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

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       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 judgement, 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 classified as "Other Assets Especially Mentioned" over $100,000 are reviewed quarterly by the Board's Executive and Loan Committee to review the level of loan losses required to be specifically allocated.

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       Net interest income of the registrant for the nine-month period ended September 30, 2003 increased by $792,280, or 6.9 percent, to $12,323,222 as compared to $11,530,942 for the nine months ended September 30, 2002. Total interest income decreased $1,084,918, or 5.8 percent for the first nine months of 2003 as compared to the same period in 2002. This decrease was primarily the result of the declining interest rate environment which caused the interest income on loans to decrease $483,592 and interest income on investments to decrease $556,572 for the first nine months of 2003 as compared to the same period of 2002. However, the decrease in total interest income was offset by a decrease in total interest expense of $1,877,198, or 26.6 percent to $5,176,750 for the first nine months of 2003 as compared to $7,053,948 for the same period in 2002. The decrease in total interest expense was primarily caused by a $1,667,417 decrease in interest expense on time deposits for the nine months ended September 30, 2003 as compared to the same period in 2002.   
       Total other income increased $121,212, or 10.4 percent to $1,288,567 for the three-month period ended September 30, 2003 as compared to $1,167,355 for the three-month period ended September 30, 2002. This increase in other income for the three-month period ended September 30, 2003 was primarily due to a $149,847 increase in mortgage banking fees, and a $189,872 increase in gains on the sale of loans. These gains were offset however, by a $204,057 decrease in gains on the sale of investment securities and a $27,769 decrease in service charges on deposit accounts, as compared to the three-month period ended September 30, 2002.
       Total other income increased $441,848, or 15.2 percent for the nine-month period ended September 30, 2003 as compared to the nine-month period ended September 30, 2002. The increase was primarily due to a $291,465 increase in mortgage banking fees, a $189,872 increase in the gain on the sale of loans and a $123,380 increase in service charges on deposit accounts. These gains were offset however by a $144,998 decrease in gains on the sale of investment securities and a $26,515 decrease in dividends, as compared to the nine-month period ended September 30, 2002.
       The registrant's non-interest income is composed of several components, some of which vary significantly between quarterly periods. Service charges on deposit accounts and other non-interest income generally reflect the registrant's growth, while fees for origination of mortgage loans will often reflect stock and home mortgage market conditions and fluctuate more widely from period to period.
       For the three-month period ended September 30, 2003, total other expenses increased $88,611, or 3.1 percent to $2,989,696 as compared to $2,901,085 for the three-month period ended September 30, 2002. Salaries and employee benefits increased $102,784, or 6.4 percent and other operating expenses increased $44,279, or 7.2 percent for the three-months ended September 30, 2003 as compared to the three-months ended September 30, 2002. The increase in salaries and employee benefits is primarily due to increased average salary and benefits expense per employee. These increases were offset, however, by a decrease of $46,379, or 16.8 percent in furniture and equipment expense during the third quarter of 2003 as compared to the same period last year. This large decrease in furniture and equipment expense was primarily due to a significant upgrade in computer equipment by the registrant's subsidiary bank during 2001. The resulting depreciation on this computer equipment decreas ed in 2003 as compared to 2002. Both net occupancy expenses and advertising and public relations expenses experienced immaterial declines in the first nine months of 2003 as compared to the first nine months of 2002 as well.
       Total other expenses increased $58,430, or 0.7 percent, to $8,931,270 for the nine-months ended September 30, 2003 as compared to $8,872,840 for the same period last year. For the nine-month period ended September 30, 2003 salaries and employee benefits increased $324,127, or 6.9 percent as compared to the same period of 2002. This increase was offset, however, by a decrease in furniture and equipment

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expenses of $159,880, or 20.4 percent for the first nine months of 2003 as compared to the same period of 2002, again reflecting the decreased depreciation expense mentioned earlier. Also, net occupancy expenses decreased $57,212, or 6.3 percent and other operating expenses decreased $47,149, or 2.3 percent, for the nine months ended September 30, 2003 as compared to the same period of 2002. 
       The provision for credit losses for the three-months ended September 30, 2003, increased $165,741 to $470,488 from $304,747 over the same period in 2002. For the nine-month period ended September 30, 2003, the increase in provision for credit losses was $556,277 to $1,285,839 from $729,562 over the same period of 2002.  The increase in the provision for loan losses for both periods of 2003 was primarily the result of a deterioration in local economic conditions and one large line that was charged off during the first quarter of 2003. As a result of increases in net loan losses and problem loans compared to prior periods, the registrant anticipates that the provision for loan losses and allowance for loan losses will continue at increased levels throughout the year 2003. Increases in the provision for loan losses may have an adverse effect on the Company's results of operations for the year 2003.
       The provision for possible credit losses is based on past loan experience and other factors that, in management's judgement, 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. A more detailed description of the allowance for loan losses can be found under the section titled "Critical Accounting Policies."
       For the three-month period ended September 30, 2003, income before taxes decreased $44,131, or 2.3 percent, to $1,886,636 as compared to $1,930,767 for the three months ended September 30, 2002.  Applicable income taxes decreased $37,910, or 5.9 percent for the three-month period ended September 30, 2003 as compared to the same period in 2002.
       For the nine-month period ended September 30, 2003, income before taxes increased $619,421, or 12.8 percent, to $5,459,249 as compared to $4,839,828 for the nine-month period ended September 30, 2002. Applicable income taxes increased $175,578, or 11.5 percent for the nine-months ended September 30, 2003 as compared to the nine-months ended September 30, 2002. Income taxes increased less than the income before taxes in the first nine months of 2003 as compared to the same period of 2002 due to the registrant increasing its investment in tax-exempt securities in 2003.       
       The effect on net income and earnings per share if stock based compensation was measured using the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation," would not be material for any periods presented.
       On a basic, weighted average per share basis, net income was $2.26 per share based on 1,643,165 weighted shares outstanding for the first nine months of 2003 as compared to $2.00 per share on 1,633,734 weighted shares outstanding for the first nine months of 2002. On a fully diluted basis, net income per share was $2.24 for the first nine months of 2003 on 1,655,750 weighted shares outstanding as compared to $1.99 on 1,644,628 weighted shares outstanding for the first nine months of 2002. On a basic, weighted average per share basis, net income was $0.78 per share based on 1,643,184 weighted shares outstanding for the three months ended September 30, 2003 as compared to $0.78 per share based on 1,642,016 weighted shares outstanding for the same period of 2002. On a fully diluted basis, net income per share was $0.77 for the three months ended Septemb er 30, 2003 on 1,656,389 weighted shares outstanding as compared to $0.78 on 1,642,016 weighted shares outstanding for the same period of 2002.

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       The registrant's total assets increased 8.4 percent to $413,568,443 during the nine months ended September 30, 2003, from $381,669,730 at December 31, 2002. Loans and leases, net of allowance for credit losses, totaled $224,879,604 at September 30, 2003, a 2.0 percent decrease compared to $229,445,808 at December 31, 2002. Investment securities increased $31,345,466, or 27.5 percent, to $145,506,774 at September 30, 2003, from $114,161,308 at December 31, 2002. Federal funds sold increased $5,513,000, to $10,733,000 at September 30, 2003, from $5,220,000 at December 31, 2002. The increase in both investment securities and federal funds sold was the result of deposits growing more rapidly than loans.
       Total liabilities increased by 9.0% to $368,126,544 for the nine months ended September 30, 2003, compared to $337,667,481 at December 31, 2002. This increase was primarily due to a $29,809,761 or 10.4 percent increase in interest bearing deposits for the nine months ended September 30, 2003. Much of the increase in deposits during the first three quarters of 2003 occurred in time deposits. 
       The registrant classifies its entire investment securities portfolio as available-for-sale and marks each security to its market value. The unrealized gain on securities, net of tax, was $1,985,372 at September 30, 2003 as compared to $2,232,258 at December 31, 2002. The unrealized gain or loss on securities primarily reflects the direction of the interest rate market. When interest rates are going down, the investment securities will generally increase in market value, however, when interest rates are moving upward, the investment securities will generally decrease in market value. This dependence on the current interest rate environment can lead to large fluctuations from period to period in the unrealized gain or loss on investment securities, net of tax.
       Non-performing assets decreased to approximately $6,241,700 at September 30, 2003 compared to approximately $8,760,700 at December 31, 2002.  Non-performing assets at September 30, 2003 included $3,911,073 in other real estate owned, $2,187,279 in non-accrual loans, and $143,354 in loans past due ninety days or more as to interest or principal payment. Additionally, there were approximately $62,000 in restructured loans that were in compliance with their modified terms at September 30, 2003.  At December 31, 2002, the corresponding figures were $1,129,191 in other real estate owned, $7,236,654 in non-accrual loans, $394,898 in loans past due ninety days or more, and $464,000 loans restructured. The allowance for loan losses was 1.58 times the balance of nonaccrual loans at Septemb er 30, 2003 as compared to 0.53 at December 31, 2002. The large volume in the registrant's non-accrual loans at December 31, 2002 was principally related to two credit lines of the registrant's subsidiary bank. The largest line placed on

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nonaccrual status was a large United States Department of Agriculture guaranteed loan that was placed on nonaccrual status during the second quarter of 2002. Eighty percent of the principal and accrued interest of the loan is guaranteed by the United States Department of Agriculture. The remaining twenty percent credit exposure on the loan is secured by the underlying collateral on the loan. During the second quarter of 2003, the bank foreclosed on the underlying collateral and received a payment from the United States Department of Agriculture for eighty percent of the estimated shortfall between the remaining principal balance and the estimated net realizable value of the underlying collateral. This foreclosure led to the large increase in other real estate owned at September 30, 2003 as compared to December 31, 2002. Management does not believe that the underlying collateral is sufficient to secure the entire unguaranteed portion of the loan. Management has estimated the credit exposure on the loan and included the exposure in its allowance for loan l osses calculation for September 30, 2003. The second large line was placed on nonaccrual status during the fourth quarter of 2002. This line consists primarily of commercial real estate and land development loans and resulted in most of the net charged-off loans during the first nine months of 2003. The loans that were related to this line that were not charged-off during the first three quarters of 2003 remained on nonaccrual status as of September 30, 2003.
       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 during the first nine months of 2003 if the above nonaccrual loans had been current in accordance with their original terms was approximately $110,000.
       Loans that are classified as "substandard" or worse by the registrant represent loans to which management questions the borrowers' ability to comply with the present loan repayment terms. As of September 30, 2003, there were approximately $8,128,000 in loans that were classified as "substandard" or worse and accruing interest. This compares to approximately $13,615,000 in loans that were classified as "substandard" or worse and accruing interest as of December 31, 2002.
       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 re lated loans. Among the loans secured by real estate, the registrant has a concentration of loans secured by hotel and motel properties. Although the registrant has a loan portfolio diversified 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, 2003 were approximately $1,638,600 for a net charge-off ratio (charge-offs to total net loans) of 0.72 percent. This compares to net charge-offs of

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approximately $659,300 for the nine-months ended September 30, 2002 for a net charge-off ratio of 0.29 percent. As discussed previously, one large line was primarily responsible for the increase in net loan charge-offs during the first nine months of 2003.
       The total allowance for credit losses decreased to $3,456,896 as of September 30, 2003 from $3,809,625 as of December 31, 2002. The decrease of $352,729 in the allowance for credit losses during the first nine months of 2003 was primarily due to the large commercial real estate and land development credit line mentioned previously. As of December 31, 2002, management had estimated the credit exposure on this line in its calculation for the allowance for credit losses. Subsequently, during the first quarter of 2003, much of the exposure for this line was charged-off, thus decreasing the allowance for credit losses. 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. Cash and cash equivalents increased $1,893,293 between December 31, 2002 and September 30, 2003.
       Marketable investment securities, particularly those of short maturities, are the principal source of asset liquidity. Securities maturing in one year or less amounted to $16,289,204 at September 30, 2003, representing 11.4 percent of the registrant's investment portfolio as compared to 11.3 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 with minimal risk. Management classifies all of the Company's 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 increased by $5,513,000 from December 31, 2002 to September 30, 2003.   
       At September 30, 2003, the registrant had unfunded loan commitments outstanding of approximately $28,245,000 and outstanding standby letters of credit of approximately $992,000. Because 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.
       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, 2003 was approximately $13,315,000.
       The registrant does not anticipate that there will be any unusual demands, commitments, or events that could adversely impact the liquidity of the registrant.

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       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 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 environments. 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 int erest rate risk guidelines.
       Analysis of rate sensitivity and rate gap analysis are the primary tools used to assess 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 quarter ended September 30, 2003.

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