<PAGE>   1


Greene County Bancshares, Inc.
1998 MD&A

                                                                      EXHIBIT 13

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                              1998           1997           1996           1995              1994
                                                           ---------      ---------      ---------      ---------         ---------
                                                                      (In thousands of dollars, except per share data)

<S>                                                        <C>            <C>            <C>            <C>               <C>
Total interest income .................................... $  50,792      $  49,005      $  39,521      $  31,387         $  23,625
Total interest expense ...................................    18,572         19,144         15,825         13,444             8,497
                                                           ---------      ---------      ---------      ---------         ---------
Net interest income ......................................    32,220         29,861         23,696         17,943            15,128
Provision for loan losses ................................    (3,417)        (5,953)        (2,973)        (1,424)             (994)
Net interest income after provision for loan losses ......    28,803         23,908         20,723         16,519            14,134
Non-interest income:
  Investment securities gains ............................        --              2             --              1                --
  Other income ...........................................     4,555          3,919          3,411          2,597             2,368
Non-interest expense .....................................   (20,462)       (17,009)       (14,800)       (11,257)           (9,491)
                                                           ---------      ---------      ---------      ---------         ---------
Income before income taxes ...............................    12,897         10,820          9,334          7,860             7,011
Income tax expense .......................................    (4,690)        (3,990)        (3,371)        (2,752)           (2,510)
                                                           ---------      ---------      ---------      ---------         ---------
Net income ............................................... $   8,207      $   6,830      $   5,963      $   5,108         $   4,501
                                                           =========      =========      =========      =========         =========

PER SHARE DATA:(1)

  Net income, basic ...................................... $    6.05      $    5.04      $    4.43      $    3.83         $    3.39
  Net income, assuming dilution .......................... $    6.02      $    5.03      $    4.43      $    3.82         $    3.38
  Dividends declared ..................................... $    2.30      $    1.92      $    1.72      $    1.53         $    1.35
  Book value ............................................. $   40.81      $   37.00      $   33.76      $   30.94         $   28.02

FINANCIAL CONDITION DATA:

  Assets ................................................. $ 568,179      $ 534,102      $ 478,048      $ 420,581         $  45,525
  Loans, net ............................................. $ 466,661      $ 441,390      $ 381,272      $ 293,834         $ 241,253
  Cash and investment securities ......................... $  49,939      $  62,166      $  73,713      $  83,998         $  85,460
  Federal funds sold ..................................... $  24,300      $   5,500      $      --      $  23,800         $   3,550
  Deposits ............................................... $ 459,183      $ 461,728      $ 408,722      $ 365,951         $  98,162
  Long-term debt ......................................... $  36,627      $  15,487      $  15,806      $   3,448         $   3,688
  Other borrowed funds ................................... $   2,416      $   1,414      $   3,272      $   4,784         $   3,879
  Shareholders' equity ................................... $  55,386      $  50,113      $  45,725      $  41,074         $  37,190

SELECTED RATIOS:

  Interest rate spread ...................................      5.96%          5.70%          5.16%          4.57%            4.57%
  Net yield on interest-earning assets ...................      6.53%          6.21%          5.65%          5.09%            4.96%
  Return on average assets ...............................      1.56%          1.33%          1.32%          1.35%            1.38%
  Return on average equity ...............................     15.63%         13.93%         13.23%         13.17%           12.32%
  Average equity to average assets .......................      9.97%          9.55%          9.94%         10.24%           11.17%
  Dividend payout ratio ..................................     37.99%         38.08%         39.05%         40.17%           39.96%
  Ratio of nonperforming assets to total assets ..........      1.15%          0.81%          0.49%          0.57%            0.40%
  Ratio of allowance for loan losses to
    nonperforming assets .................................    156.34%        210.15%        315.27%        225.05%          247.99%
  Ratio of allowance for loan losses to total loans ......      2.11%          2.01%          1.87%          1.55%            1.39%
</TABLE>

(1) Amounts have been restated to reflect the effect of the Company's 3-for-1
stock split effected in October 1997.


                                       1
<PAGE>   2

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES
                 IN FINANCIAL CONDITION AND RESULTS OF OPERATION

FORWARD-LOOKING INFORMATION

       THE INFORMATION CONTAINED HEREIN CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS, INCLUDING
THOSE DISCUSSED HEREIN, COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE
ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, SUCH
FORWARD-LOOKING STATEMENTS ARE NECESSARILY DEPENDENT UPON ASSUMPTIONS, ESTIMATES
AND DATA THAT MAY BE INCORRECT OR IMPRECISE. ACCORDINGLY, ANY FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR
CIRCUMSTANCES AND MAY NOT BE REALIZED. FORWARD-LOOKING STATEMENTS CAN BE
IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "INTENDS," "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," "SEEKS," "PRO
FORMA" OR "ANTICIPATES," OR THE NEGATIVES THEREOF, OR OTHER VARIATIONS THEREON
OF COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS.

GENERAL

       Greene County Bancshares, Inc. (the "Company") was formed in 1985 and
serves as the bank holding company for Greene County Bank ("GCB"), which is a
Tennessee-chartered commercial bank that conducts the principal business of the
Company. The Company also wholly owned American Fidelity Bank, whose assets were
combined with GCB during 1996, and Premier Bank of East Tennessee, whose assets
were combined with GCB in 1998. In addition to its commercial banking
operations, GCB conducts separate businesses through four wholly-owned
subsidiaries: Superior Financial Services, Inc. ("Superior Financial"), a
consumer finance company; Superior Mortgage Company ("Superior Mortgage"), a
mortgage banking company; GCB Acceptance Corporation ("GCB Acceptance"), a
consumer finance company specializing in subprime automobile lending; and
Fairway Title Co., a title company formed in 1998.

       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,
mortgage installment loans and installment consumer 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 assets and other interest-earning assets 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.



                                       2
<PAGE>   3

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
Bank. Applicable Tennessee statutes and regulations impose restrictions on the
amount of dividends that may be declared by the Bank. Further, any dividend
payments are subject to the continuing ability of the Bank to maintain
compliance with minimum federal regulatory capital requirements and to retain
its characterization under federal regulations as a "well-capitalized"
institution. In addition, the Company maintains a line of credit of $20 million
with the Federal Home Loan Bank of Cincinnati and three federal funds lines of
credit totaling $20 million at three correspondent banks of which the aggregate
$35.2 million was available at December 31, 1998.

       In 1998, operating activities of the Company provided $17,856,198 of cash
flows. Net income of $8,206,419 adjusted for non-cash operating activities,
including $3,417,010 in provision for loan losses and amortization and
depreciation of $993,523, provided the bulk of the cash generated from
operations.

       Investing activities, including lending, used $40,377,603 of the
Company's cash flow, a 36.1% decline from 1997 levels. Loans originated net of
principal collected used $30,247,073 in funds, down from $66,708,497 in 1997 as
the Company's loan originations decreased in response to interest rate
conditions. In response, the Company implemented a more competitive commercial
loan rate structure in the fourth quarter of 1998 and also hired a senior
commercial lender from a regional bank who brought new and significant seasoned
lending relationships to the Bank and an experienced commercial lending staff.
Excess funds available because of reduced loan growth as compared to 1997 is
reflected in the increase in federal funds sold of $18,800,000 during 1998 as
compared to $5,500,000 during 1997. These uses of funds were funded in part by
cash received from other investing activities, including $8,770,371 from
proceeds from maturities of available-for-sale securities and $4,065,000 from
proceeds from maturities of securities held to maturity.

       Net additional cash inflows of $21,425,852 were provided by financing
activities, a decrease of $28,136,918 from 1997 levels. The decline was
attributable primarily to the $66,379,215 decline in growth of certificates of
deposit during 1998, offset in part by the net increase in growth of $9,496,288
in demand deposits, NOW, money market and savings accounts and by an increase in
long-term borrowings from the Federal Home Loan Bank of Cincinnati of
$23,500,000 during 1998 from $19,500,637 during 1997. The effect of this change
in borrowings is amplified by the $17,460,045 reduction in payments on long-term
debt, from $19,769,657 during 1997 to $2,309,612 during 1998.

       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's capital continued to exceed regulatory
requirements at December 31, 1998 and its record of paying dividends to its
stockholders continued uninterrupted during 1998. Management believes 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, 1998 was $55,385,798, an increase of
$5,272,938 or 10.52%, from $50,112,860 on December 31, 1997. The increase in
shareholders' equity arises primarily from net income for 1998 of $8,206,419
($6.05 per share, or $6.02 per share assuming dilution), offset in part by
quarterly dividend payments during 1998 that totalled $3,117,842 ($2.30 per
share).




                                       3
<PAGE>   4


       Risk-based capital regulations adopted by the Board of Governors of the
Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation
("FDIC") 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 (consisting of
stockholders' equity, less goodwill) 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. At December 31, 1998, the Company and the Bank each satisfied their
respective minimum regulatory capital requirements, and the Bank 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, 1998, approximately 46.2% of
the Company's gross loans had adjustable rates. The Company has a mixture of
fixed rate loans and loans tied to its 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 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 1998 was $8,206,419, an increase of $1,376,245
or 20.15% as compared to net income of $6,830,174 for 1997. The increase
resulted primarily from an increase in net interest income of $2,359,442, or
7.90%, to $32,220,308 in 1998 from $29,860,866 in 1997, and an increase in
non-interest income of $634,373, or 16.17%, to $4,555,489 in 1998 from
$3,921,116 in 1997. The increase in net interest income primarily reflects an
increase in interest income attributable to loan growth and a decrease in
interest expense associated with reliance on lower-cost debt. These changes were
offset in part by the $3,453,123, or 20.30% increase in non-interest expense to
$20,461,962 in 1998 from $17,008,839 in 1997, attributable primarily to
increases in salaries and benefits and in other expenses.

       Net income for 1997 was $6,830,174, an increase of $866,912 or 14.54% as
compared to net income of $5,963,262 for 1996. The increase resulted primarily
from an increase in net interest income of $6,164,660, or 26.0%, to $29,860,866
in 1997 from $23,696,206 in 1996, and an increase in non-interest income of
$510,336, or 15.0%, to $3,921,116 in 1997 from $3,410,780 in 1996. The increase
in net interest income primarily reflects the Company's continued growth in loan
production, primarily increases in mortgage installment, commercial real estate
and commercial loans as the Company continues to take advantage of its branch
network presence throughout East Tennessee. These increases were offset in part
by the $2,208,929, or 14.93% increase in non-interest expense to $17,008,839 in
1997 from $14,799,910 in 1996, attributable primarily to increasing compensation
and occupancy expenses associated with branch operations.



                                       4
<PAGE>   5

       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 1998, net interest income was $32,220,308 as
compared to $29,860,866 in 1997, an increase of 7.90%. This increase was due
primarily to an increase in loan volume and lower deposit rates on non-time
deposits. The loan volume increase was also due in part to the Company's
implementation during 1998 of more competitive commercial loan rates. At the
same time, the Company's net interest margin increased in 1998 to 6.53% from
6.21% in 1997. This increase in net interest margin reflects a reduction in the
cost of interest-bearing liabilities, as well as a slight increase in loan
yield. Contributing to the growth in net interest income during 1998 was the
decline in cost of funds, as reflected in the lower amount of interest expense
in 1998 despite an increase in average total deposits.

       Net interest income for 1997 was $29,860,866 as compared to $23,696,206
in 1996, an increase of 26.0%. This increase was due primarily to a $61,212,715
increase in average interest-earning assets during 1997 as compared to 1996,
offset by a $53,509,868 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 1997 to 6.21% from 5.65% in 1996. 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.
The Company's loan yields were thus enhanced by the 25 basis point prime rate
increase in the first quarter of 1997. Commercial and commercial real estate
loans comprised, in the aggregate, 51.3% of the Company's gross loan portfolio
at December 31, 1997. Offsetting the growth in interest income during 1997 was
the related increase in interest expense arising primarily from the 12.7%
increase in 1997 in the Company's average deposit base.

       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 (that is, when yields
earned exceed rates paid) 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.




                                       5
<PAGE>   6



       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>

                                                 1998
                             ----------------------------------
                              Average      Revenue/     Yield/
                              Balance      Expense      Rate
                              -------      -------      ----
<S>                        <C>           <C>           <C>
INTEREST-EARNING ASSETS:

Loans(1)
--------
Commercial ................$235,166,862  $21,002,417    8.93%
Installment - net(2)....... 207,718,394   23,064,331   11.10%
Fees on loans .............                3,754,124
                           ------------  -----------

  Total loans
   (including fees)........$442,885,256  $47,820,872   10.80%


Investment securities(3)
------------------------
Taxable ...................$ 29,326,409  $ 1,865,083    6.36%
Tax exempt(4) .............   6,250,730      282,161    4.51%
                           ------------  -----------
  Total investment
    Securities ............$ 35,577,139  $ 2,147,244    6.04%


Other short-term
  Investments .............  14,808,885      824,340    5.57%
                           ------------  -----------

  Total interest-
    earning assets ........$493,271,280  $50,792,456   10.30%
                           ------------  -----------

NON-INTEREST-EARNING
ASSETS:
Cash and due from
  Banks ...................$ 17,855,077
Premises and
  Equipment ...............   9,968,183
Other, less allowance
  for loan losses .........   5,346,239
                           ------------

 Total non-interest-
   earning assets..........$ 33,169,499
                           ------------

 Total average assets......$526,440,779
                           ============

<CAPTION>

                                             1997
                           --------------------------------------
                              Average       Revenue/    Yield/
                              Balance       Expense      Rate
                              -------       -------      ----
<S>                        <C>            <C>           <C>
INTEREST-EARNING ASSETS:

Loans(1)
--------
Commercial ................$240,601,635   $21,476,951    8.93%
Installment - net(2)....... 190,304,270    22,024,965   11.57%
Fees on loans .............                 2,502,460
                            -----------   -----------

  Total loans
   (including fees)........$430,905,905   $46,004,376   10.68%


Investment securities(3)
------------------------
Taxable ...................$ 38,079,718   $ 2,467,835    6.48%
Tax exempt(4) .............   9,210,719       403,507    4.38%
                            -----------    ----------
  Total investment
    Securities ............$ 47,290,437   $ 2,871,342    6.07%


Other short-term
  Investments .............   2,409,152       129,080    5.36%
                            -----------   -----------

  Total interest-
    earning assets ........$480,605,494   $49,004,798   10.20%
                            -----------   -----------

NON-INTEREST-EARNING
ASSETS:
Cash and due from
  Banks ...................$ 17,589,326
Premises and
  Equipment ...............   9,355,616
Other, less allowance
  for loan losses .........   5,945,568
                           ------------

 Total non-interest-
   earning assets..........$ 32,890,510
                           ------------

 Total average assets......$513,496,004
                           ============


<CAPTION>

                                           1996
                           -----------------------------------------
                              Average        Revenue/      Yield/
                              Balance        Expense       Rate
                              -------        -------       ----
<S>                          <C>            <C>          <C>
INTEREST-EARNING ASSETS:

Loans(1)
--------
Commercial ................  $173,178,149   $14,967,334   8.64%
Installment - net(2).......   174,667,162    19,022,302  10.89%
Fees on loans .............                   1,395,467
                             ------------   -----------

  Total loans
   (including fees)........  $347,845,311   $35,385,103  10.17%


Investment securities(3)
------------------------
Taxable ...................  $ 51,687,569   $ 3,125,592   6.05%
Tax exempt(4) .............    10,953,312       496,705   4.53%
                             ------------   -----------
  Total investment
    Securities ............  $ 62,640,881   $ 3,622,297   5.78%


Other short-term
  Investments .............     8,906,587       513,326   5.76%
                             ------------   -----------

  Total interest-
    earning assets ........  $419,392,779   $39,520,726   9.42%
                             ------------   -----------

NON-INTEREST-EARNING
ASSETS:
Cash and due from

  Banks ...................  $ 15,979,895
Premises and
  Equipment ...............     9,379,752
Other, less allowance
  for loan losses .........     8,457,324
                             ------------

 Total non-interest-

   earning assets..........  $ 33,816,971
                             ------------

 Total average assets......  $453,209,750
                             ============

</TABLE>

---------------------------------------------

(1) Average loan balances include nonaccrual loans.  Interest income collected
    on nonaccrual loans has been included.
(2) Installment loans are stated net of unearned income.
(3) The average balance of and the related yield associated with securities
    available for sale are based on the cost of such securities.
(4) Tax exempt income has not been adjusted to tax-equivalent basis.

                                       6
<PAGE>   7

<TABLE>
<CAPTION>

                                        1998                                  1997                              1996
                        -----------------------------------  ---------------------------------  -----------------------------------
                        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.... $160,775,161  $  3,849,723    2.39%  $150,088,946   $  3,930,293    2.62%    $150,877,450  $ 3,536,624   2.34%
  Time deposits......  255,872,184    13,975,781    5.46%   253,840,096     13,947,656    5.49%     207,440,687   11,641,179   5.61%
                       -----------    ----------            -----------     ----------              -----------   ----------

  Total deposits......$416,647,345  $ 17,825,503    4.28%  $403,929,042   $ 17,877,949    4.43%    $358,318,137  $15,177,803   4.24%

Securities sold
  Under repurchase
  Agreement and
  Short-term
  Borrowings............ 2,943,827       115,784    3.93%     4,949,115        236,553    4.78%       4,931,307      227,613   4.62%
Debt  .................  8,503,098       630,861    7.42%    16,147,018      1,029,430    6.38%       8,265,863       19,104   5.07%
                         ---------       -------             ----------      ---------                ---------       ------

Total interest-
  Bearing
  Liabilities........ $428,094,270  $ 18,572,148    4.34%  $425,025,175   $ 19,143,932    4.50%    $371,515,307  $15,824,520   4.26%
                       -----------    ----------            -----------     ----------              -----------   ----------

NON-INTEREST-BEARING
LIABILITIES:
  Demand deposits.....$ 39,821,855                         $ 33,540,018                            $ 30,945,475
  Other liabilities...   6,033,556                            5,904,610                               5,680,694
                      ------------                         ------------                            ------------
  Total liabilities...$ 45,855,411                         $ 39,444,628                            $ 36,626,169
  Stockholders' equity. 52,491,098                           49,026,201                              45,068,274
                      ------------                         ------------                            ------------

Total liabilities and
 Stockholders' equity.$526,440,779                         $513,496,004                            $453,209,750
                      ============                         ============                             ===========

Net interest income..               $ 32,220,308                          $ 29,860,866                           $23,696,206
                                    ============                          ============                            ==========

MARGIN ANALYSIS:
  Interest rate spread....                          5.96%                                 5.70%                                5.16%
                                                    =====                                 =====                                =====
  Net yield on
    Interest-earning
    assets (net
    interest
    margin)...............                          6.53%                                 6.21%                                5.65%
                                                    =====                                 =====                                =====
</TABLE>



                                       7
<PAGE>   8

       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 by prior year volume). Changes attributable
to the combined impact of volume and rate have been separately identified.

<TABLE>
<CAPTION>

                                               1998 vs. 1997                             1997 vs. 1996
                                ---------------------------------------     ------------------------------------------
                                                       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    $ 1,278    $   523    $    15    $ 1,816    $ 8,449    $ 1,752       $ 418    $10,619
Investment securities:
  Taxable ...................      (567)       (46)        11       (602)      (823)       224         (59)      (658)
  Tax exempt ................      (130)        12         (4)      (122)       (79)       (17)          3        (93)
Other short-term investments        664          5         26        695       (374)       (36)         26       (384)
                                -------    -------    -------    -------    -------    -------    --------    -------

  Total interest income .....     1,245        494         48      1,787      7,173      1,923         388      9,484
                                -------    -------    -------    -------    -------    -------    --------    -------

INTEREST EXPENSE:
   Savings, NOW accounts, and
      Money market accounts .       280       (336)       (24)       (80)       (18)       414          (2)       394
   Time deposits ............       111        (83)        (1)        27      2,603       (243)        (54)     2,306
   Short-term borrowings ....       (96)       (42)        17       (121)         1          8          --          9
   Debt .....................      (487)       169        (80)      (398)       399        108         103        610
                                -------    -------    -------    -------    -------    -------    --------    -------

   Total interest expense ...      (192)      (292)       (88)      (572)     2,985        287          47      3,319
                                -------    -------    -------    -------    -------    -------    --------    -------

Net interest income .........   $ 1,437    $   786    $   136    $ 2,359    $ 4,188    $ 1,636       $ 341    $ 6,165
                                =======    =======    =======    =======    =======    =======    ========    =======
</TABLE>

       At December 31, 1998, loans outstanding, net of unearned income and
allowance for loan losses, were $466.7 million compared to $441.4 million at
1997 year end. The increase is primarily due to the Company's increased emphasis
during fourth quarter 1998 on loan growth through implementation of a
more-competitive commercial loan rate structure and the hiring of a senior
commercial lender from a regional bank who brought new and significant seasoned
lending relationships to the Bank and an experienced commercial lending staff.
Average outstanding loans, net of unearned interest, for 1998 were $442.9
million, an increase of 2.78% from the 1997 average of $430.9 million. The
average outstanding loans for 1996 were $347.8 million. The growth in average
loans for the past three years can be attributed to the Company's continuing
market expansion into surrounding counties through the Company's branch network
and to the development of its other financing businesses and indirect financing.
During 1998, the Company continued its expansion with a new branch in Cocke
County and new offices in the consumer finance subsidiary. The marginal increase
in interest income can be attributed to the decrease in the prime rate during
the latter part of 1998. During 1997, increases in the prime rate were reflected
in the slight increase in overall loan yields in 1997 compared to 1996. During
1996, the prime rate was generally constant at 8.25%.

       Average investment securities for 1998 were $35.6 million, compared to
$47.3 million in 1997, and $62.6 million in 1996. In 1998, the average yield on
investments was 6.04%, essentially the same as the 6.07% yield in 1997 and an
increase from the 5.78% yield in 1996. This is reflective of the Company's
substantial proportion of adjustable-rate securities comprising its investment
portfolio and the reduction in the prime rate during the latter part of 1998.
Income provided by the investment portfolio in 1998 was $2,147,244 as compared
to $2,871,342 in 1997, and $3,662,297 in 1996. The decline in the average
balance of investment securities from 1997 to 1998 was the result of funding the
loan growth experienced by the Company during 1998.

       PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
decreased $2,536,195, or 42.6%, to $3,417,010 in 1998 from $5,953,205 in 1997.
The decrease in the provision for loan losses is



                                       8
<PAGE>   9


primarily attributable to a reduction in problem loans associated with Superior
Financial in prior years and management's assessment of the reduced risk profile
in its existing portfolio. The ratio of loans 30 days or more past due to total
gross loans for consumer loans originated by Superior Financial decreased from
7.61% at December 31, 1996 to 5.12% at December 31, 1997 and to 2.58% at
December 31, 1998. Management of the Company believes that these past due and
nonperforming loans originated by its consumer finance subsidiary reflect the
risk inherent in this type of business. However, management also believes this
risk is also offset by the net benefits attributable to operation of the finance
company, including a higher net yield on these types of loans, market
penetration and diversification of the Company's activities into non-traditional
lending areas.

       To further manage its credit risk on loans, the Company maintains a
"watch list" of loans that, although currently performing, have characteristics
that require closer supervision by management. At December 31, 1998, the Company
had identified $11.2 million in loans that were placed on its "watch list."

       The Company's provision for loan losses in 1997 increased by $2,980,012
or 100.23%, to $5,953,205 in 1997 from $2,973,193 in 1996. 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 increase reflected
management's assessment of the risk of loss in its loan portfolio, as indicated
by its increasing amount of charge-offs. In 1997, the Company's net charge-offs
increased $3.4 million or 456% to $4.1 million from $737,000 in 1996. The
Company's net charge-offs to average loans outstanding increased in 1997 to
0.95% from 0.21% in 1996, a 352% growth that exceeded the growth in the
Company's average loans outstanding during the same period. These charge-offs
were primarily attributable to consumer loans originated by Superior Financial
during the period 1994 through 1997 and both secured and unsecured loans.

       The Company's provision for loan losses in 1996 increased by $1,549,541
or 108.8%, to $2,973,193 in 1996 from $1,423,656 in 1995. This increase
reflected 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
reflected 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 1995 to 1996, nonperforming assets
increased $0.2 million, or 9.5%, from $2.1 million in 1995 to $2.3 million in
1996.

       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 1998 was $4,555,489 as compared to
$3,921,116 in 1997 and $3,410,780 in 1996. The largest components of
non-interest income are service charges, commissions and fees, which totaled
$3,742,053 in 1998, $3,168,699 in 1997 and $2,593,594 in 1996. The increase from
1997 to 1998 reflects management's continued focus on the generation of fee
income and additional fee income generated by the subsidiaries of Greene County
Bank.

       NON-INTEREST EXPENSE. Control of non-interest expense also is an
important aspect in managing net income. Non-interest expense includes, among
others, personnel, occupancy, and other expenses such as data processing,
printing and supplies, legal and professional fees, postage and Federal Deposit
Insurance Corporation assessments. Total non-interest expense was $20,461,962 in
1998, compared to $17,008,839 in 1997 and $14,799,910 in 1996.



                                       9
<PAGE>   10

       Personnel costs are the primary element of the Company's non-interest
expenses. In 1998, salaries and benefits represented $11,458,768 or 56.0% of
total non-interest expenses. This was an increase of $1,933,566 or 20.3% over
1997's total of $9,525,202. Personnel costs for 1997 increased $1,631,567 or
20.7% over 1996's total of $7,893,635. These increases were due to opening a new
branch requiring increased staff levels and increased employee benefit costs,
including health insurance and retirement benefit costs. Overall, the number of
full-time equivalent employees at December 31, 1998 was 307 versus 268 at
December 31, 1997, an increase of 14.6%.

       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, 1998, the Company had 35 branches
compared to 29 branches at December 31, 1997.

       Assessments by the FDIC increased from $6,187 in 1996 to $54,989 in 1997
and increased to $65,414 in 1998. These premiums, representing a percentage of
deposit base, and based upon deposit levels at period ends, have been
consistently reduced and essentially eliminated for well-capitalized banks such
as those owned by the Company, although premiums are still being assessed for
repayment of debt incurred by the federal government in connection with the
deposit insurance fund (i.e., the "FICO bonds"). For 1999, the FDIC premiums
(including assessments for the FICO bonds) are calculated at 1.176 basis points
on the assessable deposit base. The Company's premiums for 1999 are estimated to
be $55,000 assuming the same deposit base at December 31, 1998.

       Other expenses increased $1,307,247, or 27.0%, from 1997 to 1998
representing primarily the Company's new bank branch, which required additional
advertising, postage, telephone and other expenses, as well as increased
expenses related to new programs for customer product delivery. The increase
from 1996 to 1997 was $85,012, or 1.8%.

CHANGES IN FINANCIAL CONDITION

       Total assets at December 31, 1998 were $568.2 million, an increase of
$34.1 million, or 6.4%, over 1997's year end total assets of $534.1 million.
Average assets for 1998 were $526.4 million, an increase of $12.9 million or
2.5% over 1997 average assets of $513.5 million. This increase was the result of
loan growth, funded by increases in average deposits and, to a lesser extent, by
FHLB advances. Return on average assets was 1.56% in 1998, as compared to 1.33%
in 1997 and 1.32% in 1996.

       Earning assets consist of loans, investment securities and short-term
investments that earn interest. Average earning assets during 1998 were $493.3
million, an increase of 2.6% from an average of $480.6 million in 1997.

       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. For further information, see Note 1 of the Notes to Consolidated
Financial Statements. The Company has aggressive collection practices in which
senior management is significantly and directly involved.

       The Company maintains an investment portfolio to provide liquidity and
earnings. Investments at year end 1998 with an amortized cost of $30.2 million
had a market value of $30.3 million. At year end 1997, investments with an
amortized cost of $41.3 million had a market value of $41.5 million. This
decline in investments in 1998 reflects the Company's continuing shift of funds
to higher-yielding commercial and consumer lending.



                                       10
<PAGE>   11


       The Company's deposits were $459.2 million at December 31, 1998. This
represents a decrease of $2.5 million, or 0.5%, from the $461.7 million of
deposits at December 31, 1997. The decrease is primarily the result of a
reduction in certificates of deposit in late 1998 due to the Company's policy of
funding increased loan demand via lower-cost vehicles such as borrowing from the
Federal Home Loan Bank of Cincinnati. Although year-end balances of deposits
declined in 1998 as compared to 1997, the Company's average deposit balances
increased during 1998.

       In 1998, demand deposit balances increased 3.8% from 1997. Demand deposit
balances were approximately $37.1 million and $35.7 million at December 31, 1998
and 1997, respectively.

       Average interest-bearing deposits increased $12.7 million, or 3.1%, in
1998. In 1997, average interest-bearing deposits increased $45.6 million or
12.7% over 1996. 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.

       The Company's continued ability to fund its loan and overall asset growth
remains dependent upon the availability of deposit market share in the Company's
existing market of East Tennessee. As of June 30, 1998, approximately 64.7% of
the deposit base of East Tennessee was controlled primarily by five commercial
banks, one savings bank and one credit union and, as of September 1998, the
total deposit base of Tennessee commercial banks had a weighted average rate of
4.79%. Management of the Company does not anticipate further significant growth
in its deposit base unless it either offers interest rates well above its
prevailing weighted average rate of 4.28% or it acquires deposits from other
financial institutions. During 1998, the premiums charged in Tennessee by
selling financial institutions for deposit accounts ranged from 6.7% to 37.8%.
If the Company takes action to increase its deposit base by offering
above-market interest rates or by acquiring deposits from other financial
institutions and thereby increases its overall cost of deposits, its net
interest income could be adversely affected if it is unable to correspondingly
increase the rates it charges on its loans.

       Interest paid on deposits in 1998 totaled $17,825,503 reflecting a 4.28%
cost on average interest-bearing deposits of $416.6 million. In 1997, interest
of $17,877,949 was paid at a cost of 4.43% on average deposits of $403.9
million. In 1996, interest of $15,177,803 was paid at a cost of 4.24% on average
deposits of $358.3 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 repricing 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, 1998, the Company had a
positive cumulative one-year gap position of $76.7 million, indicating that
while $350.9 million in assets were repricing, only $274.2 million in
liabilities would reprice in the same time frame.



                                       11
<PAGE>   12

       The following table reflects the Company's interest rate gap position at
December 31, 1998 based upon repricing dates rather than maturity dates. This
table represents a static point in time and does not consider other variables
such as changing relationships or interest rate levels.

<TABLE>
<CAPTION>
                                  -------------------------------------------------------------
                                                        Expected Maturity Date
                                  -------------------------------------------------------------

                                         1999             2000          2001           2002
                                         ----             ----          ----           ----
                                                           (Dollars in Thousands)
<S>                                   <C>             <C>            <C>           <C>
INTEREST-EARNING ASSETS:
    Loans, net of allowance for
        loan losses.................   $  300,323      $  66,221     $  47,731      $  24,329
        Average interest rate.......         8.81%          9.44%         9.25%          9.05%
    Investment securities...........   $   26,299      $   1,948     $     830      $     759
        Average  interest rate......         5.56%          4.83%         5.37%          4.60%
    Federal funds sold..............   $   24,300             --            --             --
        Average interest rate.......         4.75%            --            --             --
                                       ----------      ----------    ----------     ----------
     Total interest-earning
        Assets......................   $  350,922      $  68,169     $  48,561      $  25,088
                                       ----------      ----------    ----------     ----------
INTEREST-BEARING LIABILITIES(1):
    Savings and time deposits.......   $  205,176      $  53,661     $  16,549      $   6,716
        Average interest rate.......         5.02%          4.79%         4.01%          3.51%

    Money market and
        Transaction accounts........   $   34,984      $  19,578     $  19,578      $  14,756

        Average interest rate.......         1.86%          1.79%         1.79%          1.66%

    Debt and other borrowed
    money(2)........................   $   31,667      $      87     $      87      $     187
       Average interest rate.......          5.15%          5.94%         5.94%          7.04%


    Securities sold under
       agreement to repurchase......   $    2,416      $      --     $      --      $      --

       Average interest rate........         4.00%            --            --             --
                                       ----------      ----------    ----------     ----------
    Total interest-bearing
    liabilities.....................   $  274,243      $  73,326     $  36,214      $  21,659
                                       ==========      ==========    ==========     ==========

Interest sensitivity gap............   $   76,679      $  (5,157)    $  12,347      $   3,429
                                       ==========      ==========    ==========     ==========
Cumulative interest
  Sensitive gap.....................   $   76,679      $  71,522     $  83,869      $  87,298
                                       ==========      ==========    ==========     ==========
Interest sensitive gap to
  Total assets......................        13.49%         -0.91%         2.17%          0.60%
                                       ==========      ==========    ==========     ==========
Cumulative interest
  Sensitive gap to total assets.....        13.49%         12.58%        14.75%         15.36%
                                       ==========      ==========    ==========     ==========

</TABLE>


<TABLE>
<CAPTION>
                                  ---------------------------------------------------------------
                                                         Expected Maturity Date
                                  ---------------------------------------------------------------
                                           2003       Thereafter         Total         Fair Value
                                           ----       ----------         -----         ----------
                                                           (Dollars in Thousands)
<S>                                   <C>             <C>            <C>           <C>
INTEREST-EARNING ASSETS:
    Loans, net of allowance for
        loan losses.................      12,118      $   15,939      $  466,661       $  467,522
        Average interest rate.......        8.67%           8.64%           8.95%
    Investment securities...........         103      $      408      $   30,347       $   30,347
        Average  interest rate......        4.69%           4.28%           5.47%
    Federal funds sold..............          --              --      $   24,300       $   24,300
        Average interest rate.......          --              --            4.75%
                                      ----------      ----------      ----------       ----------
     Total interest-earning
        Assets......................   $  12,221      $   16,347      $  521,308       $  522,169
                                      ----------      ----------      ----------       ----------
INTEREST-BEARING LIABILITIES(1):
    Savings and time deposits.......   $   5,689      $    9,512      $  297,303       $  294,227
        Average interest rate.......        2.75%           2.25%           4.76%

    Money market and
        Transaction accounts........   $  14,756      $   21,174      $  124,826       $  112,175

        Average interest rate.......        1.66%           1.51%           1.73%

    Debt and other borrowed
    money(2)........................   $     219      $    4,380      $   36,627       $   36,610
        Average interest rate.......        7.15%           6.97%           5.19%


    Securities sold under
        agreement to repurchase.....   $      --      $       --      $    2,416       $    2,416

        Average interest rate.......          --              --            4.00%
                                      ----------      ----------      ----------       ----------
    Total interest-bearing
    liabilities.....................   $  20,664      $   35,066      $  461,172       $  450,228
                                      ==========      ==========      ==========       ==========

Interest sensitivity gap............   $  (8,443)     $  (18,719)     $   60,136       $   71,941
                                      ==========      ==========      ==========       ==========
Cumulative interest
  Sensitive gap.....................  $   78,855      $   60,136      $   60,136       $   71,941
                                      ==========      ==========      ==========       ==========
Interest sensitive gap to
  Total assets......................       -1.49%          -3.29%          10.58%           12.65%
                                      ==========      ==========      ==========       ==========
Cumulative interest
  Sensitive gap to total assets.....       13.87%          10.58%          10.58%           12.65%
                                      ==========      ==========      ==========       ==========
</TABLE>

(1)    The Company has presented substantial balances of deposits as non-rate
       sensitive and/or not repricing within one year.
(2)    For further information regarding fair value of debt instruments, see
       Note 18 of Notes to Consolidated Financial Statements. Accounts also
       include a note payable to a related party. See Note 5 of Notes to
       Consolidated Financial Statements.

       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.

                                       12
<PAGE>   13

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 June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a complete
set of financial statements. This statement also requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Reclassification of financial
statements for earlier periods for comparative purposes is required. Adoption of
this new standard did not have a material effect on the Company's financial
condition or the results of its operations. The Company adopted SFAS No. 130 on
January 1, 1998.

       In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
reporting by public companies of operating segments in annual financial
statements and requires that those enterprises also report selected information
about operating segments in interim financial reports issued to shareholders.
This statement also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments. This statement is effective for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years must be restated. The disclosure impact of SFAS
No. 131 is described in Note 20 of the Consolidated Financial Statements. The
Company adopted SFAS No. 131 on December 31, 1998.

       During February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The statement
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
Restatement of disclosures for earlier periods for comparative purposes is
required. The disclosure impact of SFAS No. 132 is described in Note 11 of the
financial statements. The Company adopted SFAS No. 132 on December 31, 1998.

       In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement established accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.

                                       13
<PAGE>   14

       SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantively
modified after December 31, 1997 (and, at the Company's election, before January
1, 1998).

       The Company has not yet quantified the impacts of adopting SFAS No. 133
on its financial statements and has not determined the timing or method of its
adoption of SFAS No. 133. However, the statement could increase volatility in
earnings and other comprehensive income.

       The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." The statement requires that an entity engaged in
mortgage banking activities classify any resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold these
investments. The statement is effective for 1999 for the Company; however,
management does not expect this pronouncement to have a significant impact on
the Company's financial position.

YEAR 2000

       The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000 and thereafter. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions and/or invoices or engage
in similar normal business activities.

       The Company has been actively involved in Year 2000 ("Y2K") issues and
has assessed its state of readiness by evaluating its information technology
("IT") and non-IT systems. IT systems commonly include data processing,
accounting, telephone/PBX systems, etc. Examples of non-IT systems are alarm
systems, fax machines and other miscellaneous systems.

       With respect to its mission critical IT systems, the Company estimates
that its Y2K identification, assessment, remediation and testing efforts are
substantially complete. Test results have been reviewed by the Company's
internal auditing coordinator in conjunction with financial industry
consultants. During 1999, further testing will be carried out in order to ensure
that all systems are working properly. The Company has assessed its Y2K status
in regard to non-IT systems and has determined that no material risk exists.

       The Company has also verbally communicated with its significant vendors
in order to determine the extent to which interfaces with such entities are
vulnerable to Y2K issues and whether the products and services purchased from
such entities are Y2K compliant. The Company has received either verbal or
written assurance from these vendors that they expect to address all their
significant Y2K issues on a timely basis. Further, the Company has conducted
telephonic Y2K evaluations with significant depositors and/or borrowers and has
evaluated the responses as part of its Y2K assessment. With respect to
significant depositors, the Company does not anticipate any material Y2K issues.
The Company has assessed the results of its evaluation regarding significant
borrowers and such results are reflected in its allowance for loan losses for
the year ended December 31, 1998. The Company also began in June 1998
incorporating the Y2K issue in its underwriting process as it relates to
significant borrowers, and has begun communicating the Y2K issue to its checking
account base via statement fliers. Further, the Company has been conducting Y2K
awareness seminars with its customer base beginning in January 1999.

                                       14
<PAGE>   15

       The Company believes that the cost of its Y2K identification, assessment,
remediation and testing efforts will not exceed $200,000 in terms of incremental
cash outflows. The Company spent approximately $150,000 as of March 26, 1999 and
expects to spend an additional $50,000 on such efforts. The source of these
funds can be provided from cash flows from operations of the Company.

       The Company anticipates that the most likely worst case scenario will be
a combination of several borrowers experiencing short term Y2K cash flow
problems and a pre-Y2K increased cash demand from its overall customer base. The
Company does not consider a computer system failure as likely because of the
extensive pre-Y2K preparation by the Company. The other commonly discussed
failure is a collapse of the power grid, which the Company considers unlikely in
view of the reports made by the various power companies in the newspapers with
respect to their Y2K readiness.

       If the Company has borrowers that experience Y2K cash flow problems, they
will be dealt with in the same routine manner in which normal cash flow
interruptions by borrowers are handled; however, the Company does not anticipate
any material Y2K failure of borrowers due to the Company's ongoing review
process. Any Y2K increase in cash demand will be funded by the Company's normal
currency ordering procedures.

       The Company's Y2K coordinator will continue to review the status of the
Company's Y2K readiness and report his findings to the Board of Directors.

                                       15
<PAGE>   16


Report of Independent Accountants



To the Board of Directors
Greene County Bancshares, Inc.


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Greene County Bancshares, Inc. and its subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

                                            PricewaterhouseCoopers LLP



Knoxville, Tennessee
January 29, 1999


                                       16


<PAGE>   17

GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>

                                                                                         1998                 1997
<S>                                                                                  <C>                  <C>
ASSETS

Cash and due from banks                                                              $     19,591,814     $     20,687,367
Securities available-for-sale (Note 3)                                                     26,726,813           33,851,953
Securities held-to-maturity - approximate
   market value of $3,619,748 and $7,637,774 in
   1998 and 1997, respectively (Note 3)                                                     3,619,992            7,627,126
Federal funds sold                                                                         24,300,000            5,500,000
Loans, net (Notes 4 and 5)                                                                466,661,145          441,389,766
Premises and equipment, net (Note 6)                                                       11,715,143            9,803,199
Accrued interest receivable                                                                 3,901,795            4,377,481
Deferred income taxes (Note 12)                                                             2,648,178            2,447,858
Cash surrender value of life insurance contracts                                            4,136,062            3,904,675
Other assets                                                                                4,878,583            4,512,276
                                                                                     ----------------     ----------------
Total assets                                                                          $   568,179,525      $   534,101,701
                                                                                     ================     ================
</TABLE>





The accompanying notes are an integral part of these consolidated financial
statements.






                                       17

<PAGE>   18

GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>

<S>                                                                                  <C>                  <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits (Note 7):
   Noninterest bearing demand deposits                                                $     37,053,958     $     35,708,317
   Interest bearing accounts:
      NOW                                                                                   12,883,063           81,936,674
      Money market transaction                                                             111,966,713           30,228,480
      Savings                                                                               47,526,285           46,800,738
      Certificates of deposit $100,000 and over                                             52,022,269           61,002,308
      Other certificates of deposit                                                        197,731,072          206,052,041
                                                                                     -----------------    -----------------


         Total deposits                                                                    459,183,360          461,728,558
                                                                                     -----------------    -----------------


Federal funds purchased                                                                      4,800,000                    -
Securities sold under agreements to repurchase                                               2,416,000            1,414,000
Accrued interest and other liabilities                                                       9,767,259            5,359,563
Related party notes payable (Note 5)                                                         2,511,418            2,561,418
Long-term debt (Note 8)                                                                     34,115,690           12,925,302
                                                                                     -----------------    -----------------


         Total liabilities                                                                 512,793,727          483,988,841
                                                                                     -----------------    -----------------

Commitments and contingencies (Notes 9, 11, 13, 14 and 17)

Shareholders' equity (Note 10):
   Common stock, par value $10, authorized 5,000,000
      shares; issued and outstanding 1,357,198 and 1,354,500
      shares in 1998 and 1997, respectively                                                 13,571,980           13,545,000
   Paid-in capital                                                                           4,172,180            4,052,656
   Retained earnings                                                                        37,421,151           32,332,574
   Accumulated other comprehensive income, net of income tax
      expense of $57,820 and $60,469 in 1998 and 1997, respectively                            220,487              182,630
                                                                                     -----------------    -----------------


      Total shareholders' equity                                                            55,385,798           50,112,860
                                                                                     -----------------    -----------------


                                                                                      $    568,179,525     $    534,101,701
                                                                                     =================    =================
</TABLE>





The accompanying notes are an integral part of these consolidated financial
statements.

                                                    (continued)



                                       18


<PAGE>   19

GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                               1998               1997               1996
<S>                                                                        <C>               <C>               <C>
Interest income:
   Loans                                                                    $  47,820,872     $  46,004,376     $  35,385,103
   Securities available-for-sale                                                1,684,453         2,342,170         3,111,304
   Securities held-to-maturity                                                    462,791           529,172           510,993
   Federal funds sold                                                             824,340           129,080           513,326
                                                                           --------------    --------------    --------------
         Total interest income                                                 50,792,456        49,004,798        39,520,726
Interest expense:
   Deposit accounts                                                            17,825,503        17,877,949        15,177,803
   Securities sold under agreements to repurchase                                 115,784           236,553           227,613
   Related party notes payable                                                    197,557           249,829           160,718
   Long-term debt                                                                 433,304           779,601           258,386
                                                                           --------------    --------------    --------------
         Total interest expense                                                18,572,148        19,143,932        15,824,520
                                                                           --------------    --------------    --------------
         Net interest income                                                   32,220,308        29,860,866        23,696,206
Provision for loan losses                                                     (3,417,010)       (5,953,205)       (2,973,193)
                                                                           --------------    --------------    --------------
Net interest income after provision for loan losses                            28,803,298        23,907,661        20,723,013
Noninterest income:
   Service charges, commissions and fees                                        3,742,053         3,168,699         2,593,594
   Net realized gains on calls of available-for-sale securities                         -             1,982                 -
   Gain on sale of branch                                                               -           191,261                 -
   Other income                                                                   813,436           559,174           817,186
                                                                           --------------    --------------    --------------
         Total noninterest income                                               4,555,489         3,921,116         3,410,780
                                                                           --------------    --------------    --------------
Noninterest expense:
   Salaries and benefits                                                       11,458,768         9,525,202         7,893,635
   Occupancy expenses                                                           1,413,988         1,219,125         1,057,418
   Furniture and equipment expense                                              1,373,130         1,354,745         1,315,721
   (Gain) loss on other real estate owned                                         (5,310)             6,053         (240,252)
   Net realized losses on sales of available-for-sale securities                        -                 -             3,488
   Federal insurance premiums                                                      65,414            54,989             6,187
   Other expenses                                                               6,155,972         4,848,725         4,763,713
                                                                           --------------    --------------    --------------
         Total noninterest expense                                             20,461,962        17,008,839        14,799,910
                                                                           --------------    --------------    --------------
Income before income taxes                                                     12,896,825        10,819,938         9,333,883
Income tax expense:
   State                                                                          604,699           670,691           515,065
   Federal                                                                      4,085,707         3,319,073         2,855,556
                                                                           --------------    --------------    --------------
         Total income tax expense                                               4,690,406         3,989,764         3,370,621
                                                                           --------------    --------------    --------------
         Net income                                                         $   8,206,419     $   6,830,174     $   5,963,262
                                                                           ==============    ==============    ==============

Per share of common stock:

   Net income, basic                                                        $        6.05     $        5.04     $        4.43
                                                                           ==============    ==============    ==============

   Net income, assuming dilution                                            $        6.02     $        5.03     $        4.43
                                                                           ==============    ==============    ==============
</TABLE>




The accompanying notes are an integral part of these consolidated financial
statements.





                                       19

<PAGE>   20


GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                         1998              1997              1996
<S>                                                                  <C>               <C>              <C>
Net income                                                            $  8,206,419      $  6,830,174     $  5,963,262

Other comprehensive income, net of tax:

Tax benefit from exercise of stock options                                  43,344                 -           82,804

Unrealized gains (losses) on securities                                    (5,487)           155,289        (291,923)
                                                                     -------------     -------------    -------------


Other comprehensive income                                                  37,857           155,289        (209,119)
                                                                     -------------     -------------    -------------


Comprehensive income                                                  $  8,244,276      $  6,985,463     $  5,754,143
                                                                     =============     =============    =============
</TABLE>







The accompanying notes are an integral part of these consolidated financial
statements.




                                       20
<PAGE>   21
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                                                                                        OTHER
                                                        COMMON         PAID-IN        RETAINED      COMPREHENSIVE
                                                         STOCK         CAPITAL        EARNINGS         INCOME         TOTAL
                                                         -----         -------        --------         ------         -----
<S>                                                  <C>             <C>            <C>             <C>           <C>
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

   Other comprehensive loss, net of tax

      Unrealized loss on securities                              -              -               -      (291,923)       (291,923)

      Tax benefit from exercise of nonincentive
           stock options                                         -              -               -         82,804          82,804

   Dividends paid ($1.72 per share)                              -              -     (2,328,858)              -     (2,328,858)

   Issuance of 27,123 shares                                90,410      1,135,381               -              -       1,225,791
                                                     -------------  -------------  --------------   ------------  --------------

December 31, 1996                                        4,514,850      4,050,105      37,133,040         27,341      45,725,336

   Net income                                                    -                      6,830,174              -       6,830,174

   Other comprehensive income, net of tax

      Unrealized gain on securities                              -              -               -        155,289         155,289

   Dividends paid ($1.92 per share)                              -              -     (2,600,640)              -     (2,600,640)

   Issuance of 45 shares                                       150          2,551               -              -           2,701

   Three-for-one stock split                             9,030,000              -     (9,030,000)              -               -
                                                     -------------  -------------  --------------   ------------  --------------

December 31, 1997                                       13,545,000      4,052,656      32,332,574        182,630      50,112,860

   Net income                                                    -              -       8,206,419              -       8,206,419

   Other comprehensive loss, net of tax

      Unrealized loss on securities                              -              -               -        (5,487)         (5,487)

      Tax benefit from exercise of

      nonincentive stock options                                 -              -               -         43,344          43,344

   Dividends paid ($2.30 per share)                              -              -     (3,117,842)              -     (3,117,842)

   Issuance of 2,698 shares                                 26,980        119,524               -              -         146,504
                                                     -------------  -------------  --------------   ------------  --------------

December 31, 1998                                     $ 13,571,980   $  4,172,180   $  37,421,151    $   220,487   $  55,385,798
                                                     =============  =============  ==============   ============  ==============

</TABLE>







The accompanying notes are an integral part of these consolidated financial
statements.




                                       21
<PAGE>   22

GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                                 1998              1997              1996
<S>                                                                          <C>              <C>              <C>
Net cash provided by operating activities:
   Net income                                                                 $   8,206,419    $   6,830,174    $   5,963,262
   Adjustments to reconcile net income to net
      cash provided by operating activities:
         Provision for loan losses                                                3,417,010        5,953,205        2,973,193
         Provision for depreciation and amortization                                993,523        1,146,564        1,096,120
         Amortization of investment security premiums, net of accretion             314,599          420,829          515,996
         Net realized (gains) losses on available-for-sale securities                     -          (1,982)            3,488
         Gain on sale of fixed assets                                               (5,030)                -                -
         (Gain) loss on other real estate owned                                     (5,310)            6,053        (240,252)
         Gain on sale of branch                                                           -        (191,261)                -
         Deferred income tax benefit                                              (200,320)        (573,157)        (677,653)
         Increase in cash surrender value of life insurance contracts             (231,387)        (154,003)        (170,472)
         Change in accrued income and other assets                                  437,319      (1,033,423)        1,238,459
         Change in accrued interest and other liabilities                         4,929,375          555,121      (1,047,045)
                                                                               ------------     ------------    -------------


Net cash provided by operating activities                                        17,856,198       12,958,120        9,655,096
                                                                               ------------     ------------    -------------


Cash flows from investing activities:
   Acquisition of bank, net of acquired cash                                              -                -        1,022,043
   Purchases of available-for-sale securities                                   (1,950,832)        (578,184)     (14,766,578)
   Proceeds from sales of available-for-sale securities                                   -                -        2,000,000
   Proceeds from maturities of available-for-sale securities                      8,770,371        9,510,288       36,488,422
   Purchases of securities held-to-maturity                                        (75,000)                -      (6,815,907)
   Proceeds from maturities of securities held-to-maturity                        4,065,000        1,800,000        6,748,835
   Net originations of loans                                                   (30,247,073)     (66,708,497)     (76,092,935)
   Proceeds from sales of other real estate owned                                   544,369          347,370          337,605
   Proceeds from sale of fixed assets                                                34,267                -                -
   Fixed asset additions                                                        (2,718,705)      (1,048,526)      (1,845,545)
   Decrease (increase) in federal funds sold                                   (18,800,000)      (5,500,000)       23,800,000
Cash transferred in sale of branch                                                       -         (988,302)               -
                                                                               ------------     ------------    -------------


         Net cash used by investing activities                                 (40,377,603)     (63,165,851)     (29,124,060)
                                                                               ------------     ------------    -------------
</TABLE>









The accompanying notes are an integral part of these consolidated financial
statements.

                                                   (continued)



                                       22
<PAGE>   23

GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>

                                                                                  1998                 1997              1996
<S>                                                                         <C>               <C>                 <C>
Cash flows from financing activities:
   Net increase in demand deposits, NOW, money
      market and savings accounts                                                14,755,810         5,259,522         11,056,917
   Net increase (decrease) in certificates of deposit                          (17,301,008)        49,078,207          9,708,911
   Increase in federal funds purchased                                            4,800,000                 -                  -
   Increase (decrease) in securities sold under agreements to repurchase          1,002,000       (1,858,000)        (1,512,000)
   Payments on related party notes payable                                         (50,000)          (50,000)           (50,000)
   Payments on long-term debt                                                   (2,309,612)      (19,769,657)       (19,781,151)
   Borrowings of long-term debt                                                  23,500,000        19,500,637         29,500,000
   Proceeds from issuance and sale of common stock                                  146,504             2,701            484,366
   Cash dividends paid                                                          (3,117,842)       (2,600,640)        (2,328,858)
                                                                            ---------------   ---------------    ---------------


         Net cash provided by financing activities                               21,425,852        49,562,770         27,078,185
                                                                            ---------------   ---------------    ---------------



Net increase (decrease) in cash and cash equivalents                            (1,095,553)         (644,961)          7,609,221



Cash and cash equivalents at beginning of year                                   20,687,367        21,332,328         13,723,107
                                                                            ---------------   ---------------    ---------------



                                                                             $   19,591,814    $   20,687,367     $   21,332,328
                                                                            ===============   ===============    ===============
</TABLE>




The accompanying notes are an integral part of these consolidated financial
statements.



                                       23



<PAGE>   24

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 subsidiary 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 1997 and
            1996 consolidated financial statements and accompanying notes to
            conform with the 1998 presentation.

            PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
            include the accounts of Greene County Bancshares, Inc. and its
            wholly-owned subsidiary, Greene County Bank (the Bank).  The
            Corporation's other wholly-owned subsidiary, Premier Bank of East
            Tennessee, combined with the Bank in October 1998.  Superior
            Financial Services, Inc. and GCB Acceptance Corp., Inc., consumer
            finance companies, are wholly owned subsidiaries of Greene County
            Bank.  Superior Mortgage, Inc., a mortgage company and Fairway
            Title Co., Inc., a title company, are also wholly owned
            subsidiaries 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 Bank is 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 $1,197,000 and $6,331,000 for the
            years ended December 31, 1998 and 1997, respectively.

            INVESTMENT 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 comprehensive
            income).

            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.

                                       24

<PAGE>   25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


1.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            Management assesses the adequacy of the allowance for loan losses
            by considering a combination of regulatory and credit risk
            criteria.  The entire loan portfolio is graded and potential loss
            factors are assigned accordingly.  The potential loss factors for
            impaired loans are assigned based on regulatory guidelines.  The
            regulatory criteria are set forth in the Interagency Policy
            Statement on the Allowance for Loan and Lease Losses.  The
            potential loss factors associated with unimpaired loans are based
            on historical net loss experience and management's review of trends
            within the portfolio and related industries.

            Generally, all loans within the portfolio are assigned a level of
            risk at inception.  Thereafter, loans are reviewed on an ongoing
            basis, with commercial loans receiving more frequent review.  The
            review includes loan payment and collateral status, borrowers'
            financial data and borrowers' internal operating factors such as
            cash flows, operating income, liquidity, leverage and loan
            documentation, and any significant change can result in an increase
            or decrease in the loan's assigned risk grade.  Aggregate dollar
            volume by risk grade is monitored on an ongoing basis.  Any changes
            of risk grades for consumer loans are usually based solely upon
            payment performance.

            Generally, the Bank maintains only a general loan loss allowance.
            This allowance is increased or decreased based upon management's
            assessment of the overall risk of its loan portfolio.
            Occasionally, a portion of the allowance may be allocated to a
            specific loan to reflect unusual circumstances associated with that
            loan.

            Management reviews certain key indicators on a monthly basis as
            well as year-end loss results.  This review process provides a
            degree of objective measurement that is used in conjunction with
            periodic internal evaluations.  To the extent that this process
            yields differences between estimated and actual observed losses,
            adjustments are made to provisions and/or the level of the
            allowance.

            Increases and decreases in the allowance for loan losses due to
            changes in the measurement of the impaired loans are included in
            the provision for loan 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.

            The Bank uses several factors in determining if a loan is impaired
            under Statement of Financial Accounting Standards (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
            and collateral status, borrowers' financial data and borrowers'
            operating factors such as cash flows, operating income, liquidity,
            leverage and loan documentation, and any significant changes.  A
            loan is considered impaired, based on current information and
            events, if it is probable that the Bank 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.


                                       25
<PAGE>   26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


1.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            At December 31, 1998 and 1997, the recorded investment in loans for
            which impairment has been recognized was approximately $7,345,000
            and $2,570,000, respectively, and these loans had a corresponding
            valuation allowance of $1,079,000 and $358,000, respectively.  The
            impaired loans at December 31, 1998 and 1997, 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,
            1998 and 1997, the average recorded investment in impaired loans
            was approximately $4,961,000 and $5,100,000, respectively.

            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.

            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.

                                       26
<PAGE>   27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


            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.  Management periodically evaluates the
            net realizability of the carrying amount of such assets.  These
            assets will be amortized on a straight-line basis over their
            estimated useful lives of ten 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 two defined
            contribution plans, 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.

            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.

            NET INCOME PER SHARE OF COMMON STOCK - The Corporation follows
            Statement of Financial Accounting Standards No. 128, Earnings Per
            Share, which requires dual presentation of basic and diluted EPS on
            the face of the income statement for all entities with complex
            capital structures and requires a reconciliation of the numerator
            and denominator of the basic EPS computation to the numerator and
            denominator of the diluted EPS computation.

                                       27
<PAGE>   28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


1.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

            COMPREHENSIVE INCOME - On January 1, 1998, the Corporation adopted
            Statement of Accounting Standards No. 130, Reporting of
            Comprehensive Income, which establishes standards for reporting and
            display of comprehensive income and its components (revenues,
            expenses, gains and losses) in a complete set of financial
            statements.  This statement also requires that all items that are
            required to be recognized under accounting standards as components
            of comprehensive income be reported in a financial statement that
            is displayed with the same prominence as other financial
            statements.  Reclassification of financial statements for earlier
            periods for comparative purposes is required.  Adoption of this new
            standard did not have a material effect on the Corporation's
            financial condition or the results of its operations.

            SEGMENT REPORTING - On December 31, 1998, the Corporation adopted
            Statement of Accounting Standards No. 131, Disclosures about
            Segments of an Enterprise and Related Information, which
            establishes standards for reporting by public companies of
            operating segments in annual financial statements and requires that
            those enterprises also report selected information about operating
            segments in interim financial reports issued to shareholders.  This
            statement also establishes standards for related disclosures about
            products.  This statement requires the reporting of financial and
            descriptive information about an enterprise's reportable operating
            segments.  The segment disclosures of SFAS 131 are described in
            Note 20 of the financial statements.

            DEFERRED COMPENSATION - On December 31, 1998, the Corporation
            adopted Statement of Accounting Standards No. 132, Employers'
            Disclosures about Pensions and Other Postretirement Benefits.  The
            statement revises employers' disclosures about pension and other
            postretirement benefit plans.  It does not change the measurement
            or recognition of those plans.  Restatement of disclosures for
            earlier periods for comparative purposes is required.  The
            disclosure impact of SFAS 132 is described in Note 11 of the
            financial statements.

            STOCK SPLIT - On September 5, 1997, the Corporation announced a
            3-for-1 stock split effected in the form of a 200% stock dividend,
            payable on October 3, 1997, to shareholders of record as of
            September 19, 1997.  All references to the outstanding number of
            shares and earnings/dividends per share have been restated to
            reflect the split.

            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.  The most significant estimate impacting the
            financial statements of the Corporation is the allowance for loan
            losses.  Actual results could differ from these estimates.

                                       28
<PAGE>   29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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 $216,000 in 1998 and 1997, respectively.  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.

            On October 16, 1998, the Corporation consolidated the operations of
            Premier Bank into the operations of the Bank.  As a result, Premier
            Bank is no longer an active entity.

                                       29
<PAGE>   30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


3.          SECURITIES:

            At December 31, 1998 and 1997, 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, 1998 and 1997, were as follows:


<TABLE>
<CAPTION>

1998
----
                                                        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                        $  22,286,787    $  247,880    $  114,194     $  22,420,473
  Obligations of state and political
    subdivisions                                         1,094,267        18,473             -         1,112,740
  Federal Home Loan Bank stock                           3,193,600             -             -         3,193,600
                                                     -------------    ----------    ----------     -------------
                                                     $  26,574,654    $  266,353    $  114,194     $  26,726,813
                                                     =============    ==========    ==========     =============

Held-to-maturity:
  Obligations of state and political
    subdivisions                                     $   3,619,992    $   59,143    $   59,387     $   3,619,748
                                                     =============    ==========    ==========     =============
</TABLE>


<TABLE>
<CAPTION>
1997
----
                                                          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                        $  30,132,241    $  317,549    $  165,945     $  30,283,845
  Obligations of state and political
    subdivisions                                         1,144,316         9,541           849         1,153,008
  Federal Home Loan Bank stock                           2,415,100             -             -         2,415,100
                                                     -------------    ----------    ----------     -------------
                                                     $  33,691,657    $  327,090    $  166,794     $  33,851,953
                                                     =============    ==========    ==========     =============

Held-to-maturity:
Obligations of state and political
subsivisions                                         $   7,627,126    $   43,507    $   32,859     $   7,637,774
                                                     =============    ==========    ==========     =============
</TABLE>








                                       30



<PAGE>   31


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

3.     SECURITIES, CONTINUED:

       Interest income from securities for the years ended December 31, 1998,
       1997 and 1996, consist of:


<TABLE>
<CAPTION>
                                                            1998                 1997                1996
<S>                                                     <C>                  <C>                 <C>
U.S. treasury securities                                $   139,297          $   165,720         $   421,236
Obligations of other U.S. government
  corporations and agencies                               1,545,155            2,105,423           2,622,980
Obligations of states and political
  subdivisions                                              282,161              387,097             479,174
Other securities                                            180,631              213,102              98,907
                                                        -----------          -----------         -----------
                                                        $ 2,147,244          $ 2,871,342         $ 3,622,297
                                                        ===========          ===========         ===========
</TABLE>


       Gross realized gains and losses on all sales of securities for the years
       ended December 31, 1998, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
                                                 1998                  1997                 1996
<S>                                           <C>                   <C>                  <C>
Gross realized gains:
  Available-for-sale                          $        -            $    1,982           $        -
                                              ==========            ==========           ==========

Gross realized losses:
Available-for-sale                            $        -            $        -           $    3,488
                                              ==========            ==========           ==========
</TABLE>


       Debt securities at December 31, 1998, will mature on the following
       schedule:

<TABLE>
<CAPTION>

                                                    AVAILABLE-FOR-SALE            HELD-TO-MATURITY
                                                    ------------------            ----------------
                                                               APPROXIMATE                  APPROXIMATE
                                                   BOOK          MARKET         BOOK           MARKET
                                                   VALUE         VALUE          VALUE          VALUE
<S>                                            <C>            <C>            <C>           <C>
Due in one year or less                        $  7,174,242   $  7,185,293   $   395,326   $   397,601
Due after one year through five years             1,991,375      2,022,623     2,824,666     2,881,534
Due after five years through ten years            5,816,366      5,860,695             -             -
Due after ten years                              11,592,671     11,658,202       400,000       340,613
                                               ------------   ------------   -----------   -----------
                                               $ 26,574,654   $ 26,726,813   $ 3,619,992   $ 3,619,748
                                               ============   ============   ===========   ===========
</TABLE>

       Investment securities with book and market values of $8,238,621 and
       $8,256,203 at December 31, 1998, respectively and $4,918,255 and
       $4,953,389 at December 31, 1997, respectively, were pledged to secure
       public and trust deposits and for other purposes as required or permitted
       by law.



                                       31
<PAGE>   32

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.     LOANS:

       Major classifications of loans at December 31, 1998 and 1997, are
       summarized as follows:

<TABLE>
<CAPTION>
                                                                        1998                        1997
<S>                                                                 <C>                        <C>
Commercial                                                          $ 121,294,075              $ 108,985,440
Commercial real estate                                                115,203,849                125,357,908
Mortgage installment                                                  153,159,913                146,226,882
Installment consumer                                                   80,147,158                 72,751,994
Other loans                                                            17,102,345                  3,154,342
                                                                    -------------              -------------
                                                                      486,907,340                456,476,566
Less:
Unearned income                                                        (9,993,687)                (5,932,977)
  Allowance for loan losses                                           (10,252,508)                (9,153,823)
                                                                    $ 466,661,145              $ 441,389,766
                                                                    =============              =============
</TABLE>


       At December 31, 1998 and 1997, loans on which the accrual of interest had
       been discontinued totaled $4,159,303 and $2,264,634, respectively.
       Unrecorded interest income on these loans aggregated approximately
       $260,554, $112,300 and $169,100 for 1998, 1997 and 1996, respectively.

       Loans-in-process at December 31, 1998 and 1997 totaled $13,302,325 and
       $921,754, respectively.

       A summary of activity in the allowance for loan losses for the years
       ended December 31, 1998, 1997 and 1996, was as follows:

<TABLE>
<CAPTION>
                                                         1998                  1997                 1996
<S>                                                  <C>                  <C>                   <C>
Balance at beginning of year                         $  9,153,823         $  7,330,676          $  4,654,234
Balances acquired in acquisition of
  Premier Bank                                                  -                    -               440,000
Provision for loan losses                               3,417,010            5,953,205             2,973,193
Recoveries                                                915,893            1,012,092               888,249
                                                     ------------         ------------          ------------
                                                       13,486,726           14,295,973             8,955,676
Loans charged to allowance                             (3,234,218)          (5,142,150)           (1,625,000)
                                                     ------------         ------------          ------------
                                                     $ 10,252,508         $  9,153,823          $  7,330,676
                                                     ============         ============          ============
</TABLE>


                                       32
<PAGE>   33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


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 Bank
       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>
<S>                                                                 <C>
Balance, December 31, 1996                                          $ 11,388,251
  Additions                                                            2,711,499
  Reductions                                                          (3,849,713)
                                                                    ------------

Balance, December 31, 1997                                            10,250,037
  Additions                                                            1,841,500
  Reductions                                                          (1,820,008)
                                                                    ------------
Balances, December 31, 1998                                         $ 10,271,529
                                                                    ============
</TABLE>


       In addition to the above, the Bank provides financing for purchasers of
       automotive and other transportation equipment from dealerships in which a
       director has more than a ten percent beneficial interest. Loans
       originated through these dealerships aggregated $1,739,085 during 1998
       and $1,583,653 for 1997. 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 $65,198
       and $8,868 at December 31, 1998 and 1997, respectively, are secondarily
       collateralized by dealer finance reserves and also provide for recourse
       against the dealerships to further protect the Banks against potential
       losses.

       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, 1998:


<TABLE>
<S>                                                                    <C>
Noncompete agreement, payable in yearly principal
  installments through January 2000                                    $    80,000


8% note, interest payments due quarterly, principal
  payments January 15, 2003 through January 15, 2008                       231,418


8% note, interest payments due quarterly, principal
  payments January 15, 2002 through January 15, 2008                     2,200,000
                                                                       -----------


                                                                       $ 2,511,418
                                                                       ===========
</TABLE>
                                       33
<PAGE>   34

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


5.     RELATED PARTY TRANSACTIONS, CONTINUED:

       Scheduled principal maturities of notes payable as of December 31, 1998,
       are:

<TABLE>
                 <S>                                 <C>
                        1999                         $    40,000
                        2000                              40,000
                        2001                                   -
                        2002                             100,000
                        2003                             131,418
                 Thereafter                            2,200,000
                                                     -----------
                                                     $ 2,511,418
                                                     ===========
</TABLE>


6.     PREMISES AND EQUIPMENT:

       Premises and equipment at December 31, 1998 and 1997, was comprised of
       the following:

<TABLE>
<CAPTION>
                                                                        1998                   1997
<S>                                                                <C>                     <C>
Land                                                               $   1,892,120           $  1,763,220
Banking quarters                                                       7,720,215              6,951,635
Leasehold improvements                                                 1,515,708              1,195,989
Furniture and fixtures                                                 6,061,456              5,356,170
Construction in progress                                                 899,082                117,352
Automobiles                                                              361,257                378,996
                                                                   -------------           ------------
                                                                      18,449,838             15,763,362
Less accumulated deprecition and amortization                         (6,734,695)            (5,960,163)
                                                                   -------------           ------------
                                                                   $  11,715,143           $  9,803,199
                                                                   =============           ============
</TABLE>


7.     DEPOSITS:

       The components of interest expense on deposits for the years ended
       December 31, 1998, 1997 and 1996, were:


<TABLE>
<CAPTION>
                                                             1998                  1997                 1996
<S>                                                      <C>                  <C>                   <C>
Interest bearing accounts:
  NOW                                                    $   1,054,950        $   1,556,528         $   1,400,414
  Money market transaction                                   1,584,073            1,132,337               950,906
  Savings                                                    1,210,700            1,241,428             1,185,304
  Certificates of deposit $100,000 and over                  3,070,421            3,093,701             2,080,723
  Other certificates of deposit                             10,905,359           10,853,955             9,560,456
                                                         -------------        -------------         -------------
                                                         $  17,825,503        $  17,877,949         $  15,177,803
                                                         =============        =============         =============
</TABLE>


                                       34
<PAGE>   35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


7.     DEPOSITS, CONTINUED:

       During the year ended December 31, 1998, the Bank purchased software that
       allowed the Bank to re-class deposits held in the NOW accounts to the
       Money Market transaction account. The purpose of transferring funds from
       the NOW account to the Money Market transaction account is to reduce or
       eliminate the Bank's reserve requirement at the Federal Reserve. The Bank
       transferred approximately $74,000,000 to the Money Market transaction
       account in 1998.

8.     LONG-TERM DEBT:

       The Bank has 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 the Bank's blanket pledge of
       mortgage loans aggregating approximately $88,710,000 and stock of the
       Federal Home Loan Bank.

       Long-term debt at December 31, 1998 and 1997, was summarized as follows:


<TABLE>
<CAPTION>
                                                                        1998                      1997
<S>                                                               <C>                        <C>
5.82% note, repaid February 15, 1998                              $            -             $   4,000,000
5.88% note, repaid May 20, 1998                                                -                 4,000,000
5.81% note, repaid December 2, 1998                                            -                 2,000,000
5.65% note, payable in monthly installments of
  $21,854 through July 1, 2003                                         1,039,901                 1,253,257
6.35% note, payable in monthly installments of
  $7,368 through September 1, 2013                                       842,357                   878,824
6.10% note, payable in monthly installments of
  $8,493 through July 1, 2008                                            733,432                   793,221
4.38% note, interest payments due monthly,
  principal due November 18, 2008                                      2,500,000                         -
4.74% note, interest payments due monthly,
  principal due November 20, 2008                                      3,000,000                         -
4.64% note, interest payments due monthly,
  principal due December 11, 2003                                      2,000,000                         -
4.56% note, interest payments due monthly,
  principal due December 8, 2008                                       2,000,000                         -
4.23% note, interest payments due monthly,
  principal due December 15, 2008                                      2,000,000                         -
5.50% note, interest payments due monthly,
  principal due January 4, 1999                                       20,000,000                         -
                                                                   -------------             -------------


                                                                   $  34,115,690             $  12,925,302
                                                                   =============             =============
</TABLE>

                                       35
<PAGE>   36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


8.     LONG-TERM DEBT, CONTINUED:

       Scheduled principal maturities of long-term debt outstanding as of
       December 31, 1998, are:

<TABLE>
<CAPTION>
                         <S>                                                      <C>
                               1999                                                $20,303,605
                               2000                                                    321,755
                               2001                                                    340,993
                               2002                                                    361,383
                               2003                                                  2,249,693
                         Thereafter                                                 10,538,261
                                                                                   -----------

                                                                                   $34,115,690
                                                                                   ===========
</TABLE>


       At December 31, 1998, the Corporation maintained three unused federal
       funds lines of credit totaling $20,000,000 with interest at the federal
       funds buy rate at three correspondent banks. 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. The line of credit will expire on September
       5, 1999. The Bank also maintains a $25,000,000 letter of credit with the
       FHLB, which is used to pledge the Corporation's public deposits with the
       state collateral pool, at a quoted one-year variable interest rate which
       will expire December 16, 1999.

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, 1998 for each of the
       years in the five year period ending December 31, 2001, and thereafter
       were as follows:

<TABLE>
<CAPTION>
                               <S>                                          <C>
                                     1999                                    $ 169,074
                                     2000                                       61,491
                                     2001                                       15,138
                                     2002                                            -
                                     2003                                            -
                               Thereafter                                            -
                                                                             ---------
                                                                             $ 245,703
                                                                             =========
</TABLE>


       The total rental expense for operating leases was $396,982, $164,506 and
       $305,618 for the years ended December 31, 1998, 1997 and 1996,
       respectively.



                                       36
<PAGE>   37



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, and 1,800 as a result
       of a 1997 stock split. The options are fully vested upon grant, expire
       ten years from the date of grant and are cancelled if the key executive
       voluntarily resigns his employment or is terminated for cause.
       Compensation expense recognized by the Corporation in connection with
       these options was $93,100, $82,800 and $30,000 for the years ended
       December 31, 1998, 1997 and 1996, 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
       1998, 1997 and 1996, the Corporation granted additional stock options to
       certain key executives to purchase 6,000, 5,540 and 4,980 shares at $115,
       $100 and $71.67 per share, respectively. If a key executive is a ten
       percent or greater stockholder at the time of exercise, the option price
       is increased by ten 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 twenty percent per year and expire ten years from the date of
       grant.



                                       37
<PAGE>   38



10.    STOCK OPTIONS, CONTINUED:

       A summary of the status of the Corporation's Plans as of December 31,
       1998, 1997 and 1996, and changes during the years ended on those dates is
       presented below:

<TABLE>
<CAPTION>
1998
----
                                                   KEY EXECUTIVE            OTHER KEY EXECUTIVES                    TOTAL
                                                   -------------            --------------------                -------------
                                                      WEIGHTED AVERAGE              WEIGHTED AVERAGE           WEIGHTED AVERAGE
                                                          EXERCISE                      EXERCISE                   EXERCISE
                                              OPTIONS      PRICE         OPTIONS         PRICE       OPTIONS        PRICE


<S>                                         <C>        <C>             <C>             <C>         <C>            <C>
Outstanding at beginning of year               3,600     $   53.07        19,298       $   72.19      22,898      $   69.19
Granted                                        1,800         61.21         6,000          115.00       7,800         102.59
Exercised                                          -             -        (2,698)          54.30      (2,698)         54.30
Forfeited                                          -             -        (1,877)          80.63      (1,877)         80.63
                                            --------     ---------     ---------       ---------   ---------      ---------
Outstanding at end of year                     5,400     $   55.78        20,723       $   86.15      26,123      $   79.87
                                            ========     =========     =========       =========   =========      =========


Options exercisable at year end                5,400     $   55.78         7,785       $   68.19      13,185      $   63.11
                                            ========     =========     =========       =========   =========      =========



Fair value of each option
  granted during the year                           $51.50                       $17.42
                                                    ======                       ======


1997
----


Outstanding at beginning of year               1,800     $   50.64        13,803       $   60.99      15,603      $   59.80

Granted                                        1,800         55.50         5,540          100.00       7,340          89.09


Exercised                                          -             -           (45)          60.00         (45)         60.00
                                            --------     ---------     ---------       ---------   ---------      ---------

Outstanding at end of year                     3,600     $   53.07        19,298       $   72.19      22,898      $   69.19
                                            ========     =========     =========       =========   =========      =========


Options exercisable at year end                3,600     $   53.07         7,434       $   55.63      11,034      $   54.79
                                            ========     =========     =========       =========   =========      =========




Fair value of each option
  granted during the year                         $46.99                                     $19.20
                                                  ======                                     ======
</TABLE>




















                                       38
<PAGE>   39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


10.    STOCK OPTIONS, CONTINUED:

<TABLE>
<CAPTION>
  1996
  ----

                                               KEY EXECUTIVE      OTHER KEY EXECUTIVE           TOTAL
                                               -------------     --------------------- ------------------------
                                                       WEIGHTED-             WEIGHTED-               WEIGHTED-
                                                       AVERAGE               AVERAGE                 AVERAGE
                                                       EXERCISE              EXERCISE                EXERCISE
                                           OPTIONS      PRICE     OPTIONS     PRICE      OPTIONS      PRICE

<S>                                       <C>          <C>       <C>         <C>        <C>          <C>
Outstanding at beginning of year            11,244     $ 38.27      9,900    $  54.44      21,144    $  45.84
Granted                                      1,800       50.64      4,980       71.67       6,780       66.07
Exercised                                  (11,244)      38.27     (1,077)      50.19     (12,321)      39.31
                                          --------     -------   --------    --------   ---------    --------
Outstanding at end of year                   1,800     $ 50.64     13,803    $  60.99      15,603    $  59.80
                                          ========     =======   ========    ========   =========    ========


Options exercisable at year end              1,800     $ 50.64      5,703    $  52.21       7,503    $  51.83
                                          ========     =======   ========    ========   =========    ========


Fair value of each option
  granted during the year                         $26.72                 $13.97
                                                  ======                 ======
</TABLE>






The following table summarizes information about the Plans' stock options at
December 31, 1998:




<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                                   -------------------                -------------------
                                NUMBER     WEIGHTED-AVERAGE         NUMBER        WEIGHTED
        RANGE OF             OUTSTANDING      REMAINING          EXERCISABLE      AVERAGE
     EXERCISE PRICES         AT 12/31/98   CONTRACTUAL LIFE      AT 12/31/98   EXERCISE PRICE

    <S>                           <C>           <C>                 <C>          <C>
     *$50.64 - $61.21              5,400        9.0                 5,400        $  55.78

     $48.33 - $71.67               9,969        7.0                 6,136        $  58.44

    $100.00 - $115.00             10,754        9.6                 1,649        $ 106.99
</TABLE>

*Compensation for the key executive.



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>
                                           1998                        1997                        1996
                                --------------------------  --------------------------- ---------------------------
                                     AS                           AS                          AS
                                  REPORTED      PRO FORMA      REPORTED     PRO FORMA      REPORTED     PRO FORMA

<S>                              <C>           <C>           <C>           <C>           <C>           <C>
Net income                       $ 8,206,419   $ 8,151,888   $ 6,830,174   $ 6,775,830   $ 5,963,262   $ 5,924,579

Net income per share             $      6.05   $      6.01   $      5.04   $      5.00   $      4.43   $      4.40

Net income per share,

  assuming dilution              $      6.02   $      5.98   $      5.03   $      4.99   $      4.43   $      4.40
</TABLE>





                                       39
<PAGE>   40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


10.    STOCK OPTIONS, CONTINUED:

       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 1998, 1997 and 1996,
       respectively: dividend growth rate of 15%, 12% and 12%; expected
       volatility of 9.8%, 10.38% and 7.75%: risk-free interest rates of 5%,
       5.5% and 6.6%; and expected lives of 7 years, 7 years and 7 years.

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 have
       the option to contribute from three to ten percent of their monthly
       salary to the Plan. Effective January 1, 1998, the Corporation amended
       the profit-sharing plan to provide for a 2% company contribution. The
       Corporation contributed $80,600 in 1998. The Corporation made no
       contributions to this plan for the years ended December 31, 1997 and
       1996.

       The Corporation also has a contributory money purchase plan covering
       certain employees with one year or more of service. While the employees
       do not contribute to the plan, the Corporation makes contributions.
       Effective January 1, 1998, the Corporation amended the money purchase
       plan to provide for a contribution in the amount of 13% of each eligible
       participant's gross earnings, less bonuses and vacations, actually paid
       or received. In the prior years the Corporation made contributions in an
       amount equal to 15% of each eligible participant's gross earnings, less
       bonuses and vacations, actually paid or received. The contributions by
       the Corporation for the money purchase plan were $539,400, $571,569 and
       $505,031 for 1998, 1997 and 1996, respectively.

       The Bank has 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.

       Directors of the Corporation and the Bank also 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 $1,033,053 and $938,323 at December 31, 1998 and
       1997, 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 sheets. 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.



                                       40
<PAGE>   41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


12.    INCOME TAXES:

       The components of income tax expense for the years ended December 31,
       1998, 1997 and 1996, were:

<TABLE>
<CAPTION>
                                            1998            1997           1996
<S>                                     <C>             <C>             <C>
Current income taxes:
  Federal                               $ 4,211,321     $ 3,831,898     $ 3,461,877
  State                                     679,405         731,023         586,397
                                        -----------     -----------     -----------
                                          4,890,726       4,562,921       4,048,274
Deferred income tax benefit                (200,320)       (573,157)       (677,653)
                                        -----------     -----------     -----------
                                        $ 4,690,406     $ 3,989,764     $ 3,370,621
                                        ===========     ===========     ===========
</TABLE>


       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, 1998, 1997 and 1996, was as follows:

<TABLE>
<CAPTION>
                                                                  1998                   1997                  1996
<S>                                                           <C>                  <C>                     <C>
Tax at statutory rates                                        $  4,384,921         $  3,678,779            $  3,173,520
Tax increases (decreases) attributable to:  
  Tax exempt interest                                             (121,401)            (131,613)               (180,099)
  State income tax less federal tax benefit                        399,101              482,475                 387,022
  Interest expense disallowed                                       34,757               38,813                  20,040
  Dividends                                                        (32,770)             (27,797)                (11,551)
  Option compensation                                               31,650               28,152                  10,200
  Goodwill amortization                                             68,226               36,031                  35,785
  Cash surrender value earnings                                    (71,505)             (66,718)                (58,557)
  Other                                                             (2,573)             (48,358)                 (5,739)
                                                              ------------         ------------            ------------

                                                              $  4,690,406         $  3,989,764            $  3,370,621
                                                              ============         ============            ============
</TABLE>

       The significant components of the Corporation's deferred tax assets and
       liabilities at December 31, 1998 and 1997, were as follows:

<TABLE>
<CAPTION>
                                                                              1998                  1997
<S>                                                                       <C>                  <C>
Deferred tax assets:
  Allowance for loan losses and other real estate owned                   $  3,652,946         $  3,162,045
  Deferred compensation                                                        376,719              355,992
                                                                          ------------         ------------

     Gross deferred tax assets                                               4,029,665            3,518,037
                                                                          ------------         ------------
Deferred tax liabilities:
  Depreciation                                                                 604,198              533,785
  Unrealized appreciation on available-for-sale securities                      57,820               60,469
  Core deposit intangible                                                      292,670              334,481
  FHLB stock                                                                   210,085              141,444
  Other                                                                        216,714                   -
                                                                          ------------         ------------

     Gross deferred tax liabilities                                          1,381,487            1,070,179
                                                                          ------------         ------------

Net deferred tax asset                                                    $  2,648,178         $  2,447,858
                                                                          ============         ============
</TABLE>










                                       41
<PAGE>   42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


13.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:

       The Bank is party to financial instruments with off-balance-sheet risk in
       the normal course of business to meet the financing needs of its
       customers and to reduce its 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 Bank's 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 Bank uses the same credit policies in
       making these commitments and conditional obligations as it does for
       on-balance-sheet instruments.

       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 Bank evaluates each customer's
       credit worthiness on a case-by-case basis. The amount of collateral
       obtained if deemed necessary by the Bank 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 Bank
       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 Bank's 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, 1998 and 1997
       amounted to $4,901,888 and $1,931,888, respectively. Outstanding
       commitments to lend at fixed rates were $17,244,863 and $1,608,807 and at
       variable rates were $6,088,328 and $3,423,217 at December 31, 1998 and
       1997, respectively. Undisbursed advances on customer lines of credit were
       $58,284,854 and $61,141,551 at December 31, 1998 and 1997, respectively.
       The amount available for borrowing under inventory collateralized loans
       was $4,307,270 at December 31, 1998 and $3,970,495 at December 31, 1997.
       The Bank does 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.



                                       42
<PAGE>   43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


14.    CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS:

       The Corporation and the Bank 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 financial
       statements of the Corporation and the Bank. Under capital adequacy
       guidelines and the regulatory framework for prompt corrective action, the
       Bank must meet specific capital guidelines that involves quantitative
       measures of the assets, liabilities, and certain off-balance-sheet items
       of the Corporation and the Bank as calculated under regulatory accounting
       practices. The 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 Corporation and the Bank to maintain minimum amounts
       and ratios (set forth in the table below) of total and Tier 1 capital (as
       defined in the regulations) to risk-weighted assets (as defined), and of
       Tier 1 capital (as defined) to average total consolidated assets (as
       defined). Management believes, as of December 31, 1998 and 1997, that the
       Corporation and the Bank met all capital adequacy requirements to which
       they were subject.

       The Corporation and the Bank are well capitalized under the regulatory
       framework for prompt corrective action. To be categorized as well
       capitalized the Corporation and the Bank must maintain minimum total
       risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
       the table.



                                       43
<PAGE>   44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.    CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS, CONTINUED:


<TABLE>
<CAPTION>
                                                                             REGULATORY                         TO BE WELL
                                                                            REQUIREMENTS                     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, 1998:
  Total Capital (to Risk
Weighted Assets):
     Consolidated                    58,868,000      13.02%               36,182,960   >8%                45,228,700        >10%
                                                                                       -                                    -
     Greene County Bank              60,368,000      13.35%               36,184,160   >8%                45,230,200        >10%
                                                                                       -                                    -
Premier Bank*                                 -      0.00%                         -    0%                         -         0%

Tier I Capital (to Risk
  Weighted Assets):
     Consolidated                    53,158,000      11.75%               18,091,480   >4%                27,137,220        >6%
                                                                                       -                                    -
     Greene County Bank              54,657,000      12.08%               18,092,080   >4%                27,138,120        >6%
                                                                                       -                                    -
     Premier Bank*                            -      0.00%                         -    0%                         -         0%

  Tier I Capital (to Average
  Assets):
     Consolidated                    53,158,000      9.86%                21,570,320   >4%                26,962,900        >5%
                                                                                       -                                    -
     Greene County Bank              54,657,000      10.16%               21,524,840   >4%                26,906,050        >5%
                                                                                       -                                    -
     Premier Bank*                            -      0.00%                         -    0%                         -         0%

As of December 31, 1997:

Total Capital (to Risk Weighted 
  Assets):
     Consolidated                  $ 53,035,000      12.33%             $ 34,408,000   >8%              $ 43,010,000        >10%
                                                                                       -                                    -
     Greene County Bank              51,457,000      12.87%               31,981,840   >8%                39,977,300        >10%
                                                                                       -                                    -
     Premier Bank                     3,217,000      11.14%                2,310,320   >8%                 2,887,900        >10%
                                                                                       -                                    -
  Tier I Capital (to Risk Weighted 
  Assets):
     Consolidated                    47,612,000      11.07%               17,204,000   >4%                25,806,000        >6%
                                                                                       -                                    -
     Greene County Bank              46,415,000      11.61%               15,990,920   >4%                23,986,380        >6%
                                                                                       -                                    -
     Premier Bank                     2,854,000      9.88%                 1,155,160   >4%                 1,732,740        >6%
                                                                                       -                                    -
  Tier I Capital (to Average
  Assets):
     Consolidated                    47,612,000      9.30%                20,481,840   >4%                25,602,300        >5%
                                                                                       -                                    -
     Greene County Bank              46,415,000      9.80%                18,939,440   >4%                23,674,300        >5%
                                                                                       -                                    -
     Premier Bank                     2,854,000      7.67%                 1,487,560   >4%                 1,859,450        >5%
                                                                                       -                                    -
</TABLE>

* Combined with Greene County Bank in 1998



                                       44
<PAGE>   45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

14.    CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS, CONTINUED:

       The Corporation's principal source of funds is dividends received from
       the Bank. Under applicable banking laws, the Bank 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 Bank. As a practical matter, dividend payments by the Bank to the
       Corporation would be limited by the necessity to maintain appropriate
       amounts for capital adequacy purposes under federal banking regulations.

15.    ADDITIONAL CASH FLOW INFORMATION:

       Income taxes paid during the years ended December 31, 1998, 1997 and 1996
       amounted to $4,523,019, $4,460,000 and $5,273,919, respectively. Interest
       expense paid in cash during the years 1998, 1997 and 1996 amounted to
       $18,845,800, $18,970,895 and $15,632,435, respectively.

       Significant noncash transactions for the years ended December 31, 1998,
       1997 and 1996, were as follows:



<TABLE>
<CAPTION>
                                                                 1998             1997              1996
<S>                                                          <C>              <C>               <C>
Financed sales of other real estate owned                    $         -      $   147,128       $    59,750
Foreclosed loans transferred to OREO                           1,558,684          784,769           380,587
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>




                                       45
<PAGE>   46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

16.    PARENT COMPANY FINANCIAL INFORMATION:

       Condensed financial information for Greene County Bancshares, Inc.
       (parent company only) is as follows:


             CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                                ------------
                                                                           1998               1997
<S>                                                                     <C>                <C>
ASSETS

Cash                                                                    $    928,198       $    983,385
Investments in subsidiary                                                 55,371,639         50,043,024
Cash surrender value of life insurance contracts                             202,963            193,524
Other assets                                                               2,039,019          2,066,220
                                                                        ------------       ------------
                                                                        $ 58,541,819       $ 53,286,153
                                                                        ============       ============

LIABILITIES

Deferred income taxes                                                   $    210,068       $    302,980
Related party notes payable                                                2,511,418          2,561,418
Other liabilities                                                            434,535            308,895
                                                                        ------------       ------------
                                                                           3,156,021          3,173,293
                                                                        ------------       ------------

SHAREHOLDERS' EQUITY

Common stock                                                              13,571,980         13,545,000
Paid-in capital                                                            4,172,180          4,052,656
Retained earnings                                                         37,421,151         32,332,574
Net unrealized depreciation on available-for-sale securities,
   net of income tax expense (benefit) of $57,820
   and $60,469 in 1998 and 1997, respectively                                220,487            182,630
                                                                        ------------       ------------

      Total shareholders' equity                                          55,385,798         50,112,860
                                                                        ------------       ------------

      Total liabilities and shareholders' equity                        $ 58,541,819       $ 53,286,153
                                                                        ============       ============
</TABLE>




                                       46
<PAGE>   47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

16.         PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:



                 CONDENSED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                                    ------------------------
                                                            1998              1997               1996
<S>                                                      <C>               <C>                <C>
Revenue:

  Equity in undistributed earnings of subsidiary         $ 5,334,099       $ 3,902,503        $ 3,862,086
  Dividends from subsidiaries                              3,355,057         3,347,855          3,022,100
  Other income                                               147,130           126,212            107,871
                                                         -----------       -----------        -----------

    Total revenue                                          8,836,286         7,376,570          6,992,057

Related party interest expense                               197,557           247,215            160,718
Other expense                                                745,050           556,784            524,547
                                                         -----------       -----------        -----------

Income before income taxes                                 7,893,679         6,572,571          6,306,792

Income tax expense (benefit)                                (312,740)         (257,603)           343,530
                                                         -----------       -----------        -----------

Net income                                               $ 8,206,419       $ 6,830,174        $ 5,963,262
                                                         ===========       ===========        ===========
</TABLE>



                                       47
<PAGE>   48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

16.    PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:

                CONDENSED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            1998              1997              1996
<S>                                                                      <C>               <C>               <C>
Cash flows from operating activities:

  Net income                                                             $ 8,206,419       $ 6,830,174       $ 5,963,262
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Equity in undistributed earnings of subsidiary                      (5,334,099)       (3,902,503)       (3,862,086)
      Depreciation and amortization                                          215,999           215,999           232,855
      Change in other assets                                                (281,713)          (71,344)          537,500
      Change in other liabilities                                            125,640           (30,959)          (22,236)
                                                                         -----------       -----------       -----------
        Net cash provided by operating activities                          2,932,246         3,041,367         2,849,295
                                                                         -----------       -----------       -----------

Cash flows from investing activities:
  Acquisition of bank                                                              -                 -          (708,582)
  Increase in cash surrender value of life insurance contracts                (9,439)           (9,416)           (6,128)
                                                                         -----------       -----------       -----------
        Net cash used by investing activities                                 (9,439)           (9,416)         (714,710)
                                                                         -----------       -----------       -----------

Cash flows from financing activities:

  Capital contributed to subsidiary                                                -          (500,000)                -
  Proceeds from issuance and sale of common stock                            189,848             2,701           484,366
  Repayments of related party debt                                           (50,000)          (50,000)          (50,000)
  Repayments of debt                                                               -                 -          (327,239)
  Dividends paid                                                          (3,117,842)       (2,600,640)       (2,328,858)
                                                                         -----------       -----------       -----------
        Net cash used by financing activities                             (2,977,994)       (3,147,939)       (2,221,731)
                                                                         -----------       -----------       -----------

Net decrease in cash                                                         (55,187)         (115,988)          (87,146)
Cash at beginning of year                                                    983,385         1,099,373         1,186,519
                                                                         -----------       -----------       -----------
Cash at end of year                                                      $   928,198       $   983,385       $ 1,099,373
                                                                         ===========       ===========       ===========
</TABLE>




                                       48
<PAGE>   49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


17.    COMMITMENTS AND CONTINGENCIES:

       The Corporation is 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.



                                       49
<PAGE>   50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

18.    FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:

       The estimated fair values of the Corporation's financial instruments at
       December 31, 1998 and 1997, were as follows (rounded to the nearest
       thousand):

<TABLE>
<CAPTION>
                                                           1998                                       1997
                                                           ----                                       ----
                                             CARRYING                FAIR               CARRYING               FAIR
                                              VALUE                  VALUE               VALUE                 VALUE
                                              -----                  -----               -----                 -----
<S>                                        <C>                    <C>                <C>                   <C>
Financial assets:

  Securities                               $  30,347,000          $  30,347,000       $  41,479,000         $  41,490,000
  Federal funds sold                          24,300,000             24,300,000           5,500,000             5,500,000
  Loans, net                                 466,661,000            467,521,000         441,390,000           438,824,000

Financial liabilities:

  Deposits                                 $ 459,183,000          $ 442,375,000       $ 461,729,000         $ 444,939,000
  Securities sold under agreements
    to repurchase                              2,416,000              2,416,000           1,414,000             1,414,000
  Federal funds purchased                      4,800,000              4,800,000                   -                     -
  Long-term debt                              34,116,000             34,145,000          12,925,000            12,917,000
  Related party notes payable                  2,511,000              2,465,000           2,561,000             2,561,000
</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, 1998 and 1997.

19.    EARNINGS PER SHARE OF COMMON STOCK:

       Basic earnings per share of common stock is computed by dividing net
       income available for common shareholders by the weighted average number
       of common shares outstanding. Diluted earnings per share is computed by
       dividing adjusted net income by the weighted average number of common
       shares and assumed conversions of dilutive securities outstanding during
       each year. Stock options are regarded as dilutive securities. Dilutive
       securities are computed using the treasury stock method.



                                       50
<PAGE>   51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

19.    EARNINGS PER SHARE OF COMMON STOCK, CONTINUED:

       The following is a reconciliation of the numerators and denominators used
       in the basic and diluted earnings per share computations for the years
       ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                      1998                                  1997                                 1996
                                      ----                                  ----                                 ----
                          INCOME               SHARES           INCOME              SHARES           INCOME              SHARES
                        -----------         -------------     -----------        -------------     -----------        ------------
                        (NUMERATOR)         (DENOMINATOR)     (NUMERATOR)        (DENOMINATOR)     (NUMERATOR)        (DENOMINATOR)
<S>                     <C>                 <C>               <C>                <C>               <C>                <C>
BASIC EPS

Income available
  to common
  shareholders          $ 8,206,419           1,355,498       $ 6,830,174          1,354,498       $ 5,963,262          1,344,852

EFFECT OF DILUTIVE
SECURITIES
Stock options
  outstanding                     -               7,782                 -              4,109                 -              2,664
                        -----------         -----------       -----------        -----------       -----------        -----------

DILUTED EPS
Income available
  to common
  shareholders
  plus assumed
  conversions           $ 8,206,419           1,363,280       $ 6,830,174          1,358,607       $ 5,963,262          1,347,516
                        ===========         ===========       ===========        ===========       ===========        ===========
</TABLE>




20.    SEGMENT INFORMATION:

       The Bank's principal business consists of attracting deposits from the
       general public and investing those funds, together with funds generated
       from operations and from principal and interest payments on loans,
       primarily in commercial loans, commercial real estate loans, consumer
       loans and single-family mortgage loans. The Bank has four wholly-owned
       subsidiaries; a consumer finance business, a mortgage banking operation,
       a subprime automobile lending operation and a title insurance business.
       These subsidiaries have been disclosed below in the other column as they
       do not meet quantitative threshold on an individual basis.

       The accounting policies of the segments are the same as those described
       in the summary of significant accounting policies. Intersegment revenues
       and expenses are accounted for as if they were to third parties at
       current market prices.

       The reportable segments are strategic business units that offer different
       products and services. They are managed separately because each requires
       different marketing strategies.



                                       51
<PAGE>   52


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

20.    SEGMENT INFORMATION, CONTINUED:

<TABLE>
<CAPTION>
1998                                    BANK                  OTHER              ELILMINATIONS            TOTAL
<S>                                 <C>                   <C>                   <C>                    <C>
Interest income                     $  45,035,584         $   8,424,664         $   (2,667,792)        $  50,792,456
Interest expense                       18,374,592             2,865,348             (2,667,792)           18,572,148
                                    -------------         -------------         --------------         -------------
Net interest income                 $  26,660,992         $   5,559,316         $            -         $  32,220,308
                                    =============         =============         ==============         =============

Provision for loan losses           $   1,468,533         $   1,948,477         $            -         $   3,417,010
Noninterest income                      3,871,232             1,571,161               (886,904)            4,555,489
Noninterest expense                    15,757,712             4,978,006               (273,756)           20,461,962
Income tax expense                      4,616,824                73,582                      -             4,690,406
                                    -------------         -------------         --------------         -------------

Segment net income                  $   8,689,155             $ 130,412         $     (613,148)        $   8,206,419
                                    =============         =============         ==============         =============

Segment assets                      $ 567,732,386         $ 100,471,188         $ (100,024,049)        $ 568,179,525
                                    =============         =============         ==============         =============

1997

Interest income                     $  45,095,525         $   5,477,748         $   (1,568,475)        $  49,004,798
Interest expense                       18,962,133             1,750,274             (1,568,475)           19,143,932
                                    -------------         -------------         --------------         -------------
Net interest income                 $  26,133,392         $   3,727,474         $            -         $  29,860,866
                                    =============         =============         ==============         =============

Provision for loan losses               2,816,227             3,136,978                      -             5,953,205
Noninterest income                      2,439,416               966,171                515,529             3,921,116
Noninterest expense                    13,795,797             3,471,074               (258,032)           17,008,839
Income tax expense                      4,712,409              (722,645)                     -             3,989,764
                                    -------------         -------------         --------------         -------------

Segment net income                  $   7,248,376         $   1,191,763         $      773,561         $   6,830,174
                                    =============         =============         ==============         =============

Segment assets                      $ 532,305,851         $  76,545,128         $  (74,749,278)        $ 534,010,701
                                    =============         =============         ==============         =============

1996

Interest income                     $  38,096,534         $   2,124,082         $     (699,890)        $  39,520,726
Interest expense                       15,693,015               831,395               (699,890)           15,824,520
                                    -------------         -------------         --------------         -------------
Net interest income                 $  22,403,519         $   1,292,687         $            -         $  23,696,206
                                    =============         =============         ==============         =============

Provision for loan losses           $   2,353,500         $     619,693         $            -         $   2,973,193
Noninterest income                      3,484,299               427,657               (501,176)            3,410,780
Noninterest expense                    13,733,290             1,424,878               (358,258)           14,799,910
Income tax expense                      2,913,354               457,267                      -             3,370,621
                                    -------------         -------------         --------------         -------------

Segment net income                  $   6,887,674         $    (781,494)        $     (142,918)        $   5,963,262
                                    =============         =============         ==============         =============

Segment assets                      $ 475,417,557         $  57,421,739         $  (54,790,990)        $ 478,048,306
                                    =============         =============         ==============         =============
</TABLE>





                                       52
<PAGE>   53



                         MARKET AND DIVIDEND INFORMATION

       There currently are 1,357,948 shares of Common Stock outstanding and
approximately 1,650 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 (2)
                                     -----------         -------------

<S>                           <C>                        <C>
FISCAL 1997:
   First quarter               $         76.67(1)        $    0.416(1)
   Second quarter                        76.67(1)             0.417(1)
   Third quarter                         83.33(1)             0.417(1)
   Fourth quarter                       100.00                0.670
                                                         ----------
                                                         $    1.920
                                                         ==========

FISCAL 1998:
   First quarter               $        110.00           $    0.500
   Second quarter                       110.00                0.500
   Third quarter                        115.00                0.500
   Fourth quarter                       115.00                0.800
                                                         ----------
                                                         $    2.300
                                                         ==========
</TABLE>

-------------------

(1)    The sales price and dividend information has been restated to reflect the
       effect of the Company's 3-for-1 stock split effected as a stock dividend
       in October 1997.

(2)    For information regarding restrictions on the payment of dividends by the
       Bank 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.

                                       53