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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

|         |  |                                                                                         
|-------- |  | ----------------------------------------------------------------------------------------
|MARK ONE |  |                                                                                         
|[X]      |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|         |  |                                                                                         
|         |  | For the nine month period ended September 30, 2002                                      
|         |  |                                                                                         
|[  ]     |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|         |  |                                                                                         
|         |  | For the transition period from ___________ to ___________                               

Commission File Number 0-24161

MURFREESBORO BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Tennessee                                                      |  | 62-1694317                       
|                                                               |  |                                  
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer Identification No.)

615 Memorial Boulevard, Murfreesboro, Tennessee 37129

(Address of principal executive offices and Zip Code)


(615) 890-1111

(Registrants telephone Number, including area code)


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 [  ]

Indicate the number of shares outstanding of each of the issuers classes of
common stock as of the latest practicable date.

Common stock outstanding: 907,609 shares at November 12, 2002.





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TABLE OF CONTENTS



|                                           |  |  |  |  |  |  |  | 
|------------------------------------------ |  |  |  |  |  |  |  | 
|Consolidated Balance Sheets               
|Consolidated Statements of Operations     
|Consolidated Statements of Operations     
|Consolidated Statements of Cash Flows     
|Notes to Consolidated Financial Statements
|Section 906 Certification of the CEO      
|Section 906 Certification of the CFO      



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##### Table of Contents



PART I  FINANCIAL INFORMATION

ITEM  1.   FINANCIAL STATEMENTS

Murfreesboro Bancorp, Inc.

Consolidated Financial Statements
(Unaudited)

September 30, 2002

C O N T E N T S

|                                           |  |        |     | 
|------------------------------------------ |  | ------ | --- | 
|                                           |  | Page  
|                                           |  | Number
|                                           |  |       
|Consolidated Balance Sheets                |  |        | 2   | 
|Consolidated Statements of Operations      |  |        | 3-4 | 
|Consolidated Statements of Cash Flows      |  |        | 5   | 
|Notes to Consolidated Financial Statements |  |        | 6-8 | 

1



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##### Table of Contents



Murfreesboro Bancorp, Inc.




Consolidated Balance Sheets


As of September 30, 2002 and December 31, 2001
(Tabular amounts are in thousands)


|                                                                                                           |                                            |                                      |         |               |  |              |         |         |  | 
|---------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------------- |  | ------------ | ------- | ------- |  | 
|                                                                                                           |                                            |                                      |         | (Unaudited)   |  |              |         |        
|                                                                                                           |                                            |                                      |         | September 30, |  | December 31,
|                                                                                                           |                                            |                                      |         | 2002          |  | 2001        
|                                                                                                           |                                            |                                      |         |               |  |             
|ASSETS                                                                                                     |                                            |                                      |         |               |  |              |         |        
|Cash and due from banks                                                                                    |                                            | $                                    | 3,536   |               |  | $            | 3,710   |        
|Federal funds sold                                                                                         |                                            |                                      | 2,595   |               |  |              | 1,675   |        
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           | Total cash and cash equivalents            |                                      |         | 6,131         |  |              |         | 5,385   | 
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|Securities available for sale                                                                              |                                            |                                      | 32,669  |               |  |              | 20,309  |        
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|Loans, less allowance for possible loan losses
of $941,000 and $1,000,000, respectively                    |                                            |                                      | 102,504 |               |  |              | 96,519  |        
|Premises and equipment, net                                                                                |                                            |                                      | 4,890   |               |  |              | 5,124   |        
|Accrued interest receivable                                                                                |                                            |                                      | 831     |               |  |              | 687     |        
|Other assets                                                                                               |                                            |                                      | 2,258   |               |  |              | 2,207   |        
|Deferred tax assets                                                                                        |                                            |                                      | 340     |               |  |              | 319     |        
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           | Total assets                               |                                      | $       | 149,623       |  |              | $       | 130,550 | 
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |               |  |              |         |         |  | 
|Liabilities:                                                                                               |                                            |                                      |         |               |  |              |         |        
|Deposits                                                                                                   |                                            | $                                    | 126,101 |               |  | $            | 111,017 |        
|Short-term borrowings                                                                                      |                                            |                                      | 2,286   |               |  |              | 1,926   |        
|Accrued interest payable                                                                                   |                                            |                                      | 492     |               |  |              | 388     |        
|Accrued expenses and other liabilities                                                                     |                                            |                                      | 1,437   |               |  |              | 845     |        
|Federal Home Loan Bank advances                                                                            |                                            |                                      | 6,000   |               |  |              | 4,000   |        
|Subordinated convertible capital debentures                                                                |                                            |                                      | 3,000   |               |  |              | 3,000   |        
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           | Total liabilities                          |                                      |         | 139,316       |  |              |         | 121,176 | 
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|Shareholders equity:                                                                                      |                                            |                                      |         |               |  |              |         |        
|Preferred stock, no assigned value or rights,
1,000,000 shares authorized, no shares
issued or outstanding |                                            |                                      |        |               |  |              |        |        
|Common stock, $5.00 par value, 5,000,000
shares authorized and 907,609 shares
issued and outstanding       |                                            |                                      | 4,538   |               |  |              | 4,538   |        
|Additional paid-in capital                                                                                 |                                            |                                      | 4,530   |               |  |              | 4,530   |        
|Retained earnings                                                                                          |                                            |                                      | 961     |               |  |              | 276     |        
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           | Realized shareholders equity              |                                      |         | 10,029        |  |              |         | 9,344   | 
|Accumulated other comprehensive income                                                                     |                                            |                                      | 278     |               |  |              | 30      |        
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           | Total shareholders equity                 |                                      |         | 10,307        |  |              |         | 9,374   | 
|                                                                                                           |                                            |                                      |         |               |  |              |         |        
|                                                                                                           | Total liabilities and shareholders equity |                                      | $       | 149,623       |  |              | $       | 130,550 | 
|                                                                                                           |                                            |                                      |         |               |  |              |         |        

See notes to consolidated financial statements.

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Murfreesboro Bancorp, Inc.




Consolidated Statements of Operations


For the nine months ended September 30, 2002 and 2001
(Unaudited)
(Tabular amounts are in thousands except per share amounts)


|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |       |       |       |       | 
|---------------------------------- | ------------------------------------------------------------ | -------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------- | ----- | ----- | ----- | ----- | ----- | ----- | ----- | 
|                                   |                                                              |                                                          |                                                              |                                    |       | 2002  |       | 2001 
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Interest income:                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              | Interest and fees on loans                               |                                                              | $                                  | 5,746 |       |       | $     | 5,755 |      
|                                   |                                                              | Interest on taxable investment securities                |                                                              |                                    | 740   |       |       |       | 635   |      
|                                   |                                                              | Interest on federal funds sold                           |                                                              |                                    | 52    |       |       |       | 185   |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          |                                                              | Total interest income              |       |       | 6,538 |       |       |       | 6,575 | 
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Interest expense:                  |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              | Interest on negotiable order of withdrawal accounts      |                                                              |                                    | 105   |       |       |       | 112   |      
|                                   |                                                              | Interest on money market demand accounts                 |                                                              |                                    | 294   |       |       |       | 437   |      
|                                   |                                                              | Interest on savings deposits                             |                                                              |                                    | 9     |       |       |       | 8     |      
|                                   |                                                              | Interest on time deposits less than $100,000             |                                                              |                                    | 1,287 |       |       |       | 1,902 |      
|                                   |                                                              | Interest on time deposits of $100,000 or more            |                                                              |                                    | 766   |       |       |       | 1,038 |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          |                                                              | Total interest expense on deposits |       |       | 2,461 |       |       |       | 3,497 | 
|                                   |                                                              | Interest on short-term borrowings and advances from FHLB |                                                              |                                    | 88    |       |       |       | 102   |      
|                                   |                                                              | Interest on subordinated convertible capital debentures  |                                                              |                                    | 146   |       |       |       | 160   |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          | Total interest expense                                       |                                    |       | 2,695 |       |       |       | 3,759 |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Net interest income                |                                                              |                                                          | 3,843                                                        |                                    |       |       | 2,816 |      
|Provision for possible loan losses |                                                              |                                                          | 4                                                            |                                    |       |       | 90    |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          | Net interest income after provision for possible loan losses |                                    |       | 3,839 |       |       |       | 2,726 |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Non-interest income:               |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   | Service charges and deposits                                 |                                                          |                                                              | 60                                 |       |       |       | 31    |      
|                                   | Insufficient fund charges on deposits                        |                                                          |                                                              | 463                                |       |       |       | 315   |      
|                                   | Other fees and commissions                                   |                                                          |                                                              | 87                                 |       |       |       | 182   |      
|                                   | Increase in cash surrender value of officers life insurance |                                                          |                                                              | 73                                 |       |       |       | 64    |      
|                                   | Income from mortgage loan originations                       |                                                          |                                                              | 119                                |       |       |       | 259   |      
|                                   | Brokerage fees                                               |                                                          |                                                              | 193                                |       |       |       | 109   |      
|                                   | Other non-interest income                                    |                                                          |                                                              | 101                                |       |       |       | 109   |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          | Total non-interest income                                    |                                    |       | 1,096 |       |       |       | 1,069 |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Non-interest expense:              |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   | Salaries and employee benefits                               |                                                          |                                                              | 2,064                              |       |       |       | 1,792 |      
|                                   | Occupancy expenses, net                                      |                                                          |                                                              | 251                                |       |       |       | 196   |      
|                                   | Furniture and equipment expense                              |                                                          |                                                              | 282                                |       |       |       | 222   |      
|                                   | Advertising expenses                                         |                                                          |                                                              | 112                                |       |       |       | 116   |      
|                                   | Data processing expenses                                     |                                                          |                                                              | 277                                |       |       |       | 222   |      
|                                   | Other non-interest expense                                   |                                                          |                                                              | 906                                |       |       |       | 889   |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          | Total non-interest expense                                   |                                    |       | 3,892 |       |       |       | 3,437 |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Income before income taxes         |                                                              |                                                          | 1,043                                                        |                                    |       |       | 358   |      
|Income tax expense                 |                                                              |                                                          | 358                                                          |                                    |       |       | 114   |      
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          |                                                              | Net income                         |       | $     | 685   |       |       | $     | 244   | 
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|Earnings per share:                |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          |                                                              | Basic net income                   |       | $     | 0.75  |       |       | $     | 0.27  | 
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      
|                                   |                                                              |                                                          |                                                              | Diluted net income                 |       | $     | 0.66  |       |       | $     | 0.26  | 
|                                   |                                                              |                                                          |                                                              |                                    |       |       |       |      

See notes to consolidated financial statements.

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Murfreesboro Bancorp, Inc.
Consolidated Statements of Operations
For the quarters ended September 30, 2002 and 2001
(Unaudited)
(Tabular amounts are in thousands except per share amounts)

|                                   |                                                              |                                    |                                                              |                       |     |       |       |       |       |       |       | 
|---------------------------------- | ------------------------------------------------------------ | ---------------------------------- | ------------------------------------------------------------ | --------------------- | --- | ----- | ----- | ----- | ----- | ----- | ----- | 
|                                   |                                                              |                                    |                                                              |                       |     | 2002  |       | 2001 
|Interest income:                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   | Interest and fees on loans                                   |                                    | $                                                            | 1,914                 |     |       | $     | 2,046 |      
|                                   | Interest on taxable investment securities                    |                                    |                                                              | 314                   |     |       |       | 161   |      
|                                   | Interest on federal funds sold                               |                                    |                                                              | 15                    |     |       |       | 60    |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    |                                                              | Total interest income |     |       | 2,243 |       |       |       | 2,267 | 
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|Interest expense:                  |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   | Interest on negotiable order of withdrawal accounts          |                                    |                                                              | 37                    |     |       |       | 32    |      
|                                   | Interest on money market demand accounts                     |                                    |                                                              | 105                   |     |       |       | 153   |      
|                                   | Interest on savings deposits                                 |                                    |                                                              | 3                     |     |       |       | 3     |      
|                                   | Interest on time deposits less than $100,000                 |                                    |                                                              | 426                   |     |       |       | 576   |      
|                                   | Interest on time deposits of $100,000 and greater            |                                    |                                                              | 262                   |     |       |       | 309   |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              | Total interest expense on deposits |                                                              |                       | 833 |       |       |       | 1,073 |      
|                                   | Interest on short-term borrowings and advances from FHLB     |                                    |                                                              | 36                    |     |       |       | 39    |      
|                                   | Interest on subordinated convertible capital debentures      |                                    |                                                              | 49                    |     |       |       | 49    |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    | Total interest expense                                       |                       |     | 918   |       |       |       | 1,161 |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|Net interest income                |                                                              |                                    | 1,325                                                        |                       |     |       | 1,106 |      
|Provision for possible loan losses |                                                              |                                    |                                                             |                       |     |       | 38    |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    | Net interest income after provision for possible loan losses |                       |     | 1,325 |       |       |       | 1,068 |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|Non-interest income:               |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   | Service charges on deposits                                  |                                    |                                                              | 27                    |     |       |       | 13    |      
|                                   | Insufficient fund charges on deposits                        |                                    |                                                              | 160                   |     |       |       | 101   |      
|                                   | Other fees and commissions                                   |                                    |                                                              | 28                    |     |       |       | 52    |      
|                                   | Increase in cash surrender value of officers life insurance |                                    |                                                              | 25                    |     |       |       | 22    |      
|                                   | Income from mortgage loan originations                       |                                    |                                                              | 41                    |     |       |       | 92    |      
|                                   | Brokerage fees                                               |                                    |                                                              | 72                    |     |       |       | 21    |      
|                                   | Other non-interest income                                    |                                    |                                                              | 19                    |     |       |       | 45    |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    | Total non-interest income                                    |                       |     | 372   |       |       |       | 346   |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|Non-interest expense:              |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   | Salaries and employee benefits                               |                                    |                                                              | 687                   |     |       |       | 669   |      
|                                   | Occupancy expenses, net                                      |                                    |                                                              | 85                    |     |       |       | 70    |      
|                                   | Furniture and equipment expense                              |                                    |                                                              | 97                    |     |       |       | 82    |      
|                                   | Advertising expenses                                         |                                    |                                                              | 39                    |     |       |       | 39    |      
|                                   | Data processing expenses                                     |                                    |                                                              | 67                    |     |       |       | 77    |      
|                                   | Other non-interest expense                                   |                                    |                                                              | 334                   |     |       |       | 355   |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    | Total non-interest expense                                   |                       |     | 1,309 |       |       |       | 1,292 |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|Income before income taxes         |                                                              |                                    | 388                                                          |                       |     |       | 122   |      
|Income tax expense                 |                                                              |                                    | 145                                                          |                       |     |       | 37    |      
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    |                                                              | Net income            |     | $     | 243   |       |       | $     | 85    | 
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|Earnings per share:                |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    |                                                              | Basic net income      |     | $     | 0.27  |       |       | $     | 0.09  | 
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      
|                                   |                                                              |                                    |                                                              | Diluted net income    |     | $     | 0.23  |       |       | $     | 0.09  | 
|                                   |                                                              |                                    |                                                              |                       |     |       |       |      

See notes to consolidated financial statements.

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Murfreesboro Bancorp, Inc.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2002 and 2001
(Unaudited)

(Tabular amounts are in thousands)

|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |         |     |       |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------- | ----- | ----- | ------ | ------- | --- | ----- | -
|                                                         |                                                                                   |                                                             |                                                                                                                 |         | 2002  |       | 2001  
|Operating activities:                                    |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         | Net income                                                                        |                                                             | $                                                                                                               | 685     |       |       | $      | 244     |    
|                                                         | Adjustments to reconcile net income to net cash provided
by operating activities: |                                                             |                                                                                                                 |         |       |       |        |         |    
|                                                         |                                                                                   | Provision for loan losses                                   |                                                                                                                 |         | 4     |       |        |         | 182 |      
|                                                         |                                                                                   | Provision for depreciation, amortization and accretion, net |                                                                                                                 |         | 402   |       |        |         | 90  |      
|                                                         |                                                                                   | Stock dividend on FHLB stock                                |                                                                                                                 |         | (8    | )     |        |         | (13 | )    
|                                                         |                                                                                   | Changes in assets and liabilities:                          |                                                                                                                 |         |       |       |        |         |     |      
|                                                         |                                                                                   |                                                             | (Increase) decrease in accrued interest receivable                                                              |         |       | (144  | )      |         |     | 276   |  
|                                                         |                                                                                   |                                                             | Increase in cash surrender value of officers life insurance                                                    |         |       | (73   | )      |         |     | (64   | )
|                                                         |                                                                                   |                                                             | Increase in deferred tax asset                                                                                  |         |       | (21   | )      |         |     | (4    | )
|                                                         |                                                                                   |                                                             | (Increase) decrease in other assets                                                                             |         |       | 22    |        |         |     | (576  | )
|                                                         |                                                                                   |                                                             | Increase in accrued interest payable                                                                            |         |       | 104   |        |         |     | 54    |  
|                                                         |                                                                                   |                                                             | Increase in accrued expenses and other liabilities                                                              |         |       | 594   |        |         |     | 348   |  
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         |                                                                                   | Net cash provided by operating activities                   |                                                                                                                 | $       | 1,565 |       |        |         | 537 |      
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Investing activities:                                    |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         | Purchase of securities available for sale                                         |                                                             |                                                                                                                 | (28,119 | )     |       |        | (16,967 | )  
|                                                         | Maturities and calls of securities available for sale                             |                                                             |                                                                                                                 | 15,925  |       |       |        | 20,000  |    
|                                                         | Maturities and calls of securities held to maturity                               |                                                             |                                                                                                                 |        |       |       |        | 8,850   |    
|                                                         | Increase in loans, net                                                            |                                                             |                                                                                                                 | (5,989  | )     |       |        | (16,137 | )  
|                                                         | Additions to premises and equipment                                               |                                                             |                                                                                                                 | (80     | )     |       |        | (257    | )  
|                                                         | Outlays for other assets                                                          |                                                             |                                                                                                                 |        |       |       |        | 75      | )  
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         | Net cash used by investing activities                                             |                                                             |                                                                                                                 | (18,263 | )     |       |        | (4,586  | )  
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Financing activities:                                    |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         | Net increase in deposits                                                          |                                                             |                                                                                                                 | 15,084  |       |       |        | 5,505   |    
|                                                         | Net increase (decrease) in short-term borrowings                                  |                                                             |                                                                                                                 | 360     |       |       |        | (2,397  | )  
|                                                         | Federal Home Loan Bank advances                                                   |                                                             |                                                                                                                 | 2,000   |       |       |        | 4,000   |    
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         | Net cash provided by financing activities                                         |                                                             |                                                                                                                 | 17,444  |       |       |        | 7,108   |    
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Net increase in cash and cash equivalents                |                                                                                   |                                                             | 746                                                                                                             |         |       |       | 3,059  |        
|Cash and cash equivalents at the beginning of the period |                                                                                   |                                                             | 5,385                                                                                                           |         |       |       | 8,524  |        
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Cash and cash equivalents at the end of the period       |                                                                                   | $                                                           | 6,131                                                                                                           |         |       | $     | 11,583 |        
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Supplemental disclosure of cash flow information:        |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Cash paid during the nine months for:                    |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         |                                                                                   |                                                             | Interest                                                                                                        |         | $     | 2,591 |        |         | $   | 3,705 |  
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         |                                                                                   |                                                             | Income taxes                                                                                                    |         | $     | 160   |        |         | $   | 250   |  
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|Non-cash transactions:                                   |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        
|                                                         |                                                                                   |                                                             | Change in unrealized gain on securities available for sale,
net of taxes, of $201,000 and $55,000, respectively |         | $     | 248   |        |         | $   | 53    |  
|                                                         |                                                                                   |                                                             |                                                                                                                 |         |       |       |        |        

See notes to consolidated financial statements.

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Murfreesboro Bancorp, Inc.
Notes to Consolidated Financial Statements
September 30, 2002

(Unaudited)



|(1) |  | Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The unaudited consolidated financial statements include the accounts of
Murfreesboro Bancorp, Inc. and its subsidiary, Bank of Murfreesboro
(the Bank), which is a full service bank, and its wholly owned
subsidiaries: Bank M Insurance Group, Inc. (BIG), Bank M Mortgage
Group, Inc. (BMG), Bank M Investment Center, Inc. (BIC), Hometown
World, Inc. (HTW), and Bank M (BM). The consolidated financial
statements also include BMGs wholly owned subsidiary, Bank M Mortgage
Trust, Inc. (BMT), and its formerly 51% controlled limited liability
companies; Realty Financial Services, LLC (RFS) and Woodmont Financial
Services, LLC (WFS). BIC, HTW, BM, and WFS were formed during the year
ended December 31, 2001. During 2001, BMG acquired the other 50%
interest in BMT and sold 49% interest in RFS and WFS. BIG offers
insurance products, principally to the Bank or for loans originated by
the Bank or its subsidiaries. BMG provides loan closing services for
the Bank, BMT, RFS, and WFS. BMT, HTW, and BM had minimal activity
during the quarter and nine months ended September 30, 2002. On February 1,
2002, BMG sold its 51% controlling interest in RFS and WFS for its
recorded carrying value plus $25,000. BMG may receive up to $50,000
additional compensation from allocations of 25.5% of any future net
profits subject to certain conditions. Intercompany accounts and
transactions have been eliminated. The accompanying consolidated
financial statements have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management,
the consolidated financial statements contain all adjustments and
disclosures necessary to summarize fairly the financial position of the
Company as of September 30, 2002 and December 31, 2001, the results of
operations for the quarters and nine months ended September 30, 2002
and 2001, the changes in cash flows for the nine months ended September
30, 2002 and 2001. All significant intercompany transactions have been
eliminated. The interim consolidated financial statements should be
read in conjunction with the notes to the consolidated financial
statements presented in the Companys Annual Report to Shareholders.
The results of the interim periods are not necessarily indicative of
the results to be expected for the complete fiscal year.

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|(2) |  | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income, was adopted by the Company on January
1, 1998. SFAS 130 establishes standards for reporting comprehensive
income. Comprehensive income includes net income and other
comprehensive net income which is defined as non-owner related
transactions in equity. The following table sets forth the amounts of
other comprehensive income included in equity along with the related
tax effect for the nine months ended September 30, 2002 and 2001,
respectively.

|                                                     |  |                |     |           |  |        |     |        |  |   |     | 
|---------------------------------------------------- |  | -------------- | --- | --------- |  | ------ | --- | ------ |  | - | --- | 
|                                                     |  |                |     |           |  | Tax    |     | Net of
|                                                     |  | Pre-Tax        |     | Expense   |  | Tax   
|                                                     |  | Amount         |     | (Benefit) |  | Amount
|                                                     |  |                |     |           |  |       
|                                                     |  | (In thousands)
|Nine months ended September 30, 2002                 |  |                |     |           |  |        |     |        |  |   |     | 
|Net unrealized gain on securities available for sale |  | $              | 449 |           |  | $      | 201 |        |  | $ | 248 | 
|                                                     |  |                |     |           |  |        |     |        |  |   |     | 
|Other comprehensive income                           |  | $              | 449 |           |  | $      | 201 |        |  | $ | 248 | 
|                                                     |  |                |     |           |  |        |     |        |  |   |     | 
|Nine months ended September 30, 2001                 |  |                |     |           |  |        |     |        |  |   |     | 
|Net unrealized gain on securities available for sale |  | $              | 108 |           |  | $      | 55  |        |  | $ | 53  | 
|                                                     |  |                |     |           |  |        |     |        |  |   |     | 
|Other comprehensive income                           |  | $              | 108 |           |  | $      | 55  |        |  | $ | 53  | 
|                                                     |  |                |     |           |  |        |     |        |  |   |     | 

The following table sets forth the amounts of other comprehensive
income included in equity along
with the related tax effect for the quarters ended September 30, 2002 and
2001, respectively.

|                                                     |                                                      |                            |     |                |    |           |    |        |    |        |     |    |    | 
|---------------------------------------------------- | ---------------------------------------------------- | -------------------------- | --- | -------------- | -- | --------- | -- | ------ | -- | ------ | --- | -- | -- | 
|                                                     |                                                      |                            |     |                |    |           |    | Tax    |    | Net of
|                                                     |                                                      |                            |     | Pre-Tax        |    | Expense   |    | Tax   
|                                                     |                                                      |                            |     | Amount         |    | (Benefit) |    | Amount
|                                                     |                                                      |                            |     |                |    |           |    |       
|                                                     |                                                      |                            |     | (In thousands)
|Quarter ended September 30, 2002                     |                                                      |                            |     |                |    |           |    |        |    |        |     |   
|Net unrealized gain on securities available for sale |                                                      | $                          | 192 |                |    | $         | 80 |        |    | $      | 112 |   
|                                                     |                                                      |                            |     |                |    |           |    |        |    |        |     |   
|Other comprehensive income                           |                                                      | $                          | 192 |                |    | $         | 80 |        |    | $      | 112 |   
|                                                     |                                                      |                            |     |                |    |           |    |        |    |        |     |   
|Quarters ended September 30, 2001                    |                                                      |                            |     |                |    |           |    |        |    |        |     |   
|                                                     | Net unrealized gain on securities available for sale |                            | $   | 45             |    |           | $  | 17     |    |        | $   | 28 |   
|                                                     |                                                      |                            |     |                |    |           |    |        |    |        |     |   
|                                                     |                                                      | Other comprehensive income |     | $              | 45 |           |    | $      | 17 |        |     | $  | 28 | 
|                                                     |                                                      |                            |     |                |    |           |    |        |    |        |     |   

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|(3) |  | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The weighted average number of common shares outstanding during the
nine months and quarters ended September 30, 2002 and 2001 was 907,609.
The effect of dilutive common stock options was 17,800 shares for the
quarter ended September 30, 2001. The effect of dilutive common stock
options was 29,834 shares for the quarter ended September 30, 2002.
The effect of dilutive stock options was 17,800 shares for the nine
months ended September 30, 2001. The dilutive effect of common stock
options is estimated at 24,285 for the nine months ended September 30,
2002. The contingent issuance of common stock as related to the
subordinated convertible capital debentures was anti-dilutive for the
quarter and nine months ended September 30, 2001, as the effect of the
related interest expense exceeded the impact of contingent issuance of
common stock shares. For the quarter and nine months ended September
30, 2002, the effect of the subordinated convertible capital debentures
was to reflect the issuance of 240,000 shares of common stock and
reduction in interest expense of $49,000 and $146,000, respectively,
and an additional tax expense of $19,000 and $55,000, respectively.

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PART I

ITEM  2.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Companys Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the information and
tables which follow.

Summary

Net income for the nine months ended September 30, 2002 was $685,000 and the
net income for the nine months ended September 30, 2001 was $244,000.

Financial Condition

Earning Assets. Average earning assets for the nine months ended September 30,
2002 totaled $131,354,000 which represents 92.2% of average total assets.
Earning assets totaled $142,494,000 at September 30, 2002. Average earning
assets for the nine months ended September 30, 2001 totaled $106,698,000, which
represented 89.8% of average total assets. Earning assets totaled $137,333,000
at September 30, 2002 and $119,209,000 at December 31, 2001.

Loan Portfolio.The Companys average loans for the nine months ended
September 30, 2002 were $99,263,000 and for the nine months ended September 30,
2001 were $85,569,000. The balance in total loans at September 30, 2002 was
$103,010,000, $97,225,000 at December 31, 2001, and $95,021,000 at September
30, 2001.

Investment Portfolio.The Companys investment securities portfolio averaged
$27,906,000 for the nine months ended September 30, 2002 and $15,605,000 for
the nine months ended September 30, 2001. The portfolio totaled $32,669,000 at
September 30, 2002, $20,309,000 at December 31, 2001, and $11,305,000 at
September 30, 2001.

The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: Held to Maturity and Available
for Sale. The Available for Sale securities are carried at fair market
value, whereas the Held to Maturity securities are carried at amortized cost.
At September 30, 2002, there was unrealized gain of $449,000 in the Available
for Sale portfolio and there was an unrealized gain of $96,000 at September
30, 2001. The average balance of securities Available for Sale during the
nine months ended September 30, 2002 was $27,906,000 and the balance at
September 30, 2002 was $32,669,000. There were no securities Held to
Maturity during the nine months ended September 30, 2002 and there were no
securities classified as Held to Maturity at September 30, 2002. The average
balance of securities Available for Sale during the nine months ended
September 30, 2001 was $15,605,000 and the balance at September 30, 2001 was
$11,305,000. The average balance of securities Available for Sale during the
quarter ended September 30, 2002 was $34,953,000 and $13,471,000 for the
quarter ended September 30, 2001.

Deposits.The Companys average deposits were $121,882,000 for the nine months
ended September 30, 2002. This included average non-interest-bearing deposits
of $9,151,000, average certificates of deposit of $77,777,000, average saving
deposits of $1,278,000 and average interest-bearing transaction accounts of
$33,676,000. The Companys average deposits for the nine months ended
September 30, 2001 were $101,613,000. This included average
non-interest-bearing deposits of $7,451,000, average certificates of deposit of
$66,699,000, average savings deposits of $819,000 and average interest-bearing
transaction accounts of $26,644,000. Deposits totaled $126,101,000 at
September 30, 2002, $111,017,000 at December 31, 2001, and $105,595,000 at
September 30, 2001.

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Long-Term Debt.The Company issued $3,000,000 of floating rate subordinated
convertible capital debentures (debentures) on September 29, 1999. The
debentures convert to common stock of the Corporation on August 31, 2011 at a
conversion factor based upon the market value of the common stock on that date.
If converted before that date, the conversion will be based upon one share of
common stock for every $12.50 of debentures held. The debentures began
accruing interest on January 1, 2000 and pay interest every December 15 with
the final interest payment being made at maturity. Interest payment is based
upon a rate equal to the weighted average prime rate less 0.5%. The minimum
rate paid on the debentures is 6.5%

Capital Resources.Shareholders equity totaled $10,307,000 at of September
30, 2002. This included $9,068,000 of common stock and additional
paid-in-capital plus retained earnings of $961 ,000 and other comprehensive
income in the form of an unrealized gain on securities available for sale (net
of tax) of $278,000.

Balance Sheet Management

Liquidity Management.Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing
liabilities. Liquidity management involves having the ability to meet the
day-to-day cash flow requirements of its customers, whether they are depositors
wishing to withdraw funds or borrowers requiring funds to meet their credit
needs.

The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy
its assets. Both assets and liabilities are considered sources of liquidity
funding and both are, therefore, monitored on a daily basis.

The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment securities.
Additional sources of liquidity are loan repayments and possible prepayments
from the mortgage-backed securities from the investment portfolio.

The liability portion of the balance sheet provides liquidity through various
interest bearing and non-interest bearing deposit accounts. At September 30,
2002 and December 31, 2001, the Company had $3,500,000 of federal funds
purchase lines available at three correspondent banks. None of these lines
were drawn at September 30, 2002.

At September 30, 2002 and December 31, 2001, the Bank had $3,375,000 and $
6,865,000, respectively, as a secured line of credit with a regional bank.
This line has not been drawn. Investment securities with par values of
$3,750,000 and $7,500,000 were pledged toward this line of credit at September
30, 2002 and December 31, 2001, respectively.

Results of Operations for the Nine months Ended September 30, 2002 and 2001

Net Interest Income.Net interest income is the principal component of a
financial institutions income stream and represents the spread between
interest and fee income generated from earning assets and the interest expense
paid on deposits. The following discussion is on a fully taxable equivalent
basis.

Net interest income for the nine months ended September 30, 2002 totaled
$3,843,000. This was the result of interest income of $6,538,000 and interest
expense of $2,695,000. Interest income produced by the loan portfolio totaled
$5,746,000, interest income on investment securities totaled $740,000, and
interest income on federal funds totaled $52,000. Interest expense included
$2,053,000 of interest expense on certificates of deposit, interest expense of
$408,000 on interest-bearing transaction accounts, money market demand
accounts, and savings accounts, interest expense on other borrowings of
$88,000 and interest expense on subordinated convertible capital debentures of
$146,000.

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Net interest income for the nine months ended September 30, 2001 totaled
$2,816,000. This was the result of interest income of $6,575,000 and interest
expense of $3,759,000. Interest income produced by the loan portfolio totaled
$5,755,000, interest income on investment securities totaled $635,000 and
interest income on federal funds totaled $185,000. Interest expense included
$2,940,000 of interest expense on certificates of deposit, interest expense of
$557,000 on interest-bearing transaction accounts, money market demand
accounts, and savings accounts, interest expense on other borrowings of
$102,000 and interest expense on subordinated convertible capital debentures of
$160,000.

The trend in net interest income is commonly evaluated in terms of average
rates using the net interest margin and the interest rate spread. The net
interest margin, or the net yield on earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield on average earning
assets and the average rate paid for all funds used to support those earning
assets.

The net interest margin for the nine months ended September 30, 2002 was 3.91%.
The net cost of funds, defined as interest expense divided by average-earning
assets, was 2.74% and the yield on earning assets was 6.65% for the nine months
ended September 30, 2002. The net interest margin for the nine months ended
September 30, 2001 was 3.53%. The net cost of funds for the nine months ended
September 30, 2001 was 4.71% and the yield on earning assets was 8.24%.

The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds
and gives a direct perspective on the effect of market interest rate movements.
During recent years, the net interest margins and interest rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the nine months ended September 30, 2002 was 3.70% and for the nine months
ended September 30, 2001 was 3.27%.

Allowance for Possible Loan Losses.Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans that present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers
are responsible for the collection effort on a delinquent loan. Senior
management is informed of the status of delinquent and problem loans on a
monthly basis.

Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses
on a quarterly basis. The Companys policy is to discontinue interest accrual
when payment of principal and interest is 90 days or more in arrears, unless
there is sufficient collateral to justify continued accrual.

The allowance for possible loan losses represents managements assessment of
the risks associated with extending credit and its evaluation of the quality of
the loan portfolio. Management analyzes the loan portfolio to determine the
adequacy of the allowance for possible loan losses and the appropriate
provisions required to maintain a level considered adequate to absorb
anticipated loan losses. In assessing the adequacy of the allowance,
management reviews the size, quality, and risk of loans in the portfolio.
Management also considers such factors as loan loss experience, the amount of
past due and non-performing loans, specific known risk, the status and amount
of non-performing assets, underlying collateral values securing loans, current
and anticipated economic conditions and other factors which affect the
allowance for potential credit losses.

While it is the Companys policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
managements judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.

Management believes that the $941,000 at September 30, 2002 and $1,000,000 at
December 31, 2001 in the allowance for possible loan losses are adequate to
absorb known risks in the portfolio. No assurance can be

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given, however, that adverse economic circumstances will not result in
increased losses in the loan portfolio, and require greater provisions for
possible loan losses in the future.

Non-performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual or renegotiated. The Companys policy is to place a
loan on non-accrual status when it is contractually past due 90 days or more as
to payment of principal or interest unless there is reason to believe the
collection of principal and interest is fairly certain. At the time a loan is
placed on non-accrual status, interest previously accrued but not collected is
reversed and charged against current earnings. Recognition of any interest
after a loan has been placed on non-accrual is accounted for on a cash basis.

There were no impaired loans, loans past due ninety days or more or foreclosed
real estate held for sale at September 30, 2002 or at December 31, 2001. Loans
on non-accrual status at September 30, 2002 totaled $51,000 and $59,000 at
December 31, 2001.

Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officers life insurance. In
addition, any gains or losses realized from the sale of investment portfolio
securities available for sale are included in non-interest income. Total
non-interest income totaled $1,096,000 for the nine months ended September 30,
2002. This included $523,000 from service charges on deposit accounts, other
fees of $87,000, $73,000 from the increase in the cash surrender value of
officers life insurance and $101,000 of other non-interest income brokerage
fees of $193,000 and $119,000 income from mortgage loan originations.

Non-interest income totaled $1,069,000 for the nine months ended September 30,
2001. This included $346,000 on service charges and insufficient fund charges
on deposit accounts, $182,000 of other fees and commissions and $64,000 from
the increase in the cash surrender value of the officers life insurance,
mortgage loan origination fees of $259,000, brokerage fees of $109,000 and
other non-interest income of $218,000.

Non-interest Expenses. Non-interest expense for the nine months ended
September 30, 2002 totaled $3,892,000. Salaries and employee benefits for the
nine months ended September 30, 2002 totaled $2,064,000. Occupancy expense for
the nine months ended September 30, 2002 totaled $251,000 while furniture and
equipment expense totaled $282,000. Advertising expenses totaled $112,000 and
data processing charges were $277,000. All other non-interest expenses totaled
$906,000 for the nine months ended September 30, 2002. Other non-interest
expenses include supplies and printing, telephone, postage and legal and audit
fees.

Non-interest expense for the nine months ended September 30, 2001 totaled
$3,437,000. Salaries and employee benefits for the nine months ended September
30, 2001 totaled $1,792,000. Occupancy expenses for the nine months ended
September 30, 2001 totaled $196,000 while furniture and equipment expenses
totaled $222,000. Advertising expenses totaled $116,000 and data processing
expense totaled $222,000. Other non-interest expenses totaled $889,000. Other
non-interest expenses include supplies and printing, telephone, postage and
legal and audit fees.

For the nine months ended September 30, 2002, the Company incurred income tax
expenses of $358,000 for an effective tax rate of 34.3%.

For the nine months ended September 30, 2001, the Company incurred income tax
expenses of $114,000 for an effective tax rate of 31.8%.

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Results of Operations for the Quarters Ended September 30, 2002 and 2001

Net Interest Income.Net interest income is the principal component of a
financial institutions income stream and represents the spread between
interest and fee income generated from earning assets and the interest expense
paid on deposits. The following discussion is on a fully taxable equivalent
basis.

Net interest income for the quarter ended September 30, 2002 totaled
$1,325,000. This was the result of interest income of $2,243,000 and interest
expense of $918,000. Interest income produced by the loan portfolio totaled
$1,914,000, interest income on investment securities totaled $314,000, and
interest income on federal funds totaled $15,000. Interest expense included
$688,000 of interest expense on certificates of deposit, interest expense of
$145,000 on interest-bearing transaction accounts, savings accounts, and money
market accounts, interest expense of $49,000 on subordinated convertible
capital debentures and interest expense of $36,000 on other borrowings.

Net interest income for the quarter ended September 30, 2001 totaled
$1,106,000. This was the result of interest income of $2,267,000 and interest
expense of $1,161,000. Interest income produced by the loan portfolio totaled
$2,046,000, interest income on investment securities totaled $161,000 and
interest income on federal funds totaled $60,000. Interest expense included
$885,000 of interest expense on certificates of deposit, interest expense of
$188,000 on interest-bearing transaction accounts, money market demand
accounts, and savings accounts, interest expense on other borrowings of $39,000
and interest on subordinated convertible capital debentures of $49,000.

The trend in net interest income is commonly evaluated in terms of average
rates using the net interest margin and the interest rate spread. The net
interest margin, or the net yield on earning assets, is computed by dividing
fully taxable equivalent net interest income by average earning assets. This
ratio represents the difference between the average yield on average earning
assets and the average rate paid for all funds used to support those earning
assets.

The net interest margin for the quarter ended September 30, 2002 was 3.77%.
The net cost of funds, defined as interest expense divided by average-earning
assets, was 2.61% and the yield on earning assets was 6.39% for the quarter
ended September 30, 2002. The net interest margin for the quarter ended
September 30, 2001 was 3.93%. The net cost of funds for the quarter ended
September 30, 2001 was 4.12% and the yield on earning assets was 8.05%.

The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds
and gives a direct perspective on the effect of market interest rate movements.
During recent years, the net interest margins and interest rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the quarter ended September 30, 2002 was 3.56% and for the quarter ended
September 30, 2001 was 3.64%.

Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officers life insurance. In
addition, any gains or losses realized from the sale of investment portfolio
securities available for sale are included in non-interest income. Total
non-interest income totaled $372,000 for the quarter ended September 30, 2002.
This included $187,000 from service charges and insufficient fund charges on
deposit accounts, other fees and commissions of $28,000, $25,000 from the increase
in cash surrender value of officers life insurance, $41,000 of income from
mortgage loan originations, brokerage fees of $72,000 and other non-interest
income of $19,000.

Non-interest income totaled $346,000 for the quarter ended September 30, 2001.
This included $114,000 on service charges and insufficient fund charges on
deposit accounts, other fees and commissions of $52,000 and $22,000 from the
increase in the cash surrender value of the officers life insurance, $92,000
from mortgage loan originations, brokerage fees of $21,000 and other
non-interest income of $45,000.

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Non-interest Expenses. Non-interest expense for the quarter ended September
30, 2002 totaled $1,309,000. Salaries and employee benefits for the quarter
ended September 30, 2002 totaled $687,000. Occupancy expense for the quarter
ended September 30, 2002 totaled $85,000 while furniture and equipment expense
totaled $97,000. Advertising expenses totaled $39,000 and data processing
expenses totaled $67,000. All other non-interest expenses totaled $334,000 for
the quarter ended September 30, 2001. Other non-interest expenses include
supplies and printing, telephone, postage and legal and audit fees.

Non-interest expense for the quarter ended September 30, 2001 totaled
$1,292,000. Salaries and employee benefits for the quarter ended September 30,
2001 totaled $669,000. Occupancy expenses for the quarter ended September 30,
2001 totaled $70,000 while furniture and equipment expenses totaled $82,000.
Advertising expenses totaled $39,000 and data processing expenses totaled
$77,000. Other non-interest expenses totaled $355,000.

For the quarter ended September 30, 2002, the Company incurred income tax
expense of $145,000 for an effective tax rate of 37.4%.

For the quarter ended September 30, 2001, the Company incurred income tax
expenses of $37,000 for an effective tax rate of 30.3%.

Return on Equity and Assets

Return on assets (annualized net income divided by average total assets) for
the nine months ended September 30, 2002 was 0.64%. Return on assets for the
nine months ended September 30, 2001 was 0.27%. Return on assets for the
quarter ended September 30, 2002 was 0.64% while return on assets for the
quarter ended September 30, 2001 was 0.28%.

Return on equity (annualized net income divided by average equity) for the nine
months ended September 30, 2002 was 9.08%. Return on equity for the nine
months ended September 30, 2001 was 3.55%. Return on equity for the quarter
ended September 30, 2002 was 9.05% while return on equity for the quarter ended
September 30, 2001 was 3.72%.

Equity to assets (average equity divided by average total assets) for the nine
months ended September 30, 2002 was 7.10%. Equity to assets for the nine
months ended September 30, 2001 was 7.72%. Equity to assets for the quarter
ended September 30, 2002 was 7.06% while equity to assets for the quarter ended
September 30, 2001 was 7.44%.

There were no dividends paid during the quarters or nine months ended September
30, 2002 or 2001, so no dividend payout ratio is presented.

Effects of Inflation and Changing Prices

Inflation generally increases the cost of funds and operating overhead and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates. In addition, inflation
affects financial institutions cost of goods and services purchased, the cost
of salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings, and
stockholders equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Companys earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.

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##### Table of Contents



Average Balance Sheet and Net Interest Income

The following table sets forth weighted yields earned by the Company on
its earning assets and the weighted average rates paid on its deposits and
other interest-bearing liabilities for the nine months ended September 30, 2002
and certain other information:

|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|--------------------------------------------------- |  | ------------------------------------------------- | ------- | ------- |  | -------- | ----- | ------- |  |  | ---- | -
|                                                    |  |                                                   |         |         |  | Interest |       | Average
|                                                    |  | Average                                           |         | Income/ |  | Yields/ 
|                                                    |  | Balance                                           |         | Expense |  | Rates   
|                                                    |  |                                                   |         |         |  |         
|                                                    |  | (Fully taxable equivalent - dollars in thousands)
|Assets:                                             |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-earning assets:                            |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Loans                                               |  | $                                                 | 99,263  |         |  | $        | 5,746 |         |  |  | 7.74 | %
|U.S. Treasury and other U.S. government agencies    |  |                                                   | 27,906  |         |  |          | 740   |         |  |  | 3.55 | %
|Federal funds sold                                  |  |                                                   | 4,185   |         |  |          | 52    |         |  |  | 1.66 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-earning assets/interest income       |  |                                                   | 131,354 |         |  |          | 6,538 |         |  |  | 6.65 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Cash and due from banks                             |  |                                                   | 2,960   |         |  |          |       |         |  |  |      |  
|Other assets                                        |  |                                                   | 9,162   |         |  |          |       |         |  |  |      |  
|Allowance for possible loan losses                  |  |                                                   | (982    | )       |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total assets                                        |  | $                                                 | 142,494 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Liabilities and shareholders equity:               |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-bearing liabilities:                       |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Demand deposits and savings accounts                |  | $                                                 | 34,954  |         |  |          | 408   |         |  |  | 1.56 | %
|Certificates of deposit                             |  |                                                   | 77,777  |         |  |          | 2,053 |         |  |  | 3.53 | %
|Other borrowings                                    |  |                                                   | 6,338   |         |  |          | 88    |         |  |  | 1.86 | %
|Subordinated convertible capital debentures         |  |                                                   | 3,000   |         |  |          | 146   |         |  |  | 6.51 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-bearing liabilities/interest expense |  |                                                   | 122,069 |         |  |          | 2,695 |         |  |  | 2.95 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Non-interest-bearing demand deposits                |  |                                                   | 9,151   |         |  |          |       |         |  |  |      |  
|Other liabilities                                   |  |                                                   | 1,150   |         |  |          |       |         |  |  |      |  
|Shareholders equity                                |  |                                                   | 10,124  |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total liabilities and shareholders equity          |  | $                                                 | 142,494 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest earnings                               |  |                                                   |         |         |  | $        | 3,843 |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest income on interest-earning assets      |  |                                                   |         |         |  |          |       |         |  |  | 3.91 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Taxable equivalent adjustment:                      |  |                                                   |         |         |  |          | N/A   |         |  |  |      |  

-15-



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##### Table of Contents



The following table sets forth weighted yields earned by the Company on
its earning assets and the weighted average rates paid on its deposits and
other interest-bearing liabilities for the nine months ended September 30, 2001
and certain other information:

|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|--------------------------------------------------- |  | ------------------------------------------------- | ------- | ------- |  | -------- | ----- | ------- |  |  | ---- | -
|                                                    |  |                                                   |         |         |  | Interest |       | Average
|                                                    |  | Average                                           |         | Income/ |  | Yields/ 
|                                                    |  | Balance                                           |         | Expense |  | Rates   
|                                                    |  |                                                   |         |         |  |         
|                                                    |  | (Fully taxable equivalent  dollars in thousands)
|Assets:                                             |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-earning assets:                            |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Loans                                               |  | $                                                 | 85,569  |         |  | $        | 5,755 |         |  |  | 8.99 | %
|U.S. Treasury and other U.S. government agencies    |  |                                                   | 15,605  |         |  |          | 635   |         |  |  | 5.44 | %
|Federal funds sold                                  |  |                                                   | 5,524   |         |  |          | 185   |         |  |  | 4.47 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-earning assets/interest income       |  |                                                   | 106,698 |         |  |          | 6,575 |         |  |  | 8.24 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Cash and due from banks                             |  |                                                   | 4,807   |         |  |          |       |         |  |  |      |  
|Other assets                                        |  |                                                   | 8,332   |         |  |          |       |         |  |  |      |  
|Allowance for possible loan losses                  |  |                                                   | (974    | )       |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total assets                                        |  | $                                                 | 118,863 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Liabilities and shareholders equity:               |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-bearing liabilities:                       |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Demand deposits and savings accounts                |  | $                                                 | 27,463  |         |  |          | 557   |         |  |  | 2.71 | %
|Certificates of deposit                             |  |                                                   | 66,699  |         |  |          | 2,940 |         |  |  | 5.89 | %
|Other borrowings                                    |  |                                                   | 3,968   |         |  |          | 102   |         |  |  | 3.45 | %
|Subordinated convertible capital debentures         |  |                                                   | 3,000   |         |  |          | 160   |         |  |  | 7.11 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-bearing liabilities/interest expense |  |                                                   | 101,130 |         |  |          | 3,759 |         |  |  | 4.97 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Non-interest-bearing demand deposits                |  |                                                   | 7,451   |         |  |          |       |         |  |  |      |  
|Other liabilities                                   |  |                                                   | 1,105   |         |  |          |       |         |  |  |      |  
|Shareholders equity                                |  |                                                   | 9,177   |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total liabilities and shareholders equity          |  | $                                                 | 118,863 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest earnings                               |  |                                                   |         |         |  | $        | 2,816 |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest income on interest-earning assets      |  |                                                   |         |         |  |          |       |         |  |  | 3.53 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Taxable equivalent adjustment:                      |  |                                                   |         |         |  |          | N/A   |         |  |  |      |  

-16-



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##### Table of Contents



The following table presents changes in the Companys various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the nine months ended September 30,
2002 to the nine months ended September 30, 2001 (in thousands).

|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|------------------------------------------- |  | ---------- | ------ | ------ |  | ---------- | ------ | ---------- |  | ---------- | ----- | - |  | -------- | ---- | -
|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  | Increase
|                                            |  |            |        |        |  | Increase   |        | Increase   |  | (Decrease)
|                                            |  |            |        |        |  | (Decrease) |        | (Decrease) |  | Due to    
|                                            |  | Increase   |        | Due to |  | Due to     |        | Rate and  
|                                            |  | (Decrease) |        | Rate   |  | Volume     |        | Volume    
|                                            |  |            |        |        |  |            |        |           
|ASSETS                                      |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Interest-earning assets:                    |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Federal funds sold                          |  | $          | (133   | )      |  | $          | (116   | )          |  | $          | (45   | ) |  | $        | 28   |  
|Investment securities                       |  |            | 105    |        |  |            | (221   | )          |  |            | 501   |   |  |          | (175 | )
|Loans                                       |  |            | (9     | )      |  |            | (802   | )          |  |            | 921   |   |  |          | (128 | )
|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Total interest earning assets               |  |            | (37    | )      |  |            | (1,139 | )          |  |            | 1,377 |   |  |          | (275 | )
|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|LIABILITIES                                 |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Interest-bearing liabilities:               |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Demand deposits and savings accounts        |  |            | (149   | )      |  |            | (236   | )          |  |            | 152   |   |  |          | (65  | )
|Certificates of deposits                    |  |            | (887   | )      |  |            | (1,179 | )          |  |            | 488   |   |  |          | (196 | )
|Other borrowings                            |  |            | (14    | )      |  |            | (47    | )          |  |            | 61    |   |  |          | (28  | )
|Subordinated convertible
capital debentures |  |            | (14    | )      |  |            | (14    | )          |  |            |       |   |  |          |     |  
|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Total interest bearing liabilities          |  |            | (1,064 | )      |  |            | (1,476 | )          |  |            | 701   |   |  |          | (289 | )
|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  
|Total                                       |  | $          | 1,027  |        |  | $          | 337    |            |  | $          | 676   |   |  | $        | 14   |  
|                                            |  |            |        |        |  |            |        |            |  |            |       |   |  |          |      |  

Amounts are adjusted to a fully taxable basis, based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of the related
Federal tax benefit. The effect of volume change is computed by multiplying
the change in volume by the prior year rate. The effect of rate change is
computed by multiplying the change in rate by the prior year volume.
Rate/volume change is computed by multiplying the change in volume by the
change in rate.

-17-



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##### Table of Contents



The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended September 30, 2002 and
certain other information:

|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|--------------------------------------------------- |  | ------------------------------------------------- | ------- | ------- |  | -------- | ----- | ------- |  |  | ---- | -
|                                                    |  |                                                   |         |         |  | Interest |       | Average
|                                                    |  | Average                                           |         | Income/ |  | Yields/ 
|                                                    |  | Balance                                           |         | Expense |  | Rates   
|                                                    |  |                                                   |         |         |  |         
|                                                    |  | (Fully taxable equivalent  dollars in thousands)
|Assets:                                             |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-earning assets:                            |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Loans                                               |  | $                                                 | 100,455 |         |  | $        | 1,914 |         |  |  | 7.56 | %
|U.S. Treasury and other U.S. government agencies    |  |                                                   | 34,953  |         |  |          | 314   |         |  |  | 3.56 | %
|Federal funds sold                                  |  |                                                   | 3,917   |         |  |          | 15    |         |  |  | 1.52 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-earning assets/interest income       |  |                                                   | 139,325 |         |  |          | 2,243 |         |  |  | 6.39 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Cash and due from banks                             |  |                                                   | 2,673   |         |  |          |       |         |  |  |      |  
|Other assets                                        |  |                                                   | 9,828   |         |  |          |       |         |  |  |      |  
|Allowance for possible loan losses                  |  |                                                   | (956    | )       |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total assets                                        |  | $                                                 | 150,870 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Liabilities and shareholders equity:               |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-bearing liabilities:                       |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Demand deposits and savings accounts                |  | $                                                 | 37,288  |         |  |          | 145   |         |  |  | 1.54 | %
|Certificates of deposit                             |  |                                                   | 81,442  |         |  |          | 688   |         |  |  | 3.35 | %
|Other borrowings                                    |  |                                                   | 7,098   |         |  |          | 36    |         |  |  | 2.01 | %
|Subordinated convertible capital debentures         |  |                                                   | 3,000   |         |  |          | 49    |         |  |  | 6.48 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-bearing liabilities/interest expense |  |                                                   | 128,828 |         |  |          | 918   |         |  |  | 2.83 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Non-interest-bearing demand deposits                |  |                                                   | 9,673   |         |  |          |       |         |  |  |      |  
|Other liabilities                                   |  |                                                   | 1,712   |         |  |          |       |         |  |  |      |  
|Shareholders equity                                |  |                                                   | 10,657  |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total liabilities and shareholders equity          |  | $                                                 | 150,870 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest earnings                               |  |                                                   |         |         |  | $        | 1,325 |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest income on interest-earning assets      |  |                                                   |         |         |  |          |       |         |  |  | 3.77 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Taxable equivalent adjustment:                      |  |                                                   |         |         |  |          | N/A   |         |  |  |      |  

-18-



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##### Table of Contents



The following table sets forth weighted yields earned by the Company on
its earning assets and the weighted average rates paid on its deposits and
other interest-bearing liabilities for the quarter ended September 30, 2001 and
certain other information:

|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|--------------------------------------------------- |  | ------------------------------------------------- | ------- | ------- |  | -------- | ----- | ------- |  |  | ---- | -
|                                                    |  |                                                   |         |         |  | Interest |       | Average
|                                                    |  | Average                                           |         | Income/ |  | Yields/ 
|                                                    |  | Balance                                           |         | Expense |  | Rates   
|                                                    |  |                                                   |         |         |  |         
|                                                    |  | (Fully taxable equivalent  dollars in thousands)
|Assets:                                             |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-earning assets:                            |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Loans                                               |  | $                                                 | 92,832  |         |  | $        | 2,046 |         |  |  | 8.84 | %
|U.S. Treasury and other U.S. government agencies    |  |                                                   | 13,471  |         |  |          | 161   |         |  |  | 4.79 | %
|States and municipalities                           |  |                                                   |        |         |  |          |      |         |  |  | N/A  |  
|Federal funds sold                                  |  |                                                   | 6,689   |         |  |          | 60    |         |  |  | 3.55 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-earning assets/interest income       |  |                                                   | 112,992 |         |  |          | 2,267 |         |  |  | 8.05 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Cash and due from banks                             |  |                                                   | 2,983   |         |  |          |       |         |  |  |      |  
|Other assets                                        |  |                                                   | 8,152   |         |  |          |       |         |  |  |      |  
|Allowance for possible loan losses                  |  |                                                   | (1,021  | )       |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total assets                                        |  | $                                                 | 123,106 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Liabilities and shareholders equity:               |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Interest-bearing liabilities:                       |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Demand deposits and savings accounts                |  | $                                                 | 30,392  |         |  |          | 188   |         |  |  | 2.45 | %
|Certificates of deposit                             |  |                                                   | 66,327  |         |  |          | 885   |         |  |  | 5.37 | %
|Other borrowings                                    |  |                                                   | 5,861   |         |  |          | 39    |         |  |  | 2.67 | %
|Subordinated convertible capital debentures         |  |                                                   | 3,000   |         |  |          | 49    |         |  |  | 6.57 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total interest-bearing liabilities/interest expense |  |                                                   | 105,580 |         |  |          | 1,161 |         |  |  | 4.41 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Non-interest-bearing demand deposits                |  |                                                   | 7,712   |         |  |          |       |         |  |  |      |  
|Other liabilities                                   |  |                                                   | 637     |         |  |          |       |         |  |  |      |  
|Shareholders equity                                |  |                                                   | 9,177   |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Total liabilities and shareholders equity          |  | $                                                 | 123,106 |         |  |          |       |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest earnings                               |  |                                                   |         |         |  | $        | 1,106 |         |  |  |      |  
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Net interest income on interest-earning assets      |  |                                                   |         |         |  |          |       |         |  |  | 3.93 | %
|                                                    |  |                                                   |         |         |  |          |       |         |  |  |      |  
|Taxable equivalent adjustment:                      |  |                                                   |         |         |  |          | N/A   |         |  |  |      |  

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The following table presents changes in the Companys various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the quarter ended September 30, 2002
to the quarter ended September 30, 2001 (in thousands):

|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |          |     |  
|------------------------------------------- | ----- | ---------------------------------- | ---- | ---------- | ---- | ------ | ---- | ---------- | ---- | ---------- | --- | ---------- | --- | - | --- | -------- | --- | -
|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     | Increase
|                                            |       |                                    |      |            |      |        |      | Increase   |      | Increase   |     | (Decrease)
|                                            |       |                                    |      |            |      |        |      | (Decrease) |      | (Decrease) |     | Due to    
|                                            |       |                                    |      | Increase   |      | Due to |      | Due to     |      | Rate and  
|                                            |       |                                    |      | (Decrease) |      | Rate   |      | Volume     |      | Volume    
|                                            |       |                                    |      |            |      |        |      |            |      |           
|ASSETS                                      |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|Interest-earning assets:                    |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|Federal funds sold                          |       | $                                  | (45  | )          |      | $      | (34  | )          |      | $          | (25 | )          |     | $ | 14  |         
|Investment securities                       |       |                                    | 153  |            |      |        | (40  | )          |      |            | 257 |            |     |   | (64 | )       
|Loans                                       |       |                                    | (132 | )          |      |        | (277 | )          |      |            | 168 |            |     |   | (23 | )       
|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|Total interest earning assets               |       |                                    | (24  | )          |      |        | (351 | )          |      |            | 400 |            |     |   | (73 | )       
|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|LIABILITIES                                 |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|Interest-bearing liabilities:               |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|Demand deposits and savings accounts        |       |                                    | (43  | )          |      |        | (70  | )          |      |            | 43  |            |     |   | (16 | )       
|Certificates of deposits                    |       |                                    | (197 | )          |      |        | (325 | )          |      |            | 202 |            |     |   | (74 | )       
|Other borrowings                            |       |                                    | (3   | )          |      |        | (9   | )          |      |            | 8   |            |     |   | (2  | )       
|Subordinated convertible
capital debentures |       |                                    |     |            |      |        |     |            |      |            |    |            |     |   |    |         
|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|                                            |       | Total interest bearing liabilities |      |            | (243 | )      |      |            | (404 | )          |     |            | 253 |   |     |          | (92 | )
|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         
|                                            | Total |                                    | $    | 219        |      |        | $    | 53         |      |            | $   | 147        |     |   | $   | 19       |    
|                                            |       |                                    |      |            |      |        |      |            |      |            |     |            |     |   |     |         

Amounts are adjusted to a fully taxable basis, based on the statutory Federal
income tax rates, adjusted for applicable state income taxes net of the related
Federal tax benefit. The effect of volume change is computed by multiplying
the change in volume by the prior year rate. The effect of rate change is
computed by multiplying the change in rate by the prior year volume.
Rate/volume change is computed by multiplying the change in volume by the
change in rate.

Assets

The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Companys interest-earning assets by category at September 30, 2002 and
December 31, 2001 (in thousands):

|                                     |  |                    |         |                   |  |   |         | 
|------------------------------------ |  | ------------------ | ------- | ----------------- |  | - | ------- | 
|                                     |  | September 30, 2002 |         | December 31, 2001
|                                     |  |                    |         |                  
|Interest-bearing deposits with banks |  | $                  |        |                   |  | $ |        | 
|Investment securities                |  |                    | 32,669  |                   |  |   | 20,309  | 
|Federal funds sold                   |  |                    | 2,595   |                   |  |   | 1,675   | 
|Loans:                               |  |                    |         |                   |  |   |         | 
|Real estate                          |  |                    | 77,290  |                   |  |   | 73,319  | 
|Commercial and other                 |  |                    | 25,720  |                   |  |   | 23,906  | 
|                                     |  |                    |         |                   |  |   |         | 
|Total loans                          |  |                    | 103,010 |                   |  |   | 97,225  | 
|                                     |  |                    |         |                   |  |   |         | 
|Interest-earning assets              |  | $                  | 138,274 |                   |  | $ | 119,209 | 
|                                     |  |                    |         |                   |  |   |         | 

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Investment Portfolio

The Company has classified all investment securities as either available for
sale or held to maturity depending upon whether the Company has the intent and
ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Companys investment philosophy of maintaining flexibility to manage the
portfolio. At September 30, 2002, approximately $32,669,000 of investment
securities was classified as available for sale and at December 31, 2001,
approximately $20,309,000 of investment securities was classified as available
for sale. Approximately $449,000 of unrealized gain and $47,000 of unrealized
gain was included in shareholders equity related to the available for sale
investment securities as of September 30, 2002 and December 31, 2001,
respectively. There were no securities classified as Held to Maturity at
September 30, 2002 or December 31, 2001.

At September 30, 2002, obligations of the United States Government or its
agencies represented approximately 100% of the total investment debt portfolio.
The following table presents the carrying amounts of the Companys investment
portfolio at September 30, 2002 (in thousands):

|                                           |  |           |        |            |  |   |        | 
|------------------------------------------ |  | --------- | ------ | ---------- |  | - | ------ | 
|                                           |  | Amortized |        | Estimated 
|                                           |  | Cost      |        | Fair Value
|                                           |  |           |        |           
|Available for sale:                        |  |           |        |            |  |   |        | 
|U.S. Treasury                              |  | $         | 1,002  |            |  | $ | 1,019  | 
|U.S. Government agencies                   |  |           | 30,458 |            |  |   | 30,890 | 
|States and political subdivisions          |  |           |       |            |  |   |       | 
|Other securities                           |  |           |       |            |  |   |       | 
|                                           |  |           |        |            |  |   |        | 
|Total available for sale  debt securities |  |           | 31,460 |            |  |   | 31,909 | 
|                                           |  |           |        |            |  |   |        | 
|Federal Reserve Bank stock                 |  |           | 351    |            |  |   | 351    | 
|Federal Home Loan Bank stock               |  |           | 409    |            |  |   | 409    | 
|                                           |  |           |        |            |  |   |        | 
|Total investment portfolio                 |  | $         | 32,220 |            |  | $ | 32,669 | 
|                                           |  |           |        |            |  |   |        | 

At December 31, 2001, obligations of the United States Government or its
agencies represented approximately 100% of the total investment debt portfolio.
The following table presents the carrying amounts of the Companys investment
portfolio at December 31, 2001 (in thousands):

|                                              |  |           |        |            |  |   |        | 
|--------------------------------------------- |  | --------- | ------ | ---------- |  | - | ------ | 
|                                              |  | Amortized |        | Estimated 
|                                              |  | Cost      |        | Fair Value
|                                              |  |           |        |           
|Available for sale:                           |  |           |        |            |  |   |        | 
|U.S. Treasury                                 |  | $         | 1,003  |            |  | $ | 1,003  | 
|U.S. Government agencies                      |  |           | 18,588 |            |  |   | 18,635 | 
|States and political subdivisions             |  |           |       |            |  |   |       | 
|Other securities                              |  |           |       |            |  |   |       | 
|                                              |  |           |        |            |  |   |        | 
|Total available for sale  debt securities    |  |           | 19,591 |            |  |   | 19,638 | 
|                                              |  |           |        |            |  |   |        | 
|Federal Reserve Bank stock                    |  |           | 351    |            |  |   | 351    | 
|Federal Home Loan Bank stock                  |  |           | 320    |            |  |   | 320    | 
|                                              |  |           |        |            |  |   |        | 
|Total available for sale investment portfolio |  | $         | 20,262 |            |  | $ | 20,309 | 
|                                              |  |           |        |            |  |   |        | 

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The following table presents the maturity distribution of the carrying value
and estimated fair value of the Companys investment debt portfolio at
September 30, 2002. The weighted average yields on these instruments are
presented based on final maturity (dollars in thousands).

|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|---------------------------------------------------- |  | --------- | ------ | ---------- |  | ------------- | ------ |  |  |  | ---- | -
|                                                     |  | Amortized |        | Estimated  |  | Weighted     
|                                                     |  | Cost      |        | Fair Value |  | Average Yield
|                                                     |  |           |        |            |  |              
|Available for sale:                                  |  |           |        |            |  |               |        |  |  |  |      |  
|U.S. Treasuries due after 1 year but within
5 years  |  | $         | 1,002  |            |  | $             | 1,019  |  |  |  | 3.09 | %
|U.S. Government agencies:                            |  |           |        |            |  |               |        |  |  |  |      |  
|Due within 1 year                                    |  |           | 4,083  |            |  |               | 4,161  |  |  |  | 3.74 | %
|Due after 1 year but within 5 years                  |  |           | 26,375 |            |  |               | 26,729 |  |  |  | 3.53 | %
|Due after 5 years but within 10 years                |  |           |       |            |  |               |       |  |  |  | N/A  |  
|Due after 10 years                                   |  |           |       |            |  |               |       |  |  |  | N/A  |  
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|Total                                                |  |           | 31,460 |            |  |               | 31,909 |  |  |  | 3.54 | %
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|States and political subdivisions                    |  |           |       |            |  |               |       |  |  |  | N/A  |  
|Other                                                |  |           |       |            |  |               |       |  |  |  | N/A  |  
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|Total investments available for sale-debt
securities |  |           | 31,460 |            |  |               | 31,909 |  |  |  | 3.54 | %
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|Total investment portfolio-debt securities           |  | $         | 31,460 |            |  | $             | 31,909 |  |  |  | 3.54 | %
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  

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##### Table of Contents



The following table presents the maturity distribution of the carrying value
and estimated fair value of the Companys investment debt portfolio at December
31, 2001. The weighted average yields on these instruments are presented based
on final maturity (dollars in thousands).

|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|---------------------------------------------------- |  | --------- | ------ | ---------- |  | ------------- | ------ |  |  |  | ---- | -
|                                                     |  | Amortized |        | Estimated  |  | Weighted     
|                                                     |  | Cost      |        | Fair Value |  | Average Yield
|                                                     |  |           |        |            |  |              
|Available for sale:                                  |  |           |        |            |  |               |        |  |  |  |      |  
|U.S. Treasuries due after 1 year but within
5 years  |  | $         | 1,003  |            |  | $             | 1,003  |  |  |  | 3.09 | %
|U.S. Government agencies:                            |  |           |        |            |  |               |        |  |  |  |      |  
|Due within 1 year                                    |  |           | 9,064  |            |  |               | 9,089  |  |  |  | 3.71 | %
|Due after 1 year but within 5 years                  |  |           | 9,524  |            |  |               | 9,546  |  |  |  | 3.44 | %
|Due after 5 years but within 10 years                |  |           |       |            |  |               |       |  |  |  | N/A  |  
|Due after 10 years                                   |  |           |       |            |  |               |       |  |  |  | N/A  |  
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|Total                                                |  |           | 19,591 |            |  |               | 19,638 |  |  |  | 3.54 | %
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|States and political subdivisions                    |  |           |       |            |  |               |       |  |  |  | N/A  |  
|Other                                                |  |           |       |            |  |               |       |  |  |  | N/A  |  
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|Total investments available for sale-debt
securities |  |           | 19,591 |            |  |               | 19,638 |  |  |  | 3.54 | %
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  
|Total investment portfolio-debt securities           |  | $         | 19,591 |            |  | $             | 19,638 |  |  |  | 3.54 | %
|                                                     |  |           |        |            |  |               |        |  |  |  |      |  

Investment Policy

The objective of the Companys investment policy is to invest funds not
otherwise needed to meet the loan demand of the Banks market area to earn the
maximum return for the Bank, yet still maintain sufficient liquidity to meet
fluctuations in the Banks loan demand and deposit structure. In doing so, the
Company balances the market and credit risk against the potential investment
return, makes investments compatible with the pledge requirements of the Banks
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Investment Committee is comprised of the president and three other
directors. The President is authorized to execute security transactions for
the investment portfolio and to make decisions on purchases and sales of
securities. All the investment transactions occurring since the previous board
of directors meeting are reviewed by the board at its next monthly meeting.
Limitations on the Committees investment authority include: (a) investment in
any one municipal security may not exceed 20% of equity capital; (b) the entire
investment portfolio may not increase or decrease by more than 10% in any one
month; (c) investments in obligations of the State of Tennessee may not exceed
30% of equity capital; and (d) investment in mortgage-backed securities may not
exceed more than 40% of equity capital. The investment policy allows portfolio
holdings to include short-term securities purchased to provide the Banks
needed liquidity and longer-term securities purchased to generate stable income
for the Bank during periods of interest rate fluctuations.

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##### Table of Contents



Loan Portfolio

The following table sets forth the composition of the Companys loan portfolio
at September 30, 2002 (dollars in thousands).

|                                                 |  |         |         |             |  |            |       |  
|------------------------------------------------ |  | ------- | ------- | ----------- |  | ---------- | ----- | -
|                                                 |  |         |         |             |  | Percent of
|                                                 |  | Balance |         | Total Loans
|                                                 |  |         |         |            
|Real estate loans:                               |  |         |         |             |  |            |       |  
|Construction and land development                |  | $       | 9,152   |             |  |            | 8.9   | %
|Secured by residential properties                |  |         | 38,510  |             |  |            | 37.4  | %
|Secured by commercial real estate                |  |         | 29,628  |             |  |            | 28.8  | %
|                                                 |  |         |         |             |  |            |       |  
|Total real estate loans                          |  |         | 77,290  |             |  |            | 75.1  | %
|                                                 |  |         |         |             |  |            |       |  
|Commercial and industrial loans                  |  |         | 6,842   |             |  |            | 6.6   | %
|Other consumer loans                             |  |         | 18,878  |             |  |            | 18.3  | %
|                                                 |  |         |         |             |  |            |       |  
|Total loans                                      |  |         | 103,010 |             |  |            | 100.0 | %
|Unamortized premiums and net deferred loan costs |  |         | 435     |             |  |            | N/A   |  
|Allowance for possible loan losses               |  |         | (941    | )           |  |            | N/A   |  
|                                                 |  |         |         |             |  |            |       |  
|Net loans                                        |  | $       | 102,504 |             |  |            | N/A   |  
|                                                 |  |         |         |             |  |            |       |  

The following table sets forth the composition of the Companys loan portfolio
at December 31, 2001 (dollars in thousands).

|                                                 |  |         |        |             |  |            |       |  
|------------------------------------------------ |  | ------- | ------ | ----------- |  | ---------- | ----- | -
|                                                 |  |         |        |             |  | Percent of
|                                                 |  | Balance |        | Total Loans
|                                                 |  |         |        |            
|Real estate loans:                               |  |         |        |             |  |            |       |  
|Construction and land development                |  | $       | 6,697  |             |  |            | 6.9   | %
|Secured by residential properties                |  |         | 39,968 |             |  |            | 41.1  | %
|Secured by commercial real estate                |  |         | 26,654 |             |  |            | 27.4  | %
|                                                 |  |         |        |             |  |            |       |  
|Total real estate loans                          |  |         | 73,319 |             |  |            | 75.4  | %
|                                                 |  |         |        |             |  |            |       |  
|Commercial and industrial loans                  |  |         | 5,406  |             |  |            | 5.6   | %
|Other consumer loans                             |  |         | 18,500 |             |  |            | 19.0  | %
|                                                 |  |         |        |             |  |            |       |  
|Total loans                                      |  |         | 97,225 |             |  |            | 100.0 | %
|Unamortized premiums and net
deferred loan costs |  |         | 294    |             |  |            | N/A   |  
|Allowance for possible loan losses               |  |         | (1,000 | )           |  |            | N/A   |  
|                                                 |  |         |        |             |  |            |       |  
|Net loans                                        |  | $       | 96,519 |             |  |            | N/A   |  
|                                                 |  |         |        |             |  |            |       |  

The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Companys loan portfolio at
September 30, 2002 (in thousands).

|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 
|------------------------------------- |  | -------------- | ------ | ----------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                      |  | Maturity Range
|                                      |  |               
|                                      |  | One Year       |        | One Through |  | Over       |        |       |  |  
|                                      |  | or Less        |        | Five Years  |  | Five Years |        | Total
|                                      |  |                |        |             |  |            |        |      
|Loan maturity:                        |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 
|Real estate construction loans        |  | $              | 3,564  |             |  | $          | 5,588  |       |  | $ |       |  |  | $ | 9,152   | 
|Real estate mortgage loans            |  |                | 22,895 |             |  |            | 39,952 |       |  |   | 5,291  |  |  |   | 68,138  | 
|Commercial and industrial loans       |  |                | 5,696  |             |  |            | 1,146  |       |  |   |       |  |  |   | 6,842   | 
|All other loans                       |  |                | 1,640  |             |  |            | 10,244 |       |  |   | 6,994  |  |  |   | 18,878  | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 
|Total loans                           |  | $              | 33,795 |             |  | $          | 56,930 |       |  | $ | 12,285 |  |  | $ | 103,010 | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 
|Loan interest rate sensitivity:       |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 
|Predetermined interest rates          |  | $              | 9,835  |             |  | $          | 20,938 |       |  | $ | 12,285 |  |  | $ | 43,058  | 
|Floating or adjustable interest rates |  |                | 23,960 |             |  |            | 35,992 |       |  |   |       |  |  |   | 59,952  | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 
|Total                                 |  | $              | 33,795 |             |  | $          | 56,930 |       |  | $ | 12,285 |  |  | $ | 103,010 | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |         | 

-24-



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##### Table of Contents



The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Companys loan portfolio at
December 31, 2001 (in thousands).

|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 
|------------------------------------- |  | -------------- | ------ | ----------- |  | ---------- | ------ | ----- |  | - | ------ |  |  | - | ------ | 
|                                      |  | Maturity Range
|                                      |  |               
|                                      |  | One Year       |        | One Through |  | Over       |        |       |  |  
|                                      |  | or Less        |        | Five Years  |  | Five Years |        | Total
|                                      |  |                |        |             |  |            |        |      
|Loan maturity:                        |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 
|Real estate construction loans        |  | $              | 3,069  |             |  | $          | 3,628  |       |  | $ |       |  |  | $ | 6,697  | 
|Real estate mortgage loans            |  |                | 14,629 |             |  |            | 46,143 |       |  |   | 5,850  |  |  |   | 66,622 | 
|Commercial and industrial loans       |  |                | 2,016  |             |  |            | 3,292  |       |  |   | 98     |  |  |   | 5,406  | 
|All other loans                       |  |                | 8,217  |             |  |            | 4,164  |       |  |   | 6,119  |  |  |   | 18,500 | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 
|Total loans                           |  | $              | 27,931 |             |  | $          | 57,227 |       |  | $ | 12,067 |  |  | $ | 97,225 | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 
|Loan interest rate sensitivity:       |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 
|Predetermined interest rates          |  | $              | 7,847  |             |  | $          | 20,816 |       |  | $ | 12,067 |  |  | $ | 40,730 | 
|Floating or adjustable interest rates |  |                | 20,084 |             |  |            | 36,411 |       |  |   |       |  |  |   | 56,495 | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 
|Total                                 |  | $              | 27,931 |             |  | $          | 57,227 |       |  | $ | 12,067 |  |  | $ | 97,225 | 
|                                      |  |                |        |             |  |            |        |       |  |   |        |  |  |   |        | 

Loan Policy

All lending activities of the Bank are under the direct supervision and control
of the Banks Board with secondary authority vested in the Executive Committee.
The Senior Loan Committee, which consists of the president, one other director
and two senior lending officers, enforces loan authorizations for each officer,
decides on loans exceeding such limits, services all requests for officer
credits to the extent allowable under current laws and regulations, administers
all problem credits, and determines the allocation of funds for each lending
division. The loan portfolio consists primarily of real estate, commercial,
small business, residential construction and consumer installment loans.
Maturity of term loans is normally limited to 15 years. Conventional real
estate loans may be made up to 80% of the appraised value or purchase cost of
the real estate for no more than a 30-year term. Installment loans are based
on the earning capacity and vocational stability of the borrower.

The Bank board at its regularly scheduled meetings reviews all new loans made
the preceding month and discusses and approves any loans that exceed a loan
officers authority. Loans that are 30 days or more past due are reviewed
monthly.

The Loan Committee of the Bank periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. Each loan officer is
responsible for monitoring and collecting his or her own loan portfolio. Loan
Committee review may result in a determination that a loan should be placed on
a nonaccrual status for income recognition, subject to Bank Board approval. In
addition, to the extent that management identifies potential losses in the loan
portfolio and reduces the book value of such loans through charge-offs, to
their estimated collectible value, the Companys policy is to classify as
nonaccrual any loan on which payment of principal or interest is 90 days or
more past due, unless there is adequate collateral to cover principal and
accrued interest and the loan is in the process of collection. In addition, a
loan will be classified as nonaccrual if, in the opinion of the Loan Committee,
based upon a review of the borrowers or guarantors financial condition,
collateral value or other factors, payment is questionable, even though
payments are not 90 days or more past due.

When a loan is classified as nonaccrual, any unpaid interest is reversed
against current income. Interest is included in income thereafter only to the
extent received in cash. The loan remains in a nonaccrual classification until
such time as the loan is brought current, when it may be returned to accrual
classification. When principal or interest on a nonaccrual loan is brought
current, if in managements opinion future payments are questionable, the loan
would remain classified as nonaccrual. After a nonaccrual or renegotiated loan
is charged off, any subsequent payments of either interest or principal are
applied first to any remaining balance outstanding, then to recoveries and
finally to income.

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The large number of consumer installment loans and the relatively small dollar
amount of each make an individual review impracticable. It is the Companys
policy to charge off any consumer installment loan that is past due 90 days or
more and is not adequately collateralized.

In addition, mortgage loans secured by real estate are placed on nonaccrual
status when the mortgagor is in bankruptcy, or foreclosure proceedings are
instituted

Credit Risk Management and Allowance for Possible Loan Losses

Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and minimize these risks through its loan and
investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures
that it believes reflect the risk sensitive nature of the Company. The loan
review procedures are set to monitor adherence to the established criteria and
to ensure that on a continuing basis such standards are enforced and
maintained.

Managements objective in establishing lending and investment standards is to
manage the risk of loss and to provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
loans with a three-year or less fixed maturity, which may be amortized over a
maximum of 15 years.

The loan portfolio is regularly reviewed and management determines the amount
of loans to be charged-off. In addition, such factors as the Companys
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowance for possible losses on loans and real estate owned. Such
agencies may require the Company to recognize additions to the allowances based
on their judgments about information available at the time of their
examinations. In addition, any loan or portion thereof which is classified as
a loss by regulatory examiners is charged-off.

The allowance for possible loan losses is increased by provisions charged to
operating expense. The allowance for possible loan losses is reduced by
charging off loans or portions of loans at the time they are deemed by
management to be uncollectible and increased when loans previously charged off
are recovered. The resulting allowance for possible loan losses is viewed by
management as a single, unallocated reserve available for all loans and, in
managements opinion, is adequate to provide for reasonably foreseeable
potential loan losses. The risk associated with loans varies with the
creditworthiness of the borrower, the type of loan (consumer, commercial or
real estate) and its maturity. Cash flow adequate to support a repayment
schedule is an element considered for all types of loans. Real estate loans
are impacted by market conditions regarding the value of the underlying
property used as collateral. Commercial loans are also impacted by the
management of the business as well as economic conditions. Management believes
the allowance for possible loan losses is adequate to absorb such anticipated
charge-offs.

Rules and formulas relative to the adequacy of the allowance for possible loan
losses, although useful as guidelines to management, are not rigidly applied.
The allowance for possible loan losses was $941,000 as of September 30, 2002 or
0.91% of loans outstanding. The allowance for possible loan losses was
$1,000,000 as of December 31, 2001, or 1.03% of loans outstanding. The
provision for possible loan losses charged against earnings during the nine
months ended September 30, 2002 was $4,000. Loans totaling $84,000 were
charged-off (with recoveries made of $21,000) during the nine months ended
September 30, 2002. The provision for possible loan losses charged against
earnings during the year ended December 31, 2001 was $123,000. Loans totaling
$73,000 were charged-off (with recoveries made of $8,000) during the year ended
December 31, 2001.

No loans were past due 90 days or more and still accruing interest at September
30, 2002 or December 31, 2001. There were $51,000 of loans classified as
non-accrual at September 30, 2002 and $59,000 of loans were classified as
non-accrual at December 31, 2001. Accrual of interest is discontinued when
there is

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reasonable doubt as to the full, timely collections of interest or principal.
When a loan becomes contractually past due ninety (90) days with respect to
interest or principal, it is reviewed and a determination is made as to whether
it should be placed on non-accrual status. When a loan is placed on
non-accrual status, all interest previously accrued but not collected is
reversed against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to principal and
interest and when, in the judgment of management, the loans are estimated to be
fully collectible as to principal and interest. Restructured loans are those
loans on which concessions in terms have been granted because of a borrowers
financial difficulty. Interest is generally accrued on such loans in
accordance with the new terms. There was no other real estate owned or
foreclosed, any repossessed assets or impaired loans at September 30, 2002 or
at December 31, 2001.

Deposits

The Companys primary sources of funds are interest-bearing deposits. The
following table sets forth the Companys deposit structure at September 30,
2002 and December 31, 2001 (in thousands):

|                                                       |  |              |         |              |  |   |         | 
|------------------------------------------------------ |  | ------------ | ------- | ------------ |  | - | ------- | 
|                                                       |  | September 30 |         | December 31,
|                                                       |  | 2002         |         | 2001        
|                                                       |  |              |         |             
|Non-interest-bearing deposits:                         |  |              |         |              |  |   |         | 
|Individuals, partnerships and corporations             |  | $            | 8,991   |              |  | $ | 7,969   | 
|U. S. Government and states and political subdivisions |  |              |        |              |  |   |        | 
|Certified and official checks                          |  |              | 564     |              |  |   | 497     | 
|                                                       |  |              |         |              |  |   |         | 
|Total non-interest-bearing deposits                    |  |              | 9,555   |              |  |   | 8,466   | 
|                                                       |  |              |         |              |  |   |         | 
|Interest-bearing deposits:                             |  |              |         |              |  |   |         | 
|Interest-bearing demand accounts                       |  |              | 35,981  |              |  |   | 30,429  | 
|Saving accounts                                        |  |              | 1,448   |              |  |   | 1,016   | 
|Certificates of deposit, less than $100,000            |  |              | 49,207  |              |  |   | 43,302  | 
|Certificates of deposit, $100,000 or greater           |  |              | 29,910  |              |  |   | 27,804  | 
|                                                       |  |              |         |              |  |   |         | 
|Total interest-bearing deposits                        |  |              | 116,546 |              |  |   | 102,551 | 
|                                                       |  |              |         |              |  |   |         | 
|Total deposits                                         |  | $            | 126,101 |              |  | $ | 111,017 | 
|                                                       |  |              |         |              |  |   |         | 

The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the nine months ended
September 30, 2002 and the year ended December 31, 2001 (dollars in thousands):

|                                 |  |                    |         |                   |  |  |      |   |  |   |         |  |  |  |      |  
|-------------------------------- |  | ------------------ | ------- | ----------------- |  |  | ---- | - |  | - | ------- |  |  |  | ---- | -
|                                 |  | Nine Months Ended  |         | Year Ended       
|                                 |  | September 30, 2002 |         | December 31, 2001
|                                 |  |                    |         |                   | 
|Non-interest-bearing deposits    |  | $                  | 9,151   |                   |  |  | N/A  |   |  | $ | 7,350   |  |  |  | N/A  |  
|Interest-bearing demand deposits |  |                    | 33,676  |                   |  |  | 1.58 | % |  |   | 27,370  |  |  |  | 2.47 | %
|Savings accounts                 |  |                    | 1,278   |                   |  |  | 1.00 | % |  |   | 861     |  |  |  | 1.20 | %
|Certificates of deposit          |  |                    | 77,777  |                   |  |  | 3.53 | % |  |   | 67,370  |  |  |  | 5.70 | %
|                                 |  |                    |         |                   |  |  |      |   |  |   |         |  |  |  |      |  
|Total deposits                   |  | $                  | 121,882 |                   |  |  | 2.70 | % |  | $ | 102,951 |  |  |  | 4.40 | %
|                                 |  |                    |         |                   |  |  |      |   |  |   |         |  |  |  |      |  

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At September 30, 2002, certificates of deposits greater than $100,000
aggregated approximately $29,910,000. The following table indicates, as of
September 30, 2002, the dollar amount of $100,000 or more by the time remaining
until maturity (in thousands):

|                        |  |          |       |         |  |        |        |        |  |   |       |  |  |  |   | 
|----------------------- |  | -------- | ----- | ------- |  | ------ | ------ | ------ |  | - | ----- |  |  |  | - | 
|                        |  | 3 Months |       | 3 to 12 |  | 1 to 5 |        | Over 5
|                        |  | or less  |       | Months  |  | Years  |        | Years 
|                        |  |          |       |         |  |        |        |       
|Certificates of deposit |  | $        | 8,246 |         |  | $      | 17,117 |        |  | $ | 4,547 |  |  |  |  | 
|                        |  |          |       |         |  |        |        |        |  |   |       |  |  |  |   | 

At December 31, 2001, certificates of deposits greater than $100,000 aggregated
approximately $27,804,000. The following table indicates, as of December 31,
2000, the dollar amount of $100,000 or more by the time remaining until
maturity (in thousands):

|                        |  |          |       |         |  |        |        |        |  |   |       |  |  |  |   | 
|----------------------- |  | -------- | ----- | ------- |  | ------ | ------ | ------ |  | - | ----- |  |  |  | - | 
|                        |  | 3 Months |       | 3 to 12 |  | 1 to 5 |        | Over 5
|                        |  | or less  |       | Months  |  | Years  |        | Years 
|                        |  |          |       |         |  |        |        |       
|Certificates of deposit |  | $        | 7,919 |         |  | $      | 15,380 |        |  | $ | 4,505 |  |  |  |  | 
|                        |  |          |       |         |  |        |        |        |  |   |       |  |  |  |   | 

Long Term Debt

The Company has outstanding $3,000,000 of floating rate subordinated
convertible capital debentures at September 30, 2002 and
December 31, 2001.
Such debentures earn interest at prime rate less 0.5% with a minimum rate paid
being 6.5%. The debentures convert to one share of common stock for every
$12.50 of debentures held.

Liquidity

Of primary importance to depositors, creditors and regulators is the ability to
have readily available funds sufficient to repay fully maturing liabilities.
The Companys liquidity, represented by cash and cash due from banks, is a
result of its operating, investing and financing activities. In order to
insure funds are available at all times, the Company devotes resources to
projecting on a monthly basis the amount of funds that will be required and
maintains relationships with a diversified funding base so funds are
accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets, which are generally matched
to correspond to the maturity of liabilities.

The Company has a formal liquidity policy, and in the opinion of management,
its liquidity levels are considered adequate. Neither the Company nor the Bank
is subject to any specific regulation liquidity requirements imposed by
regulatory authorities. The Bank is subject to general FDIC guidelines, which
do not require a minimum level of liquidity. Management believes its liquidity
ratios meet or exceed these guidelines. Management does not know of any trends
or demands that are reasonably likely to result in liquidity increasing or
decreasing in any material manner. The ratio for average loans to average
deposits for the year ended December 31, 2001 was 85.6% and for the nine months
ended September 30, 2002 was 81.4%.

Capital Adequacy

Capital adequacy refers to the level of capital required to sustain asset
growth over time and to absorb losses. The objective of the Companys
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures
used by management to monitor the results of these efforts are the ratios of
average equity to average assets, average tangible equity to average tangible
assets, and average equity to net loans. The Federal Reserve Board and FDIC
have adopted capital guidelines governing the activities of bank holding
companies and banks. These guidelines require the maintenance of an amount of
capital based on risk-adjusted assets so that categories of assets with
potentially higher credit risk will require more capital backing than assets
with lower risk. In

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addition, banks and bank holding companies are required to maintain capital to
support, on a risk-adjusted basis, certain off-balance sheet activities such as
loan commitments.

The capital guidelines classify capital into two tiers, referred to as Tier I
and Tier II. Under risk-based capital requirements, total capital consists of
Tier I capital, which is generally common shareholders equity less goodwill
and excess tax assets, and Tier II capital which is primarily the qualifying
portion of the allowance for possible loan losses and certain qualifying debt
instruments. In determining risk-based capital requirements, assets are
assigned risk-weights of 0% to 100%, depending primarily on the regulatory
assigned levels of credit risk associated with such assets. Off-balance sheet
items are considered in the calculation of risk-adjusted assets through
conversion factors established by the regulators. The framework for
calculating risk-based capital requires banks and bank holding companies to
meet the regulatory minimums of 4% Tier I and 8% total risk-based capital. In
1990 regulators added a leverage computation to the capital requirements,
comparing Tier I capital to total average assets less goodwill and excess tax
assets. In 2000, the ratio was modified to reduce Tier 1 Capital by the amount
of investments in unconsolidated subsidiaries.

The following table gives the various capital ratios and balances at September
30, 2002 and December 31, 2001(dollars in thousands) for the Company:

|                                           |  |                    |         |                   |  |   |         |  
|------------------------------------------ |  | ------------------ | ------- | ----------------- |  | - | ------- | -
|                                           |  | September 30, 2002 |         | December 31, 2001
|                                           |  |                    |         |                  
|Capital:                                   |  |                    |         |                   |  |   |         |  
|Tier I capital:                            |  |                    |         |                   |  |   |         |  
|Realized shareholders equity              |  | $                  | 10,029  |                   |  | $ | 9,344   |  
|Less excess tax assets                     |  |                    | 340     |                   |  |   | 319     |  
|                                           |  |                    |         |                   |  |   |         |  
|Total Tier I capital                       |  |                    | 9,689   |                   |  |   | 9,025   |  
|                                           |  |                    |         |                   |  |   |         |  
|Tier II capital:                           |  |                    |         |                   |  |   |         |  
|Qualifying debt                            |  |                    | 3,000   |                   |  |   | 3,000   |  
|Qualifying allowance for loan losses       |  |                    | 941     |                   |  |   | 1,000   |  
|                                           |  |                    |         |                   |  |   |         |  
|Total Tier II capital                      |  |                    | 3,941   |                   |  |   | 4,000   |  
|                                           |  |                    |         |                   |  |   |         |  
|Total capital                              |  | $                  | 13,630  |                   |  | $ | 13,025  |  
|                                           |  |                    |         |                   |  |   |         |  
|Risk-adjusted assets                       |  | $                  | 111,453 |                   |  | $ | 101,689 |  
|                                           |  |                    |         |                   |  |   |         |  
|Quarterly average assets                   |  | $                  | 150,870 |                   |  | $ | 112,687 |  
|                                           |  |                    |         |                   |  |   |         |  
|Ratios:                                    |  |                    |         |                   |  |   |         |  
|Tier I capital to risk-adjusted assets     |  |                    | 8.7     | %                 |  |   | 8.9     | %
|Tier II capital to risk-adjusted assets    |  |                    | 3.5     | %                 |  |   | 3.9     | %
|Total capital to risk-adjusted assets      |  |                    | 12.2    | %                 |  |   | 12.8    | %
|Leverage  Tier I capital to quarterly     |  |                    |         |                   |  |   |         |  
|Average assets less disallowed intangibles |  |                    | 6.4     | %                 |  |   | 7.4     | %

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The following table gives the various capital ratios and balances at September
30, 2002 and at December 31, 2001 (dollars in thousands) for the Bank:

|                                           |  |                    |         |                   |  |   |         |  
|------------------------------------------ |  | ------------------ | ------- | ----------------- |  | - | ------- | -
|                                           |  | September 30, 2002 |         | December 31, 2001
|                                           |  |                    |         |                  
|Capital:                                   |  |                    |         |                   |  |   |         |  
|Tier I capital:                            |  |                    |         |                   |  |   |         |  
|Realized shareholders equity              |  | $                  | 12,713  |                   |  | $ | 11,966  |  
|Less excess tax assets                     |  |                    | 335     |                   |  |   | 331     |  
|                                           |  |                    |         |                   |  |   |         |  
|Total Tier I capital                       |  |                    | 12,378  |                   |  |   | 11,635  |  
|                                           |  |                    |         |                   |  |   |         |  
|Tier II capital:                           |  |                    |         |                   |  |   |         |  
|Qualifying debt                            |  |                    |        |                   |  |   |        |  
|Qualifying allowance for loan losses       |  |                    | 941     |                   |  |   | 1,000   |  
|                                           |  |                    |         |                   |  |   |         |  
|Total Tier II capital                      |  |                    | 941     |                   |  |   | 1,000   |  
|                                           |  |                    |         |                   |  |   |         |  
|Total capital                              |  | $                  | 13,319  |                   |  | $ | 12,635  |  
|                                           |  |                    |         |                   |  |   |         |  
|Risk-adjusted assets                       |  | $                  | 111,434 |                   |  | $ | 101,674 |  
|                                           |  |                    |         |                   |  |   |         |  
|Quarterly average assets                   |  | $                  | 150,870 |                   |  | $ | 128,047 |  
|                                           |  |                    |         |                   |  |   |         |  
|Ratios:                                    |  |                    |         |                   |  |   |         |  
|Tier I capital to risk-adjusted assets     |  |                    | 11.1    | %                 |  |   | 11.4    | %
|Tier II capital to risk-adjusted assets    |  |                    | 0.9     | %                 |  |   | 1.0     | %
|Total capital to risk-adjusted assets      |  |                    | 12.0    | %                 |  |   | 12.4    | %
|Leverage  Tier I capital to quarterly     |  |                    |         |                   |  |   |         |  
|Average assets less disallowed intangibles |  |                    | 8.2     | %                 |  |   | 9.1     | %

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established five capital categories for banks and bank holding companies. The
bank regulators adopted regulations defining these five capital categories in
September 1992. Under these new regulations each bank is classified into one
of the five categories based on its level of risk-based capital as measured by
Tier I capital, total risk-based capital, and Tier I leverage ratios and its
supervisory ratings. The following table lists the five categories of capital
and each of the minimum requirements for the three risk-based capital ratios.

|                               |  |                  |  |                   |  |             
|------------------------------ |  | ---------------- |  | ----------------- |  | ------------
|                               |  | Total Risk-Based |  | Tier I Risk-Based |  | Leverage    
|                               |  | Capital Ratio    |  | Capital Ratio     |  | Ratio       
|                               |  |                  |  |                   |  |             
|Well-capitalized               |  | 10% or above     |  | 6% or above       |  | 5% or above 
|Adequately capitalized         |  | 8% or above      |  | 4% or above       |  | 4% or above 
|Undercapitalized               |  | Less than 8%     |  | Less than 4%      |  | Less than 4%
|Significantly undercapitalized |  | Less than 6%     |  | Less than 3%      |  | Less than 3%
|Critically undercapitalized    |  |                 |  |                  |  | 2% or less  

On September 30, 2002 and December 31, 2001, the Company exceeded the
regulatory minimums and qualified as a well-capitalized institution under the
regulations.

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##### Table of Contents



Other Borrowings:

Other borrowings at September 30, 2002 and December 31, 2001 is comprised of
the following:

|                                                                                                                                                                                                                                                                                                                                                      |       |   |               |       |          |   |       |       | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | - | ------------- | ----- | -------- | - | ----- | ----- | 
|                                                                                                                                                                                                                                                                                                                                                      |       |   | September 30, |       | Dec. 31,
|                                                                                                                                                                                                                                                                                                                                                      |       |   | 2002          |       | 2001    
|                                                                                                                                                                                                                                                                                                                                                      |       |   |               |       |         
|Federal Home Loan Bank borrowings                                                                                                                                                                                                                                                                                                                     |       | $ | 6,000         |       |          | $ | 4,000 |      
|Securities sold under agreement to repurchase                                                                                                                                                                                                                                                                                                         |       |   | 2,286         |       |          |   | 1,926 |      
|                                                                                                                                                                                                                                                                                                                                                      |       |   |               |       |          |   |       |      
|                                                                                                                                                                                                                                                                                                                                                      | Total |   | $             | 8,286 |          |   | $     | 5,926 | 
|                                                                                                                                                                                                                                                                                                                                                      |       |   |               |       |          |   |       |      
|Detail of securities sold under repurchase agreements:                                                                                                                                                                                                                                                                                                |       |   |               |       |          |   |       |      
|Securities underlying the repurchase agreements  obligations
of U.S. Government agencies and corporations with amortized
cost of approximately $2,961,000 and $3,472,000 at September 30,
2002 and December 31, 2001, respectively, and
estimated fair values of $3,020,000 and $3,489,000
at September 30, 2002 and December 31, 2001, respectively |       | $ | 2,286         |       |          | $ | 1,926 |      
|                                                                                                                                                                                                                                                                                                                                                      |       |   |               |       |          |   |       |      

The Company pays interest on these repurchase agreements at approximately 0.50%
below the federal funds rate. These repurchase agreements have maturities of
one day.

Securities sold under agreement to repurchase averaged approximately $2,031,000
during the nine months ended September 30, 2002 and $2,300,000 during the year
ended December 31, 2001 and the maximum amount outstanding at any month end
during these periods was approximately $2,286,000 and $3,360,000, respectively.

The securities underlying the repurchase agreements are held in safekeeping by
a separate third party bank.

The Company pays interest of London Interbank Offering Rate (LIBOR) plus ten
basis points on the $4,000,000 of Federal Home Loan Bank borrowings. The rate
reprices quarterly and matures in June 2003. The Bank can pay any or all of
the amount borrowed without penalty at any repricing date. The borrowing is
secured by 1-4 family residential mortgage loans. The Company pays 4.20% on
the $2,000,000 advance from the Federal Home Loan Bank. The rate is fixed and
the advance is due in August 2007.

Property Acquisitions:

The Company began in March 2001 to renovate an existing building to serve as a
branch in Smyrna, Tennessee. The property is leased and opened for business in
May 2001. The cost to renovate the existing building was approximately
$50,000. No other significant property acquisitions are planned for the next
year.

Personnel:

The Company had sixty-four employees at September 30, 2002. The Company
anticipates increasing the number of employees during the last quarter of 2002
to approximately sixty-six employees to service the anticipated loan and
deposit growth and related support services during the next three months.

Research and Development:

The Company does not engage in product research and development and does not
anticipate any such activities during the next twelve months.

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##### Table of Contents



Foreign Transactions:

The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities.

PART I

ITEM 3. CONTROLS AND PROCEDURES

Within 90 days of the date of this report, we carried out an evaluation, under
the supervision and with the participation of our principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.

In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.

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##### Table of Contents



PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULT ON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits
|--- |  | --------



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Charter  incorporated by reference to Form 10SB filed April 30, 1998                                                                                                                    
|
| | By Laws  incorporated by reference to Form 10SB filed April 30, 1998                                                                                                                    
|
| | Instruments defining Rights of Security Holders including Debentures 
incorporated by reference to Form 10SB filed April 30, 1998 and Form 8A
field May 2, 2000                         
|
| | Material Contracts  Incorporated by reference to Form 10SB filed April 30,
1998 and Form 10-KSB filed March 31, 1999                                                                    
|
| | Statement re: Computation of per share earnings  Incorporated by reference
to note 1 of the consolidated financial statements as of December 31, 2001
in Form 10-KSB filed April 2, 2001



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | 99.1 Written certification of the Chief Executive Officer (principal
executive officer) pursuant to 18 U.S.C. Section 1350
|
| | 99.2 Written certification of the Chief Financial Officer (principal
financial officer) pursuant to 18 U.S.C. Section 1350

(b)  Form 8-K was filed on August 12, 2002, for the certification of the
principal executive officer and principal financial officer as a result of the
Sarbanes-Oxley Act of 2002, which became effective after the Company filed its
Form 10-QSB for June 30, 2002.

-33-



---



##### Table of Contents



SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.



|                                        
|----------------------------------------
|Murfreesboro Bancorp, Inc.

(Registrant)



|                       |  |                                                                                                           
|---------------------- |  | ----------------------------------------------------------------------------------------------------------
|Date November 12, 2002
|                      
|                      
|By                     |  | /s/ William L. Webb(Signature) *
William L. Webb,
Principal Accounting Officer and Chief Financial Officer



| |  | Print the name and title of each signing officer under his or her
signature.
|- |  | ----------------------------------------------------------------------------

-34-



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##### Table of Contents



CERTIFICATIONS

I, William E. Rowland, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-QSB of
Murfreesboro Bancorp, Inc.;                                                                                                                                                                                                                                           
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|
| | 4. |  | The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:                                                                                                         



| |    |  |                                                                                                                                                                                                                                                                                                
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing of this quarterly report (the
Evaluation Date); and                                                                                                       
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



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



| |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | All significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                                                                                                                                                                                  



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

|                         |  |                                          
|------------------------ |  | -----------------------------------------
|Date:  November 12, 2002 |  | /s/ William E. Rowland                   
|                        
|                         |  | William E. RowlandChief Executive Officer

-35-



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##### Table of Contents



CERTIFICATIONS

I, William L. Webb, certify that:



| | 1. |  | I have reviewed this quarterly report on Form 10-QSB of
Murfreesboro Bancorp, Inc.;                                                                                                                                                                                                                                           
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;                   
|
| | 4. |  | The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:                                                                                                         



| |    |  |                                                                                                                                                                                                                                                                                                
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing of this quarterly report (the
Evaluation Date); and                                                                                                       
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



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



| |    |  |                                                                                                                                                                                                                                                                                               
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) |  | All significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



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

|                         |  |                                       
|------------------------ |  | --------------------------------------
|Date:  November 12, 2002 |  | /s/ William L. Webb                   
|                        
|                         |  | William L. WebbChief Financial Officer

-36-