UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

MARK ONE

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

Commission File Number 2-90200

FIRST MCMINNVILLE CORPORATION

200 East Main Street, McMinnville, TN 37110

(931) 473-4402

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 1,044,139 shares at August 10, 2004

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES [   ]     NO [X]

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FIRST MCMINNVILLE CORPORATION

FORM 10-Q

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FIRST MCMINNVILLE CORPORATION

Consolidated Balance Sheets

June 30, 2004 and December 31, 2003

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Earnings

Three Months and Six Months Ended June 30, 2004 and 2003

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Comprehensive Earnings

Three Months and Six Months Ended June 30, 2004 and 2003

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2004 and 2003

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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FIRST MCMINNVILLE CORPORATION

Consolidated Statements of Cash Flows, Continued

Six Months Ended June 30, 2004 and 2003

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

See accompanying notes to consolidated financial statements (unaudited).

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FIRST MCMINNVILLE CORPORATION

Notes to Consolidated Financial Statements

(Unaudited)

Basis of Presentation

The unaudited consolidated financial statements include the accounts of First McMinnville Corporation (Company or Registrant) and its wholly-owned subsidiary, First National Bank of McMinnville (Bank) and the Bank’s wholly-owned subsidiary, First Community Title & Escrow Company.

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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the statements contain all adjustments and disclosures necessary to summarize fairly the financial position of the Company as of June 30, 2004 and December 31, 2003, and the results of operations for the three months and six months ended June 30, 2004 and 2003, comprehensive earnings for the three months and six months ended June 30, 2004 and 2003 and changes in cash flows for the six months ended June 30, 2004 and 2003. 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 on Form 10-K for the year ended December 31, 2003. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The purpose of this discussion is to provide insight into the financial condition and results of operations of the Company and its subsidiary. This discussion should be read in conjunction with the consolidated financial statements. Reference should also be made to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for a more complete discussion of factors that affect liquidity, capital and the results of operations.

Forward-Looking Statements

     Management’s discussion of the Company, and management’s analysis of the Company’s operations and prospects, and other matters, may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other provisions of federal and state securities laws. Although the Company believes that the assumptions underlying such forward-looking statements contained in this Report are reasonable, any of the assumptions could be inaccurate and, accordingly, there can be no assurance that the forward-looking statements included herein will prove to be accurate. The use of such words as expect, anticipate, forecast, and comparable terms should be understood by the reader to indicate that the statement is “forward-looking” and thus subject to change in a manner that can be unpredictable. Factors that could cause actual results to differ from the results anticipated, but not guaranteed, in this Report, include (without limitation) economic and social conditions, competition for loans, mortgages, and other financial services and products, changes in interest rates, unforeseen changes in liquidity, results of operations, and financial conditions affecting the Company’s customers, as well as other risks that cannot be accurately quantified or completely identified. Many factors affecting the Company’s financial condition and profitability, including changes in economic conditions, the volatility of interest rates, political events and competition from other providers of financial services simply cannot be predicted. Because these factors are unpredictable and beyond the Company’s control, earnings may fluctuate from period to period. The purpose of this type of information (such as in Item 2, as well as other portions of this Report) is to provide Form 10-Q readers with information relevant to understanding and assessing the financial condition and results of operations of the Company and not to predict the future or to guarantee results. The Company is unable to predict the types of circumstances, conditions, and factors that can cause anticipated results to change. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of changes or of unanticipated events, circumstances, or results.

Liquidity and Interest Rate Sensitivity Management

     The concept of liquidity involves the ability of the Company and its subsidiary to meet future cash flow requirements, particularly those of customers who are either withdrawing funds from their accounts or borrowing to meet their credit needs.

     Proper asset/liability management is designed to maintain stability in the balance of interest-sensitive assets to interest-sensitive liabilities in order to provide stability in net interest margins. Earnings on interest-sensitive assets such as loans tied to the prime rate of interest and Federal funds sold, may vary considerably from fixed rate assets such as long-term investment securities and fixed rate loans. Interest-sensitive liabilities such as large certificates of deposit and money market certificates, generally involve higher costs than fixed rate instruments such as passbook savings.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

     The Company maintains a formal asset and liability management process that is designed to quantify, monitor and control interest rate risk and to assist management in maintaining stability in the net interest margin under varying interest rate environments. The Company accomplishes this process 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. (Please refer to Item 3 of this Part I for additional information).

     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 held for purposes other than trading, changes in market conditions, loan volumes and pricing and deposit volume and mix. These assumptions are inherently uncertain, and, as a result, net interest income can not be precisely estimated nor can the impact of higher or lower interest rates on net interest income 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.

     Based on the results of the analysis as of June 30, 2004, the Company would expect net interest income to decrease approximately $952,000 over a twelve month period if rates decreased 2%. Net interest income would be expected to increase approximately $288,000 over a 12 month period should rates increase 2%. The rate sensitivity as of June 30, 2004 was 1 to 1.39 (0-91 days) and 1.13 to 1 (0-365 days). This asset/liability mismatch in pricing is referred to as “gap” and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap of 1.0 means that assets and liabilities are perfectly matched as to pricing within a specific time period and interest rate movements will not affect net interest margin, assuming all other factors hold constant.

     Banks, in general, must maintain large cash balances to meet day-to-day cash flow requirements as well as maintaining required reserves for regulatory agencies. The cash balances maintained are the primary source of liquidity. Federal funds sold, which are basically overnight or short-term loans to other banks that increase the other bank’s required reserves, are also a major source of liquidity.

     The Company’s investment portfolio consists of earning assets that provide interest income. For those securities classified as held-to-maturity the Company has the ability and intention to hold these securities until maturity. Securities classified as available-for-sale include securities intended to be used as part of the Company’s asset/liability strategy and/or securities that may be sold in response to changes in interest rate, prepayment risk, the need or desire to increase capital and similar economic factors. Securities totaling approximately $5.4 million mature or reprice within the next twelve months.

     A secondary source of liquidity is the Bank’s loan portfolio. At June 30, 2004 commercial, consumer and other loans of approximately $38.5 million and loans secured by first liens on 1-4 family residential properties of approximately $10.4 million either will become due or will be subject to rate adjustments within twelve months.

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FIRST MCMINNVILLE CORPORATION

FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

     As for liabilities, certificates of deposit of $100,000 or greater of approximately $37.3 million will become due during the next twelve months. The Bank’s deposit base increased approximately $5.7 million during the six months ended June 30, 2004. Securities sold under repurchase agreements increased $4,069,000 during the six months ended June 30, 2004. The deposit base increased approximately $4.2 million during the second quarter of 2004. Securities sold under repurchase agreements increased $3,662,000 during the second three months of 2004. Federal funds sold were $13,000,000 at June 30, 2004 and $6,000,000 at December 31, 2003. Advances from the Federal Home Loan Bank were $1,000,000 at June 30, 2004 and at December 31, 2003.

     Historically, there has been no significant reduction in immediately withdrawable accounts such as negotiable order of withdrawal accounts, money market demand accounts, demand deposit and regular savings. Management does not expect that there will be significant withdrawals from these accounts in the future that are inconsistent with past experience.

     The Bank is limited by law, regulation and prudence as to the amount of dividends that it can pay. At June 30, 2004, the Bank could, under the most restrictive of these regulatory limits, declare during the remainder of 2004 cash dividends in an aggregate amount not to exceed approximately $8.5 million, exclusive of any 2004 net earnings, without prior approval of the Comptroller of the Currency. However, most of these funds will be retained for use in the Company’s operations rather than being paid out in dividends. It is anticipated that with present maturities, the expected growth in deposit base, and the efforts of management in its asset/liability management program, liquidity will not pose a problem in the foreseeable future. At the present time there are no known trends or any known commitments, demands, events or uncertainties that will result in or that are reasonably likely to result in the Company’s liquidity changing in any material way.

Capital Resources

     A primary source of capital is internal growth through retained earnings. The ratio of stockholders’ equity to total assets (excluding the unrealized gain or loss on available-for-sale securities) was 15.8% at June 30, 2004 and 15.7% at December 31, 2003. Total assets increased approximately $9 million during the six months ended June 30, 2004. The annualized rate of return on average stockholders’ equity (excluding the unrealized gain or loss on available-for-sale securities) for the first six months of 2004 was 9.4% compared to 11.0% for the comparable period in 2003. Principally because of the relatively high percentage of equity capital, the return on equity is lower than the reported average for many banks in the Bank’s peer group. Dividends of $449,000 and $417,000 or $.43 and $.40 per share were declared in the six months ended June 30, 2004 and 2003, respectively. Cash dividends will be increased in the remainder of 2004 over 2003 only in the discretion of the Board of Directors and as profits permit. Dividends paid during 2003 were $1.70 per share. No material changes in the mix or cost of capital is anticipated in the foreseeable future. At the present time there are no material commitments for capital expenditures.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Capital Resources, Continued

     Regulations of the Comptroller of the Currency establish required minimum capital levels for the Bank. Under these regulations, national banks must maintain certain capital levels as a percentage of average total assets (leverage capital ratio) and as a percentage of total risk-based assets (risk-based capital ratio). Under the risk-based requirements, various categories of assets and commitments are assigned a percentage related to credit risk ranging from 0% for assets backed by the full faith and credit of the United States to 100% for loans other than residential real estate loans and certain off-balance sheet commitments. Total capital is characterized as either Tier 1 capital which includes common shareholders’ equity, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred — or total risk based capital which includes the allowance for loan losses up to 1.25% of risk weighted assets, perpetual preferred stock, subordinated debt and various other hybrid capital instruments, subject to various limits. Goodwill is not includable in Tier 1 or total capital. National banks must maintain a Tier 1 capital to risk-based assets of at least 4.0%, a total capital to risk-based assets ratio of at least 8.0% and a leverage capital ratio defined as Tier 1 capital to average total assets for the most recent quarter of at least 4.0%. The same ratios are also required in order for a national bank to be considered “adequately capitalized” under the OCC’s “prompt corrective action” regulations, which impose certain operating restrictions on institutions which are not adequately capitalized. At June 30, 2004 the Bank has a Tier 1 risk-based ratio of 29.1%, a total capital to risk-based ratio of 30.2% and a Tier 1 leverage ratio of 15.8%, and thus falls within the “well capitalized” category under the regulations.

     The Federal Reserve Board imposes consolidated capital guidelines on bank holding companies (such as the Company) which have more than $150 million in consolidated assets. These guidelines require bank holding companies to maintain consolidated capital ratios which are essentially the same as the minimum capital levels required for national banks. The Company’s consolidated capital ratios were substantially the same as those set forth above for the Bank, and exceeded the minimums required under these Federal Reserve Board guidelines.

Results of Operations

     Net earnings were $2,244,000 for the six months ended June 30, 2004 as compared to $2,485,000 for the same period in 2003. Net earnings were $1,059,000 for the quarter ended June 30, 2004 as compared to $1,255,000 during the same quarter in 2003.

     As in most financial institutions, a major element in analyzing the statement of earnings is net interest income, which is the excess of interest earned over interest paid. The net interest margin could be materially affected during periods of volatility in interest rates.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     The Company’s interest income, excluding tax equivalent adjustments, decreased by $638,000 or 7.9% during the six months ended June 30, 2004 as compared to a decrease of $720,000 or 8.2% during the six months ended June 30, 2003 as compared to the same period in 2002. Interest income for the quarter ended June 30, 2004 decreased $293,000 or 7.3% over the quarter ended June 30, 2003, and increased $10,000 or .3% from the first quarter of 2004. The decreases in 2004 and 2003 were primarily attributable to previous decreases in interest rates. The ratio of average earning assets to total average assets was 97.0% for the six months ended June 30, 2004 and 95.1% for the same period in 2003.

     Interest expense decreased by $445,000 for the six months ended June 30, 2004 or 17.6% compared to the same period in 2003. Interest expense for the quarter ended June 30, 2004 decreased $199,000 or 16.0% as compared to the quarter ended June 30, 2003. Interest expense for the quarter ended June 30, 2004 decreased $3,000 or .3% compared to the first quarter of 2004. The decrease in interest expense for the six months ended June 30, 2004 as compared to the same period in 2003 can be primarily attributable to the previous decreases in interest rates as noted above.

     The foregoing resulted in net interest income of $5,361,000 for the six months ended June 30, 2004, a decrease of $193,000 or 3.5% compared to the prior year period. Net interest income for the quarter ended June 30, 2004 decreased $94,000 or 3.4% over the second quarter of 2003 while there was an increase of $13,000 or .5% over the first quarter in 2004.

     The following schedule details the loans of the Company at June 30, 2004 and December 31, 2003:

     The Company accounts for impaired loans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures”. These pronouncements apply to impaired loans except for large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment including credit card, residential mortgage, and consumer installment loans.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     A loan is deemed to be impaired when it is probable that the Company will be unable to collect the scheduled payments of principal and interest due under the contractual terms of the lending contract. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, the Company shall recognize an impairment by creating a valuation allowance with a corresponding charge to the provision for loan losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for loan losses.

     The Company’s first mortgage single family residential and consumer loans which total approximately $59,795,000 and $2,709,000, respectively at June 30, 2004, are divided into various groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and thus are not subject to the provisions of SFAS Nos. 114 and 118. Substantially all other loans of the Company are evaluated for impairment under the provisions of SFAS Nos. 114 and 118.

     The Company considers all nonaccrual loans evaluated under the provisions of SFAS Nos. 114 and 118 to be impaired. Loans are placed on nonaccrual status when doubt as to timely collection of principal or interest exists, or when any required payment of principal or interest is past due 90 days or more unless such loans are well-secured and in the process of collection. Delays or shortfalls in loan payments are evaluated with various other factors to determine if a loan is impaired. Generally, delinquencies under 90 days are considered insignificant unless certain other factors are present which indicate impairment is probable. The decision to place a loan on nonaccrual status is also based on an evaluation of the borrower’s financial condition, collateral, liquidation value, and other factors that, in the judgment of management, affect the borrower’s ability to pay.

     Generally, at the time a loan is placed on nonaccrual status, all interest accrued on the loan in the current fiscal year is reversed from income, and all interest accrued and uncollected from the prior year is charged off against the allowance for loan losses. Thereafter, interest on nonaccrual loans is recognized as interest income only to the extent that cash is received and future collection of principal is not in doubt. If the collectibility of outstanding principal is doubtful, such interest received is applied as a reduction of principal. A nonaccrual loan may be restored to accruing status when principal and interest are no longer past due and unpaid and future collection of principal and interest on a timely basis is not in doubt. There were no loans on nonaccrual status at June 30, 2004 and 2003 nor at anytime during the six month periods then ended. Therefore, all interest income during these periods was recognized on the accrual basis.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     Loans not on nonaccrual status are classified as impaired in certain cases where there is inadequate protection by the current net worth and financial capacity of the borrower or of the collateral pledged, if any. In those cases, such loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt, and if such deficiencies are not corrected, there is a probability that the Company will sustain some loss. In such cases, interest income continues to accrue as long as the loan does not meet the Company’s criteria for nonaccrual status.

     Generally the Company also classifies as impaired any loans the terms of which have been modified in a troubled debt restructuring after January 1, 1995. Interest is accrued on such loans that continue to meet the modified terms of their loan agreements. At June 30, 2004, the Company had one loan totaling $456,000 that had been restructured. This loan was in compliance with the modified terms.

     The Company’s charge-off policy for impaired loans is similar to its charge-off policy for all loans in that loans are charged-off in the month when they are considered uncollectible.

     Impaired loans and related allowance for loan loss amounts at June 30, 2004 and December 31, 2003 were as follows:

     The allowance for loan loss related to impaired loans was measured based upon the estimated fair value of related collateral.

     The average recorded investment in impaired loans for the six months ended June 30, 2004 and 2003 was $2,291,000 and $1,525,000, respectively. The related amount of interest income recognized on the accrual method for the period that such loans were impaired was approximately $76,000 and $64,000 for 2004 and 2003, respectively.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     The following schedule details selected information as to non-performing loans of the Company at June 30, 2004 and December 31, 2003:

Transactions in the allowance for loan losses were as follows:

     The provision for loan losses was $59,000 for the first six months of 2003. There was no provision for loan losses for the first six months of 2004. The provision for loan losses is based on past loan experience and other factors which, in management’s subjective judgment, deserve current recognition in estimating possible loan losses. Such factors include past loan loss experience, growth and composition of the loan portfolio, review of specific loan problems, the relationship of the allowance for loan losses to outstanding loans, and current economic conditions that may affect the borrower’s ability to repay. This is not an exact science. Management has in place a system that is designed to identify and monitor problems on a timely basis, of course no system is either infallible or perfect. Management believes the allowance for possible loan losses at June 30, 2004 to be adequate.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     The Company maintains an allowance for loan losses which management believes is adequate to absorb losses inherent in the loan portfolio. A formal review is prepared bi-monthly by the Loan Review Committee to assess the risk in the portfolio and to determine the adequacy of the allowance for loan losses. The review includes analysis of historical performance, the level of non-performing and adversely rated loans, specific analysis of certain problem loans, loan activity since the previous assessment, reports prepared by the Loan Review Committee, consideration of current economic conditions, and other pertinent information. The level of the allowance to net loans outstanding will vary depending on the overall results of this bi-monthly assessment. The review is presented to and subject to approval by the Board of Directors.

     The following table presents total internally graded loans as of June 30, 2004 and December 31, 2003:

     The collateral values, based on estimates received by management, collateralizing the above internally graded loans total approximately $15,130,000, ($2,870,000 related to real estate loans and $12,260,000 related to commercial and other loans). Such loans are listed as classified when information obtained about possible credit problems related to the borrower has prompted management to question the ability of the borrower to comply with the repayment terms of the loan agreement. The loan classifications do not represent or result from trends or uncertainties which management expects will materially and adversely affect future operating results, liquidity or capital resources.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     Residential real estate loans that are graded substandard totaling $2,424,000 and $2,636,000 at June 30, 2004 and December 31, 2003, respectively, consist of thirty-nine and thirty-eight individual loans, respectively, that have been graded accordingly due to bankruptcies, inadequate cash flows and/or delinquencies. No material losses on these loans is anticipated by management. Management is unable to predict the impact, if any, of recent industrial plant closings in Warren County, Tennessee.

     The following detail provides a breakdown of the allocation of the allowance for possible loan losses:

     There were no material amounts of other interest-bearing assets (interest-bearing deposits with other banks, municipal bonds, etc.) at June 30, 2004 which would be required to be disclosed as past due, non-accrual, restructured or potential problem loans, if such interest-bearing assets were loans.

     Non-interest income, excluding securities gains and a gain on sale of fixed assets of $30,000 relating to the sale of proof machines in 2003, was $333,000 for the six months ended June 30, 2004 as compared to $321,000 for the same period in 2003. The increase was primarily due to increases in fees on fiduciary activities.

     Securities gains were $21,000 and $4,000 during the six month period ended June 30, 2004 and 2003, respectively. The gains in 2004 and 2003 relate primarily to calls of securities prior to their scheduled maturity.

     Non-interest expense increased $227,000 or 10.3% during the first six months of 2004 as compared to the same period in 2003. Salaries and employee benefits increased $136,000 or 9.3%, while data processing expense increased $52,000 or 53.6%. Data processing expenses in 2004 increased primarily due to increased software maintenance.

     Management is not aware of any current recommendations by the regulatory authorities which, if implemented, would have a material effect on the Company’s liquidity, capital resources or operations.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Results of Operations, Continued

     The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share for the Company begins with the basic earnings per share plus the effect of common shares contingently issuable form stock options.

     The following is a summary of components comprising basic and diluted earnings per share (EPS) for the three and six months ended June 30, 2004 and 2003:

Stock Option Plan

     In April, 1997, the stockholders of the Company approved the First McMinnville Corporation 1997 Stock Option Plan (The “Stock Option Plan”). The Stock Option Plan provides for the granting of stock options and authorizes the issuance of common stock upon the exercise of such options for up to 115,000 shares of common stock to directors and employees of the Company.

     Under the Stock Option Plan awards may be granted in the form of incentive stock options or nonstatutory stock options, and are exercisable for up to ten years following the date such option awards are granted. Exercise prices of incentive stock options must be equal to or greater than 100% of the fair market value of the common stock on the grant date.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Stock Option Plan, Continued

     SFAS No. 123, “Accounting for Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, sets forth the method for recognition of cost of plans similar to those of the Company. As is permitted, management has elected to continue accounting for the plan under APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the stock option plan. However, under SFAS No. 123, the Company is required to make proforma disclosures as if cost had been recognized in accordance with the pronouncement. Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, the Company’s net earnings and basic earnings per common share and diluted earnings per common share for the three months and six months ended June 30, 2004 and 2003, respectively, would have been reduced to the proforma amounts indicated below:

     Accordingly, due to the initial phase-in period, the effects of applying this statement for proforma disclosures are not likely to be representative of the effects on reported net earnings for future years.

     The Financial Accounting Standards Board has proposed a pronouncement that requires all companies to recognize compensation expense related to the issuance of stock options. However, implementation of this pronouncement has been delayed through Congressional action. The ultimate outcome remains unknown until Congress reaches a consensus on how to account for stock options. If the Company is required to expense stock options it will have a negative impact on earnings, the effect of which is not yet determinable.

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FORM 10-Q, CONTINUED

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Impact of Inflation

     The primary impact which inflation has on the results of the Company’s operations is evidenced by its effects on interest rates. Interest rates tend to reflect, in part, the financial market’s expectations of the level of inflation and, therefore, will generally rise or fall as the level of expected inflation fluctuates. To the extent interest rates paid on deposits and other sources of funds rise or fall at a faster rate than the interest income earned on funds, loans or invested, net interest income will vary. Inflation also affects non-interest expenses as goods and services are purchased, although this has not had a significant effect on net earnings in recent years. If the inflation rate stays flat or increases slightly, the effect on profits is not expected to be significant.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company’s primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately affect both the level of income and expense recorded on a large portion of the Company’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 such as Federal funds sold or purchased and loans, securities and deposits as discussed in Item 2. Based upon the nature of the Company’s operations, the Company is not subject to foreign currency exchange or commodity price risk.

     Interest rate risk (sensitivity) management focuses on the earnings risk associated with changing interest rates. Management seeks to maintain profitability in both immediate and long term earnings through funds management/interest rate risk management. The Company’s rate sensitivity position has an important impact on earnings. Senior management of the Company meets monthly to analyze the rate sensitivity position. These meetings focus on the spread between the cost of funds and interest yields generated primarily through loans and investments.

     Managing interest rate risk is a very subjective exercise based on a wide variety of factors. This activity is based significantly on management’s subjective beliefs about future events (such as actions of the Federal Reserve Board and the conduct of competitors) and is never guaranteed.

     There have been no material changes in reported market risks during the six months ended June 30, 2004. Please refer to Item 2 of Part 1 of this Report for additional information related to market and other risks.

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FORM 10-Q, CONTINUED

Item 4. Controls and Procedures

     Within 90 days prior to the date of filing of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information that we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our Chief Executive Officer and Chief Financial Officer also concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our Company required to be included in our periodic SEC filings. In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business.

     There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.

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PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     None

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a)		Not Applicable
(b)		Not Applicable
(c)		Shares of the Company’s common stock were issued to Directors and/or Employees pursuant to the Company’s Stock Option Plan as follows:

		The aggregate proceeds of the shares sold were $43,183.80.
		There were no underwriters and no underwriting discounts or commissions. All sales were for cash.
		The Company believes that an exemption from registration of these shares was available to the Company in that the issuance thereof did not constitute a public offering of securities within the meaning of the Securities Act of 1933, as amended.
		The securities sold are not convertible.
		The proceeds of the sales are being used by the Company for general corporate purposes.
(d)		The only restrictions on working capital and/or dividends are those reported in Item 2 of Part I.
(e)		The Issuer repurchased 370 of its common shares in the second quarter of this fiscal year, which ended June 30, 2004.

*

The Issuer purchases shares of its stock from time to time in order to provide some liquidity in the stock. The Issuer does not solicit such purchases. There is no preset number of shares that the Issuer will purchase and no “plan” or “program” of purchases.

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PART II. OTHER INFORMATION, CONTINUED

Item 3. DEFAULTS UPON SENIOR SECURITIES

(a)		None
(b)		Not Applicable

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

(a)		The annual meeting of stockholders was held April 13, 2004.
(b)		The following persons were elected at the annual meeting of stockholders on April 13, 2004:

John Gregory Brock, Arthur J. Dyer, Rufus W. Gonder, George Boles Greene, and Robert W. Jones.

(c)

(1) Each of the above directors were elected by the following tabulation:

     The terms of office of the following directors were continued after the meeting:

		Dean I. Gillespie, Charles C. Jacobs, C. Levoy Knowles, J. Douglas Milner, John J. Savage, Jr. and Carl M. Stanley
(2)		The ratification of the Audit Committee’s selection of Maggart & Associates, P.C. as independent auditors for the Company for the year ending December 31, 2004 was as follows:

(d)

Not Applicable.

Item 5. OTHER INFORMATION

(a)		None
(b)		Not Applicable

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PART II. OTHER INFORMATION, CONTINUED

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1)		Exhibits 31.1 and 31.2 consist of Rule 13a-14(a)/15d-14(a) certifications.
(2)		Exhibit 32 consists of Section 1350 certifications.
(b)		No reports on Form 8-K have been filed during the quarter for which this Report is filed.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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