
    4.27Gross loans
    
    
    377,714
    (1)
    
    
    34,068
    (2)
    
    
    9.02Total earning assets
    
    $
    624,969
    
    
    $
    50,145
    
    
    
    8.02
    %
    
    
    3.69
    %
 Average
    
    Interest
    
    AverageLiabilities
    
    Amount
    
    Paid
    
    Rate Paid(Dollars in thousands)NOW deposits, including MMDA
    
    $
    146,412
    
    
    $
    4,437
    
    
    
    3.03
    %Savings deposits
    
    
    14,500
    
    
    
    271
    
    
    
    1.87Other time deposits
    
    
    335,137
    
    
    
    17,275
    
    
    
    5.15Other borrowings
    
    
    80,142
    
    
    
    5,123
    
    
    
    6.39Total 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. 7




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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, 2003compared withYear Ended December 31, 2002Increase (decrease) due to:Volume
    
    Rate
    
    Total(In thousands)Interest earned on:Securities
    
    $
    1,564
    
    
    $
    (3,928
    )
    
    $
    (2,364
    )Federal funds sold
    
    
    (45
    )
    
    
    (18
    )
    
    
    (63
    )Net loans
    
    
    3,071
    
    
    
    (4,733
    )
    
    
    (1,662
    )Total earning assets
    
    
    4,590
    
    
    
    (8,679
    )
    
    
    (4,089
    )Interest paid on:NOW deposits, including MMDA.
    
    
    582
    
    
    
    (547
    )
    
    
    35Savings deposits
    
    
    65
    
    
    
    (65
    )
    
    
    0Time deposits
    
    
    (440
    )
    
    
    (2,185
    )
    
    
    (2,625
    )Other borrowings
    
    
    22
    
    
    
    (248
    )
    
    
    (226
    )Total interest expense
    
    
    229
    
    
    
    (3,045
    )
    
    
    (2,816
    )Change in net
interest income
    
    $
    4,360
    
    
    $
    (5,633
    )
    
    $
    (1,273
    )
 8




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Year Ended December 31, 2002compared withYear Ended December 31, 2001Increase (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
    )
    
    
    1,400Total earning assets
    
    
    9,121
    
    
    
    (8,643
    )
    
    
    478Interest 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
    )
 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. 9




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The following tables present, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories: Year EndedDecember 31, 2003Deposit Category
    
    Average Amount
    
    Average Rate Paid(Dollars in thousands)Non interest-bearing
demand deposits
    
    $
    80,424
    
    
    Not ApplicableNOW deposits, including MMDA
    
    $
    266,949
    
    
    0.93%Savings deposits
    
    $
    30,465
    
    
    0.75%Time deposits
    
    $
    362,394
    
    
    2.26%
 Year EndedDecember 31, 2002Deposit Category
    
    Average Amount
    
    Average Rate Paid(Dollars in thousands)Non interest-bearing
demand deposits
    
    $
    57,321
    
    
    Not ApplicableNOW deposits, including MMDA
    
    $
    204,486
    
    
    1.20%Savings deposits
    
    $
    21,690
    
    
    1.05%Time deposits
    
    $
    381,871
    
    
    2.83%
 Year EndedDecember 31, 2001Deposit Category
    
    Average Amount
    
    Average Rate Paid(Dollars in thousands)Non interest-bearing
demand deposits
    
    $
    40,558
    
    
    Not ApplicableNOW deposits, including MMDA
    
    $
    146,412
    
    
    3.03%Savings deposits
    
    $
    14,500
    
    
    1.87%Time deposits
    
    $
    335,137
    
    
    5.15%
 10




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##### Table of Contents



The following table indicates amounts outstanding of time certificates of
deposit of $100,000 or more and respective maturities at December 31, 2003: TimeCertificatesof Deposit(In thousands)3 months or less
    
    $
    166,2733-6 months
    
    
    70,0246-12 months
    
    
    28,702Over 12 months
    
    
    31,600Total
    
    $
    296,599
 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, 2003, loans within four broad categories exceeded 10% of
total loans: single family residential real estate loans ($130,404,000 or 23%
of total loans), commercial real estate loans ($177,706,000 or 31% of total
loans), commercial and industrial loans ($59,689,000 or 10% of total loans) and
residential construction loans ($89,046,000 or 16% of total loans). Management
believes that 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: 11




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##### Table of Contents



December 31,Type of Loan
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands)Domestic:Commercial, financial
and agricultural
    
    $
    111,390
    
    
    $
    121,663
    
    
    $
    109,470
    
    
    $
    93,618
    
    
    $
    82,288Real estate-construction
    
    
    89,046
    
    
    
    83,681
    
    
    
    71,210
    
    
    
    58,518
    
    
    
    38,982Real estate-mortgage
    
    
    352,446
    
    
    
    332,281
    
    
    
    241,795
    
    
    
    159,439
    
    
    
    130,483Consumer loans
    
    
    19,611
    
    
    
    21,031
    
    
    
    20,878
    
    
    
    20,703
    
    
    
    19,670Total loans
    
    
    572,493
    
    
    
    558,656
    
    
    
    443,353
    
    
    
    332,278
    
    
    
    271,423Less: deferred loan fees
    
    
    (834
    )
    
    
    (961
    )
    
    
    (764
    )
    
    
    (549
    )
    
    
    (512
    )Allowance for possible
loan losses
    
    
    (5,827
    )
    
    
    (5,761
    )
    
    
    (4,269
    )
    
    
    (3,025
    )
    
    
    (2,480
    )Total (net of allowance)
    
    $
    565,832
    
    
    $
    551,934
    
    
    $
    438,320
    
    
    $
    328,704
    
    
    $
    268,431
 The following is a presentation of an analysis of maturities of loans as
of December 31, 2003: Due in 1
    
    Due after 1 to
    
    Due AfterType of Loan
    
    year or less
    
    5 Years
    
    5 Years
    
    Total(In thousands)Commercial, financial
and agricultural
    
    $
    75,993
    
    
    $
    33,868
    
    
    $
    1,529
    
    
    $
    111,390Real estate-construction
    
    
    73,646
    
    
    
    15,400
    
    
    
    
    
    
    
    89,046Real estate-mortgage
    
    
    130,655
    
    
    
    172,691
    
    
    
    49,100
    
    
    
    352,446Consumer loans
    
    
    8,532
    
    
    
    11,079
    
    
    
    
    
    
    
    19,611Total
    
    $
    288,826
    
    
    $
    233,038
    
    
    $
    50,629
    
    
    $
    572,493
 The following is a presentation of an analysis of sensitivities of loans
to changes in interest rates as of December 31, 2003 (dollars in thousands): Loans due after 1 year with
Predetermined interest rates
    
    $
    227,284Loans due after 1 year with
Floating interest rates
    
    $
    56,383
 12




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##### Table of Contents



The following table presents information regarding non-accrual, past due
and restructured loans at the dates indicated (dollars in thousands): December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Loans accounted for
on a non-accrual
basis:Number
    
    
    5
    
    
    
    50
    
    
    
    3
    
    
    
    0
    
    
    
    0Amount
    
    $
    756
    
    
    $
    5,218
    
    
    $
    1,023
    
    
    $
    
    
    
    $
    Accruing loans
which are
contractually past
due 90 days or more
as to principal and
interest payments:Number
    
    
    19
    
    
    
    46
    
    
    
    7
    
    
    
    26
    
    
    
    4Amount
    
    $
    1,957
    
    
    $
    2,459
    
    
    $
    245
    
    
    $
    1,986
    
    
    $
    769Loans defined as
troubled debt
restructurings:Number
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    0
    
    
    
    0Amount
    
    $
    156
    
    
    $
    157
    
    
    $
    160
    
    
    $
    
    
    
    $
    
 As of December 31, 2003, 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 $272,000 and $175,000 would
have been recorded in the years ended December 31, 2003 and 2002, respectively,
if all loans accounted for on a non-accrual basis had been current in
accordance with their original terms. 13




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##### Table of Contents



As of December 31, 2003, management has identified other possible credit
problems as follows (in thousands): Special mention
    
    $
    10,969Substandard
    
    
    16,354Doubtful
    
    
    313Loss
    
    
    Total
    
    $
    27,636
 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 $387,647 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. 14




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##### Table of Contents



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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)Balance at beginning
of year
    
    $
    5,761
    
    
    $
    4,269
    
    
    $
    3,025
    
    
    $
    2,480
    
    
    $
    2,194Charge-offs:Commercial, financial &
Agricultural
    
    
    2,869
    
    
    
    1,058
    
    
    
    274
    
    
    
    31
    
    
    
    25Consumer loans
    
    
    178
    
    
    
    168
    
    
    
    86
    
    
    
    157
    
    
    
    66Real estate-mortgage
    
    
    57
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    3,104
    
    
    
    1,230
    
    
    
    360
    
    
    
    188
    
    
    
    91Recoveries:Commercial, financial &
Agricultural
    
    
    16
    
    
    
    29
    
    
    
    2
    
    
    
    19
    
    
    
    9Consumer loans
    
    
    32
    
    
    
    28
    
    
    
    27
    
    
    
    27
    
    
    
    18Total recoveries
    
    
    48
    
    
    
    57
    
    
    
    29
    
    
    
    46
    
    
    
    27Net charge-offs
    
    
    (3,056
    )
    
    
    (1,173
    )
    
    
    (331
    )
    
    
    (142
    )
    
    
    (64
    )Additions charged to operations
    
    
    3,122
    
    
    
    2,665
    
    
    
    1,575
    
    
    
    687
    
    
    
    350Balance at end of year
    
    $
    5,827
    
    
    $
    5,761
    
    
    $
    4,269
    
    
    $
    3,025
    
    
    $
    2,480Ratio of net charge-offs
during the period to average
loans outstanding during the
year
    
    
    .56
    %
    
    
    .24
    %
    
    
    .09
    %
    
    
    .05
    %
    
    
    .02
    %
 15




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##### Table of Contents



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: 2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Commercial, financial
and agricultural
    
    $
    3,038
    
    
    
    19.5
    %
    
    $
    3,248
    
    
    
    21.8
    %
    
    $
    1,485
    
    
    
    24.7
    %
    
    $
    999
    
    
    
    28.2
    %
    
    $
    882
    
    
    
    30.3
    %Real estate -
construction
    
    
    967
    
    
    
    15.6
    
    
    
    701
    
    
    
    15.0
    
    
    
    560
    
    
    
    16.1
    
    
    
    612
    
    
    
    17.6
    
    
    
    449
    
    
    
    14.4Real estate-mortgage
    
    
    1,477
    
    
    
    61.5
    
    
    
    1,455
    
    
    
    59.4
    
    
    
    1,908
    
    
    
    54.5
    
    
    
    1,107
    
    
    
    48.0
    
    
    
    886
    
    
    
    48.1Consumer loans
    
    
    351
    
    
    
    3.4
    
    
    
    360
    
    
    
    3.8
    
    
    
    325
    
    
    
    4.7
    
    
    
    280
    
    
    
    6.2
    
    
    
    255
    
    
    
    7.2Unallocated
    
    
    (6
    )
    
    
    N/A
    
    
    
    (3
    )
    
    
    N/A
    
    
    
    (9
    )
    
    
    N/A
    
    
    
    27
    
    
    
    N/A
    
    
    
    8
    
    
    
    N/ATotal
    
    $
    5,827
    
    
    
    100.0
    %
    
    $
    5,761
    
    
    
    100.0
    %
    
    $
    4,269
    
    
    
    100.0
    %
    
    $
    3,025
    
    
    
    100.0
    %
    
    $
    2,480
    
    
    
    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, 2003, 20% 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 88% of these
commercial loans at December 31, 2003 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, 2003, real estate mortgage loans constituted 62% of
outstanding loans. Approximately $130,404,000, or 37%, 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, underlying collateral value, payment history and
local and general economic conditions affecting collectibility. 16




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##### Table of Contents



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,
2003 and 2002, the recorded investment in loans that were considered to be
impaired was approximately $16.7 million and $19.2 million, respectively. The
average recorded balance of impaired loans during 2003 and 2002 was $17.0
million and $12.8 million, respectively. The related specific allocation of the
allowance for loan losses for these loans was approximately $388,000 and
$698,000 at December 31, 2003 and 2002, respectively. For the years ended
December 31, 2003, 2002 and 2001, the Company recognized interest income on
those impaired loans of approximately $890,000, $800,000 and $804,000,
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 1.02%, 1.03%
and 0.96% of loans outstanding at December 31, 2003, 2002 and 2001,
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 0.56%, 0.24% and 0.09% at
December 31, 2003, 2002 and 2001, respectively. Management believes these
ratios reflect managements conservative lending and effective efforts to
recover credit losses. 17




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##### Table of Contents



During 2003 the Company experienced a significantly higher amount of loan
net charge offs than in 2002. Total net charge offs for 2003 was $3,056,000
compared to $1,173,000 for 2002 and $331,000 for 2001. Of the total charge
offs during 2003, $2,852,000 or 93.3% were in the commercial loan portfolio
which typically has greater risk than other loan categories. Of these
commercial loans charged off $1.1 million were due to specific customer bankruptcies.
The increase in commercial loan net charge-offs in 2003 is reflective of the
overall challenging economic landscape and stress existing in several industry
segments of the economy. Investments As of December 31, 2003, investment securities, including mortgage-backed
securities, comprised approximately 32% 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 31,2003
    
    2002
    
    2001(In thousands)Investment
CategoryAvailable-for-sale:Obligations of U.S.
Treasury and other U.S.
Agencies
    
    $
    1,108
    
    
    $
    33,023
    
    
    $
    30,696Obligations of States and
Political Subdivisions
    
    
    64,633
    
    
    
    22,940
    
    
    
    16,577Mortgage-backed securities
    
    
    231,164
    
    
    
    189,647
    
    
    
    176,340Other securities
    
    
    6,676
    
    
    
    12,361
    
    
    
    12,691Total
    
    $
    303,581
    
    
    $
    257,971
    
    
    $
    236,304
 18




---



##### Table of Contents





December 31,2003
    
    2002
    
    2001Investment
CategoryHeld-to-maturity:Obligations of U.S.
Treasury and other U.S.
Agencies
    
    $
    
    
    
    $
    4,111
    
    
    $
    7,095Obligations of States and
Political Subdivisions
    
    
    3,812
    
    
    
    3,932
    
    
    
    2,800Mortgage-backed securities
    
    
    71
    
    
    
    185
    
    
    
    282Other securities
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    3,883
    
    
    $
    8,228
    
    
    $
    10,177


The following tables indicate for the year ended December 31, 2003, 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:

Weighted AverageAmount
    
    Yield (1)(Dollars in thousands)Investment
CategoryAvailable-for-sale:Obligations of U.S. Treasury and
other U.S. Agencies:Less than 1 Yr
    
    $
    
    
    
    
    
    %Over 1 through 5 Yrs
    
    
    1,108
    
    
    
    4.13Over 5 through 10 Yrs
    
    
    
    
    
    
    Over 10 Yrs
    
    
    
    
    
    
    Obligations of States and Political
Subdivisions:Less than 1 Yr
    
    $
    
    
    
    
    
    %Over 1 through 5 Yrs
    
    
    100
    
    
    
    7.34Over 5 through 10 Yrs
    
    
    3,189
    
    
    
    6.29Over 10 Yrs
    
    
    61,344
    
    
    
    6.36Other Securities:Less than 1 Yr
    
    $
    
    
    
    
    
    %Over 1 through 5 Yrs
    
    
    550
    
    
    
    8.00Over 5 through 10 Yrs
    
    
    2,089
    
    
    
    7.29Over 10 Yrs
    
    
    4,037
    
    
    
    5.53Mortgage-backed securities
    
    
    231,164
    
    
    
    4.35Total available-for-sale
    
    $
    303,581
    
    
    
    4.81
    %


(1)
    
    Yields are presented based on adjusted cost basis of securities
available-for-sale. Yields based on carrying value would be higher since
fair value is less than adjusted cost at December 31, 2003.
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. 19




---



##### Table of Contents



Weighted AverageAmount
    
    Yield (1)(Dollars in thousands)Investment
CategoryHeld-to-maturity:Obligations of U.S. Treasury and
other U.S. Agencies:Over 10 Yrs
    
    $
    
    
    
    
    
    %Obligations of States and Political
Subdivisions:Less than I Yr
    
    
    
    
    
    
    Over 1 through 5 Yrs
    
    
    1,278
    
    
    
    7.46Over 5 through 10 Yrs
    
    
    2,234
    
    
    
    0.53Over 10 Yrs
    
    
    300
    
    
    
    8.64Mortgage-backed securities
    
    
    71
    
    
    
    3.82Total held-to-maturity
    
    $
    3,883
    
    
    
    3.50
    %
  (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 31,2003
    
    2002
    
    2001Return on average assets
    
    
    1.11
    %
    
    
    1.39
    %
    
    
    1.06
    %Return on average equity
    
    
    18.39
    %
    
    
    26.58
    %
    
    
    20.55
    %Average equity to average
assets ratio
    
    
    6.05
    %
    
    
    5.25
    %
    
    
    5.13
    %Dividend payout ratio
    
    
    21.83
    %
    
    
    17.54
    %
    
    
    25.60
    %
 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. 20




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##### Table of Contents



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. 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. The Bank has an ATM (automated teller machine) processing
agreement with Intercept Systems, Inc. Employees The Company presently employs 188 persons on a full-time basis, including
67 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. Supervision and Regulation The following discussion is only intended to provide brief summaries of
significant statutes and regulations that affect the banking industry and
therefore is not complete. Changes in applicable laws or regulations, and in
the policies of regulators, may have a material effect on the Companys
business and prospects. Management cannot accurately predict the nature or
extent of the effects on the Companys business and earnings that fiscal or
monetary policies, or new federal or state laws, may have in the future. The Company General.As a bank holding company, the Company is subject to the Bank Holding
Company Act of 1956, which places the Company under the supervision of the
Board of Governors of the Federal 21




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Reserve. The Company must file annual
reports with the Federal Reserve and must provide it with such
additional information as it may require. In addition, the Federal Reserve
periodically examines the Company and the Bank. Bank Holding Company Regulation.In general, the Bank Holding Company Act
limits bank holding company business to owning or controlling banks and
engaging in other banking-related activities. Bank holding companies must
obtain the Federal Reserve Boards approval before they:  
    
    acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly
or indirectly, of more than 5% of the voting shares of such bank;
    
    merge or consolidate with another bank holding company; or
    
    acquire substantially all of the assets of any additional banks. Subject to certain state laws, a bank holding company that is adequately
capitalized and adequately managed may acquire the assets of both in-state and
out-of-state banks. Under the Gramm-Leach-Bliley Act of 1999, a bank holding
company meeting certain qualifications may apply to the Federal Reserve Board
to become a financial holding company, and thereby engage (directly or through
a subsidiary) in certain activities deemed financial in nature, such as
securities brokerage and insurance underwriting. With certain exceptions, the Bank Holding Company Act prohibits bank holding
companies from acquiring direct or indirect ownership or control of voting
shares in any company that is not a bank or a bank holding company unless the
Federal Reserve Board determines such activities are incidental or closely
related to the business of banking. The Change in Bank Control Act of 1978 requires a person (or group of persons
acting in concert) acquiring control of a bank holding company to provide the
Federal Reserve Board with 60 days prior written notice of the proposed
acquisition. Following receipt of this notice, the Federal Reserve Board has
60 days (or up to 90 days if extended) within which to issue a notice
disapproving the proposed acquisition. In addition, any company must obtain
the Federal Reserve Boards approval before acquiring 25% (5% if the company
is a bank holding company) or more of the outstanding shares or otherwise
obtaining control over the Company. Financial Services Modernization. The laws and regulations that affect banks
and bank holding companies underwent significant changes as a result of the
Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act. Generally, the act (i) repealed the historical
restrictions on preventing banks from affiliating with securities firms, (ii)
provided a uniform framework for the activities of banks, savings institutions
and their holding companies, (iii) broadened the activities that may be
conducted by national banks and banking subsidiaries of bank holding companies,
(iv) provided an enhanced framework for protecting the privacy of consumers
information and (v) addressed a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions. Bank holding companies may now engage in a wider variety of financial
activities than permitted under previous law, particularly insurance and
securities activities. In addition, in a change from previous law, a bank
holding company may be owned, controlled or acquired by any company engaged in
financially related activities, so long as such company meets certain
regulatory requirements. The act also permits national banks (and certain state
banks), either directly or through operating subsidiaries, to engage in 22




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certain
non-banking financial activities. Transactions with Affiliates.The Company and the Bank are deemed affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. Generally, the Federal Reserve
Act limits the extent to which a financial institution or its subsidiaries may
engage in covered transactions with an affiliate. It also requires all
transactions with an affiliate, whether or not covered transactions, to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term covered
transaction includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. Tie-In Arrangements.The Company and the Bank cannot engage in certain tie-in
arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions,
neither the Company nor the Bank may condition an extension of credit on either
a requirement that the customer obtain additional services provided by either
of the Company or the Bank, or an agreement by the customer to refrain from
obtaining other services from a competitor. The Federal Reserve Board has
adopted exceptions to its anti-tying rules that allow banks greater flexibility
to package products with their affiliates. These exceptions were designed to
enhance competition in banking and non-banking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers. State Law Restrictions.As a Tennessee business corporation, the Company may be
subject to certain limitations and restrictions under applicable Tennessee
corporate law. In addition, although the Bank is a national bank and therefore
primarily regulated by the Office of the Comptroller of the Currency (OCC),
Tennessee banking law may restrict certain activities of the Bank. The Bank General. The Bank, as a national banking association, is subject to regulation
and examination by the OCC. The federal laws that apply to the Bank regulate,
among other things, the scope of its business, its investments, its reserves
against deposits, the timing of the availability of deposited funds and the
nature and amount of and collateral for loans. The laws and regulations
governing the Bank generally have been promulgated to protect depositors and
not to protect shareholders of the Company or the Bank. Community Reinvestment Act.The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their
jurisdiction, the OCC evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
banks. These factors are also considered in evaluating mergers, acquisitions,
and applications to open a branch or facility. Insider Credit Transactions. Banks are also subject to certain restrictions
imposed by the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders, or any related interests of such
persons. Extensions of credit must be made on substantially the same terms,
including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than those prevailing at the time for
comparable transactions with persons not covered above and who are not
employees. Also, such extensions of credit must not involve more than the
normal risk of repayment or present other unfavorable features. Federal Deposit Insurance Corporation Improvement Act. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 each federal banking
agency has prescribed, by regulation, 23




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noncapital safety and soundness standards
for institutions under its authority. These standards cover internal controls,
information systems, and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational
and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. Management believes
that the Bank meets all such standards. Interstate Banking and Branching.The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 permits nationwide interstate banking and
branching under certain circumstances. This legislation generally authorizes
interstate branching and relaxes federal law restrictions on interstate
banking. Currently, bank holding companies may purchase banks in any state,
and states may not prohibit such purchases. Additionally, banks are permitted
to merge with banks in other states as long as the home state of neither
merging bank has opted out. The act requires regulators to consult with
community organizations before permitting an interstate institution to close a
branch in a low-income area. The federal banking agencies prohibit banks from
using their interstate branches primarily for deposit production and have
accordingly implemented a loan-to-deposit ratio screen to ensure compliance
with this prohibition. Tennessee has opted in to the Interstate Act and allows in-state banks to
merge with out-of-state banks subject to certain requirements. Tennessee law
generally authorizes the acquisition of an in-state bank by an out-of-state
bank by merger with a Tennessee financial institution that has been in
existence for at least 3 years prior to the acquisition. With regard to
interstate bank branching, an out-of-state bank that does not already operate a
branch in Tennessee may establish de novo branches in Tennessee, if the laws of
the home state of the out-of-state bank permit Tennessee banks to establish de
novo branches in that state. Deposit Insurance.The deposits of the Bank are currently insured to a maximum
of $100,000 per depositor through a fund administered by the Federal Deposit
Insurance Corporation. All insured banks are required to pay semi-annual
deposit insurance premium assessments to the Federal Deposit Insurance
Corporation. Capital Adequacy Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital
falls below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities. The Federal Deposit Insurance Corporation, the OCC and the Federal Reserve use
risk-based capital guidelines for banks and bank holding companies. These are
designed to make such capital requirements more sensitive to differences in
risk profiles among banks and bank holding companies, to account for
off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items. The guidelines are minimums, and the Federal Reserve has noted
that bank holding companies contemplating significant expansion programs should
not allow expansion to diminish their capital ratios and should maintain ratios
well in excess of the minimum. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1
capital for bank holding companies includes common shareholders equity,
certain qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, less intangibles except as described
above. 24




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The FDIC, the OCC and the Federal Reserve also employ a leverage ratio, which
is Tier 1 capital as a percentage of total assets less intangibles, to be used
as a supplement to risk-based guidelines. The principal objective of the
leverage ratio is to constrain the maximum degree to which a bank holding
company or bank may leverage its equity capital base. A minimum leverage ratio
of 3% is required for the most highly rated bank holding companies and banks.
Other bank holding companies and banks and bank holding companies seeking to
expand, however, are required to maintain leverage ratios of at least 4% to 5%. The Federal Deposit Insurance Corporation Improvement Act created a statutory
framework of supervisory actions indexed to the capital level of the individual
institution. Under regulations adopted by the FDIC, the OCC and the Federal
Reserve, an institution is assigned to one of five capital categories depending
on its total risk-based capital ratio, Tier 1 risk-based capital ratio, and
leverage ratio, together with certain subjective factors. Institutions which
are deemed to be undercapitalized depending on the category to which they are
assigned are subject to certain mandatory supervisory corrective actions. Recent Significant Changes in Banking Laws and Regulations International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001.On October 26, 2001, the USA PATRIOT Act was enacted. It includes the
International Money Laundering Abatement and Anti-Terrorist Financing Act of
2001 and strong measures to prevent, detect and prosecute terrorism and
international money laundering. As required by the IMLAFA, the federal banking
agencies, in cooperation with the U.S. Treasury Department, established rules
that generally apply to insured depository institutions and U.S. branches and
agencies of foreign banks. Among other things, the new rules require that financial institutions implement
reasonable procedures to (1) verify the identity of any person opening an
account; (2) maintain records of the information used to verify the persons
identity; and (3) determine whether the person appears on any list of known or
suspected terrorists or terrorist organizations. The rules also prohibit banks
from establishing correspondent accounts with foreign shell banks with no
physical presence and encourage cooperation among financial institutions, their
regulators and law enforcement to share information regarding individuals,
entities and organizations engaged in terrorist acts or money laundering
activities. The rules also limit a financial institutions liability for
submitting a report of suspicious activity and for voluntarily disclosing a
possible violation of law to law enforcement. Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act of 2002
was enacted to address corporate and accounting fraud. It established a new
accounting oversight board that enforces 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,
it (i) subjects bonuses issued to top executives to disgorgement if a
restatement of a companys financial statements was due to corporate 25




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misconduct; (ii) prohibits an officer or director from 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. Available Information The
Company maintains a website at www.franklinnetbranch.com. 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. 
 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 $41,465. 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 26




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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. 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 $10,042. 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 $15,821. 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 $10,407. 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 $4,540. 27




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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 $3,091. 
 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 million and punitive
damages in an amount not to exceed $40 million from each defendant. On
September 3, 2002, the Court granted Mr. Pressmans motion to continue trial
and set February 25, 2003, to begin the trial. A bench trial on the merits of
the case was held between February 25 and March 7, 2003. On April 3, 2003, the
United States District Judge issued an Order in which a judgment was entered
for the Defendants Franklin National Bank and Mr. Inman on all of Mr.
Pressmans claims. On May 2, 2003, Mr. Pressman filed a Notice of Appeal to the
United States Court of Appeals for the Sixth Circuit. A Proof Brief of Appellee
Franklin National Bank was filed with the Court on November 20, 2003. 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, 2003
to a vote of security holders of the Company. 
 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 28




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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, 2003First Quarter
    
    $
    30.05
    
    
    $
    18.60
    
    
    $
    .05775Second Quarter
    
    $
    30.50
    
    
    $
    29.12
    
    
    $
    .05775Third Quarter
    
    $
    31.33
    
    
    $
    29.61
    
    
    $
    .05775Fourth Quarter
    
    $
    31.36
    
    
    $
    30.32
    
    
    $
    .05775Fiscal 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
    
    
    $
    .055
 Holders of Common Stock. As of March 1, 2004, the approximate number of
holders of record of the Companys common stock was 841. 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. Recent Sales of Unregistered Securities. There were no sales of unregistered securities during the fourth quarter
of 2003. 29




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Item 6. Selected Financial Data. At or for the Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in thousands)EarningsInterest income
    
    $
    46,534
    
    
    $
    50,623
    
    
    $
    50,144
    
    
    $
    43,224
    
    
    $
    30,691Interest expense
    
    
    15,204
    
    
    
    18,020
    
    
    
    27,106
    
    
    
    25,927
    
    
    
    15,185Net interest income
    
    
    31,330
    
    
    
    32,603
    
    
    
    23,038
    
    
    
    17,298
    
    
    
    15,506Provision for loan losses
    
    
    3,122
    
    
    
    2,665
    
    
    
    1,575
    
    
    
    687
    
    
    
    350Other income
    
    
    11,174
    
    
    
    10,613
    
    
    
    8,432
    
    
    
    4,935
    
    
    
    4,665Other expense
    
    
    24,483
    
    
    
    22,869
    
    
    
    19,062
    
    
    
    14,457
    
    
    
    13,006Net income
    
    
    9,798
    
    
    
    11,085
    
    
    
    6,907
    
    
    
    4,739
    
    
    
    4,470Net income per share (basic)
    
    $
    1.18
    
    
    $
    1.40
    
    
    $
    .88
    
    
    $
    .61
    
    
    $
    .58Net income per share (diluted)
    
    $
    1.08
    
    
    $
    1.27
    
    
    $
    .83
    
    
    $
    .57
    
    
    $
    .54Average BalancesAssets
    
    $
    880,564
    
    
    $
    794,948
    
    
    $
    654,519
    
    
    $
    503,964
    
    
    $
    373,901Deposits
    
    
    740,232
    
    
    
    665,368
    
    
    
    536,607
    
    
    
    427,611
    
    
    
    333,840Loans, net
    
    
    546,902
    
    
    
    497,217
    
    
    
    377,714
    
    
    
    296,251
    
    
    
    256,206Earning assets
    
    
    838,753
    
    
    
    757,733
    
    
    
    624,969
    
    
    
    473,257
    
    
    
    350,377Shareholders equity
    
    
    53,286
    
    
    
    41,705
    
    
    
    33,603
    
    
    
    24,188
    
    
    
    23,250Balance Sheet DataAssets
    
    $
    953,565
    
    
    $
    891,233
    
    
    $
    735,851
    
    
    $
    604,946
    
    
    $
    430,400Deposits
    
    
    801,444
    
    
    
    758,372
    
    
    
    617,251
    
    
    
    491,980
    
    
    
    383,857Loans, net
    
    
    560,903
    
    
    
    532,502
    
    
    
    417,789
    
    
    
    318,921
    
    
    
    257,284Earning assets
    
    
    883,538
    
    
    
    846,930
    
    
    
    693,030
    
    
    
    569,985
    
    
    
    403,057Long-term obligations
    
    
    74,000
    
    
    
    74,000
    
    
    
    74,681
    
    
    
    74,708
    
    
    
    6,722Shareholders equity
    
    
    57,034
    
    
    
    48,548
    
    
    
    35,410
    
    
    
    30,730
    
    
    
    22,859Book value per share
    
    
    6.80
    
    
    
    6.09
    
    
    
    4.51
    
    
    
    3.94
    
    
    
    2.94Dividends per share
    
    
    .2358
    
    
    
    .22275
    
    
    
    .2125
    
    
    
    .2025
    
    
    
    .17Diluted shares outstanding (weighted)
    
    
    9,038
    
    
    
    8,754
    
    
    
    8,352
    
    
    
    8,357
    
    
    
    8,322Key RatiosReturn on average assets
    
    
    1.11
    %
    
    
    1.39
    %
    
    
    1.06
    %
    
    
    0.94
    %
    
    
    1.20
    %Return on average shareholders equity
    
    
    18.39
    %
    
    
    26.58
    %
    
    
    20.55
    %
    
    
    19.59
    %
    
    
    19.23
    %Shareholders equity to total assets
    
    
    5.98
    %
    
    
    5.45
    %
    
    
    5.13
    %
    
    
    5.08
    %
    
    
    5.31
    %
 30




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##### Table of Contents



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 strong 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. Effective November 1, 2003, the Company
ceased operations of the insurance agency. 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. In September 2003,
the mortgage subsidiary closed its 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 three policies that,
due to the judgments, estimates and assumptions inherent in those policies, are
critical to an understanding of our consolidated financial statements. These
policies relate to the methodology for the determination of our allowance for
loan and lease losses, the valuation of our repossessed and foreclosed assets
and 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. Repossessed and foreclosed assets are acquired through, or in lieu of,
loan foreclosure and are held for sale and initially recorded at fair value at
the date of foreclosure, thereby establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by independent appraisers
and/ or management and the assets are carried at the lower of carrying amount
or fair value less cost to sell. Gains and losses from the sale of these
assets are included 31




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##### Table of Contents



in other income or other expense as appropriate. Any expenses to maintain
such assets and changes in the valuation allowance, if any, are included in
other expenses. Servicing assets on loans sold are measured by allocating the previous
carrying amount between the assets sold and the retained interests based on
their relative fair values at the date of transfer. Our mortgage servicing
rights are related to in-house originations serviced for others. The initial
amount recorded as mortgage servicing rights is essentially the difference
between the amount that can be realized when loans are sold, with servicing
released, as compared to loans sold, with servicing retained. Mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. These policies and the judgments, estimates and assumptions are described
in greater detail in 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 $51.0 million at December 31, 2003. Loans and securities
scheduled to mature within one year exceeded $288.8 million at December 31,
2003, which should provide further liquidity. In addition, approximately $303.6
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 $47.5 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 $15.0 million in funds
from the Federal Home Loan Bank and $72.5 million in federal funds lines to
assist with capital and liquidity needs. At December 31, 2003, the Company had
$1.1 million in borrowings against its line of credit and the Bank had $1.7
million federal funds purchased outstanding and $15.0 million from
the Federal Home Loan Bank 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 met all financial covenants at December 31, 2003. 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 32




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##### Table of Contents



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 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. 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 $73.5 million in
brokered deposits at December 31, 2003 to help fund 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 $48.3 million in loan commitments are expected to be funded
within the next six months. Furthermore, the Bank has approximately $96.1
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 2004. 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, 2003. 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. 33




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##### Table of Contents



Interest Rate Sensitivity. The following is an analysis of rate sensitive
assets and liabilities as of December 31, 2003: 0-3 mos.
    
    3-12 mos.
    
    1-5 yrs.
    
    5 or more yrs.
    
    TotalSecurities
    
    $
    17,479
    
    
    $
    34,986
    
    
    $
    186,219
    
    
    $
    73,194
    
    
    $
    311,878Loans
    
    
    327,528
    
    
    
    42,953
    
    
    
    173,024
    
    
    
    28,154
    
    
    
    571,659Federal funds sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total rate sensitive assets
    
    
    345,007
    
    
    
    77,939
    
    
    
    359,243
    
    
    
    101,348
    
    
    
    883,537NOW deposits
    
    
    7,788
    
    
    
    11,680
    
    
    
    50,617
    
    
    
    7,787
    
    
    
    77,872Savings deposits
    
    
    145,780
    
    
    
    29,082
    
    
    
    69,446
    
    
    
    3,223
    
    
    
    247,531Time deposits
    
    
    201,883
    
    
    
    139,709
    
    
    
    47,688
    
    
    
    
    
    
    
    389,280Repurchase agreements
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    200Other borrowings
    
    
    23,750
    
    
    
    
    
    
    
    27,000
    
    
    
    41,000
    
    
    
    91,750Total rate sensitive
Liabilities
    
    
    379,301
    
    
    
    180,571
    
    
    
    194,751
    
    
    
    52,010
    
    
    
    806,633Excess (deficiency) of rate
sensitive assets less
rate sensitive liabilities
    
    $
    (34,294
    )
    
    $
    (102,632
    )
    
    $
    164,492
    
    
    $
    49,338
    
    
    $
    76,904Excess (deficiency) as a
percentage of earning
assets
    
    
    (3.9
    )%
    
    
    (11.6
    )%
    
    
    18.6
    %
    
    
    5.6
    %
    
    
    8.7
    %Cumulative excess
(deficiency)
    
    $
    (34,294
    )
    
    $
    (136,926
    )
    
    $
    27,566
    
    
    $
    76,904
    
    
    $
    76,904Cumulative excess
(deficiency) as a
percentage of earning
assets
    
    
    (3.9
    )%
    
    
    (15.5
    )%
    
    
    3.1
    %
    
    
    8.7
    %
    
    
    8.7
    %
 As indicated in the preceding table, the Company has a negative gap in the
0-3 month and 3-12 month categories between rate sensitive assets and rate
sensitive liabilities and has a positive gap in the greater than 12 months
categories. A negative gap 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, if rates are expected to increase within
12 months the Company would experience a short term decrease in earnings. In a
positive gap situation, the Companys assets would reprice faster in an
increasing interest rate environment which should also have a positive effect
on 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. For
non-maturing deposits the expected repricing dates have been used based on
historical analysis of the Companys deposit portfolio. 34




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##### Table of Contents



Cash Flows. Net cash flow provided by operating activities was $24.6
million in 2003. The most substantial impact being proceeds from the sale of
loans exceeding loans originated for sale by $18.8 million in 2003. The
majority of this loan origination volume is due to the increase in loans
originated in
the mortgage banking segment. Depreciation, amortization and accretion
totaled $4.7 million for 2003. This is composed of $1.1 million of
depreciation, $4.4 million of amortization offset by $723,000 of accretion.
Amortization of premiums in the investment portfolio and of mortgage servicing
rights increased substantially over 2002. Primary uses of cash flows included
the increase in other assets of $8.9 million and the decrease in other
liabilities of $3.0 million. Net cash used in investing activities was $61.0 million in 2003, which was
largely due to the banking segment. The net change in the investment portfolio
increased $46.1 million in 2003. Growth in the investment portfolio has
increased due to cashflow from the investment portfolio being reinvested versus
being redeployed to loan portfolio fundings as a result of slower loan growth.
The increase in net loans was $34.5 million in 2003 compared to $120.2 million
in 2002. The use of cashflow from investing activities is offset by
the $18.9 million decrease in federal funds sold for 2003. At December 31,
2003, the Company had no federal funds sold outstanding. Net cash provided by financing activities was $59.3 million in 2003. The
increase in cash flow is primarily due to an increase in deposits of $43.1
million and an increase in other borrowings by $15.4 million for 2003. The
increase in other borrowings is due to a $15 million draw of the Companys
Federal Home Loan Bank line of credit as of December 31, 2003 for short term
funding requirements. In addition, cashflow provided by financing activities
increased due to $2.8 million of proceeds from common stock issuance which is
primarily from exercise of employee stock options. Cash provided by financing
activities is offset partially by $1.9 million of dividends paid. Contractual Obligations and Commitments. Refer to note 8 of the
consolidated financial statements included herein for additional information
regarding the Companys off-balance sheet arrangements which includes other
financial instruments, commitments, guarantees and contingencies. Note 8
provides detail information regarding the Companys commitments to extend
credit, credit card commitments and standby letters of credit. The following
table provides information regarding the Companys contractual obligations,
aggregated by category of contractual obligation, for specified time periods,
as of December 31, 2003: 35




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##### Table of Contents



ContractualObligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    After 5($ In thousands)
    
    Total
    
    1 year
    
    1-3 Years
    
    4-5 Years
    
    YearsCertificates
of Deposits and other time deposits
    
    $
    389,280
    
    
    $
    341,592
    
    
    $
    29,863
    
    
    $
    17,825
    
    
    $
    Long-term Debt and
other borrowings
    
    
    91,750
    
    
    
    17,750
    
    
    
    27,000
    
    
    
    6,000
    
    
    
    41,000Operating Lease
Commitments
    
    
    6,758
    
    
    
    1,336
    
    
    
    2,376
    
    
    
    2,111
    
    
    
    935Purchase
Obligations(1)
    
    
    86
    
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    487,874
    
    
    $
    360,764
    
    
    $
    59,239
    
    
    $
    25,936
    
    
    $
    41,935
  (1)
    
    The Company has made a concentrated effort to shorten the
commitment period of many vendor contracts in anticipation of the
pending merger with Fifth Third Bancorp. Refer to Part I, Item 1.
Business, Recent Developments for more information regarding the
merger. 36




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##### Table of Contents



Capital Adequacy. Stockholders equity at December 31, 2003, was $57.0
million or 6.0% of total assets compared to $48.5 million or 5.5% of total
assets at December 31, 2002. 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, 2003:

For
    
    MinimumCapital
    
    For Well
    
    CompanyAdequacy
    
    Capitalized
    
    Consolidated
    
    BanksPurposes
    
    Category
    
    Actual
    
    ActualLeverage ratio
    
    
    4.00
    %
    
    
    5.00
    %
    
    
    8.1
    %
    
    
    7.4
    %Tier 1 risk-based ratio
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    11.5
    %
    
    
    10.6
    %Total risk-based ratio
    
    
    8.00
    %
    
    
    10.00
    %
    
    
    12.4
    %
    
    
    11.8
    %
 Financial Condition Total
assets have grown $62.3 million, or 7.0%, since December 31, 2002
to a total of $953.6 million at December 31, 2003. The growth during 2003 has
been funded by a $43.1 million increase in deposits and net income of $9.8
million. Total deposits were $801.4 million at December 31, 2003 compared to
$758.4 million at December 31, 2002. The Companys loan demand has slowed slightly as compared to the growth
demonstrated in prior years. The growth in net loans was $28.4 million, or
5.3%, since December 31, 2002 as compared to $114.7 or 27.5% growth during
2002. The primary reason for the decline in loan growth is due to the increased
competition in the Companys primary market and the loss of several loan
officers over the past year. The allowance for loan losses increased $66,000, or 1.2%, from the level
at December 31, 2002, to a total of $5.8 million or approximately 1.02% of
total loans compared to 1.03% of total loans for 2002. The slight increase in
the allowance for loan losses is primarily the result of the amount of growth
in the loan portfolio as opposed to significant deterioration in credit
quality. The Company has seen a slight decrease in the commercial loan
portfolio which carries a higher reserve factor. Management believes that the
level in the allowance for loan losses is adequate at December 31, 2003.
Management reviews in detail the level of the allowance for loan losses on a
quarterly basis. In addition, the Company has 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 .74% of total loans at December
31, 2003, have historically been below peer group average. At December 31,
2003, the Bank had non-accrual loans of $756,000 compared to non-accrual loans
of $5.2 million at December 31, 2002. The Banks non-accrual loans were higher
than usual as of December 31, 2002 due to one large loan relationship of $3.8
million that was placed on non-accrual status during the third quarter of 2002.
This loan was foreclosed on during 2003 with $820,000 charged off through the
provision for loan allowance and the remaining amount recorded as repossessed
assets. At December 31, 2003, the Bank had loans that were specifically
classified as impaired of approximately $16.7 million compared to $19.2 million
at December 31, 2002. The specific allocations of the allowance for loan losses
related to impaired loans was $388,000 at December 31, 2003 compared to
$698,000 at December 31, 2002. The average carrying value of impaired loans was
approximately $17.0 million for the year ended December 31, 2003. Interest
income of approximately $890,000 was recognized on these impaired loans during
the year ended December 31, 2003. Refer to the Loan Loss Reserve Section in
Part I Item 1. Business, for additional discussion and information regarding the
allowance for loan losses. 37




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##### Table of Contents



Loans held-for-sale decreased $14.5 million, or 74.6%, since December 31,
2002. The decrease in loans held-for-sale is primarily the result of decreased
loan originations in the mortgage banking segment during the last two quarters
of 2003 as a result of slight increases in mortgage interest rates during that
time period. Loans held-for-sale are carried at fair value. At December 31, 2003 the cost basis of securities classified as
available-for-sale exceeded the fair value of the securities by $470,000. At
December 31, 2002, fair value of the securities classified as
available-for-sale exceeded the cost of securities by $4.5 million. As a
result, unrealized (loss) gain net of taxes of $(290,000) and $2.8 million for
the years ended December 31, 2003 and 2002, respectively, is included in Other
Comprehensive Income in the stockholders equity section of the balance sheet.
The change in unrealized (loss) gain is due to economic market conditions and
slight increases in long-term interest rates during the second half of 2003.
See Notes 1 and 3 to the consolidated financial statements. Available-for-sale
securities increased $45.6 million, or 17.7%, during 2003. The primary reasons
for the significant increase in available-for-sale securities are overall bank
growth and cashflows from the securities being reinvested to a higher extent
versus being redeployed for loan portfolio fundings as in the
prior year. Held-to-maturity securities decreased $4.3 million, or 52.8%,
due to security calls and maturities within this category. The Bank did not
have any purchases in the held-to-maturity category for 2003. Premises and equipment decreased $962,000, or 9.9%, during 2003 primarily
due to depreciation expense. The Company has made a concentrated effort to
reduce the amount of capital expenditures during 2003. Accrued interest
receivable increased $234,000, or 6.3%, during 2003 due to increases of $69.7
million in the Banks loan and securities portfolios offset by continuing
decreases in interest rates during the first half of 2003. Repossessed and foreclosed assets increased $2.1 million in 2003. During
the second quarter 2003, assets were repossessed that collateralized one large
borrowing relationship totaling $2.9 million. The Bank established a valuation
allowance for these assets for the amount of $2.4 million. Subsequent to that,
during 2003, the bank realized proceeds from sales of the assets of
approximately $190,350 and charged $973,000 to the valuation allowance. The
net balance included in repossessed assets at December 31, 2003, for this
relationship was approximately $189,000. Also, during 2003 there were
additional real estate foreclosures totaling $2.8 million offset by sales of
$868,000. Long-term debt and other borrowings increased by $15.4 million in 2003.
The increase is due to a draw of $15 million on the Federal Home Loan Bank line
of credit toward the end of December 2003 for short term funding requirements.
Stockholders equity increased $8.5 million, or 17.5% from December 31, 2002 to
December 31, 2003. The increase in stockholders equity is primarily
attributable to $9.8 million in net income and a $3.7 million increase in
common stock primarily the result of employee stock options exercised offset by
a $3.1 million decrease in other comprehensive income and by $2.0 million in
dividends declared. Results of Operations Fiscal 2003 Compared with Fiscal 2002 The Company had net income of $9.8 million in 2003 compared to $11.1
million in 2002. The Company had income before taxes of $14.9 million in 2003,
representing a 15.7% decrease from the 38




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##### Table of Contents



$17.7 million recorded in 2002.
Earnings per diluted share were $1.08 for 2003 compared to $1.27 for 2002. Total interest income decreased $4.1 million, or 8.1%, in 2003 as compared
to 2002, while total interest expense decreased $2.8 million, or 15.6%, in 2003
as compared to 2002. The variances are primarily due to the banking segment.
The net interest margin of the Company for 2003 was 3.74% compared to 4.30% for
2002. The net interest margin is determined by dividing fully-taxable
equivalent net interest income by average interest-earning assets. The
contraction in the net interest margin for the current year is directly
attributable to the lowest level of interest rates seen in over 40 years. The
decrease in total interest income for 2003 can be attributed to the decrease in
rates offset by an increase in average earning assets of $81.0 million, or
10.7%, in 2003. Of the total decrease in interest income, $2.4 million is
attributable from the investment securities portfolio and $1.7 million is from
the loan portfolio. Over 50% of the Banks loans are variable rate which
causes interest income to decrease faster in a declining rate environment. As
interest rates have declined over the past 2 years, prepayment speeds
accelerated within the securities portfolio resulting in faster repricing of
securities at lower yields. The decrease in interest expense is attributable
to the decrease in interest rates offset by an increase in average interest
bearing liabilities of $52.2 million, or 7.5%, in 2003. The Banks deposits are
relatively short term in nature, which allows them to reprice faster than our
rate sensitive assets. Refer to the Average
Consolidated Assets and Average Consolidated Liabilities and Stockholders
Equity table and to the Interest Rates and
Interest Differential tables and the Rate/Volume Analysis of Net Interest
Income tables in Part I Item 1. Business, of this filing for additional information on net
interest income. The Company expects that net interest income and net interest
margin trends in coming periods will be dependent upon the magnitude of overall
balance sheet growth and the speed of interest rate changes in an improving
economy. The provision for loan losses was $3.1 million in 2003 as compared to $2.7
million in 2002. While asset quality remains strong, increases in the provision
for loan losses have been necessary due to growth in the Banks loan portfolio
and the recessionary economy. Net charge-offs were $3.1 million or .56% of
average loans outstanding in 2003, as compared to $1.2 million, or .24%, of
average loans outstanding in 2002. Of the total charge offs during 2003, $2.9
million or 93.3% were in the commercial loan portfolio which typically has
greater risk than other loan categories. Of these commercial loans charged off
in 2003 $1.1 million were due to specific customer bankruptcies. There were
three large commercial borrowing relationships that totaled $1.7 million of
the commercial loan charge offs in 2003. The increase in commercial loan net
charge-offs in 2003 is reflective of the overall challenging economic landscape
and stress existing in several industry segments of the economy. Total other income of $11.2 million in 2003 increased $562,000, or 5.3%,
from 2002. The increase is largely attributable to an increase in gain on sale
of investment securities of $2.1 million and an increase in gain on sale of
mortgage loans of $225,000 in the mortgage banking segment. The gain on sale of
mortgage loans resulted from the ability to pool mortgage loans to attain
better pricing opportunities. Service charges on deposit accounts increased
$116,000 or 4.1% due to the growth in the deposit portfolio. Income from
mortgage banking activities decreased $205,000 or 4.5% from 2002, primarily
from a decrease in mortgage origination and discount fees of $228,000. As
mortgage interest rates reached a low during 2003 rate competition caused a
decrease in the amount of origination and discount points that could be charged
to customers. Income from the Banks securities subsidiary decreased $330,000,
or 72.3%, from 2002. The decrease is primarily due to the securities
subsidiary only having one broker on staff for all of 2003 compared to three
brokers for most of 2002. 39




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Total other expenses increased $1.6 million, or 7.1%, during 2003 as
compared to 2002. The increase in repossessed and foreclosed assets expense of
$2.2 million is primarily responsible for the increase. During 2003, a $2.4
million valuation allowance was recorded on several pieces of repossessed
assets related to a single customer relationship and a $40,000 valuation
allowance on a piece of foreclosed property was recorded. The increase in
other expenses is offset somewhat by the decrease in salaries and employee
benefits of $450,000, or 3.6% primarily due to a reduction in overall
personnel. The Bank had 188 full time equivalent employees at December 31, 2003
as compared to 215 a year earlier. Mortgage banking segment expenses increased
$247,000, or 12.5%, in 2003 as compared to 2002. The increase is primarily due
to an increase in amortization of mortgage servicing rights over 2002. 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. As the merger was delayed for all of 2003 such costs were
not incurred in 2003. See Part I, Item 1. 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 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.
Earnings per diluted share were $1.27 for 2002 compared to $ 0.83 for 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. 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 40




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##### Table of Contents



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 in 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. 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. 41




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##### Table of Contents



2003Fourth
    
    Third
    
    Second
    
    FirstQuarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands, except per share data)Interest income
    
    $
    11,615
    
    
    $
    11,317
    
    
    $
    11,730
    
    
    $
    11,873Interest expense
    
    
    3,548
    
    
    
    3,667
    
    
    
    3,928
    
    
    
    4,060Net interest income
    
    
    8,067
    
    
    
    7,650
    
    
    
    7,802
    
    
    
    7,813Provision for loan losses
    
    
    1,247
    
    
    
    470
    
    
    
    485
    
    
    
    920Income before income taxes
    
    
    3,591
    
    
    
    5,235
    
    
    
    1,576
    
    
    
    4,498Net income
    
    
    2,422
    
    
    
    3,405
    
    
    
    1,082
    
    
    
    2,890Net income per shareBasic
    
    
    0.29
    
    
    
    0.41
    
    
    
    0.13
    
    
    
    0.35Diluted
    
    
    0.26
    
    
    
    0.37
    
    
    
    0.12
    
    
    
    0.33
 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
 Accounting Pronouncements Recent Accounting PronouncementsIn June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and requires that
the amount recorded as a liability be capitalized by increasing the carrying
amount of the related long-lived asset. Subsequent to initial measurement, the
liability is accreted to the ultimate amount anticipated to be paid, and is
also adjusted for revisions to the timing or amount of estimated cash flows.
The capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss. SFAS No. 143 is required to be
adopted for fiscal years beginning after June 15, 2002. The adoption of SFAS
No. 143 did not have a material impact on the Companys consolidated financial
position or results of operations. 42




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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.
The adoption of SFAS No. 146 did not have a material impact on the Companys
consolidated financial position or results of operations. 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, an entity must
recognize a liability for the fair value of the obligation it assumes under
that obligation. This interpretation is intended to improve the comparability
of financial reporting by requiring identical accounting for guarantees issued
with separately identified consideration and guarantees issued without
separately identified consideration. The initial recognition and measurement
provisions of FIN No. 45 are to be applied prospectively to guarantees issued
or modified after December 31, 2002. The interpretations disclosure
requirements were effective for the Company as of December 31, 2002.
Significant guarantees that have been entered into by the Company are disclosed
in Note 8 to the consolidated financial statements. The adoption of the
recognition and measurement provisions of FIN No. 45 did not have a material
impact on the Companys consolidated financial position or results of
operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement No. 123.
SFAS No. 148
amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. SFAS No. 148 is effective for annual and
interim periods beginning after December 15, 2002. As the Company has elected
not to change to the fair value based method of accounting for stock-based
employee compensation, the adoption of SFAS No. 148 did not have an impact on
the Companys consolidated financial position or results of operations. 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.
In December 2003, the FASB issued FIN No. 46R, Consolidation of Variable
Interest Entities  an interpretation of ARB 51 (revised December 2003), which
replaces FIN 46. FIN No. 46R was primarily issued to clarify the required
accounting for interests in VIEs. Additionally, this Interpretation exempts
certain entities from its requirements and provides for special effective dates
for enterprises that have fully or partially applied FIN No. 46 as of December
24, 2003. Application of FIN No. 46R is required in financial statements of
public enterprises that have interests in structures that are commonly referred
to as special-purpose entities, or SPEs, for periods 43




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##### Table of Contents



ending after December 15,
2003. Application by public enterprises, other than small business issuers, for
all other types of VIEs (i.e., non-SPEs) is required in financial statements
for periods ending after March 15, 2004, with earlier adoption permitted. The
adoption of FIN No. 46R did not have a material impact on the Companys
consolidated financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment to Statement 133 on
Derivative Instruments and Hedging Activities.SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is required to be applied prospectively and is effective
for contracts entered into or modified after June 30, 2003, except for SFAS No.
133 implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003 and certain provisions relating to forward
purchases and sales on securities that do not yet exist. The adoption on April
1, 2003 of the components of SFAS No. 149 which address SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003 did not have a material impact on the Companys
consolidated financial position or results of operations. The adoption on July
1, 2003 of the remaining components of SFAS No. 149 did not have a material
impact on the Companys consolidated financial position or results of
operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The adoption of SFAS No. 150 did
not have a material impact on the Companys consolidated financial position or
results of operations. In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits.SFAS No. 132(R)
expands upon the existing disclosure requirements as prescribed under the
original SFAS No. 132 by requiring more details about pension plan assets,
benefit obligations, cash flows, benefit costs and related information. SFAS
No. 132(R) also requires companies to disclose various elements of pension and
postretirement benefit costs in interim-period financial statements beginning
after December 15, 2003. SFAS No. 132(R) is effective for financial statements
with fiscal years ending after December 15, 2003. The adoption
of SFAS No. 132(R) did not have an impact on the Companys consolidated financial position
or results of operations as the Company does not offer pension or other
postretirement benefits to its employees. 
 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 44




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##### Table of Contents



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, 2003 the Company had a gap
ratio of .8 for the one-year period ending December 31, 2004 Thus, over the
next twelve months, slightly more rate-sensitive liabilities will reprice than
rate-sensitive assets. A
200 basis point decrease in interest rates spread evenly during 2004 is
estimated to cause an increase in net interest income of $953,600 compared to
net interest income if interest rates were unchanged during 2004. In
comparison, a 200 basis point increase in interest rates spread evenly during
2004 is estimated to cause a decrease in net interest income of $953,600 as
compared to net interest income if rates were unchanged during 2004. 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 LLP
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Income - Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Changes in Stockholders Equity - Years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements 45




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##### Table of Contents



INDEPENDENT AUDITORS REPORT

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, 2003
and 2002, 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, 2003. 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,
2003 and 2002, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

March 11, 2004
Nashville, Tennessee

46



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##### Table of Contents






FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |             |             | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------- | ----------- | ----------- | ---- | ----------- | ----------- | ----------- | 
|                                                                               |                                                                                                                                                 |                            |             | 2003        |             | 2002
|ASSETS                                                                         |                                                                                                                                                 |                            |             |             |             |      |             |            
|Cash and cash equivalents (Notes 1 and 2)                                      |                                                                                                                                                 | $                          | 51,025,577  |             |             | $    | 28,061,479  |            
|Federal funds sold                                                             |                                                                                                                                                 |                            |            |             |             |      | 18,922,000  |            
|Investment securities available-for-sale, at fair value (Notes 1 and 3)        |                                                                                                                                                 |                            | 72,417,286  |             |             |      | 68,324,701  |            
|Mortgage-backed securities available-for-sale, at fair value (Notes 1 and 3)   |                                                                                                                                                 |                            | 231,163,546 |             |             |      | 189,646,719 |            
|Investment securities held-to-maturity, at amortized cost (Notes 1 and 3)      |                                                                                                                                                 |                            | 3,811,997   |             |             |      | 8,043,095   |            
|Mortgage-backed securities held-to-maturity, at amortized cost (Notes 1 and 3) |                                                                                                                                                 |                            | 70,848      |             |             |      | 185,468     |            
|Federal Home Loan and Federal Reserve Bank stock                               |                                                                                                                                                 |                            | 4,414,750   |             |             |      | 4,113,200   |            
|Loans held for sale (Notes 1 and 4)                                            |                                                                                                                                                 |                            | 4,929,397   |             |             |      | 19,431,829  |            
|Loans (Notes 1 and 4)                                                          |                                                                                                                                                 |                            | 566,730,369 |             |             |      | 538,263,372 |            
|Allowance for loan losses (Notes 1, 4 and 5)                                   |                                                                                                                                                 |                            | (5,827,413  | )           |             |      | (5,761,101  | )          
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|                                                                               |                                                                                                                                                 | Net loans                  |             |             | 560,902,956 |      |             |             | 532,502,271 | 
|Premises and equipmentnet (Notes 1 and 9)                                     |                                                                                                                                                 |                            | 8,728,285   |             |             |      | 9,690,515   |            
|Accrued interest receivable                                                    |                                                                                                                                                 |                            | 3,947,920   |             |             |      | 3,713,438   |            
|Mortgage servicing rightsnet (Notes 1 and 7)                                  |                                                                                                                                                 |                            | 4,759,146   |             |             |      | 3,748,642   |            
|Repossessed and foreclosed assets (Notes 1 and 6)                              |                                                                                                                                                 |                            | 3,655,066   |             |             |      | 1,555,000   |            
|Other assets (Notes 4 and 13)                                                  |                                                                                                                                                 |                            | 3,738,038   |             |             |      | 3,294,560   |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|TOTAL                                                                          |                                                                                                                                                 | $                          | 953,564,812 |             |             | $    | 891,232,917 |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                           |                                                                                                                                                 |                            |             |             |             |      |             |            
|DEPOSITS (Note 10):                                                            |                                                                                                                                                 |                            |             |             |             |      |             |            
|                                                                               | Noninterest-bearing                                                                                                                             |                            | $           | 86,761,402  |             |      | $           | 78,506,426  |            
|                                                                               | Interest-bearing                                                                                                                                |                            |             | 714,682,628 |             |      |             | 679,865,311 |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|                                                                               |                                                                                                                                                 | Total deposits             |             |             | 801,444,030 |      |             |             | 758,371,737 | 
|Repurchase agreements (Note 1)                                                 |                                                                                                                                                 |                            | 200,000     |             |             |      | 200,000     |            
|Long-term debt and other borrowings (Note 11)                                  |                                                                                                                                                 |                            | 91,750,000  |             |             |      | 76,381,494  |            
|Accrued interest payable                                                       |                                                                                                                                                 |                            | 1,558,968   |             |             |      | 1,478,173   |            
|Other liabilities (Note 13)                                                    |                                                                                                                                                 |                            | 1,577,508   |             |             |      | 6,253,348   |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|                                                                               |                                                                                                                                                 | Total liabilities          |             |             | 896,530,506 |      |             |             | 842,684,752 | 
|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, 8,382,222 and
7,968,022 shares at December 31, 2003 and 2002, respectively |                            |             | 16,349,937  |             |      |             | 12,658,702  |            
|                                                                               | Retained earnings                                                                                                                               |                            |             | 41,060,577  |             |      |             | 33,229,064  |            
|                                                                               | Accumulated other comprehensive (loss) income, net of tax                                                                                       |                            |             | (290,123    | )           |      |             | 2,807,332   |            
|                                                                               | Unearned compensation related to outstanding restricted stock awards                                                                            |                            |             | (86,085     | )           |      |             | (146,933    | )          
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|                                                                               |                                                                                                                                                 | Total stockholders equity |             |             | 57,034,306  |      |             |             | 48,548,165  | 
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            
|TOTAL                                                                          |                                                                                                                                                 | $                          | 953,564,812 |             |             | $    | 891,232,917 |            
|                                                                               |                                                                                                                                                 |                            |             |             |             |      |             |            

See notes to consolidated financial statements.

47



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##### Table of Contents






FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |            |            | 
|--------------------------------------------------- | ------------------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                    |                                                         |                        |            | 2003       |            | 2002 |            | 2001      
|INTEREST INCOME:                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Interest and fees on loans                              |                        | $          | 33,805,891 |            |      | $          | 35,467,954 |            |   | $          | 34,067,746 |           
|                                                    | Taxable securities                                      |                        |            | 10,852,506 |            |      |            | 14,006,665 |            |   |            | 15,078,451 |           
|                                                    | Tax-exempt securities                                   |                        |            | 1,795,058  |            |      |            | 1,004,354  |            |   |            | 712,890    |           
|                                                    | Federal funds sold                                      |                        |            | 80,572     |            |      |            | 143,930    |            |   |            | 285,592    |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total interest income  |            |            | 46,534,027 |      |            |            | 50,622,903 |   |            |            | 50,144,679 | 
|INTEREST EXPENSE:                                   |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Certificates of deposit over $100,000                   |                        |            | 4,677,929  |            |      |            | 5,546,807  |            |   |            | 10,294,209 |           
|                                                    | Other deposits                                          |                        |            | 6,223,553  |            |      |            | 7,944,632  |            |   |            | 11,689,496 |           
|                                                    | Federal Home Loan Bank advances                         |                        |            | 3,383,112  |            |      |            | 3,400,886  |            |   |            | 3,551,725  |           
|                                                    | Other borrowed funds                                    |                        |            | 919,270    |            |      |            | 1,127,389  |            |   |            | 1,570,862  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total interest expense |            |            | 15,203,864 |      |            |            | 18,019,714 |   |            |            | 27,106,292 | 
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INTEREST INCOME                                 |                                                         |                        | 31,330,163 |            |            |      | 32,603,189 |            |            |   | 23,038,387 |           
|PROVISION FOR LOAN LOSSES (Note 5)                  |                                                         |                        | 3,122,000  |            |            |      | 2,665,000  |            |            |   | 1,575,000  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES |                                                         |                        | 28,208,163 |            |            |      | 29,938,189 |            |            |   | 21,463,387 |           
|OTHER INCOME:                                       |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Service charges on deposit accounts                     |                        |            | 2,950,553  |            |      |            | 2,834,865  |            |   |            | 2,491,975  |           
|                                                    | Mortgage banking activities                             |                        |            | 4,341,911  |            |      |            | 4,546,507  |            |   |            | 3,482,375  |           
|                                                    | Gain on sale of investment securities                   |                        |            | 2,115,464  |            |      |            | 1,227,378  |            |   |            | 1,282,587  |           
|                                                    | Gain on sale of mortgage loans                          |                        |            | 1,101,131  |            |      |            | 876,313    |            |   |            |           |           
|                                                    | Other service charges, commissions and fees             |                        |            | 538,921    |            |      |            | 671,385    |            |   |            | 797,901    |           
|                                                    | Commissions on sale of annuities and brokerage activity |                        |            | 126,380    |            |      |            | 456,405    |            |   |            | 377,659    |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total other income     |            |            | 11,174,360 |      |            |            | 10,612,853 |   |            |            | 8,432,497  | 
|OTHER EXPENSES:                                     |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Salaries and employee benefits (Note 17)                |                        |            | 12,006,041 |            |      |            | 12,455,544 |            |   |            | 10,506,797 |           
|                                                    | Occupancy (Notes 9 and 12)                              |                        |            | 2,142,801  |            |      |            | 2,107,176  |            |   |            | 2,060,786  |           
|                                                    | Mortgage banking                                        |                        |            | 2,217,104  |            |      |            | 1,970,159  |            |   |            | 1,203,309  |           
|                                                    | Furniture and equipment                                 |                        |            | 1,140,559  |            |      |            | 1,334,415  |            |   |            | 1,427,952  |           
|                                                    | Repossessed and foreclosed assetsnet (Note 6)          |                        |            | 2,988,552  |            |      |            | 823,453    |            |   |            |           |           
|                                                    | Communications and supplies                             |                        |            | 581,983    |            |      |            | 604,856    |            |   |            | 631,668    |           
|                                                    | Advertising and marketing                               |                        |            | 348,014    |            |      |            | 419,071    |            |   |            | 444,047    |           
|                                                    | Merger expenses                                         |                        |            | 19,172     |            |      |            | 407,160    |            |   |            |           |           
|                                                    | FDIC and regulatory assessments                         |                        |            | 306,162    |            |      |            | 271,627    |            |   |            | 230,095    |           
|                                                    | Loss on sale of mortgage loans                          |                        |            |           |            |      |            |           |            |   |            | 252,722    |           
|                                                    | Other (Note 6)                                          |                        |            | 2,732,979  |            |      |            | 2,475,068  |            |   |            | 2,305,014  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    |                                                         | Total other expenses   |            |            | 24,483,367 |      |            |            | 22,868,529 |   |            |            | 19,062,390 | 
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|INCOME BEFORE INCOME TAXES                          |                                                         |                        | 14,899,156 |            |            |      | 17,682,513 |            |            |   | 10,833,494 |           
|PROVISION FOR INCOME TAXES (Note 13)                |                                                         |                        | 5,101,288  |            |            |      | 6,597,420  |            |            |   | 3,926,407  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INCOME                                          |                                                         | $                      | 9,797,868  |            |            | $    | 11,085,093 |            |            | $ | 6,907,087  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|NET INCOME PER SHARE (Notes 1 and 16):              |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Basic                                                   |                        | $          | 1.18       |            |      | $          | 1.40       |            |   | $          | 0.88       |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Diluted                                                 |                        | $          | 1.08       |            |      | $          | 1.27       |            |   | $          | 0.83       |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|WEIGHTED AVERAGE SHARES OUTSTANDING (Note 16):      |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Basic                                                   |                        |            | 8,301,771  |            |      |            | 7,905,657  |            |   |            | 7,816,634  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           
|                                                    | Diluted                                                 |                        |            | 9,038,346  |            |      |            | 8,753,802  |            |   |            | 8,352,068  |           
|                                                    |                                                         |                        |            |            |            |      |            |            |            |   |            |           

See notes to consolidated financial statements.

48



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##### Table of Contents



FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 Common Stock
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Unamortized CostComprehensive
    
    Retained
    
    Other Comprehensive
    
    Of RestrictedShares
    
    Amount
    
    Income (Loss)
    
    Earnings
    
    Income (Loss)
    
    Stock Awards
    
    TotalBALANCEJanuary 1, 2001Comprehensive income:
    
    
    7,799,931
    
    
    $
    11,478,717
    
    
    
    
    
    
    $
    18,663,127
    
    
    $
    588,332
    
    
    $
    
    
    
    $
    30,730,176Net income
    
    
    
    
    
    
    
    
    
    $
    6,907,087
    
    
    
    6,907,087
    
    
    
    
    
    
    
    
    
    
    
    6,907,087Other comprehensive incomenet of tax:Unrealized holding gains on securities arising during the year
(net of tax of $74,951)
    
    
    
    
    
    
    
    
    
    
    112,427Less: Reclassification adjustment for gains included in net income
(net of tax of $487,383)
    
    
    
    
    
    
    
    
    
    
    (795,204
    )Other
comprehensive (loss)
    
    
    
    
    
    
    
    
    
    
    (682,777
    )
    
    
    
    
    
    
    (682,777
    )
    
    
    
    
    
    
    (682,777
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    $
    6,224,310Exercise of stock options and issuance of common stock
    
    
    43,310
    
    
    
    108,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,605Tax benefit of stock options exercised
    
    
    
    
    
    
    9,436
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,436Cash 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
    )
    
    $
    
    
    
    $
    35,409,687Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    $
    11,085,093
    
    
    
    11,085,093
    
    
    
    
    
    
    
    
    
    
    
    11,085,093Other comprehensive incomenet of tax:Unrealized holding gains on securities arising during the year
(net of tax of $1,312,105)
    
    
    
    
    
    
    
    
    
    
    3,662,751Less: 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
    
    
    
    
    
    
    
    2,901,777Comprehensive income
    
    
    
    
    
    
    
    
    
    $
    13,986,870Exercise of stock options and issuance of common stock
    
    
    113,586
    
    
    
    483,943
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483,943Tax benefit of stock options exercised
    
    
    
    
    
    
    382,091
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,091Issuance of restricted stock
    
    
    11,195
    
    
    
    195,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (195,910
    )Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,977
    
    
    
    48,977Cash
dividend declared; $0.223 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
    )
    
    $
    48,548,165Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    $
    9,797,868
    
    
    
    9,797,868
    
    
    
    
    
    
    
    
    
    
    
    9,797,868Other comprehensive incomenet of tax:Unrealized holding (losses) on securities arising during the year
(net of tax of $886,434)
    
    
    
    
    
    
    
    
    
    
    (1,705,479
    )Less: Reclassification adjustment for gains included in net income
(net of tax of $723,488)
    
    
    
    
    
    
    
    
    
    
    (1,391,976
    )Other comprehensive (loss)
    
    
    
    
    
    
    
    
    
    
    (3,097,455
    )
    
    
    
    
    
    
    (3,097,455
    )
    
    
    
    
    
    
    (3,097,455
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    $
    6,700,413Exercise of stock options and issuance of common stock
    
    
    415,218
    
    
    
    2,757,695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,757,695Tax benefit of stock options exercised
    
    
    
    
    
    
    951,356
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951,356Cancellation of restricted stock
    
    
    (1,018
    )
    
    
    (17,816
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,848
    
    
    
    43,032Amortization
of restricted stock
Cash dividend declared; $0.236 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,966,355
    )
    
    
    
    
    
    
    
    
    
    
    (1,966,355
    )BALANCEDecember 31, 2003
    
    
    8,382,222
    
    
    $
    16,349,937
    
    
    
    
    
    
    $
    41,060,577
    
    
    $
    (290,123
    )
    
    $
    (86,085
    )
    
    $
    57,034,306
 See notes to consolidated financial statements. 49




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##### Table of Contents






FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |              |              |              |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | ------------ | ------------ | ----------- | ---------- | ------------ | ------------ | ------------ | ---------- | ------------ | ------------ | ------------ | -
|                                                   |                                                                                             |                                                          |                                                     |              | 2003         |             | 2002       |              | 2001        
|CASH FLOWS FROM OPERATING ACTIVITIES:              |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   | Net income                                                                                  |                                                          | $                                                   | 9,797,868    |              |             | $          | 11,085,093   |              |              | $          | 6,907,088    |             
|                                                   | Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |                                                          |                                                     |              |              |             |            |              |              |              |            |              |             
|                                                   |                                                                                             | Depreciation, amortization and accretion                 |                                                     |              | 4,723,313    |             |            |              | 522,346      |              |            |              | 331,198      |             
|                                                   |                                                                                             | Provision for loan losses                                |                                                     |              | 3,122,000    |             |            |              | 2,665,000    |              |            |              | 1,575,000    |             
|                                                   |                                                                                             | (Increase) decrease in deferred income taxes             |                                                     |              | (358,757     | )           |            |              | 94,486       |              |            |              | (175,053     | )           
|                                                   |                                                                                             | Loans originated for sale                                |                                                     |              | (230,478,868 | )           |            |              | (206,165,613 | )            |            |              | (146,482,562 | )           
|                                                   |                                                                                             | Proceeds from sale of loans                              |                                                     |              | 249,306,761  |             |            |              | 210,652,838  |              |            |              | 135,552,372  |             
|                                                   |                                                                                             | Gain on sale of investment securities                    |                                                     |              | (2,115,464   | )           |            |              | (1,227,378   | )            |            |              | (1,282,587   | )           
|                                                   |                                                                                             | (Gain) loss on sale of loans                             |                                                     |              | (1,302,341   | )           |            |              | (571,414     | )            |            |              | 182,447      |             
|                                                   |                                                                                             | (Gain) loss on sale of premises and equipmentnet        |                                                     |              | (2,221       | )           |            |              | 100,546      |              |            |              | (8,088       | )           
|                                                   |                                                                                             | Loss (gain) on sale of repossessed and foreclosed assets |                                                     |              | 2,988,552    |             |            |              | 823,453      |              |            |              | (3,084       | )           
|                                                   |                                                                                             | (Increase) decrease in accrued interest receivable       |                                                     |              | (234,482     | )           |            |              | (93,992      | )            |            |              | 518,221      |             
|                                                   |                                                                                             | Increase (decrease) in accrued interest payable          |                                                     |              | 80,795       |             |            |              | (182,837     | )            |            |              | (1,469,779   | )           
|                                                   |                                                                                             | Increase in other liabilities                            |                                                     |              | (2,997,629   | )           |            |              | 2,684,659    |              |            |              | 690,770      |             
|                                                   |                                                                                             | Increase in other assets                                 |                                                     |              | (8,881,142   | )           |            |              | (5,994,752   | )            |            |              | (5,254,557   | )           
|                                                   |                                                                                             | Tax benefit of stock options exercised                   |                                                     |              | 951,356      |             |            |              | 382,091      |              |            |              | 9,436        |             
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   |                                                                                             |                                                          | Net cash provided by (used in) operating activities |              |              | 24,599,741  |            |              |              | 14,774,526   |            |              |              | (8,909,178   | )
|CASH FLOWS FROM INVESTING ACTIVITIES:              |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   | Decrease (increase) in federal funds sold                                                   |                                                          |                                                     | 18,922,000   |              |             |            | (18,922,000  | )            |              |            | 10,438,000   |             
|                                                   | Proceeds from sales of securities available-for-sale                                        |                                                          |                                                     | 65,134,206   |              |             |            | 82,350,507   |              |              |            | 170,154,035  |             
|                                                   | Proceeds from maturities of securities available-for-sale                                   |                                                          |                                                     | 162,846,767  |              |             |            | 90,655,059   |              |              |            | 64,621,336   |             
|                                                   | Proceeds from maturities of securities held-to-maturity                                     |                                                          |                                                     | 4,399,726    |              |             |            | 6,679,095    |              |              |            | 70,352       |             
|                                                   | Purchases of securities available-for-sale                                                  |                                                          |                                                     | (278,432,376 | )            |             |            | (187,742,612 | )            |              |            | (248,525,309 | )           
|                                                   | Purchases of securities held-to-maturity                                                    |                                                          |                                                     |             |              |             |            | (4,113,220   | )            |              |            | (7,133,260   | )           
|                                                   | Purchases of Federal Home Loan and Federal Reserve Bank stock                               |                                                          |                                                     | (301,550     | )            |             |            | (162,400     | )            |              |            | (223,300     | )           
|                                                   | Net increase in loans                                                                       |                                                          |                                                     | (34,545,805  | )            |             |            | (120,195,440 | )            |              |            | (100,443,064 | )           
|                                                   | Proceeds from sale of repossessed and foreclosed assets                                     |                                                          |                                                     | 1,095,808    |              |             |            | 4,818,479    |              |              |            | 48,084       |             
|                                                   | Purchases of premises and equipmentnet                                                     |                                                          |                                                     | (93,279      | )            |             |            | (477,337     | )            |              |            | (1,076,665   | )           
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   |                                                                                             |                                                          | Net cash used in investing activities               |              |              | (60,974,503 | )          |              |              | (147,109,869 | )          |              |              | (112,069,791 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:              |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   | Increase in deposits                                                                        |                                                          |                                                     | 43,072,293   |              |             |            | 141,120,662  |              |              |            | 125,271,292  |             
|                                                   | (Decrease) increase in repurchase agreements                                                |                                                          |                                                     |             |              |             |            | (3,000,000   | )            |              |            | 1,679,064    |             
|                                                   | Increase (decrease) in other borrowings                                                     |                                                          |                                                     | 15,368,506   |              |             |            | (187,071     | )            |              |            | 250,283      |             
|                                                   | Dividends paid                                                                              |                                                          |                                                     | (1,902,665   | )            |             |            | (1,734,577   | )            |              |            | (1,641,212   | )           
|                                                   | Net proceeds from issuance of common stock                                                  |                                                          |                                                     | 2,800,726    |              |             |            | 532,920      |              |              |            | 108,605      |             
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   |                                                                                             |                                                          | Net cash provided by financing activities           |              |              | 59,338,860  |            |              |              | 136,731,934  |            |              |              | 125,668,032  |  
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|NET INCREASE IN CASH AND CASH EQUIVALENTS          |                                                                                             |                                                          | 22,964,098                                          |              |              |             | 4,396,591  |              |              |              | 4,689,063  |             
|CASH AND CASH EQUIVALENTSBeginning of year        |                                                                                             |                                                          | 28,061,479                                          |              |              |             | 23,664,888 |              |              |              | 18,975,825 |             
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|CASH AND CASH EQUIVALENTSEnd of year              |                                                                                             | $                                                        | 51,025,577                                          |              |              | $           | 28,061,479 |              |              | $            | 23,664,888 |             
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   | Cash paid during the year for income taxes                                                  |                                                          | $                                                   | 4,611,250    |              |             | $          | 6,517,833    |              |              | $          | 4,248,627    |             
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             
|                                                   | Cash paid during the year for interest                                                      |                                                          | $                                                   | 15,123,068   |              |             | $          | 18,202,642   |              |              | $          | 28,576,071   |             
|                                                   |                                                                                             |                                                          |                                                     |              |              |             |            |              |              |              |            |             

See notes to consolidated financial statements.

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FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



|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. As of November
1, 2003, the Company discontinued the operations of Franklin Financial
Insurance which did not have a material impact on the consolidated financial
statements.                                                                                                                                                                                                                                                                                                    
|  
|   |  | 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, repossessed and
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.

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| |  | 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 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 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, 2003 or
2002. 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 (loss) 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Repossessed and 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 these assets are included in other income (expense), 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, 2003, 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 Employees, and 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. No options were granted during the year ended
December 31, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                        |                                                                                                                                            |   |           |           |      |   |           |            |   |   |           |            |  
|--------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | - | --------- | --------- | ---- | - | --------- | ---------- | - | - | --------- | ---------- | -
|                                        |                                                                                                                                            |   | 2003      |           | 2002 |   | 2001     
|Net earnings available to stockholders: |                                                                                                                                            |   |           |           |      |   |           |            |   |   |           |           
|                                        | As reported                                                                                                                                |   | $         | 9,797,868 |      |   | $         | 11,085,093 |   |   | $         | 6,907,087  |  
|                                        | 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 | )
|                                        |                                                                                                                                            |   |           |           |      |   |           |            |   |   |           |           
|Pro forma                               |                                                                                                                                            | $ | 9,797,868 |           |      | $ | 9,219,393 |            |   | $ | 5,868,421 |           
|                                        |                                                                                                                                            |   |           |           |      |   |           |            |   |   |           |           

|                                                      |             |  |      |      |      |  |      |      |  |  |   |      | 
|----------------------------------------------------- | ----------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                      |             |  | 2003 |      | 2002 |  | 2001
|Basic earnings per share:                             |             |  |      |      |      |  |      |      |  |  |   |     
|                                                      | As reported |  | $    | 1.18 |      |  | $    | 1.40 |  |  | $ | 0.88 | 
|                                                      | Pro forma   |  |      | 1.18 |      |  |      | 1.17 |  |  |   | 0.75 | 
|Diluted earnings per share available to
stockholders: |             |  |      |      |      |  |      |      |  |  |   |     
|                                                      | As reported |  | $    | 1.08 |      |  | $    | 1.27 |  |  | $ | 0.83 | 
|                                                      | Pro forma   |  |      | 1.08 |      |  |      | 1.05 |  |  |   | 0.70 | 

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

|                              |  |      |     |      |  |            |     |            |            |   |     |  
|----------------------------- |  | ---- | --- | ---- |  | ---------- | --- | ---------- | ---------- | - | --- | -
|                              |  | 2003 |     | 2002 |  | 2001      
|Dividend yield                |  |      | N/A |      |  |            | 1.8 | %          |            |   | 1.7 | %
|Expected volatility           |  |      | N/A |      |  |            | 42  | %          |            |   | 33  | %
|Risk-free interest rate range |  |      | N/A |      |  | 3.5 to 3.9 | %   |            | 4.8 to 5.1 | %
|Expected life                 |  |      | N/A |      |  | 7-10 years |     | 7-10 years



| |  | The weighted-average fair value of options, calculated using the
Black-Scholes option-pricing model, granted during 2002 and 2001 is $6.61,
and $4.11 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. 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. The adoption of SFAS No. 143 did not have a material
impact on the Companys consolidated financial position or results of
operations.       
|
| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 did not
have a material impact on the Companys consolidated financial position or
results of operations.                                                                                                                                                                                                                                 
|
| |  | 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, an entity must
recognize a liability for the
fair value of the obligation it assumes under that obligation. This
interpretation is intended to improve the comparability of financial
reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. The initial recognition and measurement provisions
of FIN No. 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002. The interpretations disclosure
requirements were effective for the Company as of December 31, 2002.
Significant guarantees that have been entered into by the Company are
disclosed in Note 8 to the consolidated financial statements. The adoption
of

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| |  | the recognition and measurement provisions of FIN No. 45 did not have a
material impact on the Companys consolidated financial position or results
of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosurean amendment of FASB Statement No.
123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No.
148 is effective for annual and interim periods beginning after December 15,
2002. As the Company has elected not to change to the fair value based
method of accounting for stock-based employee compensation, the adoption of
SFAS No. 148 did not have an impact on the Companys consolidated financial
position or results of operations. 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. In December 2003, the FASB issued FIN No. 46R,
Consolidation of Variable Interest Entities  an interpretation of ARB 51
(revised December 2003), which replaces FIN 46. FIN No. 46R was primarily
issued to clarify the required accounting for interests in VIEs.
Additionally, this Interpretation exempts certain entities from its
requirements and provides for special effective dates for enterprises that
have fully or partially applied FIN No. 46 as of December 24, 2003.
Application of FIN No. 46R is required in financial statements of public
enterprises that have interests in structures that are commonly referred to
as special-purpose entities, or SPEs, for periods ending after December 15,
2003. Application by public enterprises, other than small business issuers,
for all other types of VIEs (i.e., non-SPEs) is required in financial
statements for periods ending after March 15, 2004, with earlier adoption
permitted. The adoption of FIN No. 46R did not have a material impact on
the Companys consolidated financial position or results of operations.
|
| |  | In April 2003, the FASB issued SFAS No. 149, Amendment to Statement 133 on
Derivative Instruments and Hedging Activities.SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. SFAS No. 149 is required to be applied
prospectively and is effective for contracts entered into or modified after
June 30, 2003, except for SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003 and certain
provisions relating to forward purchases and sales on securities that do not
yet exist. The adoption on April 1, 2003 of the components of SFAS No. 149
which address SFAS No. 133 implementation issues that have been effective
for fiscal quarters that began prior to June 15, 2003 did not have a
material impact on the Companys consolidated financial position or results
of operations. The adoption on July 1, 2003 of the
remaining components of SFAS No. 149 did not have a material impact on the
Companys consolidated financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|   |  | some circumstances). SFAS No. 150
is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities. The adoption of SFAS No. 150
did not have a material impact on the Companys consolidated financial
position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers
Disclosures about Pensions and Other Postretirement Benefits.SFAS No.
132(R) expands upon the existing disclosure requirements as prescribed under
the original SFAS No. 132 by requiring more details about pension plan
assets, benefit obligations, cash flows, benefit costs and related
information. SFAS No. 132(R) also requires companies to disclose various
elements of pension and postretirement benefit costs in interim-period
financial statements beginning after December 15, 2003. SFAS No. 132(R) is
effective for financial statements with fiscal years ending after December
15, 2003. The adoption of SFAS No. 132(R) did not have an impact on the
Companys consolidated financial position or results of operations as the
Company does not offer pension or other postretirement benefits to its
employees.
|  
|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 $6,960,000 and $5,474,000 were maintained to
satisfy federal regulatory requirements at December 31, 2003 and 2002,
respectively, and are reflected in cash and cash equivalents in the
accompanying consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

57



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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, 2003 and
2002.

|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |             | 
|------------------------ | ----------------------------------------------- | - | ----------- | ----------- | ---------- | - | ---------- | --------- | ----- | - | ---------- | ---------- | - | - | ----------- | ----------- | 
|                         |                                                 |   | 2003       
|                         |                                                 |   |            
|                         |                                                 |   |             |             |            |   | Gross      |           | Gross |   |            |            |  
|                         |                                                 |   | Amortized   |             | Unrealized |   | Unrealized |           | Fair 
|                         |                                                 |   | Cost        |             | Gains      |   | Losses     |           | Value
|Available-for-Sale:      |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|                         | U.S. Treasury obligations                       |   | $           | 1,059,225   |            |   | $          | 48,900    |       |   | $          |           |   |   | $           | 1,108,125   | 
|                         | Obligations of U.S.
government agencies         |   |             |            |            |   |            |          |       |   |            |           |   |   |             |            | 
|                         | Obligations of state and
political subdivisions |   |             | 64,352,991  |            |   |            | 1,186,024 |       |   |            | (905,582   | ) |   |             | 64,633,433  | 
|                         | Corporate bonds                                 |   |             | 6,629,232   |            |   |            | 326,273   |       |   |            | (279,777   | ) |   |             | 6,675,728   | 
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|                         | Investment securities                           |   |             | 72,041,448  |            |   |            | 1,561,197 |       |   |            | (1,185,359 | ) |   |             | 72,417,286  | 
|                         | Mortgage-backed securities                      |   |             | 232,009,531 |            |   |            | 954,933   |       |   |            | (1,800,918 | ) |   |             | 231,163,546 | 
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|Total available-for-sale |                                                 | $ | 304,050,979 |             |            | $ | 2,516,130  |           |       | $ | (2,986,277 | )          |   | $ | 303,580,832 |            
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|Held-to-Maturity:        |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|                         | Obligations of U.S.
government agencies         |   | $           |            |            |   | $          |          |       |   | $          |           |   |   | $           |            | 
|                         | Obligations of state and
political subdivisions |   |             | 3,811,997   |            |   |            | 108,916   |       |   |            | (23,925    | ) |   |             | 3,896,988   | 
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|                         | Investment securities                           |   |             | 3,811,997   |            |   |            | 108,916   |       |   |            | (23,925    | ) |   |             | 3,896,988   | 
|                         | Mortgage-backed securities                      |   |             | 70,848      |            |   |            | 4,697     |       |   |            |           |   |   |             | 75,545      | 
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            
|Total held-to-maturity   |                                                 | $ | 3,882,845   |             |            | $ | 113,613    |           |       | $ | (23,925    | )          |   | $ | 3,972,533   |            
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |            |   |   |             |            

|                         |                                                 |   |             |             |            |   |            |           |       |   |            |          |   |   |             |             | 
|------------------------ | ----------------------------------------------- | - | ----------- | ----------- | ---------- | - | ---------- | --------- | ----- | - | ---------- | -------- | - | - | ----------- | ----------- | 
|                         |                                                 |   | 2002       
|                         |                                                 |   |            
|                         |                                                 |   |             |             |            |   | Gross      |           | Gross |   |            |          |  
|                         |                                                 |   | Amortized   |             | Unrealized |   | Unrealized |           | Fair 
|                         |                                                 |   | Cost        |             | Gains      |   | Losses     |           | Value
|Available-for-Sale:      |                                                 |   |             |             |            |   |            |           |       |   |            |          |   |   |             |            
|                         | 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 |            
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |          |   |   |             |            
|Held-to-Maturity:        |                                                 |   |             |             |            |   |            |           |       |   |            |          |   |   |             |            
|                         | 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   |            
|                         |                                                 |   |             |             |            |   |            |           |       |   |            |          |   |   |             |            



| |  | Gross gains of $2,121,545, $1,276,425 and $1,433,560 and gross losses of
$6,081, $49,047, and $150,973 were realized on sales of securities available
for sale in 2003, 2002 and 2001, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

58



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| |  | The amortized cost and fair value of debt and equity securities at December
31, 2003, 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    |  | $                  |            |                  |  | $    |            |            |  | $ |          |  |  | $ |          | 
|Due one to five years      |  |                    | 1,631,192   |                  |  |      | 1,758,082   |            |  |   | 1,277,346 |  |  |   | 1,337,963 | 
|Due five to ten years      |  |                    | 5,033,124   |                  |  |      | 5,277,544   |            |  |   | 2,234,397 |  |  |   | 2,222,574 | 
|Due after ten years        |  |                    | 65,377,132  |                  |  |      | 65,381,660  |            |  |   | 300,254   |  |  |   | 336,451   | 
|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 
|                           |  |                    | 72,041,448  |                  |  |      | 72,417,286  |            |  |   | 3,811,997 |  |  |   | 3,896,988 | 
|Mortgage-backed securities |  |                    | 232,009,531 |                  |  |      | 231,163,546 |            |  |   | 70,848    |  |  |   | 75,545    | 
|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 
|                           |  | $                  | 304,050,979 |                  |  | $    | 303,580,832 |            |  | $ | 3,882,845 |  |  | $ | 3,972,533 | 
|                           |  |                    |             |                  |  |      |             |            |  |   |           |  |  |   |           | 



| |  | The following table provides the
gross unrealized losses and fair value, aggregated by investment
category and length of time the individual securities have been in a
continuous unrealized position, at December 31, 2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Less than 12 months
    
    12 months or more
    
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesU.S. Treasury Obligations
    
    $
    
    
    
    $
    
    
    
    $
    1,108,125
    
    
    $
    
    
    
    $
    1,108,125
    
    
    $
    Obligations
of state and
political subdivisions
    
    
    31,991,917
    
    
    
    (901,367
    )
    
    
    488,552
    
    
    
    (4,215
    )
    
    
    32,480,469
    
    
    
    (905,582
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    2,770,222
    
    
    
    (279,777
    )
    
    
    2,770,222
    
    
    
    (279,777
    )Mortgage-backed securities
    
    
    121,168,743
    
    
    
    (1,800,918
    )
    
    
    
    
    
    
    
    
    
    
    121,168,743
    
    
    
    (1,800,918
    )Total
    
    $
    153,160,660
    
    
    $
    (2,702,285
    )
    
    $
    4,366,899
    
    
    $
    (283,992
    )
    
    $
    157,527,559
    
    
    $
    (2,986,277
    )




| |  | At December 31, 2003, 91% of the
unrealized losses in the available-for-sale security portfolio were
comprised of securities issued by U.S. Government sponsored agencies
and investment grade municipalities. The Company believes that the
price movements in these securities are dependent upon the movement
in market interest rates particularly given the negligible inherent
credit risk for these securities. At December 31, 2003, the
percentage of unrealized losses in the available-for-sale security
portfolio represented by non-rated securities was 9%.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Fair value of securities is established based on current market prices of
similar securities as of the approximate dates indicated. Securities carried
at $223,576,709 and $190,046,454 at December 31, 2003 and 2002,
respectively, were pledged to secure deposits and for other purposes.                                                                                                                                                                                                                                                                             
|
| |  | The following table reflects securities pledged at December 31, 2003 and
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                              |       |   |             |             |      |   |             |             | 
|--------------------------------------------- | ----- | - | ----------- | ----------- | ---- | - | ----------- | ----------- | 
|                                              |       |   | 2003        |             | 2002
|Investment securities available-for-sale      |       | $ | 18,170,076  |             |      | $ | 20,660,906  |            
|Investment securities held-to-maturity        |       |   | 750,733     |             |      |   | 3,389,580   |            
|Mortgage-backed securities available-for-sale |       |   | 204,655,900 |             |      |   | 165,995,968 |            
|                                              |       |   |             |             |      |   |             |            
|                                              | Total |   | $           | 223,576,709 |      |   | $           | 190,046,454 | 
|                                              |       |   |             |             |      |   |             |            



| |  | Securities carried at $221,430,783 and $182,860,963 at December 31, 2003 and
2002, respectively, serve as collateral to secure public funds deposits.                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2003 and 2002, 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.

59



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|4. |  | LOANS                                                         
|-- |  | --------------------------------------------------------------
|  
|   |  | Loans at December 31, 2003 and 2002 are summarized as follows:

|                                       |  |      |             |      |  |   |             |  
|-------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                       |  | 2003 |             | 2002
|Commercial, financial and agricultural |  | $    | 111,390,090 |      |  | $ | 121,662,948 |  
|Real estateConstruction               |  |      | 89,046,485  |      |  |   | 83,680,734  |  
|Real estateMortgage                   |  |      | 352,445,507 |      |  |   | 332,281,076 |  
|Consumer                               |  |      | 19,611,851  |      |  |   | 21,031,222  |  
|                                       |  |      |             |      |  |   |             |  
|                                       |  |      | 572,493,933 |      |  |   | 558,655,980 |  
|Deferred loan fees                     |  |      | (834,167    | )    |  |   | (960,779    | )
|Allowance for loan losses              |  |      | (5,827,413  | )    |  |   | (5,761,101  | )
|                                       |  |      |             |      |  |   |             |  
|Total loans                            |  | $    | 565,832,353 |      |  | $ | 551,934,100 |  
|                                       |  |      |             |      |  |   |             |  



| |  | 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, 2003
and 2002:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                      |  |      |           |      |  |   |           | 
|----------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                                                      |  | 2003 |           | 2002
|Loans accounted for on a nonaccrual basis                                                             |  | $    | 755,597   |      |  | $ | 5,218,087 | 
|                                                                                                      |  |      |           |      |  |   |           | 
|Accruing loans which are contractually past due 90 days
or more as to principal and interest payments |  | $    | 1,956,568 |      |  | $ | 2,459,069 | 
|                                                                                                      |  |      |           |      |  |   |           | 



| |  | Direct and indirect loans to officers and directors during 2003 and 2002 are
as follows:
| |  | ----------------------------------------------------------------------------------------

|                             |                        |   |           |            |      |   |           |            |  
|---------------------------- | ---------------------- | - | --------- | ---------- | ---- | - | --------- | ---------- | -
|                             |                        |   | 2003      |            | 2002
|Balance at beginning of year |                        | $ | 2,654,964 |            |      | $ | 978,074   |           
|                             | New loan disbursements |   |           | 4,356,313  |      |   |           | 4,149,214  |  
|                             | Repayments             |   |           | (5,147,968 | )    |   |           | (2,472,324 | )
|                             |                        |   |           |            |      |   |           |           
|Balance at end of year       |                        | $ | 1,863,309 |            |      | $ | 2,654,964 |           
|                             |                        |   |           |            |      |   |           |           



| |  | In addition, there were approximately $1,786,925 and $1,716,293 of
undisbursed loan commitments to such parties at December 31, 2003 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Gross commercial servicing rights totaled $266,542 at December 31, 2003 and
2002. Commercial servicing rights in the amount of $0, $34,326
and $5,578 were capitalized during 2003, 2002 and 2001, respectively.
Amortization of the servicing rights amounted to $67,397, $33,439 and
$29,386 during 2003, 2002 and 2001, respectively. Accumulated amortization
of commercial servicing rights was $222,160 and 154,763 at December 31, 2003
and 2002, respectively. In the opinion of management, a valuation allowance
against net commercial servicing rights at December 31, 2003 and 2002 was
not considered necessary.

60



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|5. |  | ALLOWANCE FOR LOAN LOSSES                                     
|-- |  | --------------------------------------------------------------
|  
|   |  | Transactions in the allowance for loan losses were as follows:

|                                           |  |      |            |      |  |      |            |   |  |   |           |  
|------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | --------- | -
|                                           |  | 2003 |            | 2002 |  | 2001
|BalanceBeginning of period                |  | $    | 5,761,101  |      |  | $    | 4,269,071  |   |  | $ | 3,025,138 |  
|Provisions charged to operating expense    |  |      | 3,122,000  |      |  |      | 2,665,000  |   |  |   | 1,575,000 |  
|Loans charged off                          |  |      | (3,103,977 | )    |  |      | (1,229,874 | ) |  |   | (361,293  | )
|Recoveries on loans previously charged off |  |      | 48,289     |      |  |      | 56,904     |   |  |   | 30,226    |  
|                                           |  |      |            |      |  |      |            |   |  |   |           |  
|BalanceEnd of period                      |  | $    | 5,827,413  |      |  | $    | 5,761,101  |   |  | $ | 4,269,071 |  
|                                           |  |      |            |      |  |      |            |   |  |   |           |  



| |  | The following is a summary of information pertaining to loans specifically
classified as impaired at December 31, 2003 and 2002 and for each of the
three years in the period ended December 31, 2003:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                             |                      |   |            |            |      |   |            |            | 
|------------------------------------------------------------ | -------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                             |                      |   | 2003       |            | 2002
|Impaired loans without a specific allowance for loan losses  |                      | $ | 13,924,503 |            |      | $ | 16,011,541 |           
|Impaired loans with a specific allowance for loan losses     |                      |   | 2,740,817  |            |      |   | 3,156,367  |           
|                                                             |                      |   |            |            |      |   |            |           
|                                                             | Total impaired loans |   | $          | 16,665,320 |      |   | $          | 19,167,908 | 
|                                                             |                      |   |            |            |      |   |            |           
|Specific allowance for loan losses related to impaired loans |                      | $ | 387,647    |            |      | $ | 698,088    |           
|                                                             |                      |   |            |            |      |   |            |           

|                                             |  |      |            |      |      |   |            |  |  |   |           | 
|-------------------------------------------- |  | ---- | ---------- | ---- | ---- | - | ---------- |  |  | - | --------- | 
|                                             |  | 2003 |            | 2002 | 2001 |  
|Average investment in impaired loans         |  | $    | 16,965,744 |      |      | $ | 12,810,056 |  |  | $ | 7,049,953 | 
|                                             |  |      |            |      |      |   |            |  |  |   |           | 
|Interest income recognized on impaired loans |  | $    | 890,251    |      |      | $ | 800,441    |  |  | $ | 804,155   | 
|                                             |  |      |            |      |      |   |            |  |  |   |           | 



|6. |  | REPOSSESSED AND FORECLOSED ASSETS                                                                                                                                                                                                                                                        
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Repossessed and foreclosed assets are presented net of any allowance for
losses. The allowance for losses related to repossessed and foreclosed
assets was $1,606,544 at December 31, 2003. In the opinion of management no
such allowance was considered necessary at December 31, 2002.

61



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| |  | Expenses (income) applicable to repossessed and foreclosed assets for each
of the three years in the period ended December 31, 2003 include the
following:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  |      |           |      |  |      |         |   |  |   |        |  
|--------------------------------------- |  | ---- | --------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                        |  | 2003 |           | 2002 |  | 2001
|Net loss (gain) on sales of real estate |  | $    | 31,776    |      |  | $    | (9,284  | ) |  | $ | (3,084 | )
|Provision for losses                    |  |      | 2,579,423 |      |  |      | 745,694 |   |  |   |       |  
|Operating expenses                      |  |      | 409,129   |      |  |      | 77,759  |   |  |   | 6,614  |  
|                                        |  |      |           |      |  |      |         |   |  |   |        |  
|Total                                   |  | $    | 3,020,328 |      |  | $    | 814,169 |   |  | $ | 3,530  |  
|                                        |  |      |           |      |  |      |         |   |  |   |        |  



|7. |  | MORTGAGE BANKING                                                                                                                                                                                                                                                      
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The unpaid principal balances of mortgage loans serviced for others were
approximately $382,516,000 and $287,591,000 at December 31, 2003 and 2002,
respectively.                                                                                                     
|  
|   |  | Custodial balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $3,552,746
and $3,327,000 at December 31, 2003 and 2002, 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, 2003 and 2002.
|  
|   |  | Changes in the balance of mortgage servicing rights, net, were as follows:                                                                                                                                                                                            

|                            |                       |   |           |            |      |   |           |           |   |   |           |           |  
|--------------------------- | --------------------- | - | --------- | ---------- | ---- | - | --------- | --------- | - | - | --------- | --------- | -
|                            |                       |   | 2003      |            | 2002 |   | 2001     
|BalanceBeginning of period |                       | $ | 3,748,642 |            |      | $ | 2,254,279 |           |   | $ | 1,480,561 |          
|                            | Amount capitalized    |   |           | 2,401,595  |      |   |           | 2,632,864 |   |   |           | 1,236,616 |  
|                            | Amortization expense  |   |           | (1,686,877 | )    |   |           | (834,282  | ) |   |           | (462,898  | )
|                            | Impairment adjustment |   |           | 295,786    |      |   |           | (304,219  | ) |   |           |          |  
|                            |                       |   |           |            |      |   |           |           |   |   |           |          
|BalanceEnd of period       |                       | $ | 4,759,146 |            |      | $ | 3,748,642 |           |   | $ | 2,254,279 |          
|                            |                       |   |           |            |      |   |           |           |   |   |           |          



| |  | Accumulated amortization of mortgage servicing rights was $3,911,248,
$2,224,371 and $1,390,089 at December 31, 2003, 2002 and 2001, respectively.                                                                                                      
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2003, the weighted-average amortization period of mortgage
servicing rights was 4.85 years. Projected amortization expense for the
gross carrying value of mortgage servicing rights at December 31, 2003 is
estimated to be as follows:

|                                                  |  |   |           | 
|------------------------------------------------- |  | - | --------- | 
|2004                                              |  | $ | 1,753,356 | 
|2005                                              |  |   | 1,484,369 | 
|2006                                              |  |   | 765,817   | 
|2007                                              |  |   | 420,948   | 
|2008                                              |  |   | 205,286   | 
|After 2008                                        |  |   | 137,803   | 
|                                                  |  |   |           | 
|Gross carrying value of mortgage servicing rights |  | $ | 4,767,579 | 
|                                                  |  |   |           | 



| |  | Managements estimate of the valuation allowance against the net mortgage
servicing rights was $8,433 and $304,219 at December 31, 2003 and 2002,
respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

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|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 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 are 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, 2003 and 2002
were $3,916,100 and $23,425,195, respectively. The notional amount of
forward sales contracts outstanding at December 31, 2003 and 2002 were
$6,293,000 and $34,069,732, respectively. At December 31, 2003
and 2002, the fair
value of net rate lock and forward sales commitments was $122,229 and
$271,148, respectively, which is
reflected in other assets in the accompanying balance sheets.
|  
|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |  | 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,
2003 and 2002:                                                                                                                                                                                                                                                                             

|                                         |                              |  |      |             |      |  |   |             | 
|---------------------------------------- | ---------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|                                         |                              |  | 2003 |             | 2002
|Financial instruments as of December 31: |                              |  |      |             |      |  |   |            
|                                         | Commitments to extend credit |  | $    | 120,382,048 |      |  | $ | 102,904,596 | 
|                                         | Credit card commitments      |  |      | 258,520     |      |  |   | 425,691     | 
|                                         | Standby letters of credit    |  |      | 19,849,063  |      |  |   | 19,971,453  | 



| |  | 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, 2003,
these guarantees totaled $15,598,200. No reserve has been established at
December 31, 2003 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | 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, tortious interference
with contract, fraud, and civil conspiracy in connection with the denial of
a loan to a potential borrower involved in a
real estate transaction. The Bank and Mr. Inman filed their answers in this
matter on September 18, 2000, and a motion for Summary Judgment on October
10, 2000. The Court denied the Banks motion for Summary Judgment on
February 15, 2001. On July 27, 2001, the Bank and Mr. Inman filed a second
motion for Summary Judgment. The Court granted in part and denied in part
the Bank and Mr. Inmans motion for Summary Judgment on October 5, 2001. The
case was set for trial to begin on March 5, 2002; however, on February 22,
2002, the Court, on 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

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|   |  | February 25 and March 7, 2003. On April 3, 2003, the United States District
Judge issued an Order in which a judgment was entered for the Defendants
Franklin National Bank and Mr. Inman on all of Mr. Pressmans claims. On May
2, 2003, Mr. Pressman filed a Notice of Appeal to the United States Court of
Appeals for the Sixth Circuit. A Proof Brief of Appellee Franklin National
Bank was filed with the Court on November 20, 2003.                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | 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.
|  
|9. |  | PREMISES AND EQUIPMENTNET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Premises and equipment at December 31, 2003 and 2002 are summarized as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|                                               |  |      |            |      |  |   |            |  
|---------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                               |  | 2003 |            | 2002
|Land                                           |  | $    | 1,822,249  |      |  | $ | 1,822,249  |  
|Buildings                                      |  |      | 4,210,785  |      |  |   | 4,210,785  |  
|Leasehold improvementsbuildings               |  |      | 4,087,391  |      |  |   | 4,087,391  |  
|Furniture and equipment                        |  |      | 5,600,370  |      |  |   | 5,642,081  |  
|                                               |  |      |            |      |  |   |            |  
|                                               |  |      | 15,720,795 |      |  |   | 15,762,506 |  
|Less accumulated depreciation and amortization |  |      | (6,992,510 | )    |  |   | (6,071,991 | )
|                                               |  |      |            |      |  |   |            |  
|                                               |  | $    | 8,728,285  |      |  | $ | 9,690,515  |  
|                                               |  |      |            |      |  |   |            |  



|10. |  | DEPOSITS                                                    
|--- |  | ------------------------------------------------------------
|   
|    |  | A summary of deposits at December 31, 2003 and 2002 follows:

|                                            |  |      |             |      |  |   |             | 
|------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|                                            |  | 2003 |             | 2002
|Non-interest bearing demand                 |  | $    | 86,761,402  |      |  | $ | 78,506,426  | 
|Interest-bearing demand                     |  |      | 293,168,561 |      |  |   | 274,800,866 | 
|Savings                                     |  |      | 32,233,475  |      |  |   | 26,140,671  | 
|Certificates of deposit of $100,000 or more |  |      | 296,598,598 |      |  |   | 267,968,619 | 
|Other time deposits                         |  |      | 92,681,994  |      |  |   | 110,955,155 | 
|                                            |  |      |             |      |  |   |             | 
|                                            |  | $    | 801,444,030 |      |  | $ | 758,371,737 | 
|                                            |  |      |             |      |  |   |             | 

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| |  | At December 31, 2003, the scheduled maturities of certificates of deposits
and other time deposits are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------

|                    |  |   |             | 
|------------------- |  | - | ----------- | 
|2004                |  | $ | 341,592,352 | 
|2005                |  |   | 26,376,013  | 
|2006                |  |   | 3,487,056   | 
|2007                |  |   | 4,464,138   | 
|2008                |  |   | 13,361,033  | 
|2009 and thereafter |  |   |            | 
|                    |  |   |             | 
|                    |  | $ | 389,280,592 | 
|                    |  |   |             | 



|    |  | At December 31, 2003 and 2002, $132,736 and $189,318, respectively, of
demand deposit overdrafts have been reclassified to loans. At December 31,
2003 and 2002, 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, 2003 and 2002 are
summarized as follows:                                                                                                                                                                         

|                                       |  |      |            |      |  |   |            | 
|-------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                       |  | 2003 |            | 2002
|Line of credit                         |  | $    | 1,100,000  |      |  | $ | 2,381,494  | 
|Federal funds                          |  |      | 1,650,000  |      |  |   |           | 
|Federal Home Loan Bank advances        |  |      | 58,000,000 |      |  |   | 58,000,000 | 
|Federal Home Loan Bank- Line of Credit |  |      | 15,000,000 |      |  |   |           | 
|Trust preferred securities             |  |      | 16,000,000 |      |  |   | 16,000,000 | 
|                                       |  |      |            |      |  |   |            | 
|                                       |  | $    | 91,750,000 |      |  | $ | 76,381,494 | 
|                                       |  |      |            |      |  |   |            | 



| |  | 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, 2003. Interest floats at 90-day LIBOR plus 200 basis points
(3.16% and 3.42% at December 31, 2003 and 2002, respectively), and is
payable monthly. The line matures on June 30, 2004. The average balance
outstanding under the line of credit during the years ended December 31,
2003 and 2002 was $1,236,299 and $2,051,299, respectively. The maximum
amount outstanding at any month end under the line of credit during the
years ended December 31, 2003 and 2002 was $2,481,494 and $2,381,494,
respectively. 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 met all financial covenants at December 31, 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Bank also has federal funds lines (or the equivalent thereof) with
correspondent banks totaling approximately $72,500,000 at December 31, 2003.
The average balance outstanding under the federal funds lines during the
years ended December 31, 2003 and 2002 was $6,986,712 and $5,602,605,
respectively. The maximum amount outstanding at any month end under the
federal funds lines during the years ended December 31, 2003 and 2002 was
$23,905,975 and $29,181,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | The Bank has a $15,000,000 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. The balance outstanding under this line of credit was $15,000,000 and
$0 at December 31, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |  | and 2002, respectively. The average balance
outstanding under this line of credit during the years ended December 31,
2003 and 2002 was $2,130,137 and $368,493, respectively. The maximum amount
outstanding at any month end under this line of credit during the years
ended December 31, 2003 and 2002 was $15,000,000 and $7,500,000,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Bank also has outstanding FHLB convertible advances of $27,000,000
maturing in two years and $31,000,000 maturing in five to seven years at
December 31, 2003. The interest rates on $25,000,000, $12,000,000 and
$15,000,000 of these advances are fixed (6.46%, 6.23%, and 6.12%,
respectively, at December 31, 2003) 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 (1.17%
and 1.43% at December 31, 2003 and 2002, respectively). The average balance
outstanding of FHLB advances was $58,000,000 during the years ended December
31, 2003 and 2002. The maximum amount outstanding at any month end of FHLB
advances was $58,000,000 during the years ended December 31, 2003 and 2002.
|
| |  | 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, 2003 and 2002.                                                                                                                                                                                                                                                           
|
| |  | 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, 2003 and 2002 was $0 and
$29,833, respectively. The maximum amount outstanding at any month end on
this note payable during the year ended December 31, 2002 was $680,565.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | The aggregate annual maturities of long-term debt and other borrowings
during the five years ending December 31, 2008 and thereafter are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                         |  |   |            | 
|------------------------ |  | - | ---------- | 
|Year ending December 31, |  |   |            | 
|2004                     |  | $ | 17,750,000 | 
|2005                     |  |   | 27,000,000 | 
|2006                     |  |   |           | 
|2007                     |  |   |           | 
|2008                     |  |   | 6,000,000  | 
|2009 and thereafter      |  |   | 41,000,000 | 
|                         |  |   |            | 
|Total                    |  | $ | 91,750,000 | 
|                         |  |   |            | 



|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

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| |  | options. All
leases are accounted for as operating leases. Net rent expense paid to the
chairman amounted to $678,115 in 2003, $657,465 in 2002, and $643,393 in
2001. Rent expense paid to unrelated parties amounted to $643,808 in 2003,
$706,808 in 2002, and $622,992 in 2001.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Future minimum lease payments, exclusive of any increases related to the
Consumer Price Index, under these leases as of December 31, 2003 are as
follows:                                                                                                                          

|                    |  |         |           |        |  |       |           |  |  |   |           | 
|------------------- |  | ------- | --------- | ------ |  | ----- | --------- |  |  | - | --------- | 
|                    |  | Related |           |        |  |       |           |  |  |  
|                    |  | Party   |           | Others |  | Total
|2004                |  | $       | 676,941   |        |  | $     | 659,160   |  |  | $ | 1,336,101 | 
|2005                |  |         | 676,941   |        |  |       | 517,000   |  |  |   | 1,193,941 | 
|2006                |  |         | 676,941   |        |  |       | 504,821   |  |  |   | 1,181,762 | 
|2007                |  |         | 676,941   |        |  |       | 374,185   |  |  |   | 1,051,126 | 
|2008                |  |         | 676,941   |        |  |       | 382,783   |  |  |   | 1,059,724 | 
|2009 and thereafter |  |         | 310,265   |        |  |       | 624,693   |  |  |   | 934,958   | 
|                    |  |         |           |        |  |       |           |  |  |   |           | 
|Total               |  | $       | 3,694,970 |        |  | $     | 3,062,642 |  |  | $ | 6,757,612 | 
|                    |  |         |           |        |  |       |           |  |  |   |           | 



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

|                   |         |                                  |           |           |           |      |           |           |           |   |           |           |           |  
|------------------ | ------- | -------------------------------- | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|                   |         |                                  |           | 2003      |           | 2002 |           | 2001     
|Current:           |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   | Federal |                                  | $         | 4,427,662 |           |      | $         | 5,332,219 |           |   | $         | 3,406,939 |          
|                   | State   |                                  |           | 1,032,383 |           |      |           | 1,170,715 |           |   |           | 694,521   |          
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   |         | Total current expense            |           |           | 5,460,045 |      |           |           | 6,502,934 |   |           |           | 4,101,460 |  
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|Deferred:          |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   | Federal |                                  |           | (301,078  | )         |      |           | 84,688    |           |   |           | (148,207  | )        
|                   | State   |                                  |           | (57,679   | )         |      |           | 9,798     |           |   |           | (26,846   | )        
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|                   |         | Total deferred (benefit) expense |           |           | (358,757  | )    |           |           | 94,486    |   |           |           | (175,053  | )
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          
|Total income taxes |         | $                                | 5,101,288 |           |           | $    | 6,597,420 |           |           | $ | 3,926,407 |          
|                   |         |                                  |           |           |           |      |           |           |           |   |           |          

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| |  | 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 assets (liabilities) at December 31, 2003 and
2002 are as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   |                                                         |                                |         |            |            |      |            |            |            |  
|---------------------------------- | ------------------------------------------------------- | ------------------------------ | ------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | -
|                                   |                                                         |                                |         | 2003       |            | 2002
|Deferred tax assets:               |                                                         |                                |         |            |            |      |            |           
|                                   | Allowance for loan losses                               |                                | $       | 2,230,933  |            |      | $          | 2,205,914  |           
|                                   | Unrealized loss on securities available-for-sale        |                                |         | 180,018    |            |      |            |           |           
|                                   | Repossessed and foreclosed assets                       |                                |         | 615,146    |            |      |            |           |           
|                                   | Other                                                   |                                |         | 167,372    |            |      |            | 108,226    |           
|                                   |                                                         |                                |         |            |            |      |            |           
|                                   |                                                         | Total deferred tax assets      |         |            | 3,193,469  |      |            |            | 2,314,140  |  
|                                   |                                                         |                                |         |            |            |      |            |           
|Deferred tax liabilities:          |                                                         |                                |         |            |            |      |            |           
|                                   | Unrealized gain on securities available-for-sale        |                                |         |           |            |      |            | (1,741,900 | )         
|                                   | Mortgage servicing rights                               |                                |         | (1,839,270 | )          |      |            | (1,478,223 | )         
|                                   | FHLB stock dividends                                    |                                |         | (370,081   | )          |      |            | (313,909   | )         
|                                   | Unrealized gains on mortgage loan rate lock commitments |                                |         | (72,708    | )          |      |            | (129,729   | )         
|                                   | Other                                                   |                                |         |           |            |      |            | (19,645    | )         
|                                   |                                                         |                                |         |            |            |      |            |           
|                                   |                                                         | Total deferred tax liabilities |         |            | (2,282,059 | )    |            |            | (3,683,406 | )
|                                   |                                                         |                                |         |            |            |      |            |           
|Net
deferred tax asset (liability) |                                                         | $                              | 911,410 |            |            | $    | (1,369,266 | )         
|                                   |                                                         |                                |         |            |            |      |            |           



| |  | Management believes that a valuation allowance against the deferred tax
assets at December 31, 2003 and 2002 is not considered necessary because it
is more likely than not such amounts will be fully realized.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A reconciliation of income taxes with the amount of income taxes computed by
applying the federal statutory rate (34%) to pretax income follows:                                                                

|                                             |                                                |   |           |          |      |   |           |          |   |   |           |          |  
|-------------------------------------------- | ---------------------------------------------- | - | --------- | -------- | ---- | - | --------- | -------- | - | - | --------- | -------- | -
|                                             |                                                |   | 2003      |          | 2002 |   | 2001     
|Tax expense at statutory rate                |                                                | $ | 5,065,713 |          |      | $ | 6,012,115 |          |   | $ | 3,683,388 |         
|Increase (decrease) in taxes resulting from: |                                                |   |           |          |      |   |           |          |   |   |           |         
|                                             | Tax-exempt income                              |   |           | (617,593 | )    |   |           | (337,042 | ) |   |           | (239,608 | )
|                                             | Federal tax credit                             |   |           | (96,096  | )    |   |           | (96,096  | ) |   |           |         |  
|                                             | State income taxes, net of federal tax benefit |   |           | 643,304  |      |   |           | 779,140  |   |   |           | 439,199  |  
|                                             | Non-deductible merger costs                    |   |           | 6,518    |      |   |           | 138,434  |   |   |           |         |  
|                                             | Disallowed interest expense                    |   |           | 55,798   |      |   |           | 29,166   |   |   |           | 43,122   |  
|                                             | Othernet                                      |   |           | 43,644   |      |   |           | 71,703   |   |   |           | 306      |  
|                                             |                                                |   |           |          |      |   |           |          |   |   |           |         
|Total income taxes                           |                                                | $ | 5,101,288 |          |      | $ | 6,597,420 |          |   | $ | 3,926,407 |         
|                                             |                                                |   |           |          |      |   |           |          |   |   |           |         



|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

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| |  | 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, 2003, and the changes during
those years is presented below.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      |                   |  |             |           |          |   |           |       | 
|------------------------------------- | ----------------- |  | ----------- | --------- | -------- | - | --------- | ----- | 
|                                      |                   |  |             |           |          |   | Weighted-
|                                      |                   |  |             |           |          |   | Average  
|                                      |                   |  | Shares      |           | Exercise
|                                      |                   |  | Outstanding |           | Price   
|Options outstandingJanuary 1, 2001   |                   |  | 1,469,632   |           |          | $ | 7.10      |      
|                                      | Options granted   |  |             | 407,266   |          |   |           | 10.25 | 
|                                      | Options exercised |  |             | (42,304   | )        |   |           | 2.26  | 
|                                      |                   |  |             |           |          |   |           |      
|Options outstanding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December 31, 2002 |                   |  | 2,169,945   |           |          |   | 9.53      |      
|                                      | Options granted   |  |             |          |          |   |           |      | 
|                                      | Options exercised |  |             | (415,218  | )        |   |           | 6.64  | 
|                                      | Options expired   |  |             | (34,499   | )        |   |           | 17.60 | 
|                                      |                   |  |             |           |          |   |           |      
|Options outstandingDecember 31, 2003 |                   |  | 1,720,228   |           |          |   | 10.07     |      
|                                      |                   |  |             |           |          |   |           |      
|Options exercisableDecember 31,      |                   |  |             |           |          |   |           |      
|                                      | 2001              |  |             | 1,727,121 |          |   |           | 7.51  | 
|                                      | 2002              |  |             | 1,869,019 |          |   |           | 8.75  | 
|                                      | 2003              |  |             | 1,522,600 |          |   |           | 9.50  | 



| |  | The following table summarizes information about the stock options
outstanding under the Companys Plans at December 31, 2003:
| |  | ------------------------------------------------------------------------------------------------------------------------------

|         |       |             |  |          |  |           |       |             |  |          |           |  |  |           |       |           |  |  |       |  |  |           |           |  |  |   |       | 
|-------- | ----- | ----------- |  | -------- |  | --------- | ----- | ----------- |  | -------- | --------- |  |  | --------- | ----- | --------- |  |  | ----- |  |  | --------- | --------- |  |  | - | ----- | 
|         |       |             |  |          |  |           |       |             |  |          |           |  |  | Weighted- |       | Weighted- |  |  |       |  |  | Weighted-
|Range of |       |             |  |          |  | Average   |       | Average     |  |          |           |  |  | Average  
|Exercise |       | Shares      |  | Exercise |  | Remaining |       | Shares      |  | Exercise
|Price    |       | Outstanding |  | Price    |  | Life      |       | Exercisable |  | Price   
|$        | 1.38  |             |  | -        |  | $         | 3.00  |             |  |          | 253,144   |  |  | $         | 2.99  |           |  |  | 1.99  |  |  |           | 253,144   |  |  | $ | 2.99  | 
|         | 3.01  |             |  | -        |  |           | 4.50  |             |  |          | 326,572   |  |  |           | 4.50  |           |  |  | 6.41  |  |  |           | 326,572   |  |  |   | 4.50  | 
|         | 4.51  |             |  | -        |  |           | 11.00 |             |  |          | 591,983   |  |  |           | 10.55 |           |  |  | 8.06  |  |  |           | 551,783   |  |  |   | 10.57 | 
|         | 11.01 |             |  | -        |  |           | 14.00 |             |  |          | 76,175    |  |  |           | 11.54 |           |  |  | 6.65  |  |  |           | 71,875    |  |  |   | 11.39 | 
|         | 14.01 |             |  | -        |  |           | 23.00 |             |  |          | 472,354   |  |  |           | 16.49 |           |  |  | 10.25 |  |  |           | 319,226   |  |  |   | 16.92 | 
|         |       |             |  |          |  |           |       |             |  |          |           |  |  |           |       |           |  |  |       |  |  |           |           |  |  |   |       | 
|         |       |             |  |          |  |           |       |             |  |          | 1,720,228 |  |  |           |       |           |  |  |       |  |  |           | 1,522,600 |  |  |   |       | 
|         |       |             |  |          |  |           |       |             |  |          |           |  |  |           |       |           |  |  |       |  |  |           |           |  |  |   |       | 



| |  | 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 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
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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on such
dividends. In 2002, 13,503 shares of restricted stock were issued under the
Plan. No shares were issued under the Plan in 2003.



|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 $22,397,450 and $19,954,201 at
December 31, 2003 and December 31, 2002, 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, 2003 and 2002, that the Company and the Bank are in compliance with all
capital adequacy requirements they are subject to.                                                                                                                                                                                                                                       
|   
|    |  | As of December 31, 2003, 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.                                                                                                                                                                                                                                                                                                                                    

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| |  | Actual capital amounts and ratios at December 31, 2003 and 2002, are as
follows:
| |  | --------------------------------------------------------------------------------

|                  |                                        |      |                   |              |                         |      |        |              |          |      |                        |              |   |  |          |            |   |  |   |            |   |  |   |            |  
|----------------- | -------------------------------------- | ---- | ----------------- | ------------ | ----------------------- | ---- | ------ | ------------ | -------- | ---- | ---------------------- | ------------ | - |  | -------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                  |                                        |      |                   |              |                         |      |        |              |          |      | To be well capitalized |              |   |  |          |            |   |  |  
|                  |                                        |      | For capital       |              | under prompt corrective |      |        |              |          |      |                        |              |  
|                  |                                        |      | adequacy purposes |              | action provisions       |      | Actual
|                  |                                        |      |                   |              |                         |      |       
|                  |                                        |      | Franklin          |              |                         |      |        |              | Franklin |      |                        |              |   |  | Franklin |            |   |  |  
|                  |                                        |      | National          |              |                         |      |        |              | National |      |                        |              |   |  | National |            |   |  |  
|December 31, 2003 |                                        | Bank |                   | Consolidated |                         | Bank |        | Consolidated |          | Bank |                        | Consolidated
|Amount:           |                                        |      |                   |              |                         |      |        |              |          |      |                        |              |   |  |          |            |   |  |   |            |   |  |   |           
|                  | Tier I to average
assets               |      | $                 | 35,847,428   |                         |      | $      | 35,913,039   |          |      | $                      | 44,809,285   |   |  | $        | 44,891,299 |   |  | $ | 66,450,700 |   |  | $ | 72,844,129 |  
|                  | Tier I to risk-
weighted assets        |      |                   | 25,191,668   |                         |      |        | 25,443,720   |          |      |                        | 37,787,502   |   |  |          | 38,165,580 |   |  |   | 66,491,700 |   |  |   | 72,844,129 |  
|                  | Total capital to risk-
weighted assets |      |                   | 50,383,336   |                         |      |        | 50,887,440   |          |      |                        | 62,979,170   |   |  |          | 63,609,800 |   |  |   | 74,310,700 |   |  |   | 78,671,542 |  
|Ratios:           |                                        |      |                   |              |                         |      |        |              |          |      |                        |              |   |  |          |            |   |  |   |            |   |  |   |           
|                  | Tier I to average
assets               |      |                   | 4            | %                       |      |        | 4            | %        |      |                        | 5            | % |  |          | 5          | % |  |   | 7.4        | % |  |   | 8.1        | %
|                  | Tier I to risk-
weighted assets        |      |                   | 4            | %                       |      |        | 4            | %        |      |                        | 6            | % |  |          | 6          | % |  |   | 10.6       | % |  |   | 11.5       | %
|                  | Total capital to risk-
weighted assets |      |                   | 8            | %                       |      |        | 8            | %        |      |                        | 10           | % |  |          | 10         | % |  |   | 11.8       | % |  |   | 12.4       | %

|                  |                                        |      |                   |              |                         |      |        |              |          |      |                        |              |   |  |          |            |   |  |   |            |   |  |   |            |  
|----------------- | -------------------------------------- | ---- | ----------------- | ------------ | ----------------------- | ---- | ------ | ------------ | -------- | ---- | ---------------------- | ------------ | - |  | -------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                  |                                        |      |                   |              |                         |      |        |              |          |      | To be well capitalized |              |   |  |          |            |   |  |  
|                  |                                        |      | For capital       |              | under prompt corrective |      |        |              |          |      |                        |              |  
|                  |                                        |      | adequacy purposes |              | action provisions       |      | Actual
|                  |                                        |      |                   |              |                         |      |       
|                  |                                        |      | Franklin          |              |                         |      |        |              | Franklin |      |                        |              |   |  | Franklin |            |   |  |  
|                  |                                        |      | National          |              |                         |      |        |              | National |      |                        |              |   |  | National |            |   |  |  
|December 31, 2002 |                                        | 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       | %



|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, 2003, of the difference between basic weighted average shares
outstanding and diluted weighted average shares outstanding.

|                                |               |  |           |         |      |  |           |         |  |  |           |         | 
|------------------------------- | ------------- |  | --------- | ------- | ---- |  | --------- | ------- |  |  | --------- | ------- | 
|                                |               |  | 2003      |         | 2002 |  | 2001     
|Weighted average sharesbasic   |               |  | 8,301,774 |         |      |  | 7,905,657 |         |  |  | 7,816,634 |        
|Effect of dilutive securities:  |               |  |           |         |      |  |           |         |  |  |           |        
|                                | Stock options |  |           | 736,572 |      |  |           | 848,145 |  |  |           | 535,434 | 
|                                |               |  |           |         |      |  |           |         |  |  |           |        
|Weighted average sharesdiluted |               |  | 9,038,346 |         |      |  | 8,753,802 |         |  |  | 8,352,068 |        
|                                |               |  |           |         |      |  |           |         |  |  |           |        

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|    |  | 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.                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|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 $222,682, $240,204, and
$160,645, in 2003, 2002 and 2001, respectively.
|   
|18. |  | FAIR VALUES OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | The estimated fair values of the Companys financial instruments are as
follows at December 31, 2003 and 2002:                                                                                                                                                                                                                                                                                                                                                                                             

|                         |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |             | 
|------------------------ | ------------------------------------------------ |  | -------- | ----------- | ----- |  | -------- | ----------- | ----- |  | - | ----------- |  |  | - | ----------- | 
|                         |                                                  |  | 2003     |             | 2002 
|                         |                                                  |  |          |             |      
|                         |                                                  |  | Carrying |             | Fair  |  | Carrying |             | Fair 
|                         |                                                  |  | Amount   |             | Value |  | Amount   |             | Value
|Financial assets:        |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |            
|                         | Cash and cash equivalents                        |  | $        | 51,025,577  |       |  | $        | 51,025,577  |       |  | $ | 28,061,479  |  |  | $ | 28,061,479  | 
|                         | Federal funds sold                               |  |          |            |       |  |          |            |       |  |   | 18,922,000  |  |  |   | 18,922,000  | 
|                         | Securities available-for-sale                    |  |          | 303,580,832 |       |  |          | 303,580,832 |       |  |   | 257,971,420 |  |  |   | 257,971,420 | 
|                         | Securities held-to-maturity                      |  |          | 3,882,845   |       |  |          | 3,972,533   |       |  |   | 8,228,563   |  |  |   | 8,335,437   | 
|                         | Federal Home Loan and Federal
Reserve Bank stock |  |          | 4,414,750   |       |  |          | 4,414,750   |       |  |   | 4,113,200   |  |  |   | 4,113,200   | 
|                         | Loans                                            |  |          | 566,730,369 |       |  |          | 567,365,606 |       |  |   | 538,263,372 |  |  |   | 542,273,313 | 
|                         | Loans held for sale                              |  |          | 4,929,397   |       |  |          | 5,051,626   |       |  |   | 19,431,829  |  |  |   | 19,702,977  | 
|                         | Total servicing rights                           |  |          | 4,803,528   |       |  |          | 4,803,528   |       |  |   | 3,860,421   |  |  |   | 3,860,421   | 
|                         | Accrued interest receivable                      |  |          | 3,947,920   |       |  |          | 3,947,920   |       |  |   | 3,713,438   |  |  |   | 3,713,438   | 
|                         | Rate lock commitmentsnet                        |  |          | 122,229     |       |  |          | 122,229     |       |  |   | 271,148     |  |  |   | 271,148     | 
|Financial liabilities:   |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |            
|                         | Deposits with defined maturities                 |  |          | 389,280,590 |       |  |          | 390,291,755 |       |  |   | 378,923,774 |  |  |   | 380,041,682 | 
|                         | Deposits with undefined maturities               |  |          | 412,163,440 |       |  |          | 412,163,440 |       |  |   | 379,447,963 |  |  |   | 379,447,963 | 
|                         | Other borrowings and repurchase
agreements       |  |          | 91,950,000  |       |  |          | 91,950,000  |       |  |   | 76,581,494  |  |  |   | 76,581,494  | 
|                         | Accrued interest payable                         |  |          | 1,558,968   |       |  |          | 1,558,968   |       |  |   | 1,478,173   |  |  |   | 1,478,173   | 
|Off-balance sheet items: |                                                  |  |          |             |       |  |          |             |       |  |   |             |  |  |   |            
|                         | Commitments to extend credit                     |  |          |            |       |  |          | 120,382,048 |       |  |   |            |  |  |   | 102,904,596 | 
|                         | Credit card commitments                          |  |          |            |       |  |          | 258,520     |       |  |   |            |  |  |   | 425,691     | 
|                         | Standby letters of credit                        |  |          |            |       |  |          | 19,849,063  |       |  |   |            |  |  |   | 19,971,453  | 



| |  | 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.                                                                                                                                                                                               

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| |  | 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.                                                                                                                                                                                                                                   
|
| |  | 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, 2003 and 2002 and for each of the three years in
the period ended December 31, 2003 is as follows:

|                                     |  |      |            |      |  |   |            | 
|------------------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | 
|CONDENSED BALANCE SHEETS             |  | 2003 |            | 2002
|ASSETS                               |  |      |            |      |  |   |            | 
|Cash                                 |  | $    | 378,267    |      |  | $ | 69,399     | 
|Investment in subsidiaries           |  |      | 67,804,333 |      |  |   | 62,284,408 | 
|Other                                |  |      | 10,332,165 |      |  |   | 9,342,258  | 
|                                     |  |      |            |      |  |   |            | 
|TOTAL                                |  | $    | 78,514,765 |      |  | $ | 71,696,065 | 
|                                     |  |      |            |      |  |   |            | 
|LIABILITIES AND STOCKHOLDERS EQUITY |  |      |            |      |  |   |            | 
|Liabilities                          |  | $    | 21,480,459 |      |  | $ | 23,147,900 | 
|Stockholders equity                 |  |      | 57,034,306 |      |  |   | 48,548,165 | 
|                                     |  |      |            |      |  |   |            | 
|TOTAL                                |  | $    | 78,514,765 |      |  | $ | 71,696,065 | 
|                                     |  |      |            |      |  |   |            | 

|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |           | 
|----------------------------------------------------------------------------- | --------------------------------- | ---- | ---------- | --------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|CONDENSED STATEMENTS OF INCOME                                                |                                   | 2003 |            | 2002      |  | 2001
|INCOME:                                                                       |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              | Management fees and rental income |      | $          | 1,291,522 |  |      | $          | 1,289,044 |  |   | $          | 1,206,587 | 
|                                                                              | Interest income                   |      |            | 93,750    |  |      |            | 111,198   |  |   |            | 182,319   | 
|                                                                              | Other income                      |      |            |          |  |      |            | 397       |  |   |            |          | 
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              |                                   |      | 1,385,272  |           |  |      | 1,400,639  |           |  |   | 1,388,906  |          
|EXPENSES:                                                                     |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              | Interest expense                  |      |            | 953,572   |  |      |            | 1,117,904 |  |   |            | 1,609,990 | 
|                                                                              | Salaries and employee benefits    |      |            | 552,914   |  |      |            | 548,321   |  |   |            | 502,451   | 
|                                                                              | Other                             |      |            | 921,202   |  |      |            | 1,033,322 |  |   |            | 682,514   | 
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|                                                                              |                                   |      | 2,427,688  |           |  |      | 2,699,547  |           |  |   | 2,794,955  |          
|LOSS BEFORE INCOME TAXES AND
EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES |                                   |      | (1,042,416 | )         |  |      | (1,298,908 | )         |  |   | (1,406,049 | )        
|INCOME TAX BENEFIT                                                            |                                   |      | 347,903    |           |  |      | 441,629    |           |  |   | 478,056    |          
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|LOSS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS
OF SUBSIDIARIES                  |                                   |      | (694,513   | )         |  |      | (857,279   | )         |  |   | (927,993   | )        
|EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES                              |                                   |      | 10,492,381 |           |  |      | 11,942,372 |           |  |   | 7,835,080  |          
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          
|NET INCOME                                                                    |                                   | $    | 9,797,868  |           |  | $    | 11,085,093 |           |  | $ | 6,907,087  |          
|                                                                              |                                   |      |            |           |  |      |            |           |  |   |            |          

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|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |           |            |            |            |  
|------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------ | ----------------------------------------- | ---------- | ----------- | ---------- | ---------- | ---------- | ----------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|CONDENSED STATEMENTS OF CASH FLOWS:   |                                                                               | 2003                                       |                                                  | 2002                                      |            | 2001       
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|                                      | Net income                                                                    |                                            | $                                                | 9,797,868                                 |            |             | $          | 11,085,093 |            |             | $          | 6,907,087 |           
|                                      | Adjustments to reconcile net income
to net cash used in operating activities: |                                            |                                                  |                                           |            |             |            |            |            |             |            |           |           
|                                      |                                                                               |                                            | Depreciation and amortization                    |                                           |            | 105,791     |            |            |            | 105,791     |            |           |            | 78,428     |           
|                                      |                                                                               |                                            | Equity in undistributed earnings of subsidiaries |                                           |            | (10,492,381 | )          |            |            | (11,942,372 | )          |           |            | (7,835,080 | )         
|                                      |                                                                               |                                            | Increase in other assets                         |                                           |            | (1,095,696  | )          |            |            | (637,534    | )          |           |            | (742,258   | )         
|                                      |                                                                               |                                            | Increase (decrease) in other liabilities         |                                           |            | (368,557    | )          |            |            | (41,988     | )          |           |            | 78,684     |           
|                                      |                                                                               |                                            | Tax benefit of stock options exercised           |                                           |            | 951,356     |            |            |            | 382,091     |            |           |            | 9,436      |           
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|                                      |                                                                               |                                            |                                                  | Net cash used in operating activities     |            |             | (1,101,619 | )          |            |             | (1,048,919 | )         |            |            | (1,503,703 | )
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|                                      |                                                                               | Purchase of premises and equipment         |                                                  |                                           |           |             |            |            |           |             |            |           |           |           
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|                                      |                                                                               |                                            |                                                  | Net cash used in investing activities     |            |             |           |            |            |             |           |           |            |            |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|                                      |                                                                               | Dividends paid                             |                                                  |                                           | (1,902,665 | )           |            |            | (1,734,577 | )           |            |           | (1,641,212 | )         
|                                      |                                                                               | Dividends received from subsidiary         |                                                  |                                           | 1,875,000  |             |            |            | 1,720,000  |             |            |           | 2,155,000  |           
|                                      |                                                                               | Net proceeds from issuance of common stock |                                                  |                                           | 2,800,726  |             |            |            | 532,920    |             |            |           | 108,605    |           
|                                      |                                                                               | Purchase of subsidiaries stock             |                                                  |                                           |           |             |            |            |           |             |            |           | (525,000   | )         
|                                      |                                                                               | (Repayments) proceeds from borrowingsnet  |                                                  |                                           | (1,362,574 | )           |            |            | 490,731    |             |            |           | 97,495     |           
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|                                      |                                                                               |                                            |                                                  | Net cash provided by financing activities |            |             | 1,410,487  |            |            |             | 1,009,074  |           |            |            | 194,888    |  
|NET INCREASE (DECREASE) IN CASH       |                                                                               |                                            | 308,868                                          |                                           |            |             | (39,845    | )          |            |             | (1,308,815 | )        
|CASHBeginning of year                |                                                                               |                                            | 69,399                                           |                                           |            |             | 109,244    |            |            |             | 1,418,059  |          
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          
|CASHEnd of year                      |                                                                               | $                                          | 378,267                                          |                                           |            | $           | 69,399     |            |            | $           | 109,244    |          
|                                      |                                                                               |                                            |                                                  |                                           |            |             |            |            |            |             |            |          



|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 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |  | 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.

|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |            |            | 
|---------------------------------------- | --------------------- | ------------ | ----------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | ---------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                         |                       |              |             | 2003      
|                                         |                       |              |             |           
|                                         |                       |              |             |            |            |         |            | Mortgage  |           |              |            |              |            |   |             |            |             |   |             |           
|                                         |                       |              |             | Bank       |            | Banking |            | All Other |           | Eliminations |            | Consolidated
|                                         |                       |              |             |            |            |         |            |           |           |              |            |             
|Total interest income                    |                       | $            | 45,664,735  |            |            | $       | 1,009,212  |           |           | $            | 2,741,853  |              |            | $ | (2,881,773  | )          |             | $ | 46,534,027  |           
|Total interest expense                   |                       |              | 14,483,962  |            |            |         | 153,903    |           |           |              | 1,726,675  |              |            |   | (1,160,676  | )          |             |   | 15,203,864  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Net interest income                      |                       |              | 31,180,773  |            |            |         | 855,309    |           |           |              | 1,015,178  |              |            |   | (1,721,097  | )          |             |   | 31,330,163  |           
|Provision for loan losses                |                       |              | 3,122,000   |            |            |         |           |           |           |              |           |              |            |   |            |            |             |   | 3,122,000   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Net interest income after provision      |                       |              | 28,058,773  |            |            |         | 855,309    |           |           |              | 1,015,178  |              |            |   | (1,721,097  | )          |             |   | 28,208,163  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Total other income                       |                       |              | 5,434,869   |            |            |         | 5,430,069  |           |           |              | 10,218,325 |              |            |   | (9,908,903  | )          |             |   | 11,174,360  |           
|Total other expense                      |                       |              | 18,451,039  |            |            |         | 5,262,269  |           |           |              | 2,061,581  |              |            |   | (1,291,522  | )          |             |   | 24,483,367  |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Income before taxes                      |                       |              | 15,042,603  |            |            |         | 1,023,109  |           |           |              | 9,171,922  |              |            |   | (10,338,478 | )          |             |   | 14,899,156  |           
|Provision for income taxes               |                       |              | 5,155,866   |            |            |         | 387,860    |           |           |              | (442,438   | )            |            |   |            |            |             |   | 5,101,288   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Net income                               |                       | $            | 9,886,737   |            |            | $       | 635,249    |           |           | $            | 9,614,360  |              |            | $ | (10,338,478 | )          |             | $ | 9,797,868   |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Other significant items                  |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Total assets                             |                       | $            | 919,586,521 |            |            | $       | 31,913,862 |           |           | $            | 95,634,229 |              |            | $ | (93,569,800 | )          |             | $ | 953,564,812 |           
|Depreciation, amortization and
accretion |                       |              | 2,880,929   |            |            |         | 1,716,853  |           |           |              | 125,531    |              |            |   |            |            |             |   | 4,723,313   |           
|Revenues from external customers         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         | Total interest income |              |             | 45,524,815 |            |         |            | 1,009,212 |           |              |            |             |            |   |             |           |             |   |             | 46,534,027 |           
|                                         | Total other income    |              |             | 5,434,869  |            |         |            | 5,430,069 |           |              |            | 309,422      |            |   |             |           |             |   |             | 11,174,360 |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         |                       | Total income |             | $          | 50,959,684 |         |            | $         | 6,439,281 |              |            | $            | 309,422    |   |             | $          |            |   |             | $          | 57,708,387 | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|Revenues from affiliates                 |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         | Total interest income |              | $           | 139,920    |            |         |            |          |           |              | $          | 2,741,853    |            |   | $           | (2,881,773 | )           |   |             |           |           
|                                         | Total other income    |              |             |           |            |         |            |          |           |              |            | 9,908,903    |            |   |             | (9,908,903 | )           |   |             |           |           
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           
|                                         |                       | Total income |             | $          | 139,920    |         |            | $         |          |              |            | $            | 12,650,756 |   |             | $          | (12,790,676 | ) |             | $          |           | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           

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|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |            |            | 
|---------------------------------------- | --------------------- | ------------ | ----------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | ----------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                         |                       |              |             | 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 | ) |             | $          |           | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |             |             |   |             |           

|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |            |            | 
|---------------------------------------- | --------------------- | ------------ | ----------- | ---------- | ---------- | ------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | - | ----------- | ---------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                         |                       |              |             | 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 | ) |             | $          |           | 
|                                         |                       |              |             |            |            |         |            |           |           |              |            |              |            |   |             |            |             |   |             |           

79



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|21. |  | DEFINITIVE AFFILIATION AGREEMENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On July 23, 2002, the Company signed a definitive affiliation agreement, as
amended on September 9, 2002 and December 10, 2002, which provides for the
acquisition of the Company by Fifth Third Bancorp (Fifth Third) through a
merger of the Company with and into a wholly owned subsidiary of Fifth
Third. The Board of Directors of the Company approved the definitive
affiliation agreement and the transactions contemplated thereby.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | On March 27, 2003, the Company entered into an additional amendment to the
affiliation agreement to extend its termination date to June 30, 2004. As
consideration for this amendment, Fifth Third agreed to amend the exchange
ratio to provide that each outstanding share of Franklin Financial common
stock will be exchanged for that number of shares of Fifth Third
common stock equal to (1) the sum of (a) $31.00 and (b) any increase
in the book value per share of Franklin Financial common stock,
excluding certain items, from March 31, 2003 through the end of
the fiscal quarter preceding the effective time of the merger divided
by (2) the average closing price of Fifth Third common stock for the
10 consecutive trading days ending on the fifth day before the
effective date of merger. 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.

80



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##### Table of Contents



Item 9.
    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. There has been no occurrence requiring a response to this item. 
 Item 9A. Controls and Procedures. Management has developed and implemented a policy and procedures for
reviewing disclosure controls and procedures and internal controls
over financial reporting on a
quarterly basis. As of December 31, 2003, management, including the Companys
principal executive and financial officers, evaluated the effectiveness of the
design and operation of disclosure controls and procedures, and, based on its
evaluation, 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 over
financial reporting or in other factors that could significantly
affect these controls during the fourth quarter 2003. 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. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant. Directors Presently, the Board of Directors of the Company consists of seven
directors. The Companys By-Laws provide that the Board of Directors shall
consist of not less than five nor more than twenty-five members, the precise
number to be determined from time to time by the Board of Directors. With the exception of Mr. Fisher, Ms. Smiley
and Mr. Cross, each of the Companys directors have served as directors of the
Company since December 1988. Mr. Fisher has been a member of the Board of
Directors since January 2002. Ms. Smiley and Mr. Cross have served as
directors of the Company since May 2000. James W. Cross, IV, age 40, has been the owner and President of Century
Construction Company, Inc. since 1983. Robert C. Fisher,age 55, has served as President of Belmont University
since April 2000. From July 1996 to April 2000, Mr. Fisher served as Vice
President of Academic Affairs for Arkansas State University. Gordon E. Inman, age 65, has served as Chairman of the Board of the
Company since December 1988 and of the Bank since May 1989. In October of
2002, Mr. Inman was appointed 81




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##### Table of Contents



President and Chief Executive Officer of the Company. In addition, Mr.
Inman was the owner of Inman Realtors, a real estate brokerage firm from 1979
to 1996. Mr. Inman is also a Trustee of Belmont University in Nashville,
Tennessee. D. Wilson Overton, age 54, is an independent Certified Public Accountant
and has been the owner of Wilson Overton CPA and an independent consultant
since 1999. From September 1996 through 1999, Mr. Overton was a CPA with and a
shareholder of Williams, Crosslin, Sparks & Vanden, P.C. From 1992 to
September 1996, Mr. Overton was a shareholder in the regional accounting firm
of Home CPA Group, a professional association. Edward M. Richey, age 52, has served as the President of Richey Insurance
Service, Inc. since 1976. From 1979 to 1997, Mr. Richey was also the owner and
a director of Goodman, Inman & Richey, Inc., a weight loss franchise
operation, of which he served as President from 1979 to 1986. Edward P. Silva, age 61, is an attorney-at-law who has been a partner in
the law firm of Hartzog, Silva & Davies since 1974. Melody J. Smiley, age 51, is a Certified Public Accountant and has been
the sole owner of Melody J. Smiley, CPA, since 1986. Executive Officers The executive officers of the Company are as follows: Name
    
    Age
    
    Position HeldGordon E. Inman
    
    
    65
    
    
    Chairman of the Board, President and Chief
Executive OfficerJ. Myers Jones, III
    
    
    53
    
    
    President of Franklin National BankGeorge J. Regg, Jr.
    
    
    59
    
    
    Executive Vice President, Secretary and
General CounselJohn P. Slayden
    
    
    51
    
    
    Senior Vice PresidentKelly S. Swartz
    
    
    35
    
    
    Vice President and Chief Financial Officer
 Executive officers are appointed by the Board of Directors of the Company
and hold office at the pleasure of the Board. Executive officers devote their
full time to the affairs of the Company. See Directors above for information
with respect to Gordon E. Inman. J. Myers Jones, IIIhas served as President and Chief Executive Officer of
the Bank since August 1992. From 1989 to 1992, Mr. Jones served as County
Executive Officer of NationsBank of Tennessee, N.A. George J. Regg, Jr.has served as Executive Vice President, Secretary and
General Counsel of the Company since February 2001 and as Senior Vice
President, Secretary and General Counsel of the Company from November 1997 to
January 2001. Mr. Regg served as President of Goodman, Inman, Richey, Inc., a
weight loss franchise operation, from 1994 to 1997, and as its Vice President
and General Counsel from 1983 to 1994. 82




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##### Table of Contents



John P. Slaydenhas served as Senior Vice President and Credit
Administrator of the Company since June 1998. Mr. Slayden served as Executive
Vice President of First American National Bank from 1982 to 1998. Kelly S. Swartzhas served as Vice President of the Company and Bank since
June 2003 and as Chief Financial Officer of the Company since August, 2003 and
Comptroller of the Bank since August 2003. Mrs. Swartz is a certified public
accountant and from March 2000 to June 2003 was an independent consultant.
From June 1990 to March 2000, Mrs. Swartz was employed by Deloitte & Touche,
LLP a National accounting firm, and served in various capacities including
Senior Manager of Audit Services. There are no family relationships between any director or executive
officer and any other director or executive officer of the Company. Audit Committee of the Board of Directors The Board of Directors has established a standing Audit Committee in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended. The Audit Committee presently consists of D. Wilson Overton, James W.
Cross, IV, and Melody J. Smiley. The Board of Directors has determined that
D. Wilson Overton is an audit committee financial expert as such term has
been defined by SEC rules. The Audit Committee has been assigned the principal
function of reviewing the internal and external financial reporting of the
Company, reviewing the scope of the independent audit, pre-approving all
expenses relating to services provided by the Companys independent accountants
and considering comments by the auditors regarding internal controls and
accounting procedures and managements response to these comments. The Company
has adopted a written charter for the Audit Committee which was included with
the proxy statement for the Companys 2001 Annual Meeting of Shareholders. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys directors, executive officers and persons who own more than 10% of
the outstanding Common Stock of the Company, to file with the Securities and
Exchange Commission reports of changes in ownership of the Common Stock of the
Company held by such persons. Officers, directors and greater than 10%
shareholders are also required to furnish the Company with copies of all forms
they file under this regulation. To the Companys knowledge, based solely on a
review of the copies of such reports furnished to the Company and
representations that no other reports were required, during the year ended
December 31, 2003, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10% shareholders were complied with except
for the following: (i) Mrs. Swartz failed to file on a timely
basis the initial report on Form 3. The report was subsequently filed on
February 25, 2004. Although it is not the Companys obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has adopted a
policy requiring all Section 16 reporting persons to report to the General
Counsel of the Company prior to engaging in any transactions in the Companys
Common Stock. 83




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##### Table of Contents



Code of Ethics The Company
has adopted a code of ethics that applies to the Chief Executive
Officer, Chief Financial Officer and other Senior
Financial Officers. A copy of the code of ethics has
been filed with this Annual Report as Exhibit 14.1. In the event that the
Company makes any amendment to, or grants any waiver from, a provision of the
code of ethics that requires disclosure under applicable SEC or Nasdaq rules,
the Company intends to disclose such amendment or waiver and the reasons
therefor on its website (www.franklinnetbranch.com). 84




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##### Table of Contents



Item 11. Executive Compensation The following table provides certain summary information for the fiscal
years ended December 31, 2003, 2002 and 2001 concerning compensation paid or
accrued by the Company to or on behalf of the Companys Chief Executive Officer
and the other executive officers of the Company who earned more than $100,000
during fiscal 2003 (the Named Executive Officers). SUMMARY COMPENSATION TABLE Annual Compensation
    
    Long-Term CompensationRestricted
    
    NumberName and
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    of Options
    
    All OtherPrincipal
    
    
    
    
    
    Salary
    
    Bonus
    
    Awards(1)
    
    Awarded
    
    CompensationPosition
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    (#)
    
    ($)Gordon E. Inman
    
    
    2003
    
    
    $
    231,525
    
    
    $
    173,150
    
    
    
    
    
    
    
    
    
    
    $
    39,434
    (2)Chairman,
    
    
    2002
    
    
    
    220,500
    
    
    
    
    
    
    
    31,500
    
    
    
    229,750
    
    
    
    131,553
    (3)President and
    
    
    2001
    
    
    
    210,000
    
    
    
    
    
    
    
    
    
    
    
    266,666
    
    
    
    26,875
    (4)Chief Executive
OfficerJ. Myers Jones
    
    
    2003
    
    
    $
    151,705
    
    
    $
    40,071
    
    
    
    
    
    
    
    
    
    
    $
    9,400
    (5)President of
    
    
    2002
    
    
    
    139,283
    
    
    
    
    
    
    
    16,643
    
    
    
    18,819
    
    
    
    7,033
    (6)Franklin National
    
    
    2001
    
    
    
    133,101
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    5,711
    (7)BankGeorge J. Regg,
    
    
    2003
    
    
    $
    167,087
    
    
    $
    42,979
    
    
    
    
    
    
    
    
    
    
    $
    12,800
    (8)Jr. Executive
    
    
    2002
    
    
    
    150,917
    
    
    
    
    
    
    
    17,168
    
    
    
    19,078
    
    
    
    9,894
    (9)Vice President,
    
    
    2001
    
    
    
    137,250
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    7,454
    (10)Secretary and
General CounselJohn P. Slayden
    
    
    2003
    
    
    $
    114,200
    
    
    $
    31,475
    
    
    
    
    
    
    
    
    
    
    $
    4,764
    (11)Senior Vice
    
    
    2002
    
    
    
    104,900
    
    
    
    
    
    
    
    12,583
    
    
    
    16,791
    
    
    
    3,430
    (12)President
    
    
    2001
    
    
    
    100,650
    
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    3,100
    (13)
   (1)
    
    The amounts under the Restricted Stock Awards column represent the
market value of restricted shares of Franklin common stock based on the
closing price of the common stock on the respective dates of grant.
Aggregate restricted stock holdings in terms of number of shares and
dollar values as of December 31, 2003, for each Named Executive Officer
were as follows: Mr. Inman: 1,800, $41,274; Mr. Jones: 951, $21,806; Mr.
Regg: 981, $22,494; and Mr. Slayden: 719, $16,487. The restrictions on
these shares of common stock lapse in equal increments over a period of
four years and each share earns dividends as they are declared and paid by
the Board of Directors.(2)
    
    Includes $9,934 paid in 2003 to Mr. Inman in lieu of cafeteria plan
benefits, $6,000 in matching contributions under the Companys 401(k)
plan, $23,500 awarded to Mr. Inman as compensation for his services as a
director of the Company and the Bank.(3)
    
    Includes $10,153 paid in 2002 to Mr. Inman in lieu of cafeteria plan
benefits, $5,500 in matching contributions under the Companys 401(k)
plan, $17,000 awarded to Mr. Inman as compensation for his services as a
director of the Company and the Bank, and a $900 auto allowance. Also
includes $70,000 recognized as compensation for the receipt of an
automobile and $28,000 as compensation for club membership dues paid on
his behalf. 85




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##### Table of Contents



(4)
    
    Includes $10,525 paid in 2001 to Mr. Inman in lieu of cafeteria plan
benefits and $5,031 in matching contributions under the Companys 401(k)
plan. Also includes $11,319 as the value of 770 shares of common stock
awarded to Mr. Inman as compensation for his services as a director of the
Company and the Bank, and a $2,100 auto allowance.(5)
    
    Includes $6,000 paid in 2003 to Mr. Jones in matching contributions under
the Companys 401(k) plan and $3,400 awarded to Mr. Jones as compensation
for his service as a director of the Bank.(6)
    
    Includes $4,533 paid in 2002 to Mr. Jones in matching contributions under
the Companys 401(k) plan and $2,500 awarded to Mr. Jones as compensation
for his service as a director of the Bank.(7)
    
    Includes $4,094 paid in 2001 to Mr. Jones in matching contributions under
the Companys 401(k) plan and $1,617 as the value of 110 shares of common
stock awarded to Mr. Jones as compensation for his service as a director
of the Bank.(8)
    
    Includes $6,000 paid in 2003 to Mr. Regg in matching contributions under
the Companys 401(k) plan and $6,800 awarded to Mr. Regg as compensation
for his service as an officer of the Company.(9)
    
    Includes $4,894 paid in 2002 to Mr. Regg in matching contributions under
the Companys 401(k) plan and $5,000 awarded to Mr. Regg as compensation
for his service as an officer of the Company.(10)
    
    Includes $4,220 paid in 2001 to Mr. Regg in matching contributions under
the Companys 401(k) plan and $3,234 as the value of 220 shares of common
stock awarded to Mr. Regg as compensation for his service as an officer of
the Company.(11)
    
    Includes $4,764 paid in 2003 to Mr. Slayden in matching contributions
under the Companys 401(k) plan.(12)
    
    Includes $3,430 paid in 2002 to Mr. Slayden in matching contributions
under the Companys 401(k) plan.(13)
    
    Includes $3,100 paid in 2001 to Mr. Slayden in matching contributions
under the Companys 401(k) plan. Director Compensation The Company awarded $3,400 to each outside director of the Company as
compensation for his service as a director of the Company during 2003. Gordon
Inman received $23,500 as compensation for his service as Chairman of the Board
of Directors of the Company. The Banks outside directors currently receive a
fee of $1,000 per month. In addition, each director of the Bank (other than J.
Myers Jones) was awarded $1,700 as compensation for his service as a director
of the Bank during 2003. Mr. Jones was awarded $3,400 as compensation for his
service as a director of the Bank during 2003. Compensation to be paid to
directors of the Company and the Bank during fiscal 2004 has not yet been
established. Employment Agreement On January 1, 2000, the Company entered into an employment agreement with
Gordon E. Inman, pursuant to which Mr. Inman serves as Chairman of the Board.
The employment agreement is for a term of five years, expiring on December 31,
2004, and provides for automatic renewal for a period of one additional year
unless the Company gives prior written notice that the agreement shall not be
so extended. The agreement provides for Mr. Inman to be paid an initial annual
base salary of $200,000, with the amount of the base salary to be increased
annually by 5%. The agreement also provides for the annual grant of stock
options to Mr. Inman. These options are to be granted by the Board of
Directors of the Company. The agreement also provides for Mr. Inman to receive
the use of a Company automobile, as well as health, disability and life
insurance. Stock Option Plan On April 18, 2000, the Board of Directors adopted the 2000 Stock Option
Plan (the 2000 Plan), which was subsequently approved by the Companys
shareholders on May 16, 2000. The 2000 Plan was established for employees who
are contributing significantly to the management or operation of the business
of the Company or its subsidiaries as determined by the Stock Option Committee
(the Committee). The Plan provides for the grant of incentive and
non-qualified stock options to purchase up to 1,875,000 shares of Common Stock
at the discretion of the Committee. The option exercise price of incentive
stock options must be at least 100% (110% in the case of a holder of 10% or
more of the 86




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##### Table of Contents



Common Stock) of the fair market value of the stock on the date the option
is granted and the options are exercisable by the holder thereof in full at any
time prior to their expiration in accordance with the terms of the Plan.
Incentive stock options granted pursuant to the Plan will expire on or before
(i) the date which is the tenth anniversary of the date the option is granted,
or (ii) 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 or any subsidiary of the Company. There were no grants of stock options made during the fiscal year ended
December 31, 2003 due to the Companys pending merger. See
Part I, Item 1. Business-Recent
Developments for more information regarding the merger. The following table presents information regarding options exercised
during 2003 and the value of unexercised options and warrants held at December
31, 2003 by the Named Executive Officers. There were no SARs outstanding during
fiscal 2003. Value of Unexercised In-Number of Unexercised
    
    The-Money Options atShares
    
    
    
    
    
    Options at Fiscal Year
    
    Fiscal Year End(1)Acquired on
    
    Value
    
    End Exercisable/
    
    Exercisable / UnexercisableName
    
    Exercise
    
    Realized
    
    Unexercisable (#)
    
    ($)Gordon E. Inman
    
    
    
    
    
    
    
    
    
    1,215,604 / 11,813
    
    $25,404,117 / $178,369J. Myers Jones
    
    
    61,256
    
    
    $
    1,459,050
    
    
    71,616/14,114
    
    1,474,768/213,125George J. Regg, Jr.
    
    
    
    
    
    
    
    
    
    20,270/30,809
    
    354,827/541,708John P. Slayden
    
    
    
    
    
    
    
    
    
    7,148/16,143
    
    118,060/259,888
   (1)
    
    Dollar values calculated by determining the difference between the
closing price value of the Companys common stock on December 31,
2003 ($30.60) and the exercise price of such options. Restricted Stock Plan On April 17, 2001, the Board adopted the Franklin Financial Corporation
2001 Key Employee Restricted Stock Plan (the Restricted Stock Plan), which
was subsequently approved by the Companys shareholders on May 15, 2001. The
Restricted Stock Plan was established to further enable the Company to attract
and retain individuals with the talent to perform services that advance the
interests of the Company. The Restricted Stock Plan authorizes the Company to
issue up to 250,000 shares of the Companys common stock to top executives or
key management of the Company and its subsidiaries. Shares issued under the
Restricted Stock Plan are restricted for a specific period or periods
determined by the committee of the Board of Directors which administers the
Restricted Stock Plan (the Committee) and set forth in the agreement that
evidences the restricted stock grant. During the period or periods of
restriction, the shares of restricted stock granted may not be sold,
transferred, pledged, assigned or otherwise disposed of. The Committee may
establish additional restrictions, which will be set forth in the restricted
stock award agreement, including a stipulated price for each share of
restricted stock, restrictions based upon the achievement of specific
performance goals, time-based restrictions on vesting following the attainment
of performance goals, or any other restriction permissible under federal and
state 87




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##### Table of Contents



securities laws. Shares issued pursuant to the Restricted Stock Plan
become freely transferable by the participant after the last day of the period
or periods of restriction. Compensation Committee Interlocks and Insider Participation The Board of Directors does not have a Compensation Committee, the
functions which would be served by such a committee being reserved to the
independent members of the Board of Directors. Gordon E. Inman, the Companys
Chairman of the Board, President and Chief Executive Officer is an executive
officer who is also a member of the Companys Board of Directors. In January 1989, the organizers of the Company entered into an agreement
with Gordon E. Inman, the Chairman, President and Chief Executive Officer of
the Company and Chairman of the Board of the Bank, to lease a two-story office
building and property located adjacent to same. Since 1989, the Company and
Mr. Inman entered into several addendums to the lease agreement providing for
the lease of additional space in the building. The monthly rental on the
office building is presently $40,815, with increases to be made on an annual
basis based on any increase in the Consumer Price Index (CPI) during the
previous year. The ground lease with respect to the property adjacent to the
building requires that the Company pay a monthly rental of $650, with increases
to be made on an annual basis based on the increase in the CPI during the
previous year. In December 1993, the Bank entered into an agreement with Mr.
Inman for the lease of office/warehouse space on Main Street in Franklin,
Tennessee. As amended, the monthly rental on this facility is presently
$10,407, with increases to be made on an annual basis based on any increase in
the CPI during the previous year. In 2000, the Bank also entered into a lease
agreement with Mr. Inman for an additional building on Main Street in Franklin,
Tennessee with a monthly rental of $4,540. Lease payments to Mr. Inman by the
Company with respect to such properties totaled $678,115 during 2003 and
$657,465 during 2002. 88




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##### Table of Contents



Item 12.
    Security Ownership of Certain Beneficial Owners and Management. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of March 1, 2004
with respect to ownership of the outstanding Common Stock of the Company by (i)
all persons known to the Company to own beneficially more than 5% of the
outstanding shares of the Common Stock of the Company, (ii) each director and
nominee for director of the Company, (iii) each Named Executive Officer (as
defined herein) and (iv) all executive officers and directors of the Company as
a group. Amount and Nature of
    
    Percent ofBeneficial Owner
    
    Beneficial Ownership(1)
    
    Outstanding sharesGordon E. Inman(2)
    
    
    4,417,253
    
    
    
    45.9
    %J. Myers Jones(3)
    
    
    181,400
    
    
    
    2.1
    %George J. Regg, Jr.(4)
    
    
    91,254
    
    
    
    1.1
    %John P. Slayden(5)
    
    
    13,771
    
    
    
    *James W. Cross, IV
    
    
    12,636
    
    
    
    *Robert C. Fisher
    
    
    300
    
    
    
    *D. Wilson Overton
    
    
    76,005
    
    
    
    *Edward M. Richey(6)
    
    
    1,018,967
    
    
    
    12.1
    %Edward P. Silva
    
    
    26,931
    
    
    
    *Melody J. Smiley
    
    
    11,663
    
    
    
    *All executive officers and directors
as a group (10 persons)(7)
    
    
    5,850,180
    
    
    
    60.1
    %
   *
    
    Less than 1%(1)
    
    Except as otherwise indicated, each person named in this table possesses
sole voting and investment power with respect to the shares beneficially
owned by such person. Beneficial Ownership includes shares for which an
individual, directly or indirectly, has or shares voting or investment
power or both and also includes warrants and options which are exercisable
within sixty days of the date hereof. Beneficial ownership as reported in
the above table has been determined in accordance with Rule 13d-3 of the
Securities Exchange Act of 1934, as amended (the Act). The percentages
are based upon 8,394,806 shares outstanding, except for certain parties
who hold presently exercisable options to purchase shares. The
percentages for those parties who hold presently exercisable options are
based upon the sum of 8,394,806 shares plus the number of shares subject
to presently exercisable options held by them, as indicated in the
following notes.(2)
    
    Includes 1,219,542 shares subject to presently exercisable stock options.
Mr. Inmans business address is 230 Public Square, Franklin, Tennessee
37064.(3)
    
    Includes 76,321 shares subject to presently exercisable stock options.(4)
    
    Includes 31,040 shares subject to presently exercisable stock options.(5)
    
    Includes 12,646 shares subject to presently exercisable stock options.(6)
    
    Mr. Richey owns 879,411 shares individually, Mr. Richeys wife owns 9,200
shares in her IRA and 144,356 shares are owned by Richey Insurance
Company, an entity owned by Mr. Richey. Mr. Richeys address is P. O. Box
277, Franklin, Tennessee 37065.(7)
    
    Includes 1,339,549 shares subject to presently exercisable stock options. 89




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##### Table of Contents



Change of Control As previously reported in its periodic reports filed with the Securities
and Exchange Commission, the Company has entered into an Affiliation Agreement
(as subsequently amended, the Agreement) with Fifth Third Bancorp and Fifth
Third Financial Corporation. If completed, the transaction will result in a
change in control of the Company with the Company being merged with and into
Fifth Third Financial Corporation. 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 ofSecurities to be
    
    WeightedIssued Upon
    
    Average
    
    Number ofExercise of
    
    Exercise Price
    
    SecuritiesOutstanding
    
    of Outstanding
    
    RemainingOptions,
    
    Options,
    
    Available forWarrants and
    
    Warrants and
    
    FutureEquity Plans Approved by Shareholders
    
    Rights
    
    Rights
    
    Issuance1990 Incentive Stock Option Plan
    
    
    958,521
    
    
    $
    7.62
    
    
    
    2000 Incentive Stock Option Plan
    
    
    959,334
    
    
    $
    10.45
    
    
    
    971,5822000 Stock Purchase Plan
    
    
    
    
    
    
    
    
    
    
    23,1962001 Key Employee Restricted Stock Plan
    
    
    
    
    
    
    
    
    
    
    236,497
 
 Item 13. Certain Relationships and Related Transactions. For information regarding transactions between the Company and Mr. Inman,
see Item 11. Executive Compensation - Compensation Committee Interlocks and
Insider Participation above. The Bank has made outstanding loans to certain of the Companys directors,
executive officers, their associates and members of the immediate families of
such directors and executive officers. These loans were made in the ordinary
course of business, were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with persons not affiliated with the Company or the Bank and did
not involve more than the normal risk of collectibility or present other
unfavorable features. 
 Item 14. Principal Accountant Fees and Services. Deloitte & Touche LLP, which served as the Companys independent public
accountants for the year ended December 31, 2003, has been selected by the
Board of Directors as the Companys independent public accountants for the
current fiscal year. 90




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##### Table of Contents



Audit Fees. The aggregate fees billed by Deloitte & Touche LLP for
professional services rendered for the audit of the Companys annual financial
statements testing requirements in accordance with FDICIA, quarterly review
procedures and procedures performed in connection with the form S-4
Registration Statement were $490,541 for fiscal 2003 (of which 100% were pre-approved by
the Audit Committee) and $565,218 for fiscal 2002. Audit-Related
Fees.There were no fees billed by Deloitte & Touche LLP for
audit-related services. Tax-Related Fees.The aggregate fees billed by Deloitte & Touche LLP for
professional services rendered for tax compliance, tax advice and tax planning
were $24,000 for fiscal 2003 (of which 100% were pre-approved by the Audit
Committee) and $32,665 for fiscal 2002. These fees were incurred in connection
with the preparation of the Companys tax returns. All Other Fees.There were
no fees billed to the Company by Deloitte &
Touche LLP for either fiscal 2003 or fiscal 2002 for any other services. 
  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
Auditors Report  Deloitte & Touche LLP Consolidated Balance Sheets  December 31, 2003 and 2002 Consolidated Statements of Income  Years ended
December 31, 2003, 2002 and 2001 Consolidated Statements of Changes in Stockholders Equity
 Years ended December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows  Years ended
December 31, 2003, 2002 and 2001 Notes 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 91




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##### Table of Contents



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. 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 2002 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).
 92




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Exhibit No.
    
    
    
    Description of Exhibit*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).*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).
 93




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##### Table of Contents



Exhibit No.
    
    
    
    Description of Exhibit*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)14.1
    
    -
    
    Franklin Financial Corporation Code
of Ethics21.1
    
    -
    
    Subsidiaries of the Registrant23.1
    
    -
    
    Consent of Deloitte & Touche LLP.31.1
    
    -
    
    Certification of CEO pursuant to
Rule 13a-14(a).31.2
    
    -
    
    Certification of CFO pursuant to
Rule 13a-14(a).32.1
    
    -
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    -
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K. On October 31, 2003 the Company furnished a Form 8-K to the Commission in
connection with the Companys press release announcing the Companys results
for the three and six months ended September 30, 2003 and its financial
condition as of September 30, 2003. 94




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SIGNATURES Pursuant
to the requirements of Section 13 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 12, 2004
    
    By:
    
    /s/
    
    Gordon E. InmanGordon E. InmanChairman, President and Chief ExecutiveOfficer(principal executive officer)Date: March 12, 2004
    
    By:
    
    /s/
    
    Kelly S. SwartzKelly S. SwartzVice 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. Inman
    
    Chairman of
    
    March 12, 2004the Board, President andGordon E. Inman
    
    Chief Executive Officer/s/ James W. Cross
    
    Director
    
    March 12, 2004James W. Cross, IV/s/ Robert C. Fisher
    
    Director
    
    March 12, 2004Robert C. Fisher/s/ Wilson Overton
    
    Director
    
    March 12, 2004Wilson Overton/s/ Melody J. Smiley
    
    Director
    
    March 12, 2004Melody J. Smiley/s/ Edward M. Richey
    
    Director
    
    March 12, 2004Edward M. Richey/s/ Edward P. Silva
    
    Director
    
    March 12, 2004Edward P. Silva
 95




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Exhibit 31.1 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, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];c) evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; andd) disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrants internal control over financial
reporting; and
 5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of registrants board of
directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report
financial information; andb) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control
over financial reporting.
 Date: March 12, 2004 /s/ Gordon E. InmanGordon E. InmanChairman, President and ChiefExecutive Officer




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##### Table of Contents



Exhibit 31.2 I, Kelly Swartz, 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, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being
prepared;b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986];c) evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; andd) disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter (the registrants fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrants internal control over financial
reporting; and
 5. The registrants other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of registrants board of
directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report
financial information; andb) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control
over financial reporting.
 Date: March 12, 2004 /s/ Kelly S. SwartzKelly S. SwartzVice President and ChiefFinancial Officer




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##### Table of Contents



FRANKLIN FINANCIAL CORPORATION 
 EXHIBIT INDEX Exhibit Number
    
    
    
    Description of Exhibit14.1
    
    -
    
    Franklin Financial Corporation Code
of Ethics21.1
    
    -
    
    Subsidiaries of the Registrant23.1
    
    -
    
    Consent of Deloitte & Touche LLP32.1
    
    -
    
    Certifications of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    -
    
    Certifications of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 99