<PAGE>
 
                                                                    EXHIBIT 13
                                                                    ----------
 
 
                            SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                          1996       1995       1994       1993        1992
                        ---------  ---------  ---------  ---------  -----------
<S>                     <C>        <C>        <C>        <C>        <C>
                             (In thousands of dollars, except per share data)
Total interest
 income ..............  $ 39,629   $ 31,491   $ 23,625   $ 21,638    $ 21,414
Total interest
 expense .............    15,825     13,444      8,497      8,197       8,774
                        --------   --------   --------   --------    --------
Net interest income ..    23,804     18,047     15,128     13,441      12,640
Provision for loan
 losses...............    (2,973)    (1,424)      (994)      (834)     (1,611)
                        --------   --------   --------   --------    --------
Net interest income
 after provision for
 loan losses .........    20,831     16,623     14,134     12,607      11,029
Non-interest income:
  Investment
   securities gains ..        --          1         --         15          74
  Other income .......     3,303      2,493      2,368      1,951       1,291
Non-interest expense .   (14,800)   (11,257)    (9,491)    (8,035)     (6,876)
                        --------   --------   --------   --------    --------
Income before income
 taxes................     9,334      7,860      7,011      6,538       5,518
Income tax expense ...    (3,371)    (2,752)    (2,510)    (2,221)     (1,763)
                        --------   --------   --------   --------    --------
Net income before
 accounting change ...     5,963      5,108      4,501      4,317       3,755
Accounting change ....        --         --         --         52          --
                        --------   --------   --------   --------    --------
Net income ...........  $  5,963   $  5,108   $  4,501   $  4,265    $  3,755
                        ========   ========   ========   ========    ========
 
Per Share Data:
  Net income .........  $  13.28   $  11.45   $  10.16   $   9.56    $   8.41
  Dividends declared .  $   5.16   $   4.60   $   4.06   $   3.67    $   3.22
  Book value .........  $ 101.28   $  92.83   $  84.06   $  79.27    $  73.96
 
Financial Condition
 Data:
  Assets .............  $478,048   $420,581   $345,525   $313,577    $288,713
  Loans, net .........  $381,272   $293,834   $241,253   $192,127    $179,011
  Cash and investment
   securities.........  $ 73,713   $ 83,998   $ 85,460   $ 99,815    $ 92,966
  Federal funds sold .  $     --   $ 23,800   $  3,550   $  8,270    $  6,465
  Deposits ...........  $408,722   $365,951   $298,162   $267,281    $245,647
  Long-term debt .....  $ 13,194   $  3,448   $  3,688   $  3,914    $     --
  Other borrowed
   funds .............  $  3,272   $  4,784   $  3,879   $  5,644    $  7,775
  Shareholders'
   equity ............  $ 45,725   $ 41,074   $ 37,190   $ 35,046    $ 33,033
 
Selected Ratios:
  Interest rate
   spread ............      5.19%      4.60%      4.57%      4.46%       4.54%
  Net yield on
   interest-earning
   assets.............      5.68%      5.12%      4.96%      4.84%       5.07%
  Return on average
   assets.............      1.32%      1.35%      1.38%      1.41%       1.38%
  Return on average
   equity.............     13.23%     13.17%     12.32%     12.35%      11.54%
  Average equity to
   average assets ....      9.94%     10.24%     11.17%     11.43%      11.89%
  Dividend payout
   ratio..............     38.86%     40.17%     39.96%     38.39%      38.29%
  Ratio of
   nonperforming
   assets to total
   assets.............      0.49%      0.57%      0.40%      1.54%       1.58%
  Ratio of allowance
   for loan losses to
   nonperforming
   assets.............    315.27%    225.05%    247.99%     63.47%      55.36%
  Ratio of allowance
   for loan losses to
   total loans .......      1.87%      1.55%      1.39%      1.54%       1.35%
</TABLE>
 
 
                                       1
 
<PAGE>
 
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES
                IN FINANCIAL CONDITION AND RESULTS OF OPERATION
 
GENERAL
 
  Greene County Bancshares, Inc. (the "Company") was formed in 1985 and serves
as the bank holding company for Greene County Bank and Premier Bank of East
Tennessee (collectively, the "Banks"), which are Tennessee-chartered commercial
banks that conduct the principal business of the Company. The Company also
wholly owned American Fidelity Bank, whose assets were combined with Greene
County Bank during 1996. In addition, Greene County Bank wholly owns a finance
company, a mortgage company and, beginning in 1997, an acceptance corporation.
Each of these subsidiaries are expected to play a strategic role in the
Company's future growth.
 
  The principal business of the Company consists of accepting deposits from the
general public and investing these funds and borrowed funds primarily in loans
and, to a limited extent, securities available for sale or held to maturity.
Loans are originated by the Company within its primary market area of east
Tennessee and include commercial loans, commercial real estate loans, consumer
loans, real estate loans and single-family residential first mortgage loans.
 
  The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loans, investment
securities and other interest-earning securities and interest paid on deposits
and other interest-bearing liabilities. To a lesser extent, the Company's net
income also is affected by the level of non-interest expenses such as
compensation and employee benefits and Federal Deposit Insurance Corporation
premiums.
 
  The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
general credit needs of small businesses in the Company's market area,
competition among lenders, the level of interest rates and the availability of
funds. Deposit flows and costs of funds are influenced by prevailing market
rates of interest, primarily on competing investments, account maturities and
the levels of personal income and savings in the Company's market area.
 
ACQUISITIONS
 
  On January 1, 1996, the Company acquired 100% of the stock of Premier
Bancshares, Inc., the one-bank holding company of Premier Bank of East
Tennessee. At that time, Premier Bancshares, Inc. had consolidated assets of
approximately $24.2 million, deposits of approximately $22.0 million and
stockholders' equity of approximately $1.7 million. Premier Bancshares, Inc. was
subsequently merged into the Company, and Premier Bank of East Tennessee became
a wholly-owned subsidiary of the Company.
 
  As part of its strategic plan for continued growth, the Company also considers
selected acquisitions of branches on a periodic basis. Any acquisitions would be
subject to price, market and other issues as well as the regulatory capital
levels of the Company or its banks.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  LIQUIDITY. Liquidity refers to the ability or the financial flexibility to
manage future cash flows to meet the needs of depositors and borrowers and fund
operations. Maintaining appropriate levels of liquidity allows the Company to
have sufficient funds available for reserve requirements, customer demand for
loans, withdrawal of deposit balances and maturities of deposits and other
liabilities. The Company's primary source of liquidity is dividends paid by the
Banks. Applicable Tennessee statutes and regulations impose restrictions on the
amount of dividends that may be declared by the subsidiary Banks. Further, any
dividend payments are subject to the continuing ability of each of the Banks to
maintain their respective compliance with minimum federal regulatory
 
                                       2
 
<PAGE>
 
capital requirements and to retain their characterization under federal
regulations as "well-capitalized" institutions. In addition, the Company
maintains a line of credit of $20 million with the Federal Home Loan Bank of
Cincinnati and a $5 million line of credit with a correspondent bank.
 
  In 1996, operating activities of the Company provided $9,655,096 of cash
flows. Net income of $5,963,262, adjusted for non-cash operating activities,
including $2,973,193 in provision for loan losses and amortization and
depreciation of $1,096,120, provided the bulk of the cash generated from
operations.
 
  Investing activities, including lending, used $29,124,060 of the Company's
cash flow. Loans originated net of principal collected used $76,092,935 in
funds.
 
  Net additional cash inflows of $27,078,185 were provided by financing
activities. Net deposit growth accounted for $20,765,828 of the increase. Other
increases arose from net borrowings of long-term debt of $9,718,849 and proceeds
from issuance of common stock of $484,366. Offsetting these increases were a
decrease in securities sold under agreements to repurchase of $1,512,000, cash
dividends paid to shareholders of $2,328,858 and payments on related party notes
payable of $50,000.
 
  CAPITAL RESOURCES. The Company's capital position is reflected in its
shareholders' equity, subject to certain adjustments for regulatory purposes.
Shareholders' equity, or capital, is a measure of the Company's net worth,
soundness and viability. The Company continues to exhibit a strong capital
position while consistently paying dividends to its stockholders. Further, the
capital base of the Company allows it to take advantage of business
opportunities while maintaining the level of resources deemed appropriate by
management of the Company to address business risks inherent in the Company's
daily operations.
 
  Shareholders' equity on December 31, 1996 was $45,725,336, an increase of
$4,651,076, or 11.32%, from $41,074,260 on December 31, 1995. The increase in
shareholders' equity reflects net income for 1996 of $5,963,262 ($13.28 per
share) and proceeds and tax benefits from stock issuances during 1996 totaling
$1,308,595. This increase was offset in part by quarterly dividend payments
during 1996 totaling $2,328,858 ($5.16 per share) and the reduction in equity
associated with the decline in the value of securities available for sale of
$291,923.
 
  Risk-based capital regulations adopted by the Board of Governors of the
Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation
require bank holding companies and banks, respectively, to achieve and maintain
specified ratios of capital to risk-weighted assets. The risk-based capital
rules are designed to measure Tier 1 Capital and Total Capital in relation to
the credit risk of both on- and off-balance sheet items. Under the guidelines,
one of four risk weights is applied to the different on-balance sheet items.
Off-balance sheet items, such as loan commitments, are also subject to
risk-weighting after conversion to balance sheet equivalent amounts. All bank
holding companies and banks must maintain a minimum total capital to total
risk-weighted assets ratio of 8.00%, at least half of which must be in the form
of core, or Tier 1, capital (consisting of stockholders' equity, less goodwill).
At December 31, 1996, the Company and the Banks each satisfied their respective
minimum regulatory capital requirements, and each of the Banks was
"well-capitalized" within the meaning of federal regulatory requirements.
 
ASSET/LIABILITY MANAGEMENT
 
  The operations and profitability of the Company are largely impacted by
changes in interest rates and management's ability to control interest rate
sensitivity. Management believes that its asset/liability strategy reduces the
risk associated with fluctuation in interest rates. The Company strives to be
neither asset sensitive nor liability sensitive by relying upon a mix of fixed
rate and variable rate products. At December 31, 1996, approximately 45.4% of
the Company's gross loans had adjustable rates. The Company has a mixture of
fixed rate loans and loans tied to the Prime Rate, and this also applies to the
investment portfolio. It is management's belief that while this mixture may not
give maximum returns under certain market conditions, it can prevent severe
swings in earnings under other conditions. Management believes the Company is
somewhat asset sensitive; therefore, in a falling rate environment earnings will
tend to fall, while in a rising rate environment earnings will
 
                                       3
 
<PAGE>
 
tend to improve. Despite the implementation of strategies to achieve a matching
position of assets and liabilities and to reduce the exposure to fluctuating
interest rates, the results of operations of the Company will remain subject to
the level and movement of interest rates.
 
CHANGES IN RESULTS OF OPERATIONS
 
  NET INCOME. Net income for 1996 was $5,963,262, an increase of $854,822 or
16.7% as compared to net income of $5,108,440 for 1995. The increase resulted
primarily from an increase in net interest income of $5,757,262, or 31.9%, to
$23,804,336 in 1996 from $18,047,074 in 1995, and an increase in non-interest
income of $808,190, or 32.4%, to $3,302,650 in 1996 from $2,494,451 in 1995. The
increase in net interest income reflects the Company's continued growth in loan
production through its expanding branch network (primarily increases in
commercial, commercial real estate and consumer loans) as well as increases
arising from the Company's acquisition during 1996 of Premier Bank of East
Tennessee. These increases were offset in part by the $3,542,742, or 31.5%
increase in non-interest expense to $14,799,910 in 1996 from $11,257,168 in
1995, attributable primarily to increasing compensation and furniture and
equipment expenses associated with the growth of the Company's branch network.
 
  Net income for 1995 was $5,108,440, an increase of $607,044, or 13.5%, as
compared to net income of $4,501,396 in 1994. The increase was attributable to
an increase of $2,919,257, or 19.3%, in net interest income to $18,047,074 in
1995 from $15,127,817 in 1994. This increase arose from the Company's increase
in loan production and the general increase in loan rates during 1995. This
increase was offset in part by an increase in non-interest expense of
$1,766,088, or 18.6%, in 1995 as a result of the Company's increased personnel
and furniture and fixture costs associated with its branch expansion and
acquisition strategy.
 
  NET INTEREST INCOME. The largest source of earnings for the Company is net
interest income, which is the difference between interest income on
interest-earning assets and interest paid on deposits and other interest-bearing
liabilities. The primary factors which affect net interest income are changes in
volume and yields of earning assets and interest-bearing liabilities, which are
affected in part by management's responses to changes in interest rates through
asset/liability management. During 1996, net interest income was $23,804,336 as
compared to $18,047,074 in 1995, an increase of 31.9%. This increase was due
primarily to a $66,883,842 increase in average interest-earning assets during
1996 as compared to 1995, offset by a $60,730,007 increase in average interest
bearing liabilities during the same period to fund such growth. At the same
time, the Company's net interest margin increased in 1996 to 5.68% from 5.12% in
1995. This increase in net interest margin reflects the Company's focus on
commercial and commercial real estate loans, which generally have shorter terms
and are priced based upon the prime rate offered by New York banks as reported
in The Wall Street Journal, and its growing portfolio of consumer loans, which
are generally higher-yielding and less susceptible to yield curve compression.
Commercial and commercial real estate loans comprised, in the aggregate, 49.8%
of the Company's gross loan portfolio at December 31, 1996. Offsetting the
growth in interest income during 1996 was the related increase in interest
expense arising from the 18.4% increase in 1996 in the Company's average deposit
base, although this increase was mitigated by the reduction in the average cost
of deposits in 1996 to 4.24% from 4.30% in 1995 as customers shifted to
shorter-term deposit instruments that carry lower rates.
 
  Net interest income for 1995 increased $2,919,257, or 19.3%, to $18,047,074 in
1995 from $15,127,817 in 1994. The increase arose despite a slight decrease in
the ratio of average interest-earning assets to average interest-bearing
liabilities to 113.4% in 1995 from 114.0% in 1994, as the Company experienced a
significant shift in its lending portfolio to higher-yielding installment loans
and also experienced increased lending volume funded in part by a shift by the
Company away from an emphasis on lower-yielding securities investments. This
series of shifts is reflected in the Company's interest rate spread increasing
to 4.60% in 1995 from 4.57% in 1994, and the increase in the Company's net yield
on interest earning assets to 5.12% in 1995 from 4.96% in 1994.
 
                                       4
 
<PAGE>
 
  Average Balances, Interest Rates and Yields. Net interest income is affected
by (i) the difference between yields earned on interest-earning assets and rates
paid on interest-bearing liabilities ("interest rate spread") and (ii) the
relative amounts of interest-earning assets and interest-bearing liabilities.
The Company's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. When the total of interest-earning assets approximates or exceeds the
total of interest-bearing liabilities, any positive interest rate spread will
generate net interest income. Another indication of an institution's net
interest income is its "net yield on interest-earning assets," which is net
interest income divided by average interest-earning assets.
 
  The following table sets forth certain information relating to the Company's
consolidated average interest-earning assets and interest-bearing liabilities
and reflects the average yield on assets and average cost of liabilities for the
periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively, for
the periods presented. During the periods indicated, non-accruing loans, if any,
are included in the net loan category.
 
<TABLE>
<CAPTION>
                                1996                                1995                               1994
                   ---------------------------------  ---------------------------------  ---------------------------------
                     Average      Revenue/    Yield/    Average      Revenue/    Yield/    Average      Revenue/     Yield/
                     Balance       Expense     Rate     Balance       Expense     Rate     Balance       Expense      Rate
                   ------------  -----------  ------  ------------  -----------  ------  ------------  -----------  --------
<S>                <C>           <C>          <C>     <C>           <C>          <C>     <C>           <C>          <C>
INTEREST-EARNING
 ASSETS:
Loans
-----
 Commercial .....  $173,178,149  $14,967,334   8.64%  $141,349,273  $12,335,077   8.73%  $107,896,016  $ 8,829,755   8.18%
 Installment-
  net ...........   174,667,162   19,022,302  10.89%   130,530,479   13,469,095  10.32%   106,954,932    9,176,909   8.58%
 Fees on loans ..                  1,503,597                            954,685                          1,099,331
                   ------------  -----------          ------------  -----------          ------------  -----------
 
  Total loans
   (including
   fees).........  $347,845,311  $35,493,233  10.20%  $271,879,752  $26,758,857   9.84%  $214,850,948  $19,105,995   8.89%
 
Investment
----------
 securities
 ----------
 Taxable ........  $ 51,687,569  $ 3,125,592   6.05%  $ 59,939,744  $ 3,735,181   6.23%  $ 72,793,654  $ 3,740,550   5.14%
 Tax exempt .....    10,953,312      496,705   4.53%     9,117,893      369,795   4.06%    11,605,844      557,011   4.80%
                   ------------  -----------          ------------  -----------          ------------  -----------
 
  Total
   investment
   securities....  $ 62,640,881  $ 3,622,297   5.78%  $ 69,057,637  $ 4,104,976   5.94%  $ 84,399,498  $ 4,297,561   5.09%
  Other
   short-term
   investments...     8,906,587      513,326   5.76%    11,571,548      627,135   5.42%     5,660,533      221,094   3.91%
                   ------------  -----------          ------------  -----------          ------------  -----------
 
  Total interest-
   earning
   assets .......  $419,392,779  $39,628,856   9.45%  $352,508,937  $31,490,968   8.93%  $304,910,979  $23,624,650   7.75%
                                 -----------                        -----------                        -----------
 
Non-interest-
-------------
 earning assets
 --------------
 Cash and due
  from banks ....  $ 15,979,895                       $ 12,668,334                       $ 11,069,948
 Premises and
  equipment......     9,379,752                          6,916,037                          6,008,216
 Other, less
  allowance for
  loan losses ...     8,457,324                          6,649,556                          5,096,879
 
  Total non-
   interest-
   earning
   assets .......  $ 33,816,971                       $ 26,233,927                       $ 22,175,043
                   ------------                       ------------                       ------------
 
Total Assets ....  $453,209,750                       $378,742,864                       $327,086,022
                   ============                       ============                       ============
</TABLE>
 
 
                                                   (Continued on following page)
 
                                       5
 
<PAGE>
 
 
<TABLE>
<CAPTION>
                                     1996                               1995                               1994
                       ---------------------------------  ---------------------------------  ---------------------------------
                         AVERAGE      REVENUE/    YIELD/    AVERAGE      REVENUE/    YIELD/    AVERAGE      REVENUE/     YIELD/
                         BALANCE       EXPENSE     RATE     BALANCE       EXPENSE     RATE     BALANCE       EXPENSE      RATE
                       ------------  -----------  ------  ------------  -----------  ------  ------------  -----------  --------
<S>                    <C>           <C>          <C>     <C>           <C>          <C>     <C>           <C>          <C>
INTEREST-BEARING
 LIABILITIES:
Deposits
--------
 Savings, NOW
  accounts, and money
  markets............  $150,877,450  $ 3,536,624  2.34%   $130,045,108  $ 3,167,357  2.44%   $136,249,522  $ 3,178,767   2.33%
 Time deposits ......   207,440,687   11,641,179  5.61%    172,627,254    9,849,464  5.71%    120,926,616    4,851,789   4.01%
                       ------------  -----------          ------------  -----------          ------------  -----------
 
  Total deposits ....  $358,318,137  $15,177,803  4.24%   $302,672,362  $13,016,821  4.30%   $257,176,138  $ 8,030,556   3.12%
 
 Securities sold
  under repurchase
  agreement and
  short-term
  borrowings.........     4,931,307      227,613  4.62%      4,553,803      231,581  5.09%      5,607,061      227,879   4.06%
 Debt ...............     8,265,863      419,104  5.07%      3,559,135      195,492  5.49%      4,706,302      238,398   5.07%
                       ------------  -----------          ------------  -----------          ------------  -----------
 
  Total interest-
   bearing
   liabilities.......  $371,515,307  $15,824,520  4.26%   $310,785,300  $13,443,894  4.33%   $267,489,501  $ 8,496,833   3.18%
                                     -----------                        -----------                        -----------
 
Non-interest-bearing
--------------------
 liabilities
 -----------
 Demand deposits ....  $ 30,945,475                       $ 24,424,083                       $ 21,292,288
 Other liabilities ..     5,680,694                          4,745,198                          1,771,324
                       ------------                       ------------                       ------------
                       $ 36,626,169                       $ 29,169,281                       $ 23,063,612
Stockholders'
 equity .............    45,068,274                         38,788,283                         36,532,909
 
Total liabilities and
 stockholders'
 equity .............  $453,209,750                       $378,742,864                       $327,086,022
                       ============                       ============                       ============
 
Net interest income .  $             $23,804,336          $             $18,047,074                        $15,127,817
                                     ===========                        ===========                        ===========
 
MARGIN ANALYSIS:
 Interest rate
  spread ............                             5.19%                              4.60%                               4.57%
                                                  ====                               ====                                ====
 Net yield on
  interest-earning
  assets (net
  interest margin) ..                             5.68%                              5.12%                               4.96%
                                                  ====                               ====                                ====
</TABLE>
 
 
  Rate/Volume Analysis. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied in prior year volume). Changes attributable
to the combined impact of volume and rate have been separately identified.
 
<TABLE>
<CAPTION>
                                  1996 VS. 1995                      1995 VS. 1994
                        --------------------------------   --------------------------------
                                          RATE/    TOTAL                     RATE/     TOTAL
                        VOLUME    RATE    VOLUME  CHANGE   VOLUME    RATE    VOLUME   CHANGE
                        -------  -------  ------  -------  -------  -------  ------  ---------
<S>                     <C>      <C>      <C>     <C>      <C>      <C>      <C>     <C>
Interest Income
---------------
Loans net of unearned
 income...............  $7,478   $  983   $275    $8,736   $5,072   $2,040   $ 541    $7,653
Investment securities:
 Taxable .............    (515)    (111)    15      (611)    (662)     796    (140)       (6)
 Tax exempt ..........      73       44      9       126     (120)     (86)     19      (187)
Other short-term
 investments..........    (144)      40     (9)     (113)     231       86      89       406
                        ------   ------   ----    ------   ------   ------   -----    ------
 
  Total interest
   income.............   6,892      956    290     8,138    4,521    2,836     509     7,866
                        ------   ------   ----    ------   ------   ------   -----    ------
 
Interest Expense
----------------
 Savings, NOW
  accounts, and money
  market accounts ....     506     (119)   (19)      368     (146)     140      (6)      (12)
 Time deposits .......   1,986     (162)   (33)    1,791    2,073    2,048     876     4,997
 Short-term
  borrowings .........      20      (21)    (2)       (3)     (42)      57     (11)        4
 Debt ................     260      (15)   (20)      225      (57)      20      (5)      (42)
                        ------   ------   ----    ------   ------   ------   -----    ------
 
  Total interest
   expense............   2,772     (317)   (74)    2,381    1,828    2,265     854     4,947
                        ------   ------   ----    ------   ------   ------   -----    ------
 
Net interest income ..  $4,120   $1,273   $364    $5,757   $2,693   $  571   $(345)   $2,919
                        ======   ======   ====    ======   ======   ======   =====    ======
</TABLE>
 
 
                                       6
 
<PAGE>
 
  At December 31, 1996, loans, net of unearned income and allowance for loan
losses, were $381.3 million compared to $293.8 million at 1995 year end. The
increase is primarily due to increases in commercial and installment lending, as
well as the loans acquired through the acquisitions of Premier Bank. Average
loans, net of unearned interest, for 1996 were $347.8 million, up 27.9% from
1995's average of $271.9 million. The average outstanding loans for 1994 were
$214.9 million. The average growth in loans for the past three years can be
attributed to the market expansion into surrounding counties and indirect
financing. During 1996, the prime rate was essentially constant at 8.25%, down
slightly from 1995 levels but still well above the levels in 1994. This movement
in the prime rate basically accounts for the slight reduction in yield on
commercial loans in 1996 compared to 1995 and also the sizable increases in
overall loan yields in 1995 compared to 1994.
 
  Average investment securities for 1996 were $62.6 million, compared to $69.1
million in 1995, and $84.4 million in 1994. In 1996 the average yield on
investments was 5.78%, a decrease from 5.94% in 1995 and up from 5.09% in 1994.
This pattern generally reflects the trend in intermediate to longer-term
interest rates which are indicative of the maturities of the Company's
investment portfolio. Income provided by the investment portfolio in 1996 was
$3,622,297 as compared to $4,104,976 in 1995, and $4,297,561 in 1994. The
decline in investment securities from 1995 to 1996 was the result of funding the
large loan growth experienced by the Company. Income provided by federal funds
sold totaled $513,326 in 1996, compared to $627,135 in 1995 and $221,094 in
1994. The reduction in income from federal funds sold in 1996 compared to 1995
was primarily the result of decreases in volume as noted above. Average yields
on federal funds sold were 5.76% in 1996, 5.42% in 1995 and 3.91% in 1994.
 
  PROVISION FOR LOAN LOSSES. The Company's provision for loan losses increased
to $2,973,193 for 1996 from $1,423,656 for 1995. This increase was primarily in
response to management's concerns about the loss potential arising from the
increase in the Company's nonperforming assets to $2.3 million in 1996 from $2.1
million in 1995. These loans are comprised of a mixture of loan types.
Management attributes the increase in the amount of nonperforming loans to the
higher individual balances of individual commercial loans originated during 1996
and the increase in the consumer loan portfolio, primarily through Greene County
Bank's consumer finance company. Consumer loans are generally considered to
carry a higher risk of loss than commercial and housing loans.
 
  In addition, the increase reflects management's assessment of the risk of loss
in its loan portfolio, as indicated by its increasing amount of charge-offs.
Management anticipates a down turn in the business cycle and expects the trend
in net charge offs to continue. In 1996, the Company's net charge-offs increased
$521,000 or 241.2% to $737,000 from $216,000 in 1995. The Company's 1996 rate of
growth in net charge-offs exceeded the rate of growth in the Company's loan
portfolio during 1996, as indicated by the increase in the Company's ratio of
net charge-offs to average loans outstanding by approximately 2.6 times, to
0.21% in 1996 from 0.08% in 1995. These charge-offs were primarily consumer
loans that were originated during the period 1993 through 1996 and were both
secured and unsecured. The Company continues to make these types of loans and
anticipates that the rate of charge-offs in connection with these loans will
continue to increase, particularly with an anticipated down turn in the economy.
The ratio of loans past due to total gross loans for consumer loans originated
by the Company's finance company subsidiary increased from 5.03% in 1995 to
7.61% in 1996. Finally, the Company has identified $6,945,000 in "watch list"
loans that, although currently performing, have characteristics that require
closer supervision by management. To be placed on the "watch list," a borrower
may be experiencing adverse legal proceedings or adverse trends in financial
position.
 
  The Company's provision for loan losses in 1995 increased by $429,656, or
43.2%, to $1,423,656 in 1995 from $994,000 in 1994. This increase reflects the
Company's more aggressive identification of potential problem loans and the
inclusion of the risks associated with such loans in the determination of the
Company's allowance for losses. In addition, the provision reflects the
perceived risk associated with commercial loans originated by the Company which
have higher individual balances and are more susceptible to delinquency than
mortgage installment and installment real estate loans. This approach is
consistent with the Company's concurrent imposition during 1995 of stricter loan
underwriting standards. From 1994 to 1995, nonperforming assets increased
$678,000, or 48.8%, from $1.4 million in 1994 to $2.1 million in 1995.
 
                                       7
 
<PAGE>
 
  NON-INTEREST INCOME. Income that is not related to interest-earning assets,
consisting primarily of service charges, commissions and fees, has become more
important as increases in levels of interest-bearing deposits and other
liabilities make it more difficult to maintain interest rate spreads.
 
  Total non-interest income for 1996 was $3,302,650 as compared to $2,494,451 in
1995 and $2,368,981 in 1994. The largest components of non-interest income are
service fees on deposit accounts and service charges and commissions, which
totaled $2,593,594 in 1996, $1,861,244 in 1995 and $1,918,156 in 1994. The
increase from 1995 to 1996 reflects management's focus on the generation of fee
income and also fee income generated by Premier Bank since its acquisition by
the Company effective January 1, 1996.
 
  NON-INTEREST EXPENSE. Control of non-interest expense also is an important
aspect in managing net income. Non-interest expense includes personnel,
occupancy, and other expenses such as data processing, printing and supplies,
legal and professional fees, postage, Federal Deposit Insurance Corporation
assessment, etc. Total non-interest expense was $14,799,910 in 1996, compared to
$11,257,168 in 1995 and $9,491,080 in 1994.
 
  Personnel costs are the primary element of the Company's non-interest
expenses. In 1996 salaries and benefits represented $7,893,635 or 53.3% of total
non-interest expenses. This was an increase of $2,067,071 or 35.5% over 1995's
total of $5,826,564. Personnel costs for 1995 increased $1,075,972 or 22.65%
over 1994's total of $4,750,592. These increases were due to opening new
branches requiring increased staff levels and increased employee benefit costs,
including health insurance and retirement benefit costs, as well as the
acquisition of Premier Bank. Nineteen full-time equivalent employees were added
as a result of the acquisition of Premier Bank. Overall, the number of full-time
equivalent employees at December 31, 1996 was 233 versus 182 at December 31,
1995, an increase of 28%.
 
  Occupancy and furniture and equipment expense exhibited the same upward trend
during the past three years as did personnel costs due to essentially the same
reasons referenced above. At December 31, 1996, the Company had 27 branches,
including the sixth office of a finance company subsidiary of Greene County Bank
which opened in Bristol, Tennessee, effective January 1, 1997, compared to 18
branches at December 31, 1995.
 
  Assessments by the FDIC decreased from $616,859 in 1994 to $346,501 in 1995
and to $6,187 in 1996. These premiums have been consistently reduced and
essentially eliminated for well-capitalized banks such as those owned by the
Company. For 1997, the FDIC premiums for well-capitalized banks are calculated
at 1.296 basis points on the assessable deposit base. The Company estimates its
total premiums for 1997 at approximately $52,000 based on its deposit levels at
December 31, 1996.
 
  Other expenses increased by $1,445,639, or 43.6%, from 1995 to 1996,
representing increases in dealer commissions on indirect loans acquired and
expenses related to the Company's significant market expansion activities,
including the acquisition of Premier Bank of East Tennessee.
 
CHANGES IN FINANCIAL CONDITION
 
  Total assets at December 31, 1996 were $478.0 million, an increase of $57.5
million, or 13.6%, over 1995's year end total assets of $420.6 million. Average
assets for 1996 were $453.2 million, an increase of $74.5 million or 19.7% over
1995 average assets of $378.7 million. This increase is the result of normal
growth and the acquisition of Premier Bank effective January 1, 1996.
Approximately $24.2 million of assets were added as a result of the Premier Bank
acquisition. Asset growth was funded primarily by increases in deposits,
approximately $22.0 million of which were acquired via the Premier Bank
acquisition. Return on average assets was 1.32% in 1996, as compared to 1.35% in
1995 and 1.38% in 1994.
 
  Earning assets consist of loans, investment securities and short-term
investments that earn interest. Average earning assets during 1996 were $419.4
million, an increase of 19.0% from an average of $352.5 million in 1995.
 
                                       8
 
<PAGE>
 
  Non-performing loans include non-accrual and classified loans. The Company has
a policy of placing loans 90 days delinquent in non-accrual status and charging
them off at 120 days past due. Other loans past due that are well secured and in
the process of collection continue to be carried on the Company's balance sheet.
The Company has aggressive collection practices in which senior management is
much involved.
 
  The Company maintains an investment portfolio to provide liquidity and
earnings. Investments at year end 1996 with an amortized cost of $52.5 million
had a market value of $52.3 million. At year end 1995, investments with an
amortized cost of $69.9 million had a market value of $70.3 million.
 
  The funds to support the Company's asset growth over the past three years have
been provided by increased deposits, which were $408.7 million at December 31,
1996. This represents an 11.7% increase from the deposits at year end 1995 of
$366.0 million. Excluding the approximate $22.0 million in deposits acquired via
the Premier Bank acquisition, deposits increased $20.7 million, or 5.7%. The
increase is primarily the result of the Company's aggressive efforts to attract
new deposit customers.
 
  In 1996, demand deposit balances increased 22.4% from 1995. Demand deposit
balances were $33.9 million and $27.7 million at December 31, 1996 and 1995,
respectively.
 
  Average interest-bearing deposits increased $55.7 million, or 18.4%, in 1996.
In 1995 average interest-bearing deposits increased $45.5 million or 17.7% over
1994. These increases in deposits are reflective of the Company's aggressive
efforts to attract new deposit customers for the purpose of funding various
lending programs.
 
  Interest paid on deposits in 1996 totaled $15,177,803 reflecting a 4.24% cost
on average interest-bearing deposits of $358.3 million. In 1995, interest of
$13,016,821 was paid at a cost of 4.30% on average deposits of $302.7 million.
In 1994, interest of $8,030,556 was paid at a cost of 3.12% on average deposits
of $257.2 million.
 
INTEREST RATE SENSITIVITY
 
  Deregulation of interest rates and more volatile short-term, interest-bearing
deposits have created a need for shorter maturities of earning assets. An
increasing percentage of commercial and installment loans are being made with
variable rates or shorter maturities to increase liquidity and interest rate
sensitivity. The difference between interest sensitive asset and interest
sensitive liability repricing within time periods is referred to as the interest
rate sensitivity gap. Gaps are identified as either positive (interest sensitive
assets in excess of interest sensitive liabilities) or negative (interest
sensitive liabilities in excess of interest sensitive assets). The Company
currently believes it is slightly asset sensitive. The Company considers certain
demand and time deposits as having longer maturities than what may be considered
typical for the industry and, thus, its liabilities are not as sensitive to
changes in interest rates. On December 31, 1996, the Company had a positive
cumulative one-year gap position of $82.8 million, indicating that while $282.2
million in assets were repricing, only $199.4 million in liabilities would
reprice in the same time frame.
 
                                       9
 
<PAGE>
 
  The following table reflects the Company's interest rate gap position at
December 31, 1996. This table represents a static point in time and does not
consider other variables such as changing relationships or interest rate levels.
 
<TABLE>
<CAPTION>
                     UP TO    (GREATER THAN) THREE MONTHS  (GREATER THAN) ONE YEAR  (GREATER THAN) THREE YEARS
                     THREE        BUT (LESS THAN) ONE       BUT (LESS THAN) THREE      BUT (LESS THAN) FIVE
                    MONTHS               YEAR                       YEARS                     YEARS
                   SENSITIVE           SENSITIVE                  SENSITIVE                 SENSITIVE
                   ---------  ---------------------------  -----------------------  --------------------------
<S>                <C>        <C>                          <C>                      <C>
Interest-Earning
 Assets:
  Loans, net of
   unearned
   income........  $133,497           $114,099                   $ 84,800                    $39,935
  Investment
   securities ...    28,572              6,075                      9,675                      4,174
                   --------           --------                   --------                    -------
 
    Total
     interest-
     earning
     assets......  $162,069           $120,174                   $ 94,475                    $44,109
                   --------           --------                   --------                    -------
 
 
Interest-Bearing
 Liabilities:
  Savings and
   time deposits   $ 60,019           $112,066                   $ 74,774                    $ 9,253
  Money market
   and
   transaction
   accounts .....                       14,771                     64,491                     15,710
  Debt and other
   borrowed money
    .............     4,326              4,979                      1,480                        705
  Securities sold
   under
   agreement to
   repurchase....     3,272                 --                         --                         --
                   --------           --------                   --------                    -------
 
    Total
     interest-bearing
     liabiliti es
      ...........  $ 67,617           $131,816                   $140,745                    $25,668
                   --------           --------                   --------                    -------
 
Interest
 sensitivity
 gap ............  $ 94,452           $(11,642)                  $(46,270)                   $18,441
                   ========           ========                   ========                    =======
 
Cumulative
 interest
 sensitive gap ..  $ 94,452           $ 82,810                   $ 36,540                    $54,981
                   ========           ========                   ========                    =======
 
Interest
 sensitive gap to
 total assets ...     19.76%             (2.44)%                    (9.68)%                     3.86%
                   ========           ========                   ========                    =======
 
Cumulative
 interest
 sensitive gap to
 total assets ...     19.76%             17.32 %                     7.64 %                    11.50%
                   ========           ========                   ========                    =======
<CAPTION>
                   (GREATER THAN) FIVE YEARS  (GREATER THAN) 10 YEARS
                      BUT (LESS THAN) 10        BUT (LESS THAN) 20
                             YEARS                     YEARS           (GREATER THAN) 20 YEARS
                           SENSITIVE                 SENSITIVE                SENSITIVE           TOTAL
                   -------------------------  -----------------------  -----------------------  -----------
<S>                <C>                        <C>                      <C>                      <C>
Interest-Earning
 Assets:
  Loans, net of           $ 11,812                   $ 4,430                  $    30            $388,603
   unearned
   income........
  Investment
   securities ...            1,118                       508                    2,259              52,381
                          --------                   -------                  -------            --------
 
    Total
     interest-            $ 12,930                   $ 4,938                  $ 2,289            $440,984
     earning              --------                   -------                  -------            --------
     assets......
 
 
Interest-Bearing
 Liabilities:
  Savings and             $  8,035                   $    --                  $    --            $264,147
   time deposits
  Money market              15,710                        --                       --             110,682
   and
   transaction
   accounts .....
  Debt and other             2,561                     1,755                       --              15,806
   borrowed money
    .............
  Securities sold
   under                        --                        --                       --               3,272
   agreement to           --------                   -------                  -------            --------
   repurchase....
 
    Total
     interest-bearing     $ 26,306                   $ 1,755                  $    --            $393,907
     liabiliti es         --------                   -------                  -------            --------
      ...........
 
Interest
 sensitivity              $(13,376)
 gap ............         ========                   $ 3,183                  $ 2,289            $ 47,077
                                                     =======                  =======            ========
 
Cumulative
 interest                 $ 41,605
 sensitive gap ..         ========                   $44,788                  $47,077            $ 88,682
                                                     =======                  =======            ========
 
Interest
 sensitive gap to            (2.80)%
 total assets ...         ========                      0.67%                    0.48%               9.85%
                                                     =======                  =======            ========
 
Cumulative
 interest                     8.70 %                    9.37%                    9.85%
 sensitive gap to         ========                   =======                  =======
 total assets ...
</TABLE>
 
 
---------
 
(1) The Company has presented substantial balances of deposits as non-rate
    sensitive and/or not repricing within one year.
 
  The above table reflects a positive cumulative gap position in all maturity
classifications. This is the result of core deposits being used to fund shorter
term interest earning assets, such as loans and investment securities. A
positive cumulative gap position implies that interest earning assets (loans and
investments) will reprice at a faster rate than interest-bearing liabilities
(deposits). In a rising rate environment, this position will generally have a
positive effect on earnings, while in a falling rate environment this position
will generally have a negative effect on earnings. Other factors, however,
including the speed at which assets and liabilities reprice in response to
changes in market rates and the interplay of competitive factors, can also
influence the overall impact on net income of changes in interest rates.
Management believes that a rapid, significant and prolonged increase or decrease
in rates could have a substantial adverse impact on the Company's net interest
margin.
 
                                       10
 
<PAGE>
 
INFLATION
 
  The effect of inflation on financial institutions differs from its impact on
other types of businesses. Since assets and liabilities of banks are primarily
monetary in nature, they are more affected by changes in interest rates than by
the rate of inflation.
 
  Inflation generates increased credit demand and fluctuation in interest rates.
Although credit demand and interest rates are not directly tied to inflation,
each can significantly impact net interest income. As in any business or
industry, expenses such as salaries, equipment, occupancy, and other operating
expenses also are subject to the upward pressures created by inflation.
 
  Since the rate of inflation has been stable during the last several years, the
impact of inflation on the earnings of the Company has been insignificant.
 
EFFECT OF NEW ACCOUNTING STANDARDS
 
  In February 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards ("SFAS") No. 128, Earnings Per Share," which (i) replaces
the presentation of primary earnings per share ("EPS") with a presentation of
basic EPS; (ii) requires dual representation of basic and diluted EPS on the
face of the consolidated statements of income regardless of whether basic and
diluted EPS are the same; and (iii) requires a reconciliation of the numerator
and denominator used in computing basic and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application is not permitted. SFAS No. 128
requires restatement of all prior-period EPS data presented.
 
                                       11
 
<PAGE>
 
              [COOPERS & LYBRAND, L.L.P. LETTERHEAD APPEARS HERE]
 
REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors
Greene County Bancshares, Inc.
 
We have audited the accompanying consolidated balance sheets of Greene County
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Greene County
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
 
                                         /s/ Coopers & Lybrand, L.L.P.
                                         COOPERS & LYBRAND L.L.P.
 
Knoxville, Tennessee
January 27, 1997
<PAGE>
 
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
 
 
<TABLE>
<CAPTION>
                                                       1996           1995
                                                   ------------  --------------
ASSETS
<S>                                                <C>           <C>
Cash and due from banks .........................  $ 21,332,328   $ 13,723,107
Securities available-for-sale (Note 3) ..........    42,924,649     60,899,628
Securities held-to-maturity--approximate market
 value of $9,417,689 and $9,354,100 in 1996 and
 1995, respectively (Note 3) ....................     9,456,437      9,375,472
Federal funds sold ..............................            --     23,800,000
 
Loans, net (Notes 4 and 5) ......................   381,272,115    293,834,416
 
Premises and equipment, net (Note 6) ............     9,839,369      8,339,400
Accrued interest receivable .....................     4,090,877      3,539,110
Deferred income taxes (Note 12) .................     1,968,356      1,455,094
Cash surrender value of life insurance
 contracts ......................................     3,750,672      3,580,200
Other assets ....................................     3,413,503      2,034,451
                                                   ------------   ------------
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                   $478,048,306   $420,580,878
                                                   ============   ============
</TABLE>
 
 
  The accompanying notes are an integral part of these consolidated financial
statements.
 
 
                                 Facing Page 2
<PAGE>
 
 
<TABLE>
<CAPTION>
                                                      1996            1995
                                                  -------------  --------------
      LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                               <C>            <C>
Deposits (Note 7):
  Noninterest bearing demand deposits ..........  $ 33,892,483    $ 27,656,469
  Interest bearing accounts:
    NOW ........................................    81,334,083      73,327,447
    Money market transaction ...................    29,348,009      28,199,189
    Savings ....................................    46,170,980      39,792,797
    Certificates of deposit $100,000 and over ..    46,118,347      33,222,712
    Other certificates of deposit ..............   171,857,795     163,751,974
                                                  ------------    ------------
      Total deposits ...........................   408,721,697     365,950,588
                                                  ------------    ------------
Securities sold under agreements to repurchase .     3,272,000       4,784,000
Accrued interest and other liabilities .........     4,523,533       4,472,328
Related party notes payable (Note 5) ...........     2,611,418              --
Long-term debt (Note 8) ........................    13,194,322       3,448,172
                                                  ------------    ------------
 
      Total liabilities ........................   432,322,970     378,655,088
                                                  ------------    ------------
 
Common stock subject to rescission (Note 19) ...            --         851,530
                                                  ------------    ------------
 
Commitments and contingencies (Notes 9, 11, 13,
 14 and 17)
 
Shareholders' equity (Note 10):
  Common stock, par value $10, authorized
   1,000,000 shares; issued and outstanding
   451,485 and 442,444 shares in 1996 and 1995,
   respectively.................................     4,514,850       4,424,440
  Paid in capital ..............................     4,132,909       2,914,724
  Retained earnings ............................    37,133,040      33,498,636
  Net unrealized (depreciation) appreciation on
   available-for-sale securities, net of income
   tax expense (benefit) of $(33,186) and
   $145,291 in 1996 and 1995, respectively .....       (55,463)        236,460
                                                  ------------    ------------
 
      Total shareholders' equity ...............    45,725,336      41,074,260
                                                  ------------    ------------
                                                  $478,048,306    $420,580,878
                                                  ============    ============
</TABLE>
 
                                       2
<PAGE>
 
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                         1996          1995           1994
                                      ------------  ------------  -------------
<S>                                   <C>           <C>           <C>
Interest income:
  Loans ............................  $35,493,233   $26,758,857    $19,105,995
  Securities available-for-sale ....    3,111,304     3,680,264      2,380,783
  Securities held-to-maturity ......      510,993       424,712      1,916,778
  Federal funds sold ...............      513,326       627,135        221,094
                                      -----------   -----------    -----------
    Total interest income ..........   39,628,856    31,490,968     23,624,650
                                      -----------   -----------    -----------
Interest expense:
  Deposit accounts .................   15,177,803    13,016,821      8,030,556
  Securities sold under agreements
   to repurchase ...................      227,613       231,581        227,879
  Related party notes payable ......      160,718            --             --
  Long-term debt ...................      258,386       195,492        238,398
                                      -----------   -----------    -----------
    Total interest expense .........   15,824,520    13,443,894      8,496,833
                                      -----------   -----------    -----------
    Net interest income ............   23,804,336    18,047,074     15,127,817
Provision for loan losses ..........    2,973,193     1,423,656        994,000
                                      -----------   -----------    -----------
 
Net interest income after provision
 for loan losses ...................   20,831,143    16,623,418     14,133,817
                                      -----------   -----------    -----------
Noninterest income:
  Service fees on deposit accounts .    1,316,334     1,155,621        971,878
  Service charges and commissions ..    1,277,260       705,623        946,278
  Net realized gains on sales of
   available-for-sale securities ...           --         1,373             --
  Net realized gains on calls of
   held-to-maturity securities .....           --         4,000             --
  Other income .....................      709,056       627,834        450,825
                                      -----------   -----------    -----------
    Total noninterest income .......    3,302,650     2,494,451      2,368,981
                                      -----------   -----------    -----------
Noninterest expense:
  Salaries and benefits ............    7,893,635     5,826,564      4,750,592
  Occupancy expenses ...............    1,057,418       815,506        757,278
  Furniture and equipment expense ..    1,315,721     1,048,160        707,137
  (Gain)/Loss on other real estate
   owned............................     (240,252)      (97,637)       141,950
  Net realized losses on sales of
   available-for-sale securities ...        3,488            --         85,435
  Federal insurance premiums .......        6,187       346,501        616,859
  Other expenses ...................    4,763,713     3,318,074      2,431,829
                                      -----------   -----------    -----------
 
    Total noninterest expense ......   14,799,910    11,257,168      9,491,080
                                      -----------   -----------    -----------
 
Income before income taxes .........    9,333,883     7,860,701      7,011,718
 
Income tax expense .................    3,370,621     2,752,261      2,510,322
                                      -----------   -----------    -----------
 
    Net income .....................  $ 5,963,262   $ 5,108,440    $ 4,501,396
                                      ===========   ===========    ===========
 
Per share of common stock:
    Net income .....................  $     13.28   $     11.45    $     10.16
                                      ===========   ===========    ===========
</TABLE>
 
 
 
  The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       3
<PAGE>
 
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                                                NET UNREALIZED
                                                                 APPRECIATION
                                                              (DEPRECIATION) ON
                          COMMON     PAID IN     RETAINED     AVAILABLE-FOR-SALE
                          STOCK      CAPITAL     EARNINGS         SECURITIES          TOTAL
                        ----------  ----------  ------------  ------------------  --------------
<S>                     <C>         <C>         <C>           <C>                 <C>
December 31, 1993 ....  $4,421,000  $2,887,694  $27,736,810       $      --        $35,045,504
  Adoption of FASB
   115, net of tax ...          --          --           --        (363,283)          (363,283)
  Issuance of 344
   shares.............       3,440      27,030           --              --             30,470
  Net income .........          --          --    4,501,396              --          4,501,396
  Change in unrealized
   depreciation, net
   of tax ............          --          --           --        (227,972)          (227,972)
  Dividends paid
   ($4.06 per share) .          --          --   (1,795,818)             --         (1,795,818)
                        ----------  ----------  -----------       ---------        -----------
December 31, 1994 ....   4,424,440   2,914,724   30,442,388        (591,255)        37,190,297
  Net income .........          --          --    5,108,440              --          5,108,440
  Change in unrealized
   appreciation, net
   of tax ............          --          --           --         827,715            827,715
  Dividends paid
   ($4.60 per share) .          --          --   (2,052,192)             --         (2,052,192)
                        ----------  ----------  -----------       ---------        -----------
December 31, 1995 ....   4,424,440   2,914,724   33,498,636         236,460         41,074,260
  Net income .........          --          --    5,963,262              --          5,963,262
  Change in unrealized
   appreciation, net
   of tax ............          --          --           --        (291,923)          (291,923)
  Dividends paid
   ($5.16 per share) .          --          --   (2,328,858)             --         (2,328,858)
  Proceeds from stock
   rescission offer,
   net of expenses ...      49,340     692,085           --              --            741,425
  Issuance of 4,107
   shares.............      41,070     443,296           --              --            484,366
  Tax benefit from
   exercise of
   non-incentive stock
   options............          --      82,804           --              --             82,804
                        ----------  ----------  -----------       ---------        -----------
December 31, 1996 ....  $4,514,850  $4,132,909  $37,133,040       $ (55,463)       $45,725,336
                        ==========  ==========  ===========       =========        ===========
</TABLE>
 
 
 
 
 
 
  The accompanying notes are an integral part of these consolidated financial
statements.
 
                                       4
<PAGE>
 
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
 
<TABLE>
<CAPTION>
                                      1996           1995            1994
                                  -------------  -------------  ---------------
<S>                               <C>            <C>            <C>
Net cash provided by operating
 activities:
  Net income ...................  $  5,963,262   $  5,108,440    $  4,501,396
  Adjustments to reconcile net
   income to net cash provided
   by operating activities:
    Provision for loan losses ..     2,973,193      1,423,656         994,000
    Provision for depreciation
     and amortization ..........     1,096,120        651,997         523,416
    Amortization of investment
     security premiums, net of
     accretion..................       515,996        368,321         554,152
    Net realized gains on calls
     of securities
     held-to-maturity...........            --         (4,000)             --
    Net realized (gains) losses
     on available-for-sale
     securities.................         3,488         (1,373)         85,435
    (Gain) loss on other real
     estate owned ..............      (240,252)       (97,637)        141,950
    Increase in cash surrender
     value of life insurance
     contracts..................      (170,472)      (171,987)        (77,183)
    Deferred income
     tax benefit ...............      (677,653)      (568,718)       (349,744)
    Change in accrued income and
     other assets ..............     1,238,459     (1,379,867)       (428,505)
    Change in accrued interest
     and other liabilities .....    (1,047,045)     1,035,754         914,910
                                  ------------   ------------    ------------
      Net cash provided by
       operating activities ....     9,655,096      6,364,586       6,859,827
                                  ------------   ------------    ------------
Cash flows from investing
 activities:
  Acquisition of bank, net of
   acquired cash ...............     1,022,043             --              --
  Purchases of
   available-for-sale
   securities ..................   (14,766,578)   (21,848,101)    (16,191,440)
  Proceeds from sales of
   available-for-sale
   securities ..................     2,000,000        787,017      20,977,519
  Proceeds from maturities of
   available-for-sale
   securities ..................    36,488,422     21,991,907       2,518,207
  Purchases of securities
   held-to-maturity.............    (6,815,907)    (2,909,704)     (1,628,389)
  Proceeds from maturities of
   securities held-to-maturity .     6,748,835      3,050,011      11,051,414
  Net decrease in interest
   bearing deposits in financial
   institutions.................            --             --         100,049
  Net originations of loans ....   (76,092,935)   (53,970,350)    (49,467,022)
  Proceeds from sales of other
   real estate owned ...........       337,605        148,400          59,284
  Fixed asset additions ........    (1,845,545)    (1,979,839)     (2,057,501)
  Net decrease (increase) in
   federal funds sold ..........    23,800,000    (20,250,000)      4,720,000
                                  ------------   ------------    ------------
      Net cash used by investing
       activities...............   (29,124,060)   (74,980,659)    (29,917,879)
                                  ------------   ------------    ------------
</TABLE>
 
 
                                   (continued)
 
 
                                       5
<PAGE>
 
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
<TABLE>
<CAPTION>
                                        1996          1995           1994
                                    -------------  ------------  --------------
<S>                                 <C>            <C>           <C>
Cash flows from financing
 activities:
  Net increase in demand deposits,
   NOW, money market and savings
   accounts.......................    11,056,917    11,135,801      1,434,930
  Net increase in certificates of
   deposit........................     9,708,911    56,652,831     29,445,945
  Increase (decrease) in
   securities sold under
   agreements to repurchase ......    (1,512,000)      905,000     (1,766,000)
  Payments on related party notes
   payable........................       (50,000)           --             --
  Payments on long-term debt .....   (19,781,151)     (239,537)    (1,726,033)
  Borrowings of long-term debt ...    29,500,000            --      1,500,000
  Proceeds from issuance and sale
   of common stock ...............       484,366            --         30,470
  Proceeds from sale of common
   stock subject to rescission ...            --       851,530             --
  Cash dividends paid ............    (2,328,858)   (2,052,192)    (1,795,818)
                                    ------------   -----------    -----------
    Net cash provided by financing
     activities...................    27,078,185    67,253,433     27,123,494
                                    ------------   -----------    -----------
Net increase (decrease) in cash
 and cash equivalents ............     7,609,221    (1,362,640)     4,065,442
Cash and cash equivalents at
 beginning of year ...............    13,723,107    15,085,747     11,020,305
                                    ------------   -----------    -----------
Cash and cash equivalents at end
 of year .........................  $ 21,332,328   $13,723,107    $15,085,747
                                    ============   ===========    ===========
</TABLE>
 
                                       6
<PAGE>
 
GREENE COUNTY BANCSHARES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
  The accounting policies of Greene County Bancshares, Inc. (the Corporation)
and subsidiaries conform to generally accepted accounting principles and to
general practices of the banking industry. The following is a summary of the
more significant policies. Certain reclassifications have been made in the 1995
and 1994 consolidated financial statements and accompanying notes to conform
with the 1996 presentation.
 
  PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of Greene County Bancshares, Inc. and its wholly owned
subsidiaries, Greene County Bank and Premier Bank of East Tennessee (the Banks).
Superior Financial, Inc. and GCB Acceptance, Inc., consumer finance companies,
are wholly owned subsidiaries of Greene County Bank. Superior Mortgage, Inc., a
mortgage company, is also a wholly owned subsidiary of Greene County Bank. All
material intercompany balances and transactions have been eliminated in
consolidation.
 
  CASH AND DUE FROM BANKS -- For purposes of reporting cash flows, cash and due
from banks include cash on hand, cash items in the process of collection and
amounts due from banks with a maturity of less than three months.
 
  The Banks are required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The average reserve balance
maintained in accordance with such requirements was approximately $5,594,000 and
$4,563,000 for the years ended December 31, 1996 and 1995, respectively.
 
  INVESTMENT SECURITIES -- Effective January 1, 1994, the Corporation adopted
the provisions of Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain
Investments in Debt and Equity Securities. Investments in certain debt and
equity securities are classified as either Held-to-Maturity (reported at
amortized cost), Trading (reported at fair value with unrealized gains and
losses included in earnings), or Available-for-Sale (reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity). During 1995, the Corporation made a one time
reclassification of many of its securities held from the held-to-maturity
category to the available-for-sale category. The amortized cost of the
securities transferred was $23,125,015 with unrealized gains of $297,357 and
unrealized losses of $16,546.
 
  Premiums and discounts on investment securities are recognized in interest
income on a method which approximates the level yield method over the period to
maturity.
 
  Gains and losses from sales of investment securities are recognized at the
time of sale based upon specific identification of the security sold.
 
  LOANS -- Loans are stated at principal amounts outstanding, reduced by
unearned income and an allowance for loan losses.
 
  Interest income on installment loans is recognized in a manner that
approximates the level yield method when related to the principal amount
outstanding. Interest on other loans is calculated using the simple interest
method on the principal amount outstanding.
 
 
                                       7
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
 
  The Banks provide an allowance for loan losses and include in operating
expenses a provision for loan losses determined by management. Management's
periodic evaluation of the adequacy of the allowance is based on the Banks' past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrowers' experience, estimated value of any
underlying collateral, and current economic conditions. Management believes it
has established the allowance in accordance with generally accepted accounting
principles and has taken into account the views of its regulators and the
current economic environment.
 
  The Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure, on January 1, 1995. Under the new standards, a loan is considered
impaired, based on current information and events, if it is probable that the
Corporation will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
Uncollateralized loans are measured for impairment based on the present value of
expected future cash flows discounted at the historical effective interest rate,
while all collateral-dependent loans are measured for impairment based on the
fair value of the collateral. The adoption of SFAS 114 and 118 resulted in no
additional provision for credit losses at January 1, 1995.
 
  At December 31, 1996 and 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS 114 was approximately
$5,996,000 and $3,653,000, respectively, and these loans had a corresponding
valuation allowance of $891,700 and $548,000, respectively. The impaired loans
at December 31, 1996 and 1995, were measured for impairment using the fair value
of the collateral as all of these loans were collateral dependent. For the years
ended December 31, 1996 and 1995, the average recorded investment in impaired
loans was approximately $4,353,000 and $3,550,000, respectively.
 
  The Corporation uses several factors in determining if a loan is impaired
under SFAS No. 114. The internal asset classification procedures include a
thorough review of significant loans and lending relationships and include the
accumulation of related data. This data includes loan payment status, borrowers'
financial data and borrowers' operating factors such as cash flows, operating
income or loss, etc.
 
  Increases and decreases in the allowance from loan losses due to changes in
the measurement of the impaired loans are included in the provision for credit
losses. Loans continue to be classified as impaired unless they are brought
fully current and the collection of scheduled interest and principal is
considered probable.
 
  When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
 
  Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual if repayment in full of principal and/
or interest is in doubt.
 
  Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
 
 
                                       8
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
 
  While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding, except in the case of
loans with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectibility of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan had been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
 
  PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation and amortization computed principally on the
straight-line method based on the estimated useful lives of the respective
assets. Leasehold improvements are stated at cost adjusted for accumulated
amortization computed on a straight-line method over the shorter of the
estimated useful life of the assets or the term of the lease.
 
  OTHER REAL ESTATE OWNED -- Other real estate owned represents real estate
acquired through foreclosure or repossession and is initially recorded at the
lower of cost (principal balance and any accrued interest of the former loan
plus costs of obtaining title and possession) or fair value minus estimated
costs to sell. Initial writedowns are charged against the allowance for loan
losses. Initial costs relating to the development and improvement of the
property are capitalized and considered in determining the fair value of the
property, whereas those costs relating to holding the property are expensed.
Valuations are periodically performed by management and if the carrying value of
a property exceeds its net realizable value, the property is written down by a
charge against income.
 
  OTHER ASSETS -- Included in other assets are core deposit intangibles and
goodwill which arose from the acquisition of Premier Bancshares in 1996. These
assets will be amortized on a straight-line basis over their estimated useful
lives of 10 years.
 
  INCOME TAXES -- The Corporation files a consolidated federal income tax
return.
 
  There are two components of the income tax provision; current and deferred.
Current income tax provisions approximate taxes to be paid or refunded for the
applicable period. Balance sheet amounts of deferred taxes are recognized on the
temporary differences between the bases of assets and liabilities as measured by
tax laws and their bases as reported in the financial statements. Deferred tax
expense or benefit is then recognized for the change in deferred tax liabilities
or assets between periods.
 
  Recognition of deferred tax assets is based on management's belief that it is
more likely than not that the tax benefit associated with certain temporary
differences and tax credits will be realized in that sufficient taxes have been
paid in prior years to provide for such realization.
 
  RETIREMENT BENEFITS -- The Corporation has established a defined contribution
plan, the cost of which is charged to current operations. Additionally, the
Corporation has established certain supplemental deferred compensation plans
which are funded through insurance policies as described in Note 11.
 
  NET INCOME PER SHARE OF COMMON STOCK -- Net income per share of common stock
is computed by dividing net income by the weighted average number of common
shares, common shares subject to rescission, and common stock equivalents
outstanding during each year. Stock options are regarded as common stock
equivalents. Common stock equivalents are computed using the treasury stock
method. The weighted average number of common and common equivalent shares
outstanding was 449,172 for 1996; 446,152 for 1995; and 443,188 for 1994.
 
 
                                       9
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
 
  TRUST ASSETS -- Assets held by the Corporation in trust capacities are not
included in the accompanying consolidated balance sheets because such items are
not assets of the Corporation.
 
  STOCK-BASED COMPENSATION -- On January 1, 1996, the Corporation adopted
Statement of Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). As permitted by SFAS 123, the Corporation has chosen to
apply APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations in accounting for its Plans. The pro forma disclosures
of the impact of SFAS 123 is described in Note 10 of the financial statements.
 
  SIGNIFICANT ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Two significant estimates of the Corporation
include the allowance for loan loss and allowance for other real estate owned.
Actual results could differ from those estimates.
 
2. ACQUISITION:
 
  On January 1, 1996, the Corporation acquired 100% of the stock of Premier
Bancshares, Inc. ("Premier"), a one-bank holding company for Premier Bank of
East Tennessee, Niota, Tennessee ("Premier Bank"). As of the acquisition date,
Premier had assets of approximately $24.2 million, deposits of approximately
$22.0 million, debt and other liabilities of approximately $.5 million, and
capital of approximately $1.7 million. The purchase price of Premier was
$3,140,000, consisting of cash of $708,582 and the Corporation's promissory
notes to the sellers in the aggregate principal amount of $2,431,418, plus
$230,000 for noncompete agreements with the sellers. The transaction was
accounted for as a purchase, resulting in the recording of a core deposit
intangible of approximately $1.1 million, goodwill of approximately
$1.3 million, and an increase to deferred tax and other liabilities of
approximately $.4 million. Amortization of the intangibles was approximately
$215,000 during 1996. Prior to March 31, 1996, the Corporation merged Premier
into the Corporation since Premier had no assets other than the stock of Premier
Bank. This transaction resulted in the Corporation owning 100% of the stock of
Premier Bank.
 
 
                                       10
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
3. SECURITIES:
 
  At December 31, 1996 and 1995, securities have been classified in the
consolidated financial statements according to management's intent. The carrying
amount of securities and their approximate market values at December 31, 1996
and 1995, were as follows:
 
1996
----
<TABLE>
<CAPTION>
                                GROSS       GROSS       GROSS      APPROXIMATE
                              AMORTIZED   UNREALIZED  UNREALIZED     MARKET
                                COST        GAINS       LOSSES        VALUE
                             -----------  ----------  ----------  -------------
<S>                          <C>          <C>         <C>         <C>
Available-for-sale:
  U.S. treasury securities
   and obligations of U.S.
   government corporations
   and agencies ...........  $39,409,885   $411,145    $484,074    $39,336,956
  Obligations of state and
   political subdivisions .    1,344,513         --      15,720      1,328,793
  Federal Home Loan Bank
   stock...................    2,258,900         --          --      2,258,900
                             -----------   --------    --------    -----------
                             $43,013,298   $411,145    $499,794    $42,924,649
                             ===========   ========    ========    ===========
Held-to-maturity:
  Obligations of state and
   political subdivisions .  $ 9,456,437   $ 44,046    $ 82,794    $ 9,417,689
                             ===========   ========    ========    ===========
1995
----
 
Available-for-sale:
  U.S. treasury securities
   and obligations of U.S.
   government corporations
   and agencies ...........  $59,451,721   $484,938    $103,186    $59,833,473
  Federal Home Loan Bank
   stock ..................    1,066,155         --          --      1,066,155
                             -----------   --------    --------    -----------
                             $60,517,876   $484,938    $103,186    $60,899,628
                             ===========   ========    ========    ===========
Held-to-maturity:
  Obligations of state and
   political subdivisions .  $ 9,375,472   $ 17,245    $ 38,617    $ 9,354,100
                             ===========   ========    ========    ===========
</TABLE>
 
 
  Interest income from securities for the years ended December 31, 1996, 1995
and 1994, consist of:
<TABLE>
<CAPTION>
                                              1996        1995         1994
                                           ----------  ----------  ------------
<S>                                        <C>         <C>         <C>
U.S. treasury securities ................  $  421,236  $1,084,503   $1,565,806
Obligations of other U.S. government
 corporations and agencies ..............   2,622,980   2,590,906    2,112,716
Obligations of states and political
 subdivisions............................     479,174     370,034      557,011
Other securities ........................      98,907      59,533       62,028
                                           ----------  ----------   ----------
                                           $3,622,297  $4,104,976   $4,297,561
                                           ==========  ==========   ==========
</TABLE>
 
                                       11
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
3. SECURITIES, CONTINUED:
 
  Gross realized gains and losses on all sales of securities for the years ended
December 31, 1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
                                                       1996    1995      1994
                                                      ------  ------  ----------
  <S>                                                 <C>     <C>     <C>
  Gross realized gains:
    Available-for-sale .............................  $   --  $1,373   $ 21,453
                                                      ======  ======   ========
  Gross realized losses:
    Available-for-sale .............................  $3,488  $   --   $106,888
                                                      ======  ======   ========
</TABLE>
 
 
  Debt securities at December 31, 1996, will mature on the following schedule:
<TABLE>
<CAPTION>
                                                         HELD-TO-MATURITY
                                                      -----------------------
                                                                   APPROXIMATE
                                                         BOOK        MARKET
                                                        VALUE         VALUE
                                                      ----------  -------------
  <S>                                                 <C>         <C>
  Due in one year or less ..........................  $1,805,104   $1,806,484
  Due after one year through five years ............   6,731,487    6,754,761
  Due after five years through ten years ...........     519,846      523,772
  Due after ten years ..............................     400,000      332,672
                                                      ----------   ----------
                                                      $9,456,437   $9,417,689
                                                      ==========   ==========
</TABLE>
 
 
  Investment securities with book and market values of $31,076,496 and
$31,112,304 at December 31, 1996, respectively and $19,298,953 and $19,248,100
at December 31, 1995, respectively, were pledged to secure public and trust
deposits and for other purposes as required or permitted by law.
 
4. LOANS:
 
  Major classifications of loans at December 31, 1996 and 1995, are summarized
as follows:
<TABLE>
<CAPTION>
                                                     1996            1995
                                                 -------------  ---------------
     <S>                                         <C>            <C>
     Commercial ...............................  $ 97,339,711    $ 75,502,470
     Commercial real estate ...................    97,989,789      73,719,533
     Mortgage installment .....................   108,877,733      92,276,492
     Installment real estate ..................    11,354,642         556,560
     Installment consumer .....................    71,354,067      55,876,354
     Other loans ..............................     5,389,306       2,772,096
                                                 ------------    ------------
                                                  392,305,248     300,703,505
     Less:
       Unearned income ........................    (3,702,457)     (2,214,855)
       Allowance for loan losses ..............    (7,330,676)     (4,654,234)
                                                 ------------    ------------
                                                 $381,272,115    $293,834,416
                                                 ============    ============
</TABLE>
 
                                       12
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
4. LOANS, CONTINUED:
 
  At December 31, 1996 and 1995, loans on which the accrual of interest had been
discontinued totaled $616,000 and $901,580, respectively. Unrecorded interest
income on these loans aggregated approximately $169,145, $116,300 and $68,270
for 1996, 1995 and 1994, respectively.
 
  A summary of activity in the allowance for loan losses for the years ended
December 31, 1996, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
                                         1996          1995          1994
                                      ------------  -----------  --------------
<S>                                   <C>           <C>          <C>
Balance at beginning
 of year ...........................  $ 4,654,234   $3,446,762    $ 3,061,988
Balances acquired in acquisition of
 Premier Bank ......................      440,000           --             --
Provision for loan losses ..........    2,973,193    1,423,656        994,000
Recoveries .........................      888,249      455,778        750,250
                                      -----------   ----------    -----------
                                        8,955,676    5,326,196      4,806,238
Loans charged to allowance .........   (1,625,000)    (671,962)    (1,359,476)
                                      -----------   ----------    -----------
Balance at end of year .............  $ 7,330,676   $4,654,234    $ 3,446,762
                                      ===========   ==========    ===========
</TABLE>
 
 
5. RELATED PARTY TRANSACTIONS:
 
  Certain officers, employees and directors and/or companies in which they have
ten percent or more beneficial ownership were indebted to the Banks as indicated
below. In the opinion of management all such loans were made in the ordinary
course of business on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
borrowers and did not involve more than the normal risk of collectibility.
<TABLE>
<CAPTION>
<S>                                                             <C>
Balance, December 31, 1994 ...................................   $10,954,723
  Additions ..................................................     5,928,364
  Reductions .................................................    (3,947,070)
                                                                 -----------
Balance, December 31, 1995 ...................................    12,936,017
  Additions ..................................................     5,346,426
  Reductions .................................................    (6,894,192)
                                                                 -----------
Balance, December 31, 1996 ...................................   $11,388,251
                                                                 ===========
</TABLE>
 
 
  In addition to the above, the Banks provide financing for purchasers of
automotive and other transportation equipment from dealerships in which
directors have more than a ten percent beneficial interest. Loans originated
through these dealerships aggregated $1,837,032 during 1996 and $2,880,711 for
1995. Such financing is represented by installment notes that are the
obligations of the purchasers and are primarily collateralized by the equipment.
Some of these notes, totaling $30,126 and $1,041,964 at December 31, 1996 and
1995, respectively, are secondarily collateralized by dealer finance reserves
and also provide for recourse against the dealerships to further protect the
Banks against potential losses.
                                       13
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
5. RELATED PARTY TRANSACTIONS, CONTINUED:
 
  As described in Note 2, the acquisition of Premier Bank generated promissory
notes to the sellers and noncompete agreements with the sellers, a related
party. These notes can be summarized as follows at December 31, 1996:
<TABLE>
<CAPTION>
<S>                                                                <C>
 
  Noncompete agreement, payable in yearly principal installments
   through January 2000 .........................................   $  180,000
 
  8% note, interest payments due quarterly, principal payments
   January 15, 2003 through January 8, 2015 .....................      231,418
 
  8% note, interest payments due quarterly, principal payments
   January 15, 2002 through January 8, 2015 .....................    2,200,000
                                                                    ----------
                                                                    $2,611,418
                                                                    ==========
</TABLE>
 
 
  Scheduled principal maturities of notes payable as of December 31, 1996, are:
<TABLE>
<CAPTION>
<S>                                                              <C>
 
      1997 ....................................................   $   50,000
      1998 ....................................................       50,000
      1999 ....................................................       40,000
      2000 ....................................................       40,000
      2001 ....................................................           --
      Thereafter ..............................................    2,431,418
                                                                  ----------
                                                                  $2,611,418
                                                                  ==========
</TABLE>
 
 
6. PREMISES AND EQUIPMENT:
 
  Premises and equipment at December 31, 1996 and 1995, was comprised of the
following:
<TABLE>
<CAPTION>
                                                      1996           1995
                                                   ------------  --------------
<S>                                                <C>           <C>
  Land ..........................................  $ 1,624,513    $   825,781
  Banking quarters ..............................    6,752,104      6,021,351
  Leasehold improvements ........................    1,331,231        874,704
  Furniture and fixtures ........................    6,029,526      5,003,262
  Construction in progress ......................       54,748        701,553
  Automobiles ...................................      282,838         64,132
                                                   -----------    -----------
                                                    16,074,960     13,490,783
  Less accumulated depreciation and amortization    (6,235,591)    (5,151,383)
                                                   -----------    -----------
                                                   $ 9,839,369    $ 8,339,400
                                                   ===========    ===========
</TABLE>
 
                                       14
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
7. DEPOSITS:
 
  The components of interest expense on deposits for the years ended
December 31, 1996, 1995 and 1994, were:
<TABLE>
<CAPTION>
                                            1996         1995          1994
                                         -----------  -----------  ------------
  <S>                                    <C>          <C>          <C>
  Interest bearing accounts:
    NOW ...............................  $ 1,400,414  $ 1,385,871   $1,242,285
    Money market transaction ..........      950,906      796,167      881,000
    Savings ...........................    1,185,304      985,319    1,055,482
    Certificates of deposit $100,000
     and over .........................    2,080,723    1,723,218      760,064
    Other certificates of deposit .....    9,560,456    8,126,246    4,091,725
                                         -----------  -----------   ----------
                                         $15,177,803  $13,016,821   $8,030,556
                                         ===========  ===========   ==========
</TABLE>
 
 
8. LONG-TERM DEBT:
 
  The Banks have entered into long-term debt arrangements with the Federal Home
Loan Bank of Cincinnati (FHLB) to provide funding for the origination of fixed
rate mortgages. This debt is collateralized by that Banks' blanket pledge of
mortgage loans aggregating approximately $19,791,000 and stock of the Federal
Home Loan Bank.
 
  Long-term debt at December 31, 1996 and 1995, was summarized as follows:
<TABLE>
<CAPTION>
                                                         1996          1995
                                                      -----------  ------------
  <S>                                                 <C>          <C>
  5.5% note, interest payments due monthly,
   principal due May 20, 1997 ......................  $ 4,000,000   $       --
  5.7% note, interest payments due monthly,
   principal due November 20, 1997 .................    4,000,000           --
  5.81% note, interest payments due monthly,
   principal due December 2, 1998 ..................    2,000,000           --
  5.65% note, payable in monthly installments of
   $21,854 through July 1, 2003 ....................    1,438,966    1,614,497
  6.35% note, payable in monthly installments of
   $7,368 through September 1, 2013 ................      910,337      939,916
  6.10% note, payable in monthly installments of
   $8,493 through July 1, 2008 .....................      845,019      893,759
                                                      -----------   ----------
                                                      $13,194,322   $3,448,172
                                                      ===========   ==========
</TABLE>
 
 
  Scheduled principal maturities of long-term debt outstanding as of
December 31, 1996, are:
<TABLE>
<CAPTION>
     <S>                                     <C>
 
     1997 .................................   $ 8,270,324
     1998 .................................     2,286,482
     1999 .................................       303,605
     2000 .................................       321,753
     2001 .................................       340,954
     Thereafter ...........................     1,671,204
                                              -----------
                                              $13,194,322
                                              ===========
</TABLE>
 
                                       15
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
8. LONG-TERM DEBT, CONTINUED:
 
  At December 31, 1996, the Corporation maintained an unused line of credit of
$5,000,000 with interest at prime with a correspondent bank. The Corporation
also maintains an unused line of credit of $20,000,000 with the Federal Home
Loan Bank of Cincinnati with the option of selecting a variable rate of interest
for up to 90 days or a fixed rate for a maximum of 30 days. The line of credit
will expire on September 5, 1997.
 
9. LEASES:
 
  The Corporation leases certain banking facilities and equipment under
long-term operating lease agreements, which generally contain renewal options
for periods ranging from 5 to 30 years, and require the payment of certain
additional costs (generally maintenance and insurance).
 
  Future minimum lease payments for these noncancelable operating leases, with a
term in excess of one year, at December 31, 1996, for each of the years in the
five year period ending December 31, 2001, and thereafter were as follows:
<TABLE>
<CAPTION>
       <S>                                                        <C>
 
       1997 ....................................................   $183,422
       1998 ....................................................    149,483
       1999 ....................................................    122,336
       2000 ....................................................     44,457
       2001 ....................................................     15,138
                                                                   --------
                                                                   $514,836
                                                                   ========
</TABLE>
 
 
  The total rental expense for operating leases was $305,618, $164,977 and
$164,316 for the years ended December 31, 1996, 1995 and 1994, respectively.
 
10. STOCK OPTIONS:
 
  On January 6, 1989, the Corporation established a stock option plan, whereby a
certain key executive was granted options to purchase 300 shares per year of the
Corporation's stock at one and one-half times book value at each year end. The
number of options granted per year was increased to 600 as a result of a 1991
stock split. The options expire ten years from the date of grant and are
canceled if the key executive voluntarily resigns his employment or is
terminated for cause. Compensation expense recognized was $30,000, $24,000 and
$20,400 for the years ended December 31, 1996, 1995 and 1994, respectively.
 
  During 1993, the Corporation granted certain other key executives stock option
awards to purchase shares of the Corporation's stock. Shares under this plan are
to be awarded at market price at the date of grant. In 1996, 1995 and 1994, the
Corporation granted additional stock options to certain key executives to
purchase 1,660, 1,300 and 1,000 shares at $215, $180 and $160 per share,
respectively. If a key executive is a 10 percent or greater stockholder at the
time of exercise, the option price is increased by 10 percent. The options
granted in 1993 and 1994 are nonincentive stock options and are fully vested.
The options granted in 1995 and subsequent years are incentive stock options and
vest at the rate of 20 percent per year and expire ten years from the date of
grant.
 
 
                                       16
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
10. STOCK OPTIONS, CONTINUED:
 
  A summary of the status of the Corporation's Plans as of December 31, 1996 and
1995, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
                                      1996                     1995
                             -----------------------  -----------------------
                                         WEIGHTED                  WEIGHTED
                                         AVERAGE                   AVERAGE
                             OPTIONS  EXERCISE PRICE  OPTIONS   EXERCISE PRICE
                             -------  --------------  -------   --------------
  <S>                        <C>      <C>             <C>      <C>
  Outstanding at beginning
   of year ................   7,048      $137.53       5,148       $126.45
  Granted .................   2,260       198.21       1,900        167.54
  Exercised ...............   4,107       117.94          --            --
                              -----      -------       -----       -------
  Outstanding at end of
   year....................   5,201      $179.37       7,048       $137.53
                              =====      =======       =====       =======
  Options exercisable at
   year end ...............   2,501      $155.46       5,748       $130.18
                              =====      =======       =====       =======
  Weighted-average fair
   value of options granted
   during the year ........   2,260      $180.32       1,900       $158.23
                              =====      =======       =====       =======
</TABLE>
 
 
  The following table summarizes information about the Plans' stock options at
December 31, 1996:
<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING           OPTIONS EXERCISABLE
                    -----------------------------  ---------------------------
                      NUMBER     WEIGHTED-AVERAGE    NUMBER         WEIGHTED
  RANGE OF          OUTSTANDING     REMAINING      EXERCISABLE      AVERAGE
  EXERCISE PRICES   AT 12/31/96  CONTRACTUAL LIFE  AT 12/31/96   EXERCISE PRICE
  ---------------   -----------  ----------------  -----------  ----------------
  <S>               <C>          <C>               <C>          <C>
  $151.76 ........       600           10 years         600         $151.76
  $145.00-
   $215.00 .......     4,601          8.8 years       1,901         $156.63
</TABLE>
 
 
  Had compensation cost for the Corporation's Plans been determined based on the
fair value at the grant dates for awards under the Plans consistent with the
method of SFAS 123, the Corporation's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                        1996                    1995
                               ----------------------  ----------------------
                                   AS                      AS
                                REPORTED   PRO FORMA    REPORTED    PRO FORMA
                               ----------  ----------  ----------  ------------
  <S>                          <C>         <C>         <C>         <C>
  Net income ................  $5,963,262  $5,924,579  $5,108,440   $5,090,594
  Net income per share ......  $    13.28  $    13.19  $    11.45   $    11.41
</TABLE>
 
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend growth rate
of 12% and 12%; expected volatility of 7.75% and 6.26%: risk-free interest rates
of 6.6% and 5.65%; and expected lives of 7 years and 7 years.
 
 
                                       17
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
11. PROFIT SHARING AND DEFERRED COMPENSATION:
 
  The Corporation has a contributory profit-sharing plan covering certain
employees with one year or more of service. Participating employees are required
to contribute at least 3 percent of their monthly salary to the Plan and the
Corporation contributes to the Plan up to 10 percent of its profit before taxes
(not to exceed 15 percent of the total compensation of participating employees).
The contributions by the Corporation were $503,999, $427,666 and $396,192 for
1996, 1995 and 1994, respectively.
 
  The Banks have established supplemental benefit plans for selected officers
and directors. These plans are nonqualified and therefore, in general, a
participant's or beneficiary's claim to benefits is as a general creditor.
 
  Certain current and retired key officers participate in a deferred
compensation plan which provides for a defined benefit upon retirement. Payment
of benefits under such plans is contingent upon employment to retirement,
obtaining retirement age in the event of disability, or upon death. The cost of
such plans is being charged to operations over the period of active employment
from the contract date.
 
  In 1993, a plan was established whereby directors of the Corporation and the
Banks have the right to participate in a deferred compensation plan which
permits the directors to defer director compensation and earn a guaranteed
interest rate on such deferred amounts. Compensation costs associated with the
plan are charged to operations.
 
  Included in accrued interest and other liabilities in the consolidated
financial statements is $817,623 and $608,018 at December 31, 1996 and 1995,
respectively, related to the above supplemental benefit plans. To fund these
plans, the Corporation purchased single premium universal life insurance
contracts on the lives of the related directors and officers. The cash surrender
value of such contracts is included in the consolidated balance sheet. If all of
the assumptions regarding mortality, interest rates, policy dividends, and other
factors are realized, the Corporation will ultimately realize its full
investment in such contracts.
 
12. INCOME TAXES:
 
  The components of income tax expense for the years ended December 31, 1996,
1995 and 1994, were:
<TABLE>
<CAPTION>
                                           1996         1995          1994
                                        -----------  -----------  -------------
<S>                                     <C>          <C>          <C>
Current income taxes
  Federal ............................  $3,461,877   $2,914,271    $2,450,101
  State ..............................     586,397      406,708       409,965
                                        ----------   ----------    ----------
                                         4,048,274    3,320,979     2,860,066
Deferred income tax benefit ..........    (677,653)    (568,718)     (349,744)
                                        ----------   ----------    ----------
                                        $3,370,621   $2,752,261    $2,510,322
                                        ==========   ==========   ===========
</TABLE>
 
                                       18
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
12. INCOME TAXES, CONTINUED:
 
  A reconciliation of expected federal tax expense based on the federal
statutory rate of 34 percent to consolidated tax expense for the years ended
December 31, 1996, 1995 and 1994, was as follows:
<TABLE>
<CAPTION>
                                           1996         1995          1994
                                        -----------  -----------  -------------
     <S>                                <C>          <C>          <C>
     Tax at statutory rates ..........  $3,173,520   $2,672,638    $2,383,984
     Tax increases (decreases)
      attributable to:
       Tax exempt interest ...........    (180,099)    (122,480)     (188,581)
       State income tax less federal
        tax benefit ..................     387,022      268,427       276,517
       Interest expense disallowed ...      20,040       23,860        19,649
       Other .........................     (29,862)     (90,184)       18,753
                                        ----------   ----------    ----------
                                        $3,370,621   $2,752,261    $2,510,322
                                        ==========   ==========    ==========
</TABLE>
 
 
  The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
                                                          1996         1995
                                                       ----------  ------------
  <S>                                                  <C>         <C>
  Deferred tax assets:
    Allowance for loan losses and other real estate
     owned...........................................  $2,358,372   $1,694,540
    Unrealized depreciation on available-for-sale
     securities......................................      33,186           --
    Deferred compensation ...........................     310,257      230,888
    Other ...........................................      58,146       65,692
                                                       ----------   ----------
      Gross deferred tax assets .....................   2,759,961    1,991,120
                                                       ----------   ----------
  Deferred tax liabilities:
    Depreciation ....................................     385,060      349,619
    Unrealized appreciation on available-for-sale
     securities......................................          --      145,291
    Core deposit intangible .........................     376,290           --
    Other ...........................................      30,255       41,116
                                                       ----------   ----------
      Gross deferred tax liabilities ................     791,605      536,026
                                                       ----------   ----------
  Net deferred tax asset ............................  $1,968,356   $1,455,094
                                                       ==========   ==========
</TABLE>
 
 
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
 
  The Banks are party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their customers and
to reduce their own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in consolidated balance sheets.
 
  The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The Banks use the same credit policies in making these commitments
and conditional obligations as they do for on-balance-sheet instruments.
 
 
                                       19
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED:
 
  Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Banks evaluate each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Banks upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include marketable securities, trade
accounts receivable, property, plant, and equipment and/or income-producing
commercial properties.
 
  Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
 
  Most of the Banks' business activities are with customers located within the
state of Tennessee for residential, consumer and commercial loans. A majority of
the loans are secured by residential or commercial real estate or other personal
property. The loans are expected to be repaid from cash flow or proceeds from
the sale of selected assets of the borrowers.
 
  Outstanding standby letters of credit as of December 31, 1996 and 1995
amounted to $2,269,878 and $1,832,150, respectively. Outstanding commitments to
lend at fixed rates were $3,755,700 and $939,000 and at variable rates were
$8,429,531 and $3,396,000 at December 31, 1996 and 1995, respectively.
Undisbursed advances on customer lines of credit were $52,021,000 and
$38,536,000 at December 31, 1996 and 1995, respectively. The amount available
for borrowing under inventory collateralized loans was $5,941,000 at December
31, 1996 and $5,733,000 at December 31, 1995. The Banks do not anticipate any
losses as a result of these transactions that would be unusual in relation to
its historical levels of loan losses on its recorded loan portfolio.
 
14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS:
 
  The Banks are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators that, if undertaken, could have a direct material effect on the
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involves quantitative measures of the Banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
 
  Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Banks meet all capital adequacy requirements to which they are subject.
 
 
                                       20
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS, CONTINUED:
 
  The Banks are well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Banks must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as set forth
in the table. There are no conditions or events since that notification that
management believes have changed the institutions' category.
<TABLE>
<CAPTION>
                                                                                            TO BE WELL
                                                                                         CAPITALIZED UNDER
                                                       FOR CAPITAL                       PROMPT CORRECTIVE
                             ACTUAL                 ADEQUACY PURPOSES                    ACTION PROVISIONS
                       ------------------   ----------------------------------  -----------------------------------
                         AMOUNT     RATIO     AMOUNT             RATIO            AMOUNT              RATIO
                       -----------  ------  -----------  ---------------------  -----------  ----------------------
<S>                    <C>          <C>     <C>          <C>                    <C>          <C>
As of December 31,
 1996:
Total Capital (to
 Risk Weighted
 Assets):
  Consolidated ......  $47,860,000  12.69%  $30,178,000  (more than or = to)8%  $37,721,900  (more than or = to)10%
  Greene County
   Bank .............   46,247,000  13.01%   28,441,120  (more than or = to)8%   35,551,400  (more than or = to)10%
  Premier Bank ......    2,625,000  11.94%    1,758,640  (more than or = to)8%    2,198,300  (more than or = to)10%
 
Tier I Capital (to
 Risk Weighted
 Assets):
  Consolidated ......   43,112,000  11.43%   15,088,760  (more than or = to)4%   22,633,140  (more than or = to)6%
  Greene County
   Bank .............   41,772,000  11.75%   14,220,560  (more than or = to)4%   21,330,840  (more than or = to)6%
  Premier Bank ......    2,349,000  10.69%      879,320  (more than or = to)4%    1,318,980  (more than or = to)6%
 
Tier I Capital (to
 Average Assets):
  Consolidated ......   43,112,000   9.16%   18,821,120  (more than or = to)4%   23,526,400  (more than or = to)5%
  Greene County
   Bank .............   41,772,000   9.60%   17,413,200  (more than or = to)4%   21,766,500  (more than or = to)5%
  Premier Bank ......    2,349,000   7.32%    1,283,640  (more than or = to)4%    1,604,550  (more than or = to)5%
</TABLE>
 
 
  The Corporation's principal source of funds is dividends received from the
Banks. Under applicable banking laws, the Banks may only pay dividends from
retained earnings and only to the extent that the remaining balance of retained
earnings is at least equal to the capital stock amounts of the respective Banks.
As a practical matter, dividend payments by the Banks to the Corporation would
be limited by the necessity to maintain appropriate amounts for capital adequacy
purposes.
 
 
 
 
                                       21
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
15. ADDITIONAL CASH FLOW INFORMATION:
 
  Income taxes paid during the years ended December 31, 1996, 1995 and 1994
amounted to $5,273,919, $3,617,622 and $2,890,684, respectively. Interest
expense paid in cash during the years 1996, 1995 and 1994 amounted to
$15,632,435, $12,360,091 and $8,342,385, respectively.
 
  Significant noncash transactions for the years ended December 31, 1996, 1995
and 1994, were as follows:
<TABLE>
<CAPTION>
                                               1996        1995        1994
                                            -----------  --------  ------------
<S>                                         <C>          <C>       <C>
Financed sales of other real estate
 owned ...................................  $    59,750  $159,000   $1,044,876
Foreclosed loans transferred to OREO .....      380,587   124,767      391,893
Transfer of OREO to premises .............           --        --       74,763
Assets acquired/generated through bank
 purchase:
  Investments ............................    6,750,643        --           --
  Loans, net .............................   14,638,794        --           --
  Property, plant and equipment, net .....      567,992        --           --
  Other assets ...........................      450,034        --           --
  Intangibles ............................    2,159,966        --           --
Liabilities assumed/generated through bank
 purchase:
  Deposits ...............................   22,005,281        --           --
  Accrued interest and other liabilities .      546,483        --           --
  Notes payable ..........................    2,431,418        --           --
  Noncompete payable .....................      230,000        --           --
  Deferred tax liability .................      376,290        --           --
</TABLE>
 
                                       22
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
16. PARENT COMPANY FINANCIAL INFORMATION:
 
  Condensed financial information for Greene County Bancshares, Inc. (parent
company only) was as follows:
 
 
                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    -------------------------
                                                       1996           1995
                                                    ------------  -------------
  <S>                                               <C>           <C>
  ASSETS
 
  Cash ...........................................  $ 1,099,373    $ 1,186,519
  Investment in subsidiaries .....................   44,756,925     39,319,173
  Premises and equipment, net ....................      695,117        711,999
  Cash surrender value of life insurance
   contracts .....................................      184,108        177,980
  Other assets ...................................    1,976,263        672,088
                                                    -----------    -----------
      Total assets ...............................  $48,711,786    $42,067,759
                                                    ===========    ===========
  LIABILITIES
 
  Deferred income taxes ..........................  $   343,104    $   141,969
  Related party notes payable ....................    2,611,418             --
  Other liabilities ..............................       31,928             --
                                                    -----------    -----------
                                                      2,986,450        141,969
                                                    -----------    -----------
  Common stock subject to rescission .............           --        851,530
                                                    -----------    -----------
  SHAREHOLDERS' EQUITY
 
  Common stock ...................................    4,514,850      4,424,440
  Paid-in capital ................................    4,132,909      2,914,724
  Retained earnings ..............................   37,133,040     33,498,636
  Net unrealized depreciation on
   available-for-sale securities, net of income
   tax (benefit) of $(33,186) and $145,291 in 1996
   and 1995, respectively ........................      (55,463)       236,460
                                                    -----------    -----------
      Total shareholders' equity .................   45,725,336     41,074,260
                                                    -----------    -----------
      Total liabilities and shareholders' equity .  $48,711,786    $42,067,759
                                                    ===========    ===========
</TABLE>
 
                                       23
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:
 
 
                        CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
                                               YEARS ENDED DECEMBER 31,
                                          ----------------------------------
                                             1996        1995         1994
                                          ----------  ----------  -------------
  <S>                                     <C>         <C>         <C>
  Revenue:
    Equity in undistributed earnings of
     subsidiaries.......................  $3,862,086  $2,366,336   $1,736,400
    Dividends from subsidiaries ........   3,022,100   2,818,338    2,795,818
    Interest income ....................          --          --        3,752
    Other income .......................     107,871      53,837       62,593
                                          ----------  ----------   ----------
      Total revenue ....................   6,992,057   5,238,511    4,598,563
  Related party interest expense .......     160,718          --           --
  Other expense ........................     524,547      92,586       99,315
                                          ----------  ----------   ----------
  Income before income taxes ...........   6,306,792   5,145,925    4,499,248
  Income tax expense (benefit) .........     343,530      37,485       (2,148)
                                          ----------  ----------   ----------
  Net income ...........................  $5,963,262  $5,108,440   $4,501,396
                                          ==========  ==========   ==========
</TABLE>
 
                                       24
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:
 
 
                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                                     ---------------------------------------
                                        1996          1995           1994
                                     ------------  ------------  --------------
<S>                                  <C>           <C>           <C>
Cash flows from operating
 activities:
  Net income ......................  $ 5,963,262   $ 5,108,440    $ 4,501,396
Adjustments to reconcile net income
 to net cash provided by operating
 activities:
    Equity in undistributed
     earnings of subsidiaries .....   (3,862,086)   (2,366,336)    (1,736,400)
    Depreciation and
     amortization .................      232,855        18,233        (19,973)
    Change in other assets ........      537,500      (493,106)            --
    Change in other liabilities ...      (22,236)      (18,597)         9,249
                                     -----------   -----------    -----------
      Net cash provided by
       operating activities .......    2,849,295     2,248,634      2,754,272
                                     -----------   -----------    -----------
Cash flows from investing
 activities:
  Acquisition of bank .............     (708,582)           --             --
  Proceeds from maturities of
   investment securities ..........           --            --         78,772
  Increase in cash surrender value
   of life insurance contracts ....       (6,128)       (9,492)        (2,987)
                                     -----------   -----------    -----------
      Net cash provided (used) by
       investing activities .......     (714,710)       (9,492)        75,785
                                     -----------   -----------    -----------
Cash flows from financing
 activities:
  Capital contributed to
   subsidiary .....................           --            --     (1,000,000)
  Proceeds from issuance and sale
   of common stock ................      484,366            --         30,470
  Proceeds from sale of common
   stock subject to rescission ....           --       851,530             --
  Repayments of related party
   debt ...........................      (50,000)           --             --
  Repayments of debt ..............     (327,239)           --             --
  Dividends paid ..................   (2,328,858)   (2,052,192)    (1,795,818)
                                     -----------   -----------    -----------
      Net cash used by financing
       activities..................   (2,221,731)   (1,200,662)    (2,765,348)
                                     -----------   -----------    -----------
Net increase (decrease) in cash ...      (87,146)    1,038,480         64,709
Cash at beginning of year .........    1,186,519       148,039         83,330
                                     -----------   -----------    -----------
Cash at end of year ...............  $ 1,099,373   $ 1,186,519    $   148,039
                                     ===========   ===========    ===========
</TABLE>
 
                                       25
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
17. COMMITMENTS AND CONTINGENCIES:
 
  The Corporation and Banks are involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
the Corporation's consolidated financial position, results of operations, or
cash flows.
 
18. FAIR VALUES OF FINANCIAL INSTRUMENTS:
 
  The following information is presented as required by Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments. For financial instruments not described below, generally short term
financial instruments, book value approximates fair value. The following methods
and assumptions were used to estimate the fair value of each class of financial
instruments:
 
  SECURITIES AND INTEREST BEARING DEPOSITS -- Fair values of securities and
interest bearing deposits are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
 
  FEDERAL FUNDS SOLD -- Fair values of federal funds sold are based on quoted
market prices.
 
  LOANS, NET -- The fair value for loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
 
  DEPOSITS -- The fair value of demand deposits, savings accounts and money
market deposits is the amount payable on demand at the reporting date. The fair
value of certificates of deposit is estimated by discounting the future cash
flows using the current rate offered for similar deposits with the same
remaining maturities.
 
  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE -- Fair values of securities
sold under agreements to repurchase are based on quoted market prices.
 
  The estimated fair values of the Corporation's financial instruments at
December 31, 1996 and 1995, were as follows (rounded to the nearest thousand):
<TABLE>
<CAPTION>
                                     1996                        1995
                          --------------------------  --------------------------
                            CARRYING        FAIR        CARRYING         FAIR
                             VALUE         VALUE         VALUE          VALUE
                          ------------  ------------  ------------  --------------
  <S>                     <C>           <C>           <C>           <C>
  Financial assets:
    Securities .........  $ 52,470,000  $ 51,390,000  $ 70,125,000   $ 70,701,000
    Federal funds sold .            --            --    23,800,000     23,800,000
    Loans, net .........   381,272,000   378,528,000   293,834,000    294,133,000
  Financial liabilities:
    Deposits ...........  $408,722,000  $388,942,000  $365,951,000   $367,782,000
    Securities sold
     under agreements to
     repurchase.........     3,272,000     3,272,000     4,784,000      4,784,000
    Long-term debt .....    13,194,000    13,027,000     3,448,000      3,444,000
</TABLE>
 
 
  The Corporation believes that the fair value of commitments to extend credit
and standby letters of credit approximate the stated amounts at December 31,
1996 and 1995.
 
 
                                       26
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
 
19. COMMON STOCK SUBJECT TO RESCISSION:
 
  On May 31, 1995, the Corporation forwarded a letter to several hundred
potential subscribers for common stock of the Corporation. The response to the
letter resulted in a sale of 5,009 shares of the Corporation's common stock to
192 new shareholders (the "New Shareholders"). The Corporation received
approximately $851,530 in payment for the newly issued common shares. No
commissions or other fees were paid or received by the Corporation or any other
person in connection with the sale of such shares. During the quarter ended June
30, 1996, the Corporation concluded a rescission offer to the New Shareholders
(the "Rescission Offer"). The need for the Rescission Offer arose from the sale
of the common stock to the New Shareholders without registration with the
Securities and Exchange Commission and the necessary state securities divisions
or the availability of an exemption from registration.
 
  In the Rescission Offer, the Corporation offered to rescind the sale of the
shares issued to the New Shareholders and to refund the consideration paid for
such shares, plus interest from the date of payment through the date the
Corporation received notice of a New Shareholder's election to rescind, less any
amount of income received on such stock by the New Shareholders. The Rescission
Offer was made pursuant to the applicable securities laws in the states in which
the New Shareholders reside. Simultaneously with the Rescission Offer, the
Corporation registered these shares of common stock in order that the New
Shareholders, if they desired to retain the common shares, would hold
appropriately registered stock.
 
  At the conclusion of the Rescission Offer, the New Shareholders, with the
exception of three, opted to retain their shares. With respect to the three New
Shareholders who requested a refund of their consideration, the Corporation
refunded approximately $14,000. Professional fees to date associated with the
Rescission Offer total approximately $88,000. The Corporation accordingly
increased its shareholders' equity by $750,000 during the quarter ended June 30,
1996. Additional professional fees incurred during the quarter ended September
30, 1996, amounted to approximately $8,000, resulting in proceeds from the
Rescission Offer, net of expenses to date, in the approximate amount of
$742,000.
 
20. OTHER EXPENSES:
 
  Included in other expenses on the consolidated statement of income is the
following significant component:
<TABLE>
<CAPTION>
                                                     1996      1995      1994
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Dealer reserve expense ..........................  $795,840  $181,717   $5,709
</TABLE>
 
                                       27
<PAGE>
 
                        MARKET AND DIVIDEND INFORMATION
 
  There currently are 451,500 shares of Common Stock outstanding and
approximately 1,460 holders of record of the Common Stock.
 
  There is no established public trading market in which shares of the Common
Stock are regularly traded, nor are there any uniformly quoted prices for shares
of the Common Stock. The following table sets forth certain information known to
management as to the prices at the end of each quarter for the Common Stock and
cash dividends declared per share of Common Stock for the calendar quarters
indicated.
<TABLE>
<CAPTION>
                                           SALES PRICE AT   DIVIDENDS DECLARED
                                            QUARTER-END       PER SHARE (1)
                                           --------------  --------------------
<S>                                        <C>             <C>
 
FISCAL 1995:
  First quarter .........................     $170.00             $1.00
  Second quarter ........................      170.00              1.00
  Third quarter .........................      180.00              1.00
  Fourth quarter ........................      180.00              1.60
 
FISCAL 1996:
  First quarter .........................     $190.00             $1.12
  Second quarter ........................      200.00              1.12
  Third quarter .........................      200.00              1.12
  Fourth quarter ........................      215.00              1.80
</TABLE>
 
 
---------
 
(1) For information regarding restrictions on the payment of dividends by the
    Banks to the Company, see "Management's Discussion and Analysis of Financial
    Condition and Results of Operation -- Liquidity and Capital Resources" in
    this Annual Report. See also Note 14 of Notes to Consolidated Financial
    Statements.