For the transition period from ______________________ to _____________________

State of incorporation: Tennessee                   IRS Employer ID No.: 62-1110294

Registrant's telephone number, including area code: (931)-363-2585

Securities registered under Section 12(b) of the Exchange Act: None

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 past 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]

Shares of Common Stock outstanding on February 29, 2004 were 1,651,195.

Documents Incorporated by Reference:

Part III.  Portions of the Registrant's Proxy Statement relating to the Registrant's Annual Meeting of Shareholders to be held on April 29, 2004 are incorporated by reference into Items 10, 11, 12 and 13.

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ITEM 1: BUSINESS

On November 1, 2002, the Bank formed FNBP Holdings, Inc ("FNBP Holdings"), a corporation organized and existing under the laws of the state of Nevada. FNBP Investments, Inc. (FNBP Investments") was also formed on November 1, 2002 and was organized and existed under the laws of the state of Nevada. The principal activity of FNBP Investments was to manage the investment securities portfolio. Both FNBP Holdings and FNBP Investments ceased operations and were dissolved during the fourth quarter of 2003. FNBP Holdings only major activity was the ownership of stock in FNBP Investments.

The Corporation was organized under the laws of the state of Tennessee in 1981 and its only significant asset is the common stock of First National, headquartered in Pulaski, Tennessee.

The Corporation, through its subsidiaries, offers a diversified range of financial services to its customers. These include activities related to general banking business with complete services in the commercial, corporate and retail banking field.

As of February 29, 2004, First National had 159 employees, 19 of whom were part-time. The Corporation has no employees other than those employed by First National and its subsidiaries.

COMPETITION

First National operates principally in three market areas, Giles County, Tennessee, Lincoln County, Tennessee and Marshall County, Tennessee. The following discussion of market areas contains the most recent information available from reports filed with the FDIC and the Office of Thrift Supervision.

Giles County is located in southern Middle Tennessee, approximately 70 miles from Nashville, Tennessee. Pulaski is the largest city in Giles County. Giles County had an estimated population of 29,447 in 2002 and a median household income of $35,754 in 2000, the latest available data.

Lincoln County is also located in southern Middle Tennessee approximately 80 miles from Nashville, Tennessee. The largest city in Lincoln County is Fayetteville. Lincoln County had an estimated population of 31,777 in 2002, and a median household income of $34,600 in 2000, the latest available data.

Marshall County is located in southern Middle Tennessee, approximately 50 miles from Nashville, Tennessee. Lewisburg is the largest city in Marshall County. Marshall County had an estimated population of 27,370 in 2002 and a median household income of $39,404 in 2000, the latest available data.

The Bank has substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits are the range and quality of financial services offered, the ability to offer attractive rates and availability of convenient office locations. Direct competition for deposits comes from other commercial banks (as well as from credit unions and saving institutions in neighboring counties). Additional significant competition for savings deposits may come from other investment alternatives, such as money market mutual funds and corporate and government securities. The primary factors in competing for loans are the range and quality of the lending services offered, interest rates and loan origination fees. Competition for the origination of loans normally comes from other savings and financial institutions, commercial banks, credit unions, insurance companies and other financial service companies. The Corporation believes that its strategy in relationship banking and local autonomy in the communities it serves allows flexibility in rates and products offered in response to local needs.

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The Corporation believes this is its most effective method of competing with both the larger regional bank holding companies and the smaller community banks.

The Corporation does not maintain an internet website. As such, the Corporation does not make available on a website free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports. The Corporation will, however, provide paper copies of such filings free of charge upon request. To request any of these documents please write to First Pulaski National Corporation, Attention: Corporate Secretary, 206 South First Street, Pulaski, Tennessee 38478.

Both the Corporation and First National are subject to extensive state and federal banking laws and regulations that impose restrictions on and provide for general regulatory oversight of the Corporation's and First National's operations. These laws and regulations are generally intended to protect depositors and not shareholders. The following discussion describes the material elements of the regulatory framework which apply.

The Corporation is a bank holding company under the federal Bank Holding Company Act of 1956. As a result, it is subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.

Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would substantially lessen competition or otherwise function as a restraint of trade, or result in or tend to create a monopoly, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the communities to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the communities to be served. The Federal Reserve's consideration of financial resources generally focuses on capital adequacy, which is discussed below.

Change in Bank Control. Subject to various exceptions, the Bank Holding Company Act and the Federal Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring "control" of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company.

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Control is rebuttably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and either:

• The bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934; or

• No other person owns a greater percentage of that class of voting securities immediately after the transaction.

Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of any of its bank subsidiaries.

First National is a national bank chartered under the federal National Bank Act. As a result, it is subject to the supervision, examination and reporting requirements of the National Bank Act and the regulations of the Office of the Comptroller of the Currency (the "OCC"). The OCC regularly examines First National's operations and has the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. The OCC also has the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law. Additionally, First National's deposits are insured by the FDIC to the maximum extent provided by law. First National also is subject to numerous state and federal statutes and regulations that will affect its business, activities and operations.

The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

The Corporation and First National are required to comply with the capital adequacy standards established by the Federal Reserve, in the Corporation's case, and the OCC, in the case of First National. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. First National is also subject to risk-based and leverage capital requirements adopted by the OCC, which are substantially similar to those adopted by the Federal Reserve for bank holding companies.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.

Failure to meet capital guidelines could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and other restrictions on its business. As described above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements. For a more detailed discussion of capital requirements and the Corporation's and the Bank's capital levels see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources, Capital and Dividends " and Note M to the Notes to Consolidated Financial Statements.

The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into one of which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making

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acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution and a lower capital category based on supervisory factors other than capital. As of December 31, 2003, First National was considered well capitalized by its primary regulator.

The Corporation is a legal entity separate and distinct from First National. The principal sources of the Corporation's cash flow, including cash flow to pay dividends to its shareholders, are dividends that First National pays to it as its sole shareholder. Statutory and regulatory limitations apply to First National's payment of dividends to the Corporation as well as to its payment of dividends to its shareholders.

The payment of dividends by the Corporation and First National may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. If, in the opinion of the OCC, First National was engaged in or about to engage in an unsafe or unsound practice, the OCC could require, after notice and a hearing, that First National stop or refrain from engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institution's capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay di vidends out of current operating earnings. See "Prompt Corrective Action" above.

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation's financial institutions. The Corporation cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which the Corporation's business may be affected by any new regulation or statute.

The Corporation's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve's monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through the Federal Reserve's statutory power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The Federal Reserve, through its monetary and fiscal policies, affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. The Corporation cannot predict the nature or impact of future changes in monetary and fiscal policies.

The Corporation and the Bank are headquartered at 206 South First Street, Pulaski, Tennessee, in Giles County. The banking facility housing the headquarters was completed in 1966 and has undergone several major renovation and expansion projects over the years. The most recent expansion at this facility was completed in early 1995. An expansion and renovation of the Bank's Industrial Park Road office, on the western edge of Pulaski, was completed in early 1996. The Minor Hill Road office, in the southern part of Pulaski, operates in a facility that was completed in 1985. Other banking facilities operated by the Bank include offices at Ardmore in the southeastern corner of Giles County and at Fayetteville and Park City in adjacent Lincoln County, Tennessee. The Ardmore office, in existence since 1963, has also undergone several major expansions, with the most recent being completed in early 1993. The Lincoln County office, located on West College Stree t in Fayetteville, Tennessee, was opened in September of 1991 in a leased facility that the Bank enlarged and renovated. Growth in the Fayetteville operation

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Common stock of First Pulaski National Corporation is not traded through an organized exchange but is traded between local individuals. As such, price quotations are not available on NASDAQ or any other quotation service. The following trading prices for 2003 and 2002 represent trades of which the Corporation was aware, primarily through its officers and directors and those of the Bank, and do not necessarily include all trading transactions for the period and may not necessarily reflect actual stock values.

The Corporation reviews its dividend policy at least annually. The amount of the dividend, while in the Corporation's sole discretion, depends in part upon the performance of First National. The Corporation's ability to pay dividends is restricted by federal laws and regulations applicable to bank holding companies, and by Tennessee laws relating to the payment of dividends by Tennessee corporations.

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Because substantially all operations are conducted through its subsidiaries, the Corporation's ability to pay dividends also depends on the ability of the subsidiaries to pay dividends to the Corporation. The ability of First National to pay cash dividends to the Corporation is restricted by applicable regulations of the OCC and the FDIC. For a more detailed discussion of these limitations see "Supervision and Regulation - Payment of Dividends."

The table below contains selected financial data for the Corporation for the last five years. All weighted average outstanding share data is computed after giving retroactive effect of the merger of the Corporation and Belfast Holding Company in 2001. Note O to the Consolidated Financial Statements which follows shows figures for basic earnings per share and gives effect to dilutive stock options in determining diluted earnings per share. Total average equity and total average assets exclude unrealized gains or losses on investment securities.

The basic earnings per share data and the diluted earnings per share data in the above table are based on the following weighted average number of shares outstanding:

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Certain of the statements in this discussion may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, (the "Exchange Act"), as amended. The words "expect," "anticipate," "intend," "should," "may," "could," "plan," "believe," "likely," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Corporation to differ materially from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, (i) increased competition with other financial institutions, (ii) lack of sustained growth in the economy in the Corporation's market area, (iii) rapid fluctuations in in terest rates, (iv) significant downturns in the businesses of one or more large customers, (v) risks inherent in originating loans, including prepayment risks, (vi) the fluctuations in collateral values, the rate of loan charge-offs and the level of the provision for losses on loans, (vii) changes in the legislative and regulatory environment and (viii) loss of key personnel. Many of such factors are beyond the Corporation's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Corporation cautions investors that future financial and operating results may differ materially from those projected in forward-looking statements made by, or on behalf of, the Corporation. The Corporation disclaims any obligation to update or revise any forward-looking statements contained in this discussion, whether as a result of new information, future eve nts or otherwise.

Management looks at several key performance indicators in evaluating the results of operations of the Corporation and the Bank. One key item is the volume and quality of loans. The Bank experienced weak loan demand in 2003, leading to a decrease in loans of almost $5 million from December 31, 2002 to December 31, 2003. The weak economic conditions prevalent in the Bank's market area contributed to the weak loan demand, along with increased credit standard during 2003. Other real estate owned increased by almost $2.1 million from the end of year 2002 to the end of year 2003, primarily due to commercial real estate loans on which the Bank foreclosed. One large commercial building comprises over fifty percent of other real estate owned at December 31, 2003. Management anticipates that other real estate owned will continue at higher than normal historic levels until this property

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is sold. Management is seeking to increase the volume of loans in 2004, but does not intend to increase credit risk to unacceptable levels. Another key item is the growth of deposits, which grew over $31.3 million in 2003. This increase in deposits coupled with the reduction in loan volume resulted in the $45.7 million increase in investments in 2003.

Net income increased by over $940,000 to $5.01 million in 2003 as compared to 2002, while the net interest margin fell to 4.60% in 2003 from 4.72% in 2002. Management monitors the Corporation's net interest margin closely and strives to maintain the net interest margin above the average net interest margin of the Corporation's peer group. Another key contributor to 2003 net income was mortgage loan origination fees the Bank received when it generated and sold 1-4 family mortgages. These fees increased by almost $300,000 to $789,150 in 2003 as compared to 2002, primarily due to the large number of refinancings that occurred in 2003. Mortgage refinancing activity began to decline at the end of 2003 and management anticipates that the mortgage banking fees will be below 2003 levels in 2004.

The accounting principles we follow and our methods of applying these principles conform to accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles to the determination of our allowance for loan losses, we have made judgements 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 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 criticized as "Special Mention" over $100,000 are reviewed quarterly by the Executive and Loan Committee of the Bank's Board of Directors to review the level of loan losses required to be specifically allocated.

For a more detailed description of other accounting policies the Corporation considers significant in the determination of its results of operations, statement of condition and cash flows, see Note A, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements.

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Net income for 2003 was approximately $5.01 million or $3.03 per diluted share, compared with approximately $4.07 million or $2.47 per diluted share in 2002 and approximately $4.25 million or $2.60 per diluted share in 2001. Return on average assets was 1.25% in 2003, 1.10% in 2002 and 1.23% in 2001. The return on average equity was 11.7%, 9.9% and 10.8% for 2003, 2002 and 2001, respectively. Expenses related to the merger of the Corporation and Belfast Holding Company negatively impacted earnings in 2001 and 2002. Increased depreciation expenses related to major data and computer systems upgrades by First National in 2001 also negatively impacted earnings in 2001and 2002. Also, the economic downturn adversely affected a particular large credit, causing a significant increase in the provision for loan losses in 2002.

Net interest income is the difference between interest and fees earned on loans, securities and other interest-earning assets (interest income) and interest paid on deposits and borrowed funds (interest expense). In 2003, net interest income increased by 5.2% to $16,512,255 from $15,702,064 in 2003, following an increase of 10.9% in 2002 from $14,162,693 in 2001. The increase in net interest income in 2003 and 2002 as compared to the previous year was primarily due to the growth experienced by the Corporation, as well as more effective pricing of loans and deposits by the Corporation. Total assets of the Corporation increased approximately $36.8 million from December 31, 2002 to December 31, 2003. Deposits increased approximately $31.3 million, while loans decreased approximately $5.0 million from December 31, 2002 to December 31, 2003. Although loans decreased in 2003 from 2002 levels, the Corporation allocated the increase in deposits to securities , which helped the Corporation to earn interest on such amounts, leading to the increase in net interest income in 2003 as compared to 2002. The net increase in net interest income in 2002 was due primarily to growth in the Corporation's total assets as well as the types of assets that saw the primary growth. Total assets of the Corporation increased $18.0 million from December 31, 2001 to December 31, 2002, with loans increasing approximately $24.3 million and deposits increasing approximately $14.6 million from December 31, 2001 to December 31, 2002. The higher growth in loans over deposits contributed significantly to the increase in net interest income in 2002 as compared to 2001 since loans are the highest yielding asset of the Corporation.

Net interest income on a fully taxable equivalent basis increased $1,035,000 from 2002 to 2003. This increase resulted from a $1,279,000 increase due to increased volumes offset by a $244,000 decrease due to changes in interest rates. The increase in net interest income of $1,620,000 in 2002, on a taxable equivalent basis, as compared to 2001, resulted from an increase of $2,535,000 due to increased volumes offset by a decrease of $915,000 due to interest rates remaining at historic low levels.

Net interest income is a function of the average balances of interest-earning assets and interest-bearing liabilities and the yields earned and rates paid on those balances. Management must maintain the spread between the yields earned and rates paid to maintain an adequate net interest margin.

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The following tables summarize the changes in interest earned and interest paid for the given time periods and indicate the factors affecting these changes. The first table presents, by major categories of assets and liabilities, the average balances, the components of the taxable equivalent net interest earnings/spread, and the yield or rate for the years 2003, 2002 and 2001.

Note: The taxable equivalent adjustment has been computed based on a 34% federal income tax rate and has given effect to the disallowance of interest expense, for federal income tax purposes, related to certain tax-free assets. Loans include nonaccrual loans for all years presented. Interest on loans includes loan fees. Loan fees included above amounted to $959,652 for 2003, $1,160,456 for 2002 and $1,169,047 for 2001.

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The following table shows the change from year to year for each component of the taxable equivalent net interest margin separated into the amount generated by volume changes and the amount generated by changes in the yields earned or rates paid.

Non-interest income equaled $4,169,202 in 2003, an increase of $557,871, or 15.4% from 2002. The increase is attributable primarily to an increase of $297,464 in mortgage banking fees, a $200,694 gain on sale of other assets and an $52,183 increase in other service charges. The increase in mortgage banking fees was primarily related to increased mortgage refinancing activity in 2003 due to the historically low mortgage interest rate level that was present throughout much of 2003. The Corporation anticipates that the mortgage banking fees will return to the lower level seen in previous years as fewer mortgage refinancing opportunities will be available in the future. However, these increases were partially offset by a $32,462 decrease in gains on the sale of investment securities.

Non-interest income in 2002 was $3,611,331, a decrease of 6.6% from 2001 due primarily to a decrease of $157,122 in service charges on deposit accounts, a decrease of $128,148 in commissions and fees and a decrease of $112,217 in net gains on the sale of securities. However, these decreases were partially offset by a $217,085 increase in mortgage banking fees.

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Non-interest expense in 2003 was $11,945,933, up $186,906, or 1.6 % from 2002. This increase is attributable primarily to a $352,361, or 5.5% increase in salaries and employee benefits. The increase in salaries and employee benefits was primarily due to increased personnel expenses per employee. The increase in personnel expenses was offset by a $207,315, or 19.2% decrease in furniture and fixtures expense. The large decrease in furniture and fixtures expense was mainly due to decreased depreciation expenses related to major data and computer upgrades in 2001.

Non-interest expense in 2002 was $11,759,027, up $997,474, or 9.3 % from 2001. This increase is attributable primarily to a $656,298, or 11.5% increase in salaries and employee benefits and a $231,092, or a 27.3% increase in furniture and equipment expense. The increase in salaries an employee benefits was primarily a result of increased personnel expenses per employee. The increase in furniture and fixture expense was primarily due to increased depreciation expenses related to major data and computer upgrades in 2001. Other operating expenses increased 1.5%, or $38,408 in 2002 as compared to 2001.

The provision for loan losses is the charge to earnings which management feels is necessary to maintain the allowance for loan losses at a level considered adequate to absorb potential future losses on existing loans and to provide for uncertainties in the economy. The adequacy of the allowance for loan losses is determined by a continuous evaluation of the loan portfolio. First National utilizes an independent loan review function which considers loans on their own merits based on factors which include past loan experience, collateral value, off-balance sheet credit risk, and possible effects of prevailing economic conditions. Findings are presented regularly to management, where other factors such as actual loan loss experience relative to the size and characteristics of the loan portfolio, deterioration in concentrations of credit, trends in portfolio volumes, delinquencies and non-performing loans and, when applicable, reports of the regulatory age ncies are considered. Management performs calculations for the minimum allowance level needed and a final evaluation is made. Note A to the Notes to Consolidated Financial Statements provides a detailed description of the Corporation's loan loss methodology.

Income tax expense includes federal and state taxes on earnings. Income taxes were $2,205,371, $1,873,758, and $1,967,525 in 2003, 2002 and 2001, respectively. The effective tax rates were 30.6%, 31.5%, and 31.6% respectively. Note I to the Consolidated Financial Statements provides a detailed analysis of the components of income tax expense.

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Management's focus is to promote loan growth in the Corporation's target market, emphasizing the expansion of business in the Corporation's trade area. Efforts are taken to maintain a fairly diversified portfolio without significant concentration of risk. Overall loans declined $4,952,065 from December 31, 2002 to December 31, 2003. The decrease in loans was primarily due to an approximately $3.0 million decrease in construction and land development loans, a $2.8 million decrease in loans to individuals and a $1.2 million decrease in other loans at the year-end 2003 as compared to the year-end 2002. However, these decreases were offset by increases of approximately $2.0 million in real estate loans, and $0.8 million commercial and industrial loans as of December 31, 2003 as compared to December 31, 2002.

Over the last three years, average total loans and leases increased by $10.0 million or 4.5% in 2003, by $23.6 million or 11.9% in 2002, by $6.1 million or 3.2% in 2001. The growth in deposits was the primary support for this continuing increase in loan demand.

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. Among the loans secured by real es tate, 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.

(1) Includes student loans, non-taxable loans, overdrafts, and all other loans not included in any of the designated categories.

The table below summarizes the percentages of the loans selected for use in the preceding table falling into each of the indicated maturity ranges, and the sensitivity of such loans to interest rate changes for those with maturities greater than one year, all as of December 31, 2003.

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The following table summarizes loan and lease balances at the end of each period and daily averages, changes in the allowance for possible losses arising from loans charged off and recoveries on loans previously charged off, and additions to the allowance which have been charged to expense.

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The allowance for loan losses was 1.43 times the balance of nonaccrual loans at the end of 2003, 0.53 in 2002 and 1.43 in 2001. Nonaccrual loans decreased $4.83 million from December 31, 2002 to December 31, 2003. The large nonaccrual loan balance in 2002 was principally related to two credit lines of the Bank. The largest line placed on non-accrual status was a large United States Department of Agriculture ("USDA") guaranteed loan that was placed on nonaccrual status in 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. During the second quarter of 2003, the bank foreclosed on the underlying collateral and received a payment from the USDA 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 December 31, 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 losses calculation for December 31, 2003. The second large line placed on nonaccrual status consists primarily of commercial real estate and land development loans. This line was placed on nonaccrual status during the fourth quarter of 2002 and resulted in much of the charged-off real estate loans in 2003. Net c harged-off loans exceeded the provision for loan losses by $360,949 in 2003. The provision for loan losses exceeded net loan charge-offs by $722,039 in 2002, and by $203,965 in 2001. Management believes that the allowance for possible loan losses as of December 31, 2003 is adequate.

The following table sets out respectively the allocation of the Allowance for Loan Losses and the percentage of loans by category to total loans outstanding at the end of each of the years indicated.