PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements. (Continued)

page 5

industry. In connection with the application of those principles to the determination of our allowance for loan losses, we have made judgments and estimates which have significantly impacted our financial position and results of operations.
       The allowance for loan losses is maintained at a level that is considered to be adequate to reflect estimated credit losses for specifically identified loans as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. A formal review of the allowance for loan losses is prepared quarterly to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. Our methodology of assessing the appropriateness of the allowance consists of several elements, which include the formula allowance, as well as specific allowances.
       The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. For purposes of the quarterly review, the loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. Each loan is assigned a risk rating by loan officers using established credit policy guidelines. These risk ratings are periodically reviewed and all risk ratings are subject to review by an independent Credit Review Department. Each risk rating is assigned an allocation percentage which, when multiplied times the dollar value of loans in that risk category, results in the amount of the allowance for loan losses allocated to these loans. Allocation percentages are based on our historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
       Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred in excess of the amount determined by the application of the above formula. Every substandard or worse loan in excess of $25,000 and all loans criticized as "Special Mention" over $100,000 are reviewed quarterly by the Executive and Loan Committee of the registrant's bank subsidiary Board of Directors to review the level of loan losses required to be specifically allocated.

       Net interest income, the largest component of net income for the registrant, is the difference between income earned on loans and investments and interest paid on deposits and other sources of funds. Net interest income increased $458,639, or 13.1 percent during the third quarter of 2002 as compared to the third quarter of 2001.  Total interest income decreased $601,192, or 9.0 percent for the third quarter of 2002 as compared to the same period in 2001. The decrease in total interest income was primarily due to the lower interest rate environment that began to take effect during the first quarter of 2001. However, the decrease in total interest income was more than offset by a decrease in total interest expense of $1,059,831, or 33.2 percent for the third quarter of 2002 as compared to the same period in 2001. The decrease in total interest expense was again primarily due to the lower interest rate environment. The percentage change was greater for the to tal interest expense than the total interest income primarily due to the general decline in the level of interest rates that occurred in 2001 and continued through the first quarter of 2002. Interest rates stabilized somewhat during the second and third quarters of 2002; however, interest rates were at historically low levels and continued a slight decline throughout the second and third quarters of 2002. Since the registrant is liability sensitive, the declining interest rate environment present throughout 2001 and into 2002, caused the average interest rate paid on deposits to decrease faster than the average rate earned on loans and investments.
        Net interest income of the registrant for the nine-month period ended September 30, 2002 increased by $1,079,254, or 10.3 percent, as compared to the nine months ended September 30, 2001. Total interest income decreased $1,697,293, or 8.4 percent for the first nine months of 2002 as compared to the same period in 2001. This decrease was primarily the result of the declining interest rate environment which caused the interest income on loans to decrease $1,070,999 for the first nine months of 2002 as compared to the same period of 2001. However, the decrease in total interest income was offset by a decrease in total interest expense of $2,776,547, or 28.2 percent for the first nine months of 2002 as compared to the same period in 2001. The decrease in total interest expense was primarily caused by a $3,320,502 decrease in interest expense on time deposits that was partially offset by a $568,311 increase in interest expense on savings and money market account s for the nine months ended September 30, 2002 as compared to the same period in 2001.  The increase in interest expense on savings and money market accounts was primarily due to a large increase in money market account balances. Much of this increase in money market balances was offset by a decrease in time deposits; thus resulting in significantly lower interest expense on time deposits and increasing interest expense on money market accounts. The apparent cause of the flow of funds from time deposits to money market accounts seems to be the low interest rate environment prevalent throughout 2002 and the improved liquidity offered by money market accounts. Money market accounts have allowed depositors to hedge against interest rate increases since the funds may be removed with little notice and no early withdrawal penalties are incurred, as with time deposits.
       Total other income decreased $72,442, or 5.8 percent for the three-month period ended September 30, 2002, as compared to the three-month period ended September 30, 2001. This decrease in other income was primarily due to a $230,867 decrease in other income for the three months ended September 30, 2002 as compared to the same period of 2001. This decrease was primarily due to a $205,868 decrease in income from First Pulaski Reinsurance Company ("FPRC") during the third quarter of 2002 as compared to the third quarter of 2001. FPRC is a wholly-owned subsidiary of First National Bank of Pulaski, the registrant's wholly-owned banking subsidiary. FPRC received its insurance license during the third quarter of 2001. Revenues and expenses that FPRC incurred in the first and second quarters of 2001 were held in escrow until FPRC received its insurance license during the third quarter of 2001. Thus, the third quarter of 2001 contained revenue and expenses that occurred throughout first nine months of 2001. However, much of this

decrease in other income was offset by a $129,835 increase in security gains and a $29,326 increase in mortgage banking fees.
       Total other income decreased $57,913, or 2.0 percent for the nine-month period ended September 30, 2002 as compared to the nine-month period ended September 30, 2001. The decrease was primarily due to a $208,955 decrease in service charges on deposit accounts and a $74,659 decrease in other income for the nine months ended September 30, 2002 as compared to the same period of 2001. The decline in service charges on deposit accounts primarily resulted from a decrease in overdraft fees for the first nine months of 2002 as compared to the same period of 2001. The decrease in other income was primarily due to an approximately $50,000 decrease in income from FPRC during the nine months ended September 30, 2002 as compared to the same period of 2001as a result of the escrow arrangement described above. However, the decrease in total other income was largely offset by a $100,128 increase in security gains and a $145,849 increase in mortgage banking fees during the nine m onths ended September 30, 2002 as compared to the same period of 2001.
       For the three-month period ended September 30, 2002, total other expenses decreased $17,727, or 0.6 percent as compared to the three-month period ended September 30, 2001. Salaries and employee benefits increased $183,435, or 12.8 percent for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001. Also, occupancy expense increased $42,572, or 17.5 percent during the third quarter of 2002 as compared to the third quarter of 2001. Much of the increase in occupancy expense was due to increased depreciation on the registrant's new banking facility located in Fayetteville, Tennessee that was completed during December 2001. However, these increases were offset by a $224,204 decrease in other operating expenses and a $33,581 decrease in advertising and public relations expenses during the three months ended September 30, 2002 as compared to the same period of 2001. As with other income, much of the decrease in other operating expenses was due to the fact that operating expenses for the three months ended September 30, 2001 included nine months of FPRC's expenses. Other expenses of FPRC during the third quarter of 2002 decreased $167,319 as compared to the same period of 2001.
       Total other expenses increased $810,289, or 10.1 percent, for the nine months ended September 30, 2002 as compared to same period last year. For the nine-month period ended September 30, 2002 salaries and employee benefits increased $537,327, or 12.8 percent as compared to the same period of 2001. Occupancy expenses increased $113,916 for the nine months ended September 30, 2002 as compared to the same period of 2001. Again, this was primarily the result of increased depreciation expense attributable to the new Fayetteville building, as well as an increase in expenses related to repairs and maintenance of the registrant's banking facilities. Furniture and equipment expense increased $158,262 for the nine months ended September 20, 2002 as compared to the same period of 2001 primarily due to a significant upgrade in computer equipment by the registrant's subsidiary bank during t he third quarter of 2001, resulting in increased depreciation expense in 2002
       The provision for credit losses for the three-month period ended September 30, 2002, increased $135,247 or 79.8 percent over the same period of 2001. For the nine months ended September 30, 2002, the increase in provision for credit losses was $114,596, or 18.6 percent, over the same period in 2001. The increases in provision for possible credit losses for both the three and nine months ended September 30, 2002 were primarily the result of the increase in loans that the registrant experienced during the first nine months of 2002 as compared to the first nine months of 2001 and a deterioration in local economic conditions that led to higher specific allowances. Loans, net of unearned income, increased over $20,800,000 during the first nine months of 2002, compared to an almost $5,000,000 increase during the first nine months of 2001. This large increase in loans during the first nine months of 2002 led to an increase in the formula allowance referred to under the section titled "Critical Accounting Policies".

      The provision for possible credit losses is based on past loan experience and other factors that, in management's judgment, deserve current recognition in estimating possible credit losses. Such factors include past loan loss experience, growth and composition of the loan portfolio, review of specific problem loans, the relationship of the allowance for credit losses to outstanding loans and current economic conditions that may affect the borrower's ability to repay.
        For the three-month period ended September 30, 2002, income before taxes increased $268,677, or 16.2 percent, as compared to the three months ended September 30, 2001.  Applicable income taxes increased $97,803, or 17.8 percent for the three-month period ended September 30, 2002 as compared to the same period in 2001.
       For the nine-month period ended September 30, 2002, income before taxes increased $96,456, or 2.0 percent, as compared to the nine-month period ended September 30, 2001. Applicable income taxes increased $41,127, or 2.7 percent for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001.
       On a basic weighted average per share basis, net income was $2.00 per share based on 1,633,734 shares for the first nine months of 2002 as compared to $1.98 per share based on 1,624,739 shares for the first nine months of 2001. On a fully diluted basis, net income per share was $1.99 for the first nine months of 2002 on 1,644,628 shares as compared to $1.97 on 1,632,342 shares for the first nine months of 2001. For the three months ended September 30, 2002, the basic weighted average net income per share was $0.78 based on 1,642,016 shares as compared to $0.68 per share based on 1,631,860 for the three months ended September 30, 2001. On a fully diluted basis, net income per share was $0.78 for the three months ended September 30, 2002 based on 1,642,016 shares as compared to $0.68 per share based on 1,641,719 shares for the three months ended September 30, 2001.
       The following table shows the return on assets (net income divided by average total assets) and return on equity (net income divided by average stockholders' equity (net of unrealized gain or loss on securities) for the nine months ended September 30, 2002 (annualized) and for the year ended December 31, 2001.

at December 31, 2001.  The unrealized gain on securities, net of tax, was $2,132,548 at September 30, 2002 as compared to $1,414,799 at December 31, 2001. The increase in unrealized gains on securities occurred as a result of the decline in the general level of interest rates that began during 2001 and continued into 2002.  Federal funds sold decreased $2,487,000, or 30.2 percent to $5,736,000 at September 30, 2002, from $8,223,000 at December 31, 2001. The decrease in investment securities and federal funds sold was primarily the result of loans growing more quickly than deposits during the first nine months of 2002.
       Total liabilities increased by 2.6% to $330,419,775 for the nine-months ended September 30, 2002, compared to $321,896,577 at December 31, 2001. This increase was primarily due to a $6,787,777 or 2.5 percent increase in interest bearing deposits.  Non-performing assets increased to approximately $6,080,400 at September 30, 2002 compared to approximately $2,865,100 at December 31, 2001.  Non-performing assets at September 30, 2002 included approximately $446,600 in other real estate owned, approximately $5,302,500 in non-accrual loans, and approximately $331,300 in loans past due ninety days or more as to interest or principal payment. Additionally, there were approximately $62,000 in restructured loans at September 30, 2002.  The increase in the registrant's non-accrual loans at September 30, 2002 was principally related to the registrant's placement of a large United States Department of Agriculture guaranteed loan on non-accrual status. Eighty percent of the principal amount of the loan i s guaranteed by the United States Department of Agriculture and management believes that its twenty percent credit exposure on the loan is sufficiently secured by the value of the underlying collateral that is available to the bank. At December 31, 2001, the corresponding figures were approximately $296,700 in other real estate owned, approximately $2,166,000 in non-accrual loans, approximately $402,400 in loans past due ninety days or more, and no loans restructured.
       Nonaccrual loans are those for which management has discontinued accrual of interest because there exists significant uncertainty as to the full and timely collection of either principal or interest or such loans have become contractually past due 90 days with respect to principal or interest unless such loans are well secured and in the process of collection. The additional amount of interest that would have been recorded if the above nonaccrual loans had been current in accordance with their original terms was $248,074.
       Credit risk represents the maximum accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted and any collateral or security proved to be of no value. Concentrations of credit risk or types of collateral arising from financial instruments exist in relation to certain groups of customers. A group concentration arises when a number of counterparties have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The registrant does not have a significant concentration to any individual customer or counterparty. The major concentrations of credit risk for the registrant arise by collateral type in relation to loans and credit commitments. The only significant concentration that exists is in loans secured by real estate and agricultural related loans. Although the registrant has a loan portfolio divers ified by type of risk, the ability of its customers to honor their contracts is to some extent dependent upon their regional economic condition. A geographic concentration arises because the registrant grants commercial, real estate and consumer loans primarily to customers in Giles, Marshall and Lincoln Counties, Tennessee. In order to mitigate the impact of credit risk, management strives to identify loans experiencing difficulty early enough to correct the problems and to maintain an allowance for loan losses at a level management believes is sufficient to cover inherent losses in the loan portfolio.
       Net charge-offs for the nine months ended September 30, 2002 were approximately $659,300 for a net charge-off to total loans ratio of 0.29 percent. This compares to net charge-offs of approximately

$606,000 for the nine months ended September 30, 2001 for a net charge-off to total loans ratio of 0.29 percent.
       The registrant has computed allowances for credit losses which management believes to be sufficient. The allowance for credit losses has increased $70,232 since December 31, 2001. The total allowance for credit losses increased to $3,157,818 as of September 30, 2002 from $3,087,586 as of December 31, 2001. The allowance for credit losses was 51.9 percent of non-performing assets as of September 30, 2002 and 107.8 percent of non-performing assets as of December 31, 2001. However, as mentioned previously, a substantial portion of the total amount of non-accrual loans at September 30, 2002 carried a government guarantee as to a substantial portion of the principal amount of these loans. If the guaranteed portion of non-accrual loans were deducted from non-performing assets, the allowance for credit losses would have been 120.9 percent of non-performing assets as of September 30, 2002. Management believes that the allowance for credit losses is sufficient to cover potential losses in the loan portfolio.

       Liquidity is the ability to fund increases in loan demand or to compensate for decreases in deposits and other sources of funds, or both. Maintenance of adequate liquidity is an essential component of the financial planning process. The objective of asset/liability management is to provide an optimum balance of liquidity and earnings. The registrant seeks to generate adequate cash flows to meet its needs without sacrificing income or taking undue risks. Cash and cash equivalents decreased $4,614,514 between December 31, 2001 and September 30, 2002.  This decrease was the primarily the result of loans increasing faster than deposits.
       Marketable investment securities, particularly those of short maturities, are the principal source of asset liquidity. Securities maturing in one year or less amounted to $12,381,769 at September 30, 2002, representing 11.3 percent of the registrant's investment portfolio as compared to 10.3 percent one year earlier. These securities may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital, or asset/liability strategy. Management classifies the registrant's entire investment portfolio in the available-for-sale category and reports these securities at fair value. Management does not anticipate the sale of a material amount of investment securities in the foreseeable future.
       Other sources of liquidity include maturing loans and federal funds sold. As mentioned previously, federal funds sold decreased by $2,487,000, or 30.2 percent from December 31, 2001 to September 30, 2002.
       At September 30, 2002, the registrant had unfunded loan commitments outstanding of approximately $26,700,000 and outstanding standby letters of credit of approximately $572,000. Since these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these commitments, the bank has the ability to liquidate federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase federal funds from other financial institutions.
       As discussed above, the registrant's bank subsidiary originates residential mortgage loans for sale in the secondary market which it may be required to repurchase if a default occurs with respect to the payment of any of the first four installments of principal and interest after a loan is sold and the default continues for a period of 90 days. These loans are considered in the computation of the allowance for loan losses to cover future defaults. The total mortgage loans sold with repurchase requirements outstanding as of September 30, 2002 was approximately $5,504,000.

       The registrant's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on a large portion of the registrant's assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which possess a short term to maturity. Based upon the nature of the registrant's operations, the registrant is not subject to foreign currency exchange or commodity price risk.
       Interest rate risk management focuses on the earnings risk associated with changing interest rates, as well as the risk to the present value of the registrant's equity. Management seeks to maintain profitability in both immediate and long-term earnings through funds management and interest rate risk management. The registrant's rate sensitive position has an important impact on earnings and the present value of the registrant's equity. Management of the registrant meets regularly to analyze the rate sensitivity position, focusing on the spread between the cost of funds and interest yields generated primarily through loans and investments. Management also seeks to maintain stability in the net interest margin under varying interest rate environment. These goals are accomplished through the development and implementation of lending, funding and pricing strategies designed to maximize net interest income under varying interest rate environments subject to specific liquidity and interest rate risk guidelines.
       Analysis of rate sensitivity and rate gap analysis are the primary tools used to asses the direction and magnitude of changes in net interest income resulting from changes in interest rates. Included in the analysis are cash flows and maturities of financial instruments, changes in market conditions, and pricing and deposit volume and mix. Since these assumptions are inherently uncertain, net interest income can not be precisely estimated nor can the impact changes in interest rates be precisely predicted. Actual results will differ due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management's strategies, among other factors.
       There have been no material changes in reported market risks during the nine months ended September 30, 2002.

                    Date:  November 14, 2002                                          /s/Harold Bass             
                                                                                                       Harold Bass, Secretary/Treasurer
                                                                                                       (The registrant's Principal Financial Officer and
                                                                                                       Principal Accounting Officer)