<PAGE>   1

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                                   FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                                       OR

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                         Commission file number 33-94050

                             VOLUNTEER BANCORP, INC.
                 (Name of small business issuer in its charter)

           TENNESSEE                                     62-1271025
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)                 

                              210 EAST MAIN STREET
                          ROGERSVILLE, TENNESSEE 37857
              (Address of principal executive offices and Zip Code)

                    Issuer's telephone number (423) 272-2200

Securities registered under Section 12(b) of the Exchange Act:  NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
                                                                      ---   ---
         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         THE REGISTRANT'S REVENUES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
WERE $7,329,113.

         THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 20, 1999 IS APPROXIMATELY
$5,937,690. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. OUTSTANDING AT MARCH 15, 1999,
COMMON STOCK, $.01 PAR VALUE, 539,027.

                    Documents Incorporated by Reference: NONE

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<PAGE>   2



                                     PART I

ITEM 1.    DESCRIPTION OF BUSINESS

THE COMPANY

         The Company is a registered bank holding company organized under the
laws of Tennessee, chartered in 1985. The Company, with consolidated total
assets of approximately $98 million at December 31, 1998, is headquartered in
Rogersville, Tennessee with offices in Church Hill and Sneedville, Tennessee and
conducts its operations through its subsidiary, The Citizens Bank of East
Tennessee (the "Bank"), a state bank organized under the laws of the state of
Tennessee in April 1906. The Company does not engage in any activities other
than acting as a bank holding company for the Bank. The Company believes it can
present an alternative to recent mega-mergers by offering local ownership, local
decision making and other personalized service characteristics of community
banks. The holding company structure provides flexibility for expansion of the
Company's banking business through acquisition of other financial institutions
and provision of additional banking-related services which the traditional
commercial bank may not provide under present laws.

         The Bank provides a full range of retail banking services, including
(i) the acceptance of demand, savings and time deposits; (ii) the making of
loans to consumers, businesses and other institutions; (iii) the investment of
excess funds in the sale of federal funds, U.S. government and agency
obligations, and state, county and municipal bonds; and (iv) other miscellaneous
financial services usually handled for customers by commercial banks.

MARKET AREA AND COMPETITION

         The Company and the Bank compete with other commercial banks, savings
and loan associations, credit unions and finance companies operating in Hancock
and Hawkins counties and elsewhere. One other commercial bank is doing business
in Hancock County, and in Hawkins County there are five commercial banks and
savings and loan associations. The Bank is subject to substantial competition in
all aspects of its business. Intense competition for loans and deposits comes
from other financial institutions in the market area. In certain aspects of its
business, the Bank also competes with credit unions, small loan companies,
insurance companies, mortgage companies, finance companies, brokerage houses and
other financial institutions, some of which are not subject to the same degree
of regulation and restriction as the Bank and some of which have financial
resources greater than those of the Bank. The future success of the Bank will
depend primarily upon the difference between the cost of its borrowing
(primarily interest paid on deposits) and income from operations (primarily
interest or fees earned on loans, sales of loans and investments). The Bank
competes for funds with other institutions, which, in most cases, are
significantly larger and are able to provide a greater variety of services than
the Bank and thus may obtain deposits at lower rates of interest.

NET INTEREST INCOME

         The following table sets forth weighted average yields earned by the
Company on its earning assets and the weighted average rates paid on its average
deposits and other interest-bearing liabilities for the years indicated, and
certain other information:




                                      - 2 -


<PAGE>   3





<TABLE>
<CAPTION>
                                                         1998                               1997
                                         ----------------------------------   ------------------------------
(Fully taxable equivalent)                             Interest     Average              Interest    Average
(Dollars in thousands except             Average       Income/      Yields/   Average     Income/    Yields/
for per share data)                      Balance       Expense       Rate     Balance     Expense     Rate
-------------------                      -------       -------       ----     -------     -------     ----
<S>                                      <C>            <C>          <C>      <C>          <C>        <C>  
ASSETS:

Interest-earning assets:

Loans net of unearned income.........    $54,684        $5,362       9.81%    $42,185      $4,141     9.82%
U.S. Treasury and other U.S.                                         6.29%                        
  government agencies................     20,291         1,277       6.46%     17,065       1,113     6.52%
States and municipalities............      1,781           115       5.16%        102           8     7.84%
FHLB stock...........................          8            --         -- 
Federal funds sold...................      5,854           302       8.54%      3,875         202     5.21%
                                         -------         -----                -------      ------
    Total interest-earning                                                                        
      assets/interest income.........     82,618         7,056                 63,227       5,464     8.64%
                                          ------         -----                 ------      ------
Cash and due from banks..............      2,164                                1,983
Other assets.........................      4,863                                4,675
Allowance for loan losses............       (727)                                (550)
                                         -------                              -------
    Total............................    $88,918                              $69,335
                                         =======                              =======

LIABILITIES AND STOCKHOLDERS'
  EQUITY:

Interest-bearing liabilities:

Demand deposits......................     13,559           492       3.63%    $11,742      $  423     3.60%
Savings..............................      3,156            93       2.95%      2,222          66     2.97%
Individual retirement accounts.......      5,766           330       5.72%      4,382         246     5.61%
Time certificates....................     47,637         2,759       5.79%     35,101       2,029     5.78%
Securities sold under repurchase.....      1,680           101       6.01%        709          43     6.06%
Note payable.........................      3,064           236       7.70%      3,281         264     8.05%
                                          ------        ------                  -----
  Total interest-bearing                                                                          
    liabilities/interest expense.....     74,862         4,011       5.36%     57,437       3,071     5.35%
                                          ------         -----                 ------      ------
Non-interest bearing demand                                                  
  deposits...........................      9,031                                7,710
Other liabilities....................      1,018                                  624
Stockholders' equity.................      4,007                                3,564
                                         -------                              -------
  Total..............................    $88,918                              $69,335
                                         =======                              =======
Net interest earnings................                   $3,045                             $2,393
                                                        ======                             ======
Net interest on interest earning assets                              3.69%                            3.78%
                                                                     =====                            =====
Return on average assets.............       0.51%                                0.31%
Return on average equity.............      11.36%                                6.09%
Cash dividends declared..............    $     0                              $     0
Dividend payout ratio................        N/A                                  N/A
</TABLE>                                                                     
                                                                          



                                      - 3 -


<PAGE>   4



         The following table presents a summary of changes in interest income,
interest expense, and the interest rate differential aggregated by the changes
in volumes and rates:

<TABLE>
<CAPTION>
                                                       December 31, 1998                 December 31, 1997
                                                            versus                            versus
                                                       December 31, 1997                  December 31, 1996
                                                      Increase (Decrease)               Increase (Decrease)
                                                      Change Due to: (1)                 Change Due to: (1)
                                                ------------------------------      ------------------------------
(Dollars in Thousands)                          Volume       Rate       Total       Volume       Rate       Total
                                                -------      ----      -------      -------      ----      -------
<S>                                             <C>          <C>       <C>          <C>          <C>       <C>    
Increase (decrease) in(2):
Loans, net of unearned income .............     $ 1,226      $ (5)     $ 1,221      $ 1,330      $(48)     $ 1,282
U.S. Treasury and other U.S. government
  agency securities .......................         204       (40)         164          156        13          169
States and municipal securities ...........         109        (2)         107            3        (0)           3
FHLB stock ................................           8         0            0           --        --           --
Federal funds sold ........................         102        (2)         100          (29)        4          (25)
                                                -------      ----      -------      -------      ----      -------
         Total interest income ............       1,649       (49)       1,592        1,460       (31)       1,429
                                                -------      ----      -------      -------      ----      -------
Increase (decrease) in(2):
Demand deposits ...........................          66         3           69           44         5           49
Savings deposits ..........................          28        (1)          27           18        (0)          18
Individual retirement accounts ............          79         5           84           72        (2)          70
Time certificates .........................         726         4          730          669         8          677
Securities sold under repurchase agreements          58        (0)          58           32         0           32
Note payable ..............................         (17)      (11)         (28)         (14)      (12)         (26)
                                                -------      ----      -------      -------      ----      -------
         Total interest expense ...........         940         0          940          822        (2)         820
                                                -------      ----      -------      -------      ----      -------
Increase (decrease) in net interest income      $   709      $(49)     $   652      $   638      $(29)     $   609
                                                =======      ====      =======      =======      ====      =======
</TABLE>



(1) Increases (decreases) are attributable to volume changes and rate changes on
the following basis: Volume Change equals change in volume times prior year
rate. Rate Change equals change in rate times prior year volume. The Rate/Volume
Change equals the change in volume times the change in rate, and it is allocated
between Volume Change and Rate Change at the ratio that the absolute value of
each of these components bears to the absolute value of their total. The change
attributable to FHLB stock is allocated 100% as a change in volume for 1998.

(2) For purposes of this schedule, non-accruing loans are included in the
average balances and tax exempt income is reflected on a tax equivalent basis.
As tax exempt income is exempt only for Federal income tax purposes and not
Tennessee purposes, tax equivalent income is based upon an effective 34% tax
rate. Loan fees included in interest income are not material to the
presentation.

LIABILITY AND ASSET MANAGEMENT

         The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income.

         The asset/liability committee, which consists of H. Lyons Price, Reed
D. Matney, Lawrence E. Gray and other officers, is charged with monitoring the
liquidity and funds position of the Company. The Committee regularly reviews (a)
the rate sensitivity position on a three-month, six-month, and one-year time
horizon; (b) loans to deposit ratios; and (c) average maturity for certain
categories of liabilities.








                                     - 4 -
<PAGE>   5

         The Company does not operate an asset/liability management model. No
estimates of the impact of changing interest rates on historical or projected
earnings are available. The current level of interest rate risk can, however, be
inferred from maturity and repricing data. At December 31, 1998, the Company had
a negative cumulative repricing gap within one year of approximately $37.4
million, or approximately 40.99% of total earning assets. This negative
repricing gap indicates that the Company's future earnings may be materially
adversely impacted by a rise in market interest rates, as occurred in early
1995, and such impact would primarily be felt in the twelve month period after
such a rise in rates.

         The Company is in the process of selecting an asset/liability model
with which to simulate operations and subsequently develop policies regarding
permitted gap positions, permitted risks in deviations from budget earnings and
liquidity. In the interim, management is acquiring securities to be designated
available for sale in order to better manage unexpected liquidity needs and
swings in interest rates.

         The following table represents an interest sensitivity profile for the
Company as of December 31, 1998 and 1997. The table represents a static point in
time and does not consider other variables, such as changing spread
relationships or interest rate levels. "Net repricing gap" is the difference
between total earning assets and total interest-bearing liabilities repricing in
any given period and "cumulative gap" is the sum of the net repricing gap from
period to period. Interest-bearing demand, savings and money market account
deposits are presented as repricing in the earliest period presented.

                                                  

<TABLE>
<CAPTION>
                                                            December 31, 1998
                                      ---------------------------------------------------------------
                                                    After 3      After 12
                                                     months       months
                                       Within        Within       Within          After
                                      3 months     12 months      5 years        5 years       Total
                                      --------      --------      --------       -------      -------
(Dollars in thousands)
<S>                                   <C>           <C>           <C>            <C>          <C>    
EARNING ASSETS:
Loans ...........................     $ 14,706      $ 15,836      $ 26,818       $ 1,870      $59,230
Investment Securities:
     Available for Sale .........            0         3,246         4,188        18,392       25,826
     Held to maturity ...........            0           250           251         1,112        1,362
FHLB stock ......................          262             0             0             0          262
Federal funds sold ..............        4,515             0             0             0        4,515
                                      --------      --------      --------       -------      -------
         Total earning assets ...     $ 19,483      $ 19,332      $ 31,006       $21,374      $91,195
                                      ========      ========      ========       =======      =======

INTEREST-BEARING LIABILITIES:
Interest-bearing deposits .......     $ 41,027      $ 30,663      $  5,983       $     0      $77,673
Securities sold under repurchase
agreements ......................        1,462             0             0             0        1,462
Long-term debt ..................        3,045             0             0             0        3,045
                                      --------      --------      --------       -------      -------
         Total interest-bearing
           liabilities ..........     $ 45,534      $ 30,663      $  5,983       $     0      $82,180
                                      ========      ========      ========       =======      =======
Net repricing gap ...............     $(26,051)     $(11,331)     $ 25,023       $21,374      $ 9,015
                                      ========      ========      ========       =======      -------
Rate sensitivity gap:
Net repricing gap as a percentage
  of total earning assets .......       -28.57%       -12.43%        27.44%        23.44%        9.89%
                                      ========      ========      ========       =======      =======
Cumulative gap ..................     $(26,051)     $(37,382)     $(12,359)      $ 9,015
                                      ========      ========       =======       =======
Cumulative gap as a percentage of
  total earning assets ..........       -28.57%       -40.99%       -13.55%         9.89%
                                      ========      ========       =======       =======
</TABLE>




                                      - 5 -


<PAGE>   6
<TABLE>
<CAPTION>
                                                            December 31, 1997
                                      ---------------------------------------------------------------
                                                    After 3      After 12
                                                     months       months
                                       Within        Within       Within          After
                                      3 months     12 months      5 years        5 years       Total
                                      --------      --------      --------       -------      -------
(Dollars in thousands)
<S>                                   <C>           <C>           <C>            <C>          <C>    
EARNING ASSETS:
Loans ...........................     $ 13,174      $ 11,901      $ 23,140       $   468      $48,683
Investment Securities:
     Available for sale .........            0           498         5,766        10,845       17,109
     Held to maturity ...........          500           325           200            60        1,085
Federal funds sold ..............        4,842             0             0             0        4,842
                                      --------      --------      --------       -------      -------
         Total earning assets ...     $ 18,516      $ 12,724      $ 29,106       $11,373      $71,719
                                      ========      ========      ========       =======      =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits .......     $ 31,040      $ 24,993      $  4,238       $     0      $60,271
Securities sold under repurchase
agreements ......................        1,217             0             0             0        1,217
Long-term debt ..................        3,265             0             0             0        3,265
                                      --------      --------      --------       -------      -------
Total interest-bearing liabilities..  $ 35,522      $ 24,993      $  4,238       $     0      $64,753
                                      ========      ========      ========       =======      =======
Net repricing gap ...............     $(17,006)     $(12,269)     $ 24,868       $11,373      $ 6,966
                                      ========      ========      ========       =======      =======
Rate sensitivity gap:
Net repricing gap as a percentage
  of total earning assets .......       -23.71%       -17.11%        34.67%        15.86%        9.71%
                                      ========      ========      ========       =======      =======
Cumulative gap ..................     $(17,006)     $(29,275)     $ (4,407)      $ 6,966
                                      ========      ========       =======       =======
Cumulative gap as a percentage of
  total earning assets ..........       -23.71%       -40.82%        -6.14%         9.71%
                                      ========      ========       =======       =======
</TABLE>





                                      - 6 -


<PAGE>   7



Management has made the following assumptions in the above analysis:

(a)      Assets and liabilities are generally assigned to a period based upon
         their earliest repricing period when the repricing is less than the
         contractual maturity.

(b)      Nonaccrual loans are included in the loan category.

(c)      Investment securities available for sale are currently treated in the
         same manner as comparable securities in the investment securities held
         to maturity portfolio in that they are scheduled according to the
         earlier of their contractual maturities or earliest repricing dates;
         however, the maturities of callable agency securities are scheduled
         according to their call dates when valued at a premium to par.

(d)      Money market deposits and savings deposits that have no contractual
         maturities are scheduled in the within 3 months category.






                                     - 7 -


<PAGE>   8



DEPOSITS

         The Company's primary sources of funds are interest-bearing deposits.
The following table sets forth the Company's deposit structure at December 31,
1998 and 1997.

<TABLE>
<CAPTION>
                                                                1998            1997
                                                               -------         -------
(In Thousands)
<S>                                                            <C>             <C>    
Non interest-bearing deposits:
Individuals, partnerships and corporations ...........         $ 9,521         $ 8,570
U. S. Government and states and political subdivisions             116              83
Certified and official checks ........................             355             164
                                                               -------         -------
  Total non interest-bearing deposits ................           9,992           8,817
                                                               -------         -------
Interest-bearing deposits:
Interest-bearing demand accounts .....................          14,838          12,636
Savings accounts .....................................           3,603           2,585
Individual retirement accounts .......................           2,163           1,674
Certificates of deposit, less than $100,000 ..........          41,564          33,405
Certificates of deposit, greater than $100,000 .......          15,505           9,970
                                                               -------         -------
  Total interest-bearing deposits ....................          77,673          60,270
                                                               -------         -------
  Total deposits .....................................         $87,665         $69,087
                                                               =======         =======
</TABLE>

         The following table presents a breakdown by category of the average
amount of deposits and the weighted average rate paid on deposits for the
periods as indicated:

<TABLE>
<CAPTION>
                                                      December 31,
                                     --------------------------------------------------
                                             1998                       1997
                                     --------------------   ---------------------------
(In Thousands)
<S>                                  <C>            <C>         <C>            <C>    
Non interest-bearing deposits ..     $ 9,031                    $ 7,710
Savings deposits ...............       3,156        2.95%         2,222           2.97%
Individual retirement accounts .       5,766        5.72%         4,382           5.61%
Time deposits ..................      47,637        5.79%        35,101           5.78%
Interest-bearing demand deposits      13,559        3.63%           709           3.60%
                                     -------                    -------
         Total deposits ........     $79,149                    $50,124
                                     =======                    =======
</TABLE>

         At December 31, 1998 and 1997, time deposits greater than $100,000
aggregated approximately $15.0 million and $10.0 million, respectively. The
following table indicates, as of December 31, 1998 and 1997, the dollar amount
of $100,000 or more deposits by the time remaining until maturity:

<TABLE>
<CAPTION>
                                          1998                                         1997
                      ----------------------------------------------     --------------------------------
                                               1 Year                                             1 Year                
                      3 Months      3 to 12    through                   3 Months     3 to 12     through    
                       or less       Months    5 years       Total        or less      Months     5 years      Total
                      --------     --------   --------      ------      ---------     -------     -------     -------
(In Thousands)
<S>                   <C>           <C>        <C>           <C>         <C>          <C>         <C>         <C>   
Time certificates       $6,839       7,539       1,127       $15,505       $3,199       5,625       1,146       $9,970
                        ======       =====       =====       =======       ======       =====       =====       ======
</TABLE>




                                      - 8 -


<PAGE>   9



ASSETS

         The management of the Company considers many criteria in managing
assets, including creditworthiness, diversification and structural
characteristics, maturity and interest rate sensitivity. The following table
sets forth the Company's interest earning assets by category at December 31,
1998 and 1997.

<TABLE>
<CAPTION>
                                                 1998            1997
                                               --------        --------
         (In Thousands)
<S>                                            <C>             <C>
         Investment securities:
           Available for sale ..........       $ 25,827        $ 17,109
           Held to maturity ............          1,362           1,085
         FHLB stock ....................            262              --
         Federal funds sold ............          4,515           4,842
         Loans:
           Real estate .................         38,282          32,760
           Commercial and other ........         20,948          15,923
                                               --------        --------
             Total loans ...............         59,230          48,683
            Less unearned income .......           (205)           (213)
                                               --------        --------
           Loans, net of unearned income         59,025          48,470
                                               --------        --------
         Interest earning assets .......       $ 90,991        $ 71,506
                                               ========        ========
</TABLE>


INVESTMENT PORTFOLIO

         At year end 1998, obligations of the United States Government or its
agencies and obligations of states and political subdivisions represented 100%
of the investment portfolio. The following table presents the composition of the
carrying value of the Company's investment portfolio at December 31, 1998 and
1997.

<TABLE>
<CAPTION>
                                                                 1998          1997
                                                                -------       -------
         (In Thousands)
<S>                                                             <C>           <C>    
         Held to maturity:
         Obligations of U.S.  Government agencies .......       $ 1,362       $ 1,085
                                                                =======       =======
         Available for sale:
         U.S. Treasury securities .......................       $ 3,476       $ 3,964
         Obligations of U.S. Government agencies ........        18,127        13,042
         Obligations of states and political subdivisions         4,223           103
         FHLB stock .....................................           262            --
                                                                -------       -------
                                                                $26,088       $17,109
                                                                =======       =======
</TABLE>



                                      - 9 -


<PAGE>   10



         The following table presents the maturity distribution of the amortized
cost and estimated market value of the Company's investment portfolio at
December 31, 1998 and 1997. The weighted average yields on these instruments are
presented based on final maturity. Yields on obligations of states and political
subdivisions have not been adjusted to a fully-taxable equivalent basis.

<TABLE>
<CAPTION>
                                                                    1998                                    1997
                                                    -------------------------------------    ---------------------------------
                                                                  Estimated      Weighted                Estimated    Weighted
                                                    Amortized       Market       Average     Amortized     Market      Average
                                                       Cost         Value         Yield        Cost         Value       Yield
                                                     -------       -------       ---------    -------      -------    --------
(Dollars in Thousands)
<S>                                                 <C>           <C>            <C>         <C>         <C>           <C>  
Held to maturity:
Obligations of U.S.
  Government agencies:
  Due within 1 year.............................     $    --       $    --                       $500         $494
  Due after 1 year but within 5 years...........         250           252                        250          247
  Due after 5 years but  within 10 years........         999         1,001                        200          199
  Due after 10 years............................         113           120                        135          143
                                                     -------       -------                    -------      ------- 
     Total......................................     $ 1,362       $ 1,373         5.38%      $ 1,085      $ 1,083        5.64%
                                                     =======       =======                    =======      =======
Available for sale:
------------------
U.S. Securities:
  Due within 1 year.............................     $ 1,918       $ 1,938                    $   493      $   498
  Due after 1 year but within 5 years...........       1,498         1,538                      3,435        3,466
                                                     -------       -------                    -------      ------- 
    Total.......................................       3,416         3,476         6.13%        3,928        3,964        6.19%
                                                     -------       -------                    -------      ------- 
Obligations of U.S. Government agencies:
  Due within 1 year.............................          --            --                        704          702
  Due after 1 year but within 5 years..........        2,638         2,650                      2,726        2,745
  Due after 5 years but within 10 years.........      10,673        10,724                      9,567        9,595
  Due after 10 years............................       4,762         4,753                             
                                                     -------       -------                    -------      ------- 
   Total........................................      18,073        18,127         6.27%       12,997       13,042        6.29%
                                                     -------       -------                    -------      ------- 
Obligations of states and  political subdivisions:
  Due after 1 year but within 5 years..........          402           407
  Due after 5 years but within 10 years.........       3,025         3,108                        100          103        5.00%
  Due after 10 years..........................           705           708                              
                                                     -------       -------                    -------      ------- 
Total...........................................       4,132         4,223                        100          103
                                                     -------       -------                    -------      -------
         Total..................................     $25,621       $25,826         6.22%      $17,025      $17,109        6.26%
                                                     =======       =======                    =======      =======
</TABLE>


INVESTMENT POLICY

         The objective of the Company's investment policy is to invest funds not
otherwise needed to meet the loan demand of its market area to earn the maximum
return for the Company, yet still maintain sufficient liquidity to meet
fluctuations in the Company's loan demand and deposit structure. In doing so,
the Company balances the market and credit risks against the potential
investment return, makes investments compatible with the pledge requirements of
the Company's deposits of public funds, maintains compliance with regulatory
investment requirements, and assists the various public entities with their
financing needs. H. Lyons Price and Reed D. Matney are authorized to execute
security transactions for the investment portfolio based on the decisions of the
investment committee. The investment committee, which consists of the President,
Chief Executive Officer and Chairman of the Board, has full authority over the
investment portfolio and makes decisions on purchases and sales of securities.
All the investment transactions occurring since the previous board of directors'
meeting are reviewed by the board at its next monthly meeting, and the entire
portfolio is reviewed on a semi-annual basis. The investment policy allows
portfolio holdings to include short-term securities purchased to provide the
Company's needed liquidity and longer term securities purchased to generate
level income for the Company over periods of interest rate fluctuations.

         The Company's investment securities portfolio of $27,450,577 at
December 31, 1998, consisted of $1,362,477 of securities held to maturity, which
are carried at amortized cost and $26,088,100 of securities available for sale
which are carried at market value. In addition, unrealized gains on investment
securities available for sale were $238,669 and unrealized losses were $33,670.
The Company's investment securities portfolio of $18,193,760 at December 31,
1997, consisted of $1,085,104 of securities held to maturity, which are carried
at amortized cost and $17,108,656 of securities available for sale which are
carried at market value. In addition, unrealized gains on investment securities
available for sale were $98,995 and unrealized losses were $14,997.
       

                                     - 10 -
<PAGE>   11

         As reflected in Note 2 to Consolidated Financial Statements, the
investment securities held to maturity had unrealized gains of $10,450 and
unrealized losses of $0 at December 31, 1998, compared to $8,563 unrealized
gains and $10,429 unrealized losses at year end December 31, 1997.

         At December 31, 1998, the Company had approximately $250,000 of
structured notes in the held to maturity category, which constitutes
approximately 0.9% of its investment securities portfolio. Structured notes have
uncertain cash flows which are driven by interest rate movements and expose the
Company to greater market risk than traditional medium-term notes. All of the
Company's investments of this type are government agency issues (primarily
Federal Home Loan Bank and Federal National Mortgage Association). The
unrealized gain in these securities was approximately $2,000 or 19.14% of total
gross unrealized gains on held to maturity securities. It is management's intent
to hold these securities to maturity. The market risk associated with the
structured notes is not considered material to the Company's financial position,
results of operations or liquidity.

LOAN PORTFOLIO

         Total loans of $59,230,000 at December 31, 1998, reflected an increase
of $10,547,000 compared to total loans for the year ended December 31, 1997.
Residential real estate loans, which historically have had low loss experience,
increased $3,820,000 or 22.3%. Construction and land development loans, loans
secured by farmland and commercial real estate loans increased by $1,702,000 or
10.9%. Commercial and industrial loans and agricultural loans increased by
$2,614,000 or 48.6%. These types of loans carry a higher level of risk in that
the borrowers' ability to repay may be affected by local economic trends.
Installment and other consumer loans increased by $2,411,000 , or 22.9%. These
loans, generally secured by automobiles and other consumer goods, contain a
historically higher level of risk; however, this risk is mitigated by the fact
that these loans generally consist of small individual balances. As the loan
portfolio is concentrated in Hawkins and surrounding counties, there is a risk
that the borrowers' ability to repay the loans could be affected by changes in
local economic conditions. The following table sets forth the composition of the
Company's loan portfolio at December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                              1998          1997
                                             -------       -------
(In Thousands)
<S>                                          <C>           <C>    
Real estate loans:
  Construction and land development ..       $ 5,598       $ 5,716
  Secured by farmland and improvements         2,401         2,508
  Secured by residential properties ..        20,991        17,171
  Commercial real estate loans .......         9,292         7,365
                                             -------       -------
    Total real estate loans ..........        38,282        32,760
                                             -------       -------
Loans to farmers .....................           816           547
Commercial and industrial loans ......         7,174         4,829
Installment loans ....................         9,626         8,304
Other consumer loans .................         3,249         2,189
All other loans ......................            83            54
                                             -------       -------
    Total loans ......................       $59,230       $48,683
                                             =======       =======
</TABLE>


         The following table sets forth the maturities of the loan portfolio and
the sensitivity to interest rate changes of that portion of the Company's loan
portfolio that matures after one year.

<TABLE>
<CAPTION>
                                                     December 31, 1998
                                      ------------------------------------------------
                                                       Maturity Range
                                      ------------------------------------------------
                                      One Year    One Through      Over
(In Thousands)                        or Less      Five Years   Five Years      Total
                                      -------       -------       ------       -------
<S>                                   <C>           <C>           <C>          <C>    
Real estate construction loans        $ 5,467       $   131       $    0       $ 5,598
Real estate mortgage loans ....        11,382        13,676        7,626        32,684
Commercial and industrial loans         4,703         2,016          455         7,174
Agricultural loans ............           613           203            0           816
All other loans ...............         4,788         7,981          189        12,958
                                      -------       -------       ------       -------
  Total loans .................       $26,953       $24,007       $8,270       $59,230
                                      =======       =======       ======       =======
</TABLE>

         The sensitivity to interest rate changes of that portion of the
Company's loan portfolio that matures after one year is set forth below. 



                                     - 11 -


<PAGE>   12




Real estate, commercial and industrial and agricultural loans maturing after one
year as of December 31, 1998 (in thousands):

<TABLE>
<S>                                                     <C>    
Fixed rate .................................            $16,752
Floating rate ..............................              7,355
                                                        -------
                                                        $24,107
                                                        -------
Other loans maturing after one year:
Fixed rate .................................            $ 8,092
Floating rate ..............................                 78
                                                        -------
                                                        $ 8,170
                                                        -------
         Total loans maturing after one year            $32,277
                                                        =======
</TABLE>

LOAN POLICY

         All lending activities of the Company are under the direct supervision
and control of the senior loan committee, which consists of three directors. The
loan committee enforces loan authorizations for each officer, decides on loans
exceeding such limits, services all requests for officer credits to the extent
allowable under current laws and regulations, administers all problem credits,
and determines the allocation of funds for each lending division. The Company's
established maximum loan volume to deposits is 85%. The loan portfolio consists
primarily of real estate, commercial, farming and installment loans. Commercial
loans consist of either real estate loans or term loans. Maturity of term loans
is normally limited to five to seven years. Conventional real estate loans may
be made up to 80% of the appraised value or purchase cost of the real estate for
no more than a thirty-year term. Installment loans are based on the earning
capacity and vocational stability of the borrower.

         The board of directors at its regularly scheduled meetings reviews all
new loans in excess of $100,000 made the preceding month. Loans which are 30
days or more past due are reviewed monthly.

         Management of the Company periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. The review may result in a
determination that a loan should be placed on a nonaccrual status for income
recognition. In addition, to the extent that management identifies potential
losses in the loan portfolio, it reduces the book value of such loans, through
charge-offs, to their estimated collectible value. The Company's policy is to
classify as nonaccrual any loan on which payment of principal or interest is 90
days or more past due except where there is adequate collateral to cover
principal and accrued interest and the loan is in the process of collection.
Management defines "in the process of collection" as that point where the
customer has agreed to an accelerated repayment plan to bring the loan current,
which definition is in accordance with generally accepted accounting principles
("GAAP") but is not in accordance with such definition as contained in Banking
Bulletin 91-19. No concessions are granted and late fees are collected. In
addition, a loan will be classified as nonaccrual if, in the opinion of the
management, based upon a review of the borrower's or guarantor's financial
condition, collateral value or other factors, payment is questionable, even
though payments are not 90 days or more past due.

         When a loan is classified as nonaccrual, any unpaid interest is
reversed against current income. Interest is included in income thereafter only
to the extent received in cash. The loan remains in a nonaccrual classification
until such time as the loan is brought current, when it may be returned to
accrual classification. When principal or interest on a nonaccrual loan is
brought current, if in management's opinion future payments are questionable,
the loan would remain classified as nonaccrual. After a nonaccrual or
renegotiated loan is charged off, any subsequent payments of either interest or
principal are applied first to any remaining balance outstanding, then to
recoveries and lastly to income.

         The large number of consumer installment loans and the relatively small
dollar amount of each makes an individual review impracticable. It is the
Company's policy to charge off any consumer installment loan which is past due
90 days or more.







                                     - 12 -
<PAGE>   13

         In addition, mortgage loans secured by real estate are placed on
nonaccrual status when the mortgagor is in bankruptcy, or foreclosure
proceedings are instituted. Any accrued interest receivable remains an
obligation of the borrower.

         The Company's underwriting guidelines are applied to four major
categories of loans, commercial and industrial, consumer, agricultural and real
estate which includes residential, construction and development and certain
other real estate loans. The Company requires its loan officers and loan
committee to consider the borrower's character, the borrower's financial
condition as reflected in current financial statements, the borrower's
management capability, the borrower's industry and the economic environment in
which the loan will be repaid. Before approving a loan, the loan officer or
committee must determine that the borrower is basically honest and creditworthy,
determine that the borrower is a capable manager, understand the specific
purpose of the loan, understand the source and plan of repayment, determine that
the purpose, plan and source of repayment as well as collateral are acceptable,
reasonable and practical given the normal framework within which the borrower
operates.

CREDIT RISK MANAGEMENT AND RESERVE FOR LOAN LOSSES

         Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures that
it believes reflect the risk sensitive nature of the Company. The loan review
procedures are set to monitor adherence to the established criteria and to
ensure that on a continuing basis such standards are enforced and maintained.

         Management's objective in establishing lending and investment standards
is to manage the risk of loss and provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
and farming loans with one year or less fixed maturity.

         The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as the Company's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.

         The reserve for loan losses is increased by provisions charged to
operating expense. The reserve is reduced by charging off loans or portions of
loans at the time they are deemed by management to be uncollectible and
increased when loans previously charged off are recovered. The resulting reserve
for loan losses is viewed by management as a single, unallocated reserve
available for all loans and, in management's opinion, is adequate to provide for
reasonably foreseeable potential loan losses. Rules and formulas relative to the
adequacy of the reserve, although useful as guidelines to management, are not
rigidly applied. The reserve for loan losses was $810,563 at year end 1998, or
1.37% of loans outstanding, net of unearned income, compared to $660,336 or
1.36% at year end 1997. The following table presents data related to the
Company's reserve for loan losses for the years ended December 31, 1998 and
1997.




                                     - 13 -


<PAGE>   14
<TABLE>
<CAPTION>
                                                                                                 1998          1997
                                                                                                -----         -----
(Dollars In Thousands)
<S>                                                                                             <C>           <C>  
Balance at beginning of period ..........................................................       $ 660         $ 457
Charge offs:
  Commercial, financial and agricultural ................................................         (29)           (4)
  Real estate mortgage ..................................................................           0             0
  Installment loans to individuals ......................................................         (65)          (14)
                                                                                                -----         -----
                                                                                                  (94)          (18)
                                                                                                -----         -----
Recoveries:
  Commercial, financial and agricultural ................................................           2             1
  Real estate mortgage ..................................................................           0             0
  Installment loans to individuals ......................................................           3             5
                                                                                                -----         -----
                                                                                                    5             6
                                                                                                -----         -----
Net charge offs .........................................................................         (89)          (12)
                                                                                                -----         -----
Additions to charged to operations ......................................................         240           215
                                                                                                -----         -----
Balance at end of period ................................................................       $ 811         $ 660
                                                                                                =====         =====

Ratio of net charge offs during the period to average loans outstanding during the period        0.16%         0.03%
                                                                                                =====         =====
Average allowance for loan losses to average total loans ................................        1.33%         1.30%
                                                                                                =====         =====
</TABLE>

         At December 31, 1998 and 1997, the allowance for loan losses was
allocated as follows:

<TABLE>
<CAPTION>
                                                     1998                     1997
                                            ---------------------    --------------------- 
                                                       Percent of               Percent of 
                                                     loans in each            loans in each
                                                      category to              category to 
                                            Amount    total loans    Amount    total loans 
                                            ------    -----------    ------    ----------- 
(Dollars in thousands)
<S>                                          <C>         <C>          <C>         <C>   
Commercial, financial and agricultural       $241        13.49%       $165        11.04%
Real estate mortgage .................         --        64.63%          0        67.29%
Installment loans to individuals .....        570        21.88%        495        21.67%
                                             ----       ------        ----       ------
   Total .............................       $811       100.00%       $660       100.00%
                                             ====       ======        ====       ======
</TABLE>

         The allocation of the allowance is presented based in part on
evaluations of past history and composition of the loan portfolio. Since these
factors are subject to change, the current allocation of the allowance is not
necessarily indicative of the breakdown of future losses.

         The following table sets forth information with respect to
nonperforming loans of the Company on the dates indicated. Accrual of interest
is discontinued when there is reasonable doubt as to the full, timely
collections of interest or principal. When a loan becomes contractually past due
90 days with respect to interest or principal, it is reviewed and a
determination is made as to whether it should be placed on nonaccrual status.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current period interest income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Interest accruals are resumed on
such loans only when they are brought fully current with respect to principal
and interest and when, in the judgment of management, the loans are estimated to
be fully collectible as to principal and interest. Restructured loans are those
loans on which concessions in terms have been granted because of a borrower's
financial difficulty. Interest is generally accrued on such loans in accordance
with the new terms.

<TABLE>
<CAPTION>
Nonperforming assets (Dollars in thousands):
                                                                                                    December 31,      
                                                                                                   ----------------- 
                                                                                                    1998       1997
                                                                                                   ------     ------ 
<S>                                                                                                <C>        <C>
Nonaccrual loans..........................................................................        $    19    $    70
Restructured loans........................................................................              0          0
Other loans past due 90 days or more to principal or interest payments....................            418        186
Nonperforming loans as a percentage of net loans before allowance for loan losses.........           0.74%      0.53%
Allowance for loan losses as a percentage of nonperforming loans..........................         185.58%    257.81%
</TABLE>

CAPITAL RESOURCES/LIQUIDITY

         Liquidity. Of primary importance to depositors, creditors and
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. The Company's liquidity, represented by cash and
cash due from banks, is a result of its operating, investing and financing
activities. In order to insure funds are available at all times, the Company



                                     - 14 -
<PAGE>   15

devotes resources to projecting on a monthly basis the amount of funds which
will be required and maintains relationships with a diversified customer base so
funds are accessible. Liquidity requirements can also be met through short-term
borrowings or the disposition of short-term assets which are generally matched
to correspond to the maturity of liabilities.

         Although the Company has no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. Neither the Company
nor the Bank is subject to any specific liquidity requirements imposed by
regulatory orders. The Bank is subject to general FDIC guidelines which do not
require a minimum level of liquidity. Management believes its liquidity ratios
meet or exceed these guidelines. Management does not know of any trends or
demands which are reasonably likely to result in liquidity increasing or
decreasing in any material manner.

         The following table sets forth liquidity ratios for the periods
indicated:

<TABLE>
<CAPTION>
                                                 1998               1997
                                                 ----               ----
<S>                                             <C>                <C>   
Average loans to average deposits........       70.26%             68.98%
</TABLE>


         Impact of Inflation and Changing Prices. The consolidated financial
statements and related consolidated financial data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time and due to inflation. The impact of inflation on
operations of the Company is reflected in increased operating costs. Unlike most
industrial companies, virtually all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a more significant
impact on the Company's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services.

CAPITAL ADEQUACY

         Capital adequacy refers to the level of capital required to sustain
asset growth over time and to absorb losses. The objective of the Company's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures used
by management to monitor the results of these efforts are the ratios of average
equity to average assets, average tangible equity to average tangible assets,
and average equity to net loans.

         The Federal Reserve Board has adopted capital guidelines governing the
activities of bank holding companies. These guidelines require the maintenance
of an amount of capital based on risk-adjusted assets so that categories of
assets with potentially higher credit risk will require more capital backing
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as loan commitments.

         The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common stockholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank holding
companies to meet the regulatory minimums of 4% Tier I and 8% total risk-based
capital. In 1990 regulators added a leveraged computation to the capital
requirements, comparing Tier I capital to total average assets less goodwill.

         The Company's consolidated capital ratios are set forth below. See Note
12 to Notes to Consolidated Financial Statements for Bank-only capital ratios.








                                     - 15 -
<PAGE>   16

<TABLE>
<CAPTION>
                                                                                       December 31,    December 31, 
                                                                                           1998            1997
                                                                                         --------         --------
(Dollars in Thousands)
<S>                                                                                      <C>              <C>     
CAPITAL:
Tier I capital:
         Stockholders' common equity .............................................       $  4,401         $  3,871
         Less unrealized (loss) gain in securities ...............................             52               52
         Less disallowed intangibles .............................................           (185)            (203)
                                                                                         --------         --------
                  Total Tier I capital ...........................................          4,164            3,616
Tier II capital:
         Qualifying allowance for loan losses ....................................            743              609
                                                                                         --------         --------
                  Total capital ..................................................       $  4,907         $  4,225
                                                                                         ========         ========
Risk-adjusted assets .............................................................       $ 59,431         $ 48,725
Quarterly average assets .........................................................       $ 95,806         $ 76,127

RATIOS:

Tier I capital to risk-adjusted assets ...........................................           7.01%            7.42%
Tier II capital to risk-adjusted assets ..........................................           1.25%            1.25%
Total capital to risk-adjusted assets ............................................           8.26%            8.67%
Leverage -- Tier I capital to quarterly  average assets less disallowed intangibles          4.28%            4.83%
</TABLE>

         The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for banks and bank holding
companies. The bank regulators adopted regulations defining these five capital
categories in September 1992. Under these new regulations each bank is
classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I
leverage ratios and its supervisory ratings.

         The following table lists the five categories of capital and each of
the minimum requirements for the three risk-based capital ratios.

<TABLE>
<CAPTION>
                                                          Total Risk-Based      Tier I Risk-Based         Leverage
                                                            Capital Ratio         Capital Ratio             Ratio
                                                            -------------         -------------         ------------
<S>                                                       <C>                   <C>                     <C>        
Well-capitalized......................................      10% or above           6% or above          5% or above
Adequately capitalized................................       8% or above           4% or above          4% or above
Undercapitalized......................................      Less than 8%          Less than 4%          Less than 4%
Significantly undercapitalized........................      Less than 6%          Less than 3%          Less than 3%
Critically undercapitalized...........................           --                    --                2% or less
</TABLE>

         On December 31, 1996, the Company exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.

CERTAIN REGULATORY CONSIDERATIONS

         As a bank holding company, the Company is subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). Under the BHCA, bank holding companies may not in general directly
or indirectly acquire the ownership or control of more than 5% of the voting
shares or substantially all the assets of any company, including a bank, without
the prior approval of the Federal Reserve Board. The BHCA also restricts the
types of activities in which a bank holding company and its subsidiaries may
engage. Generally, activities are limited to banking and activities found by the
Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto.

         In addition, the BHCA prohibits the Federal Reserve Board from
approving an application by a bank holding company to acquire shares of a bank
or bank holding company located outside the acquiror's principal state of
operations unless such an acquisition is specifically authorized by statute in
the state in which the bank or bank holding company whose shares are to be
acquired is located. Tennessee has adopted legislation that authorizes
nationwide interstate bank acquisitions, subject to certain state law
reciprocity requirements, including the filing of an application with and
approval of the Tennessee Commissioner of Financial Institutions. The Tennessee
Bank Structure Act of 1974, as amended, restricts the acquisition by bank
holding companies of banks in Tennessee. A bank holding company is prohibited
from acquiring any bank in Tennessee as long as banks that it controls retain
30% or more of the total deposits in individual, partnership and corporate
demand and other transaction accounts and in savings accounts and time deposits
in all federally insured financial institutions in Tennessee, subject to certain
limitations and exclusions. Also, under this act, no bank holding






                                     - 16 -
<PAGE>   17

company may acquire any bank in operation for less than five years or begin a de
novo bank in any county in Tennessee with a population, in 1970, of 200,000 or
less, subject to certain exceptions.

Under Tennessee law, branch banking is permitted in any county in the state.

         The Bank is a Tennessee state-chartered bank and is subject to the
regulations of and supervision by the Federal Deposit Insurance Corporation (the
"FDIC") as well as the DFI, Tennessee's state banking authority. The Bank is
also subject to various requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that may
be charged thereon and limitations on the types of investments that may be made
and the type of services that may be offered. Various consumer laws and
regulations also affect the operations of the Bank. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy.

PAYMENT OF DIVIDENDS

         The Company is a legal entity separate and distinct from its banking
subsidiary. The principal source of cash flow of the Company, including cash
flow to pay dividends on its stock or principal (premium, if any) and interest
on debt securities, is dividends from the Bank. There are statutory and
regulatory limitations on the payment of dividends by the Bank to the Company,
as well as by the Company to its shareholders.

         The Bank is subject to the Tennessee Banking Act, which provides that
dividends will be paid out of undivided profits. Capital surplus, however, must
equal or exceed 50% of capital stock, and in the event capital surplus falls
below 50% of capital stock, no dividends may be paid until net profits have been
transferred to capital surplus so that it equals 50% of capital stock.
Thereafter, 10% of net profits must be transferred to capital surplus prior to
payment of dividends until capital surplus equals capital stock. The Bank is
also subject to the minimum capital requirements of the FDIC which impact the
Bank's ability to pay dividends. If the Bank fails to meet these standards, it
may not be able to pay dividends or to accept additional deposits because of
regulatory requirements. See "Certain Regulatory Considerations."

         Under current Tennessee tax law, cash dividends paid by Tennessee banks
to Tennessee residents are exempt from state income tax. Under federal income
tax law, dividends paid by the Bank would be considered taxable.

         If, in the opinion of the applicable federal bank regulatory authority,
a depository institution or a holding company is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial
condition of the depository institution or holding company, could include the
payment of dividends), such authority may require that such institution or
holding company cease and desist from such practice. The federal banking
agencies have indicated that paying dividends that deplete a depository
institution's or holding company's capital base to an inadequate level would be
such an unsafe and unsound banking practice. Moreover, the Federal Reserve
Board, the Comptroller of the Currency and the FDIC have issued policy
statements which provide that bank holding companies and insured depository
institutions generally should only pay dividends out of current operating
earnings.

         The payment of dividends by the Company and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines.

TRANSACTIONS WITH AFFILIATES

         There are various legal restrictions on the extent to which the Company
can borrow or otherwise obtain credit from the Bank. There are also legal
restrictions on the Bank's purchases of or investments in the securities of and
purchase of assets from the Company, a bank's loans or extensions of credit to
third parties, collateralized by the securities or obligations of the Company,
the issuance of guaranties, acceptances and letters of credit on behalf of the
Company, and certain bank transactions with the Company, or with respect to
which the Company acts as agent, participates or has a financial interest.
Subject to certain limited exceptions, the Bank may not extend credit to the
Company or to any other affiliate in an amount which exceeds 10% of the Bank's
capital stock and surplus and may not extend credit in the aggregate to such
affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirements as to the type, amount




                                     - 17 -
<PAGE>   18

and quality of collateral which must secure such extensions of credit by the
Bank to the Company or to such other affiliates. Also, extensions of credit and
other transactions between the Bank and the Company or such other affiliates
must be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the Bank as those prevailing
at the time for comparable transactions with non-affiliated companies. Also, the
Company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.

HOLDING COMPANY STRUCTURE AND SUPPORT OF THE BANK

         Because the Company is a holding company, its right to participate in
the assets of any subsidiary upon the latter's liquidation or reorganization
will be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of bank subsidiaries) except to the extent that the
Company may itself be a creditor with recognized claims against the subsidiary.

         Under Federal Reserve Board policy, the Company is expected to act as a
source of financial strength to, and commit resources to support, the Bank. This
support may be required at times when, absent such Federal Reserve Board policy,
the Company may not be inclined to provide it. In addition, any capital loans by
a bank holding company to any of its subsidiary banks are subordinate in right
of payment to deposits and to certain other indebtedness of such subsidiary
bank. In the event of a bank holding company's bankruptcy, any commitment by the
bank holding company to a federal bank regulatory agency to maintain the capital
of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a
priority of payment.

CROSS-GUARANTEE LIABILITY

         Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company but is subordinate
to claims of depositors, secured creditors and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The Bank is subject to these cross-guarantee provisions. As a
result, any loss suffered by the FDIC in respect of the Bank would likely result
in assertion of the cross- guarantee provisions, and a potential loss of the
Company's investment in the Bank.

FDICIA

         The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") which was enacted on December 19, 1991, substantially revised the
depository institution regulatory and funding provisions of the FDIA and made
revisions to several other federal banking statutes. Among other things, FDICIA
requires the federal banking regulators to take "prompt corrective action" in
respect of FDIC-insured depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under applicable regulations, a FDIC-insured
depository institution is defined to be well capitalized if it maintains a
Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio of at least
6% and a Total Capital Ratio of at least 10% and is not subject to a directive,
order or written agreement to meet and maintain specific capital levels. An
insured depository institution is defined to be adequately capitalized if it
meets all of its minimum capital requirements as described above. In addition,
an insured depository institution will be considered undercapitalized if it
fails to meet any minimum required measure, significantly undercapitalized if it
is significantly below such measure and critically undercapitalized if it fails
to maintain a level of tangible equity equal to not less than 2% of total
assets. An insured depository institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating.







                                     - 18 -
<PAGE>   19

         The capital-based prompt corrective action provision of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions and
are not directly applicable to holding companies which control such
institutions. However, the Federal Reserve Board has indicated that, in
regulating bank holding companies, it will take appropriate action at the
holding company level based on an assessment of the effectiveness of supervisory
actions imposed upon subsidiary depository institutions pursuant to such
provisions and regulations.

         FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.

         Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator generally within 90 days of the date on which they
became critically undercapitalized.

         The Company believes that at March 1, 1998, the Bank was well
capitalized under the criteria discussed above.

         FDICIA contain numerous other provisions, including new accounting,
audit and reporting requirements, beginning in 1995 termination of the "too big
to fail" doctrine except in special cases, limitations on the FDIC's payment of
deposits at foreign branches, new regulatory standards in such areas as asset
quality, earnings and compensation and revised regulatory standards for, among
other things, powers of state banks, real estate lending and capital adequacy.
FDICIA also requires that a depository institution provide 90 days prior notice
of the closing of any branches.

         Various other legislation, including proposals to revise the bank
regulatory system and to limit the investments that a depository institution may
make with insured funds, is from time to time introduced in Congress.

INTERSTATE ACT

         The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act"), which was enacted on September 29, 1994, among other things
and subject to certain conditions and exceptions, permits on an interstate basis
(i) bank holding company acquisitions commencing one year after enactment of
banks (of a minimum age of up to five years as established by state law in any
state), (ii) mergers of national and state banks after May 31, 1997 unless the
home state of either bank has opted out of the interstate bank merger provision,
(iii) branching de novo by national and state banks if the host state has
opted-in to this provision of the Interstate Act, and (iv) certain bank agency
activities after one year after enactment. The Interstate Act contains a 30%
intrastate deposit cap, except for the initial acquisition in the state,
restriction that applies to certain interstate acquisitions unless a different
intrastate cap has been adopted by the applicable state pursuant to the
provisions of the Interstate Act and a 10% national deposit cap restriction.
Regulations have not yet been issued under the Interstate Act. A bill has been
enacted by the Tennessee legislature which repeals the Tennessee Reciprocal
Banking Act, amends the Tennessee Bank Structure Act of 1974, and amends
Tennessee's bank branching laws by opting in to the Interstate Act. Management
cannot predict the extent to which the business of the Company and the Bank may
be affected.






                                     - 19 -
<PAGE>   20

BROKERED DEPOSITS AND PASS-THROUGH INSURANCE

         The FDIC has adopted regulations under FDICIA governing the receipt of
brokered deposits and pass-through insurance. Under the regulations, a bank
cannot accept or rollover or renew brokered deposits unless (i) it is well
capitalized or (ii) it is adequately capitalized and receives a waiver from the
FDICIA. A bank that cannot receive brokered deposits also cannot offer
"pass-through" insurance on certain employee benefit accounts. Whether or not it
has obtained such a waiver, an adequately capitalized bank may not pay an
interest rate on any deposits in excess of 75 basis points over certain index
prevailing market rates specified by regulation. There are no such restrictions
on a bank that is well capitalized. Because it believes that the Bank was well
capitalized as of March 1, 1998, the Company believes the brokered deposits
regulation will have not material effect on the funding or liquidity of the
Bank.

FDIC INSURANCE PREMIUMS

         The Bank is required to pay semiannual FDIC deposit insurance
assessments. As required by FDICIA, the FDIC adopted a risk-based premium
schedule which increased the assessment rates for most FDIC-insured depository
institutions. Under the schedule, the premiums initially range from $.23 to $.31
for every $100 of deposits. Each financial institution is assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- and further assigned to one of three subgroup within a
capital group, on the basis of supervisory evaluations by the institution's
primary federal and, if applicable, state supervisors and other information
relevant to the institution's financial condition and the risk posed to the
applicable FDIC deposit insurance fund. The actual assessment rate applicable to
a particular institution will, therefore, depend in part upon the risk
assessment classification so assigned to the institution by the FDIC. Recently
the FDIC has passed a resolution to lower premiums. The Bank currently does not
pay any premium on the insurance for its deposits.

         Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.

DEPOSITOR PREFERENCE

     The Omnibus Budget Reconciliation Act of 1993 provides that deposits and
certain claims for administrative expenses and employee compensation against an
insured depositary institution would be afforded a priority over other general
unsecured claims against such an institution, including federal funds and
letters of credit, in the "liquidation or other resolution" of such an
institution by any receiver.

EFFECT OF GOVERNMENTAL POLICIES

         The Bank is affected by the policies of regulatory authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national money supply. Among the instruments
of monetary policy used by the Federal Reserve are: purchases and sales of U.S.
Government securities in the marketplace; changes in the discount rate, which is
the rate any depository institution must pay to borrow from the Federal Reserve;
and changes in the reserve requirements of depository institutions. These
instruments are effective in influencing economic and monetary growth, interest
rate levels and inflation.

         The monetary policies of the Federal Reserve System and other
governmental policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. Because of changing conditions in the national economy and in the money
market, as well as the result of actions by monetary and fiscal authorities, it
is not possible to predict with certainty future changes in interest rates,
deposit levels, loan demand or the business and earnings of the Company and the
Bank or whether the changing economic conditions will have a positive or
negative effect on operations and earnings.

         Bills are pending before the United States Congress and the Tennessee
General Assembly which could affect the business of the Company and the Bank,
and there are indications that other similar bills may be introduced in the
future. It 





                                     - 20 -
<PAGE>   21

cannot be predicted whether or in what form any of these proposals will be
adopted or the extent to which the business of the Company and the Bank
subsidiaries may be affected thereby.

EMPLOYEES

         At December 31, 1998, the Company had a total of 46 employees with 4
of those employed on a part-time basis.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Bank's main office is located at 210 East Main Street in
Rogersville, Tennessee. The property consists of a masonry building with
approximately 10,000 square feet, 7,500 square feet of which is used by the
Bank. The Bank has a branch in Sneedville, Tennessee which is a masonry building
of approximately 7,000 square feet, which is constructed on a half acre of land
owned by the Bank. The Bank operates a third location as a branch in Church
Hill. All facilities have improvements including drive-through tellers, vaults,
night depository and certain facilities have safe deposit boxes.

ITEM 3.  LEGAL PROCEEDINGS

         There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the Company,
pending or contemplated, in which any director, officer or affiliate or any
principal security holder of the Company, or any associate of any of the
foregoing, is a party or has an interest adverse to the Company or the Bank.

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

         None







                                     - 21 -


<PAGE>   22



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company conducted public offering of its Common Stock in 1998 at a
price of $15 per share (the "Offering"). There is no established public market
for the shares. Management of the Company is aware that isolated transactions in
the Common Stock occur from time to time. To the best of the knowledge of the
Company the most recent transaction in the Common Stock was December 17, 1998
and was for the price of $15.00 per share.

         There were 471 holders of record of the Common Stock as of March 20,
1999.

         The Company currently intends to retain its earnings, if any, for use
in the business and does not anticipate paying any cash dividends in the
foreseeable future. The board of directors cannot predict when such dividends,
if any, will ever be made. The payment of dividends, if any, shall at all times
be subject to the payment of the Company's expenses, the maintenance of
reasonable working capital and risk reserves, and minimum capitalization
requirements for state banks.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         The purpose of this discussion and analysis is to provide the reader
with a concise description of the financial condition and changes therein and
results of operations of the Company and the Bank for the years ended December
31, 1998 and 1997.

         This discussion and analysis is intended to complement the audited
financial statements and footnotes and the supplemental financial data and
charts appearing elsewhere in this report, and should be read in conjunction
therewith. This discussion and analysis will focus on the following major areas:
Results of Operations, Financial Position, Capital Resources, Asset Quality, and
Liquidity and Interest-Sensitivity.

RESULTS OF OPERATIONS

         Net income for 1998 was $454,841 increasing $238,066 compared with net
income of $216,775 for 1997. The Company's return on average assets was 0.51%
for 1998 or 1.65 times the return on average assets of 0.31% for 1997. The
Company's return on average equity improved to 11.36% for 1998 compared with
6.09% for 1997.

         The Company's net income for 1998 and 1997 were impacted by the
following:

         --       The yield on average interest earnings assets was 8.54% for
                  1998 decreasing 0.10% from 8.64% for 1997.

         --       Average earning assets increased $19,391,000 to $82,618,000
                  for 1998 compared to $63,227,000 for 1997.

         --       Yield on average interest bearing liabilities increased 0.01%
                  from 5.35% in 1997 to 5.36% for 1998.

         --       Average interest bearing liabilities increased $17,425,000 to
                  $74,862,000 for 1998 compared to $57,437,000 for 1997.

         --       Average interest earning assets to average total assets
                  increased slightly from 91.19% for 1997 to 92.91% for 1998.

         --       Average interest bearing liabilities to average total assets
                  increased from 82.84% for 1997 to 84.19% for 1998.





                                     - 22 -


<PAGE>   23



         As a result of the foregoing net interest income as a percentage of
average interest earning assets decreased from 3.78% for 1997 to 3.69% for 1998.
Accordingly, net interest income for 1998 of $3,006,351 was only $616,214
greater than net interest income of $2,390,137 for 1997.

         Net interest income for 1998 was positively impacted by a decrease in
interest expense of $29,000 on parent company only borrowings. Of this decrease
of $29,000 approximately $17,000 was attributable to a decrease in average
borrowings. Average parent company only borrowings were $3,064,000 for 1998 or a
decrease of $217,000 compared to 1997 of $3,281,000. The remaining decrease of
$12,000 was attributable to a decrease in the average rate on such outstanding
borrowings from 8.05% for 1997 to 7.70% for 1998. The borrowing was incurred by
the Company in order to increase the capital of its subsidiary bank. Without
this borrowing, the Bank would not have had sufficient capital to permit the
Bank to open branches in Rogersville and Church Hill.








                                     - 23 -


<PAGE>   24



         The following table indicates the average balance, interest income or
expense, average interest rates earned or paid, interest rate spread, and
interest margin for the years ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                     1997                                 1996
                                      ---------------------------------    --------------------------------
(Fully taxable equivalent)                       Interest       Average               Interest      Average
(Dollars in thousands except          Average     Income/       Yields/    Average     Income/       Yields/
for per share data)                   Balance     Expense        Rate      Balance     Expense        Rate
                                      -------     -------        ----      -------     -------        ----
<S>                                   <C>          <C>           <C>       <C>          <C>           <C>  
ASSETS:

Interest-earning assets:

Loans net of unearned income          $42,185      $4,141        9.82%     $28,647      $2,859        9.98%
U.S. Treasury and other U.S.                                                                    
  government agencies                  17,065       1,113        6.52%      14,669         944        6.44%
States and municipalities                 102           8        7.84%          63           5        7.94%
Federal funds sold                      3,875         202        5.21%       4,424         227        5.13%
                                      -------      ------                  -------      ------
    Total interest-earning                                                                      
      assets/interest income           63,227       5,464        8.64%      47,803       4,035        8.44%
                                      -------      ------                  -------      ------
Cash and due from banks                 1,983                                1,766
Other assets                            4,675                                3,650
Allowance for loan losses                (550)                                (433)
                                      -------                              -------
    Total                             $69,335                              $52,786
                                      =======                              =======

LIABILITIES AND STOCKHOLDERS'
  EQUITY:

Interest-bearing liabilities:

Demand deposits                       $11,742      $  423        3.60%     $10,526      $  374        3.55%
Savings                                 2,222          66        2.97%       1,614          48        2.97%
Individual retirement accounts          4,382         246        5.61%       3,095         176        5.69%
Time certificates                      35,101       2,029        5.78%      23,521       1,352        5.75%
Securities sold under repurchase          709          43        6.06%         315          11        3.49%
Note payable                            3,281         264        8.05%       3,450         290        8.41%
                                      -------      ------                  -------      ------
  Total interest-bearing                                                                        
    liabilities/interest expense       57,437       3,071        5.35%      42,521       2,251        5.29%
                                      -------      ------                  -------      ------
Non-interest bearing demand
  deposits                              7,710                                6,655
Other liabilities                         624                                  663
Stockholders' equity                    3,564                                2,947
                                      -------                              -------
  Total                               $69,335                              $52,786
                                      =======                              =======
Net interest earnings                              $2,393                               $1,784
                                                   ======                               ======
Net interest on interest earning
  assets                                                         3.78%                                3.73%
                                                                 =====                                =====

Return on average assets                 0.31%                                0.16%
Return on average equity                 6.09%                                2.88%
Cash dividends declared               $     0                              $     0
Dividend payout ratio                     N/A                                  N/A
</TABLE>

         Non-interest expense increased $337,031 from $2,034,140 for 1997 to
$2,371,171 for 1998. However, non-interest expense as a percentage of average
assets decreased by 0.26% from 2.93% in 1997 to 2.67% for 1998.






                                     - 24 -


<PAGE>   25



         The following table presents non-interest expense for 1998 compared to
1997 as a percentage of average assets and the changes therein (in thousands):

<TABLE>
<CAPTION>
                                                                     1998                      1997
                                                               -------------------     -------------------
                                                                         % Average               % Average
                   Non-interest Expense                        Amount      Assets      Amount      Assets
                   --------------------                        ------      ------      ------      ------

<S>                                                            <C>          <C>        <C>          <C>  
Salaries and employee benefits............................     $1,256       1.41%      $1,094       1.58%
Occupancy, net............................................        197       0.22%         160       0.23%
Furniture and equipment...................................        263       0.30%         206       0.30%
Directors fees............................................         50       0.06%          49       0.07%
Advertising...............................................         66       0.07%          59       0.09%
FDIC insurance............................................          8       0.01%           7       0.01%
Office supplies...........................................         46       0.05%          29       0.04%
Professional services.....................................         96       0.11%          84       0.12%
Telephone.................................................         34       0.04%          34       0.05%
Postage and courier.......................................         54       0.06%          36       0.05%
Other.....................................................        301       0.34%         276       0.40%
                                                               ------       ----       ------       ---- 
                                                               $2,371       2.67%      $2,034       2.93%
                                                               ======       ====       ======       ==== 
</TABLE>



         Non-interest expenses increased 16.57% in absolute terms from 1997 to
1998 but decreased as a percentage of average total assets. The decrease is
attributable to an expansion of the Company's asset base without a corresponding
increase in non-interest expenses. Occupancy expense increased in 1998 by 55.34%
primarily attributable to the fact that 1998 was the first full year of
operations of the Bank's new main office facilities in Rogersville. Non-interest
expense as a percentage of average assets is expected to continue to decline as
growth in Bank assets is expected to increase faster than the growth in
non-interest expense.

         The provision for loan losses in 1998 was $240,000 or $35,000 greater
than the provision for loan losses of $215,000 for 1997. The provision for loan
losses is the amount management deems necessary to maintain a reserve for loan
losses at a level sufficient to meet risks inherent in the Bank's loan
portfolio. The level of the reserve is determined by management after
considering ongoing reviews of the loan portfolio as well as considering the
level and magnitude of non-performing assets and loan delinquencies, general
economic conditions in the areas served by the Company, historic loan-loss
experience, loan mix and the level of loans relative to reserves.

         Non-interest income increased $99,030 from $212,915 in 1997 to $311,945
in 1998.

         Income tax expense increased $115,147 from $137,137 in 1997 to $252,284
in 1998.

FINANCIAL POSITION

         Company total assets grew 25.04% or $19.59 million during 1998 to
$97.84 million at year end 1998 from $78.25 million at year end 1997. This
growth is primarily attributable to growth of $18.83 million in deposits and
securities sold under repurchase agreements during 1998 to $89.13 million at
year end 1998 from $70.30 million at year end 1997.

         Portfolio securities grew $9.26 million in 1998 to $59.02 million at
year end 1998 from $18.19 million at year end 1997 while federal funds decreased
$326,000 during 1998.

         Loans increased $10.55 million during 1998 to $59.02 million at year
end 1998 compared to $48.47 million at year end 1997. Of this growth real estate
mortgage loans grew $5.52 million in 1998 and consumer loans grew $2.38 million
in 1998. Real estate mortgage loans represented 64.77% of gross outstanding
loans at year end 1998. Consumer loans represented 21.81% of gross outstanding
loans at year end 1998.




                                     - 25 -


<PAGE>   26



         Deposits and securities sold under repurchase agreements grew $18.83
million in 1998 from $70.30 million at year end 1997 to $89.13 million at year
end 1998.

CAPITAL REQUIREMENTS

         The Company's equity capital was $4.40 million at year end 1998
compared to $3.87 million at year end 1997. This increase of approximately
$530,000 consists of the Company's net income for 1998 of $454,841, an increase
in the accumulated other comprehensive income of $75,020. No dividends were paid
by the Company during 1998 and the Company does not expect to pay dividends any
time in the foreseeable future.

         The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. The Bank was prohibited
from paying any dividends, other than to service the parent company
indebtedness, for two years from the opening of branches in Rogersville and
Church Hill, Tennessee (opened during 1996) without the prior written approval
of the Commissioner of Financial Institution for the State of Tennessee. At
December 31, 1997, the Bank had approximately $399,703 tangible capital in
excess of the 8% Tier I leverage capital required to be maintained by State bank
regulators during the three years subsequent to beginning operations in Hawkins
County, Tennessee. Such excess tangible capital may be used to pay dividends
from the Bank without prior regulatory approval but only if necessary to service
parent company indebtedness in accordance with the terms of such indebtedness.
These restrictions were no longer in effect at December 31, 1998.

         The Bank had committed to State banking regulators, in connection with
the approval to open branches during 1996 in Rogersville and Church Hill,
Tennessee that it would, among other things, maintain a Tier I capital plus loan
loss reserve to asset ratio of not less than 10% during the first three years
after approval. This condition was modified by State banking regulators on
September 19, 1997 to require the Bank to maintain a Tier I leverage ratio of no
less than 8% for the three years subsequent to commencing operation in Hawkins
County, Tennessee. The actual Tier I leverage ratio maintained by the Bank was
8.75% on an end of period basis at December 31, 1997. The actual tangible
capital maintained by the Bank at December 31, 1997 after the Rogersville and
Church Hill branches were opened was $6,639, which was consistent with the
approval regarding opening the branches. These requirements were no longer in
effect at December 31, 1998.

         The Company is a "small one-bank holding company" within the meaning of
regulations promulgated by the Board of Governors of the Federal Reserve System.
Accordingly, the Company's capital compliance, for bank holding company
purposes, will be measured solely with respect to the Bank and not on a
consolidated basis.

         Management believes, as of December 31, 1998, that the Bank and Company
meet all capital requirements to which they are subject and that they are in
compliance with all conditions and commitments to banking regulators regarding
the approval and opening of branches in Rogersville and Church Hill, Tennessee.
However, events beyond the control of the Company, such as a downturn in the
local economy, could adversely affect future earnings and, consequently, the
ability of the Company to meet its future minimum capital requirements.

         The Bank would be considered "well capitalized" within the applicable
regulatory capital guidelines at December 31, 1998.

LIQUIDITY RESOURCES

         Liquidity management focuses on the need to meet both short-term
funding requirements and long-term growth objectives. Primary sources for
liquidity include deposits, loan repayments and security repayments or sales of
available for sale securities.

         During 1998 the Company increased available for sale securities by
$8.98 million from $19.11 million at year end 1997 to $26.09 million at year end
1998.





                                     - 26 -


<PAGE>   27



ASSET LIABILITY MANAGEMENT

         The long-term profitability of the Company depends on properly priced
products and services, asset quality and asset-liability management.
Historically, the Company has had a mismatch between the maturities of its
assets and liabilities because customers have traditionally preferred short-term
deposits and longer-term loans. This mismatch makes the Company sensitive to
changes in interest rates and the resulting effect on interest income and the
market value of assets. The Company attempts to manage this mismatch and thus
reduce its effect on earnings during periods of significant changes in interest
rates. The strategies utilized by the Company include the origination of
shorter-term fixed rate loans and adjustable rate loans or loans with call
provisions. The Company also emphasizes checking accounts and other transaction
accounts which management believes are less rate sensitive than certificate
accounts.

         A traditional measure of interest rate sensitivity and its impact upon
the next years earnings is the Company's one-year gap position (total assets
subject to repricing less total liabilities subject to repricing). A negative
one-year gap position generally exposes the Company's earnings to rising short
term rates over the period and thus reduced net interest income because current
liabilities reprice faster than current assets. However, this earnings exposure
can be mitigated during the period if total asset growth is sufficient such that
new assets are priced at relatively higher rates and new deposit maturities are
extended. At December 31, 1998 the Company had a cumulative one year negative
gap of (40.99%) or a net of $37.38 million in liabilities repricing faster than
assets.

         While the one-year-gap measure helps provide some information about a
financial institution's interest sensitivity, it does not predict the trends of
future earnings.

         The Company's investment in derivatives at year end 1997 was $500,000
at cost. These two securities had an approximate market value at that time of
$493,558. Both securities are "inverse floaters," matured in 1998 and were the
obligation of the Federal Home Loan Bank, a quasi-government agency. Ultimate
collection of the par amount of the obligations is relatively risk free.
However, until maturity, earnings will be impacted either positively or
negatively depending upon the prevailing level of interest rates. In essence, an
inverse floater generally earns more in a falling interest rate environment and
earns less in a rising interest rate environment. At December 31, 1997 one of
these securities was earning at 4.338% while the other was earning at 4.738%.
Both securities have a par amount of $250,000. These securities were acquired by
prior management during 1994 because of their then attractive yields and the
then expectation that interest rates would continue falling or remain stable.
Current management intends to hold these securities until maturity and has no
present plans or intentions of investing in similar instruments in the future.

ASSET QUALITY

         Non-performing and other loans past due 90 days or more were $437,287
at year end 1998 compared to $256,636 at year end 1997 representing an increase
of $180,651. Non-performing loans as a percentage of net loans before the
allowance for loan losses was 0.74% at year end 1998 and 0.53% at year end 1997.
The reserve for loan losses to non-performing loans, which is a measure of the
Bank's ability to cover problem assets with existing reserves, was 185.4% at
year end 1998 and 259.8% at year end 1997. The Company had no material
restructured loans in 1998 or 1997. The asset quality of the Company continues
to be good which is a result of good underwriting standards coupled with
aggressive collection efforts and a good local economy.

EFFECTS OF INFLATION AND CHANGING PRICES

         The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation.

         Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. In the current
interest rate environment, the liquidity and maturity structures of the
Company's assets and liabilities are critical to maintenance of acceptable
performance levels.






                                     - 27 -


<PAGE>   28



YEAR 2000 COMPLIANCE

         The Company does not expect the cost of converting its computer systems
to year 2000 compliant software to be material to its financial condition or
results of operations. The Company believes it will achieve year 2000 compliance
in a timely manner and does not anticipate any disruption in its operations as
the result of any failure by the Company to be in compliance.

ITEM 7.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                              ----
<S>                                                                                                           <C>
Index to Consolidated Financial Statements:

         Independent Auditor's Report...........................................................................F-1

         Consolidated Balance Sheets at December 31, 1998 and 1997..............................................F-2

         Consolidated Statements of Earnings for the years ended December 31, 1998 and 1997.....................F-3

         Consolidated Statements of Changes in Stockholders' Equity for the years ended
                  December 31, 1998 and 1997....................................................................F-4

         Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996...................F-5

         Consolidated Statements of Comprehensive Income for the years ended 
                  December 31, 1998 and 1997....................................................................F-6

         Notes to Consolidated Financial Statements.............................................................F-7
</TABLE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

         Following is certain information regarding the nominee directors and
executive officers of the Company.

         REED D. MATNEY (49) assumed the position of Chief Executive Officer in
November 1996 and has served as the President and a Director since 1994. Mr.
Matney was employed by First Union National Bank of Tennessee until April 1994
and he was employed by the Bank in May 1994.

         G. DOUGLAS PRICE (58) has served as a Director since 1994. Mr. Price is
retired and was the former Executive for Hawkins County, Tennessee.

         WILLIAM E. PHILLIPS (51) has served as Chairman of the Board since
1994. Mr. Phillips is an attorney with the law firm of Phillips and Hale in
Rogersville, Tennessee.

         H. LYONS PRICE (64) has served as the Secretary/Treasurer and Director
since 1994. Mr. Price was employed by First Union National Bank of Tennessee
until June 1993.

         GARY E. VARNELL (52) has served as a Director of the Company since
1994. Mr. Varnell is the owner and operator of a retail office products store in
Rogersville, Tennessee.

         DR. TRUETT H. PIERCE (71) has served as a Director of the Company since
1994. Dr. Truett practices medicine in Sneedville, Tennessee.

         GEORGE L. BROOKS (69) has served as a Director of the Company since
1994. Mr. Brooks retired from Citizens Union Bank in 1993 and resides in
Rogersville, Tennessee.






                                     - 28 -
<PAGE>   29

         SHIRLEY A. PRICE (64) has served as a Director of the Company since
1994. Ms. Price is an insurance agent in Rogersville, Tennessee.

         LEON GLADSON (73) has served as a Director of the Company since 1994.
Mr. Gladson is a retired businessman and resides in Rogersville, Tennessee.

         EDDIE FREEMAN (46) has served as a Director of the Company since 1995
and serves as Vice President and Manager of the Bank's Church Hill office.

         NEIL D. MILLER (79) has served as a Director of the Company since 1994.
Mr. Miller is a farmer in Rogersville, Tennessee.

         M. CARLIN GREENE (56) has served as a Director of the Company since
1994. Mr. Greene is a real estate agent and farmer in Sneedville, Tennessee.

         SCOTT F. COLLINS (50) has served as a Director of the Company since
1994. Mr. Collins is the Hancock County Clerk & Master in Sneedville, Tennessee.

         LAWRENCE E. GRAY (54) has served as a Director of the Company since
1994 and serves as Executive Vice President of the Bank.

         No director of the Company is a director or executive officer of
another bank holding company, bank, savings and loan association, or credit
union.

         During 1998 the Board of Directors of the Company held two meetings. 
The Directors of the Company also serve as directors of the Bank. The Board of
Directors of the Bank held 12 meetings in 1998. No director attended less than
75% of the meetings held by the Company or the Bank during 1998. The Directors
received no compensation as directors of the Company but as directors of the
Bank received $300 for each meeting attended.

         The Board of Directors has three committees. Messrs. Phillips, H. Lyons
Price and Matney serve as the Executive Committee, Messrs. Doug Price, Gladson
and Collins serve as members of the Audit Committee and Messrs. Phillips,
Matney, H. Lyons Price and G. Douglas Price serve as members of the Trust
Committee. These persons receive no compensation as members of such committees.







                                     - 29 -


<PAGE>   30



ITEM 10. EXECUTIVE COMPENSATION.

         The following table sets forth the aggregate cash compensation paid by
the Company to the chief executive officer of the Company. No other executive
officer of the Company received cash compensation in excess of $100,000
(determined as of the end of 1997) for the years ended December 31, 1998, 1997
and 1996.

<TABLE>
<CAPTION>
                                                                 Annual 
                                                               Compensation
                                                               ------------
Name and Position                               Year            Salary ($)
-----------------                               ----            ----------
<S>                                             <C>            <C>
Reed Matney                                     1998              78,000
Chief Executive Officer and President           1997              72,000
                                                1996              66,000
</TABLE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         As of March 20, 1999, the Company's records indicated that the
following number of shares were beneficially owned by (i) each person known by
the Company to beneficially own more than 5% of the Company's shares; (ii)
directors and persons nominated to become directors of the Company and executive
officers; and (iii) directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
                                                                      Amount and Nature
                            Name of                               of Beneficial Ownership        Percent
                        Beneficial Owner                              (Number of Shares)         of Class
                        ----------------                              ------------------         --------

<S>                                                                <C>                           <C>   
(i)    Ralph T. Hurley...................................                   85,500                15.86%
       Rt. 2 Box 157
       Sneedville, TN  37869

       William E. Phillips(1)............................                   21,755                 4.03
       312 Main Street
       Rogersville, TN 37857

(ii)   William E. Phillips(1)............................                   21,755                 4.03
       Lawrence E. Gray(2)...............................                   18,601                 3.45
       Shirley A. Price..................................                    7,957                 1.47
       Reed D. Matney....................................                    8,343                 1.54
       Leon Gladson......................................                    3,683                    *
       Eddie Freeman.....................................                    1,852                    *
       G. Douglas Price(3)...............................                   15,894                 2.94
       Gary E. Varnell(4)................................                   16,220                 3.00
       Scott F. Collins..................................                    1,560                    *
       H. Lyons Price....................................                    6,125                 1.13
       George L. Brooks..................................                    6,125                 1.13
       M. Carlin Greene..................................                   11,678                 1.70
       Dr. Truett H. Pierce(5)...........................                   12,231                 2.16
       Neil D. Miller....................................                   11,110                 2.26

(iii)  Directors and executive officers as a group (14                     143,181                26.56%
       persons)..........................................
</TABLE>
----------
*        Less than 1%

(1)      Includes 12,211 shares owned by the Joe H. Wilson Trust, for which Mr.
         Phillips serves as co-trustee.
(2)      Includes 12,211 shares owned jointly with his father, for which he
         disclaims voting and investment power.
(3)      Includes 6,105 shares owned by his spouse, for which he disclaims
         voting and investment power.
(4)      Includes 320 shares owned jointly with his two sons.
(5)      Includes 9,158 shares owned by his spouse, for which he disclaims
         voting and investment power.





                                     - 30 -


<PAGE>   31



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Company expects to have in the future banking and other business
transactions in the ordinary course of its banking business with directors,
officers, and 10% beneficial owners of the Company and their affiliates,
including members of their families, or corporations, partnerships, or other
organizations in which such officers or directors have a controlling interest,
on substantially the same terms (including price, or interest rates and
collateral) as those prevailing at the time for comparable transactions with
unrelated parties. Any such banking transactions will not involve more than the
normal risk of collectibility nor present other unfavorable features to the
Company or the Bank.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(1) Exhibits

Exhibit
Number     Description
------     -----------

  3.1      Articles of Incorporation of Volunteer Bancorp, Inc., as amended*

  3.2      Bylaws of Volunteer Bancorp, Inc.*

 21.2      List of Subsidiaries

 23.1      Consent of Welch & Associates, Ltd.

 27        Financial Data Schedule (For SEC use only)

 *       Incorporated by reference to exhibits filed with the Registrant's
         Registration Statement on Form SB-1, Registration No. 33-94050.

(2) Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended December 31,
1999.

       


                                     - 31 -


<PAGE>   32





                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Volunteer Bancorp, Inc.

We have audited the accompanying consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity, cash flows
and comprehensive income for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Volunteer Bancorp,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.



                                                        Welch & Associates, Ltd.



January 15, 1999
Nashville, Tennessee

                                      F-1
<PAGE>   33


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                           1998                 1997
                                                                        -----------          -----------
<S>                                                                     <C>                  <C>
                                   ASSETS

Cash and due from banks (note 10)                                       $ 2,287,388          $ 2,583,960
Federal funds sold                                                        4,515,263            4,841,622
                                                                        --------------------------------
   Cash and cash equivalents                                              6,802,651            7,425,582
Investment securities available for sale (amortized
   cost of $25,883,100 and $17,024,658, respectively) (note 2)           26,088,100           17,108,656
Investment securities held to maturity (estimated market
   value of $1,372,927 and $1,083,238, respectively) (note 2)             1,362,477            1,085,104
Loans, less allowance for possible loan losses of $810,563
   and $660,336 in 1998 and 1997, respectively (note 3)                  58,214,045           47,809,870
Accrued interest receivable                                                 905,237              819,510
Premises and equipment, net (note 4)                                      4,116,851            3,647,191
Other real estate                                                            51,923               89,946
Deferred income taxes (note 8)                                               23,204                    -
Goodwill (note 1)                                                           184,908              202,791
Other assets                                                                 91,799               57,733
                                                                        --------------------------------
    Total assets                                                        $97,841,195          $78,246,383
                                                                        ================================

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits (notes 2 and 5)
   Non-interest bearing                                                 $ 9,991,890          $ 8,816,803
   Interest bearing                                                      77,673,242           60,270,586
                                                                        --------------------------------
     Total deposits                                                      87,665,132           69,087,389
Accrued interest payable                                                    939,899              720,842
Securities sold under repurchase agreements (note 16)                     1,462,130            1,216,679
Other accrued taxes, expenses and liabilities                               328,469               64,218
Long-term debt (note 6)                                                   3,045,000            3,265,000
Deferred income taxes (note 8)                                                    -               21,551
                                                                        --------------------------------
     Total liabilities                                                   93,440,630           74,375,679
                                                                        --------------------------------

Commitments and contingent liabilities (note 9)

Stockholders' equity:
   Common stock, $0.01 par value, 1,000,000 shares
    authorized, 539,027 shares issued and outstanding                         5,390                5,390
   Additional paid-in capital                                             1,916,500            1,916,500
   Retained earnings                                                      2,351,576            1,896,735
   Accumulated other comprehensive income (note 1)                          127,099               52,079
                                                                        --------------------------------
     Total stockholders' equity                                           4,400,565            3,870,704
                                                                        --------------------------------
        Total liabilities and stockholders' equity                      $97,841,195          $78,246,383
                                                                        ================================
</TABLE>



           See accompanying notes to consolidated financial statements

                                      F-2


                                    
<PAGE>   34



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                       Consolidated Statements of Earnings

                           December 31, 1998 and 1997
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           1998                  1997
                                                                        -----------          -----------
<S>                                                                     <C>                  <C>
Interest income:
    Interest and fees on loans                                          $ 5,362,173          $ 4,141,546
    Interest on federal funds                                               302,849              202,199
    Interest on investment securities:
           Taxable                                                        1,276,541            1,112,803
           Exempt from Federal income tax                                    75,605                5,000
                                                                        --------------------------------
              Total interest income                                       7,017,168            5,461,548
                                                                        --------------------------------
Interest expense:
    Interest on deposits                                                  3,674,533            2,764,396
    Interest on other borrowed funds                                        336,284              307,015
                                                                        --------------------------------
              Total interest expense                                      4,010,817            3,071,411
                                                                        --------------------------------
Net interest income                                                       3,006,351            2,390,137
Provisions for possible loan losses (note 3)                                240,000              215,000
                                                                        --------------------------------
Net interest income after provision for possible loan losses              2,766,351            2,175,137
                                                                        --------------------------------
Non-interest income:
    Service charges on deposit accounts                                     149,560              105,057
    Other fees and commissions                                               89,025               78,015
    Securities gain (loss) (note 2)                                          37,318                8,342
    Other non-interest income                                                36,042               21,501
                                                                        --------------------------------
              Total non-interest income                                     311,945              212,915
                                                                        --------------------------------
Non-interest expense:
    Salaries and employee benefits (note 7)                               1,251,557            1,094,241
    Occupancy expenses, net (note 4)                                        197,388              160,188
    Furniture and equipment expense                                         263,416              206,498
    Other non-interest expense (note 7)                                     658,810              573,213
                                                                        --------------------------------
              Total non-interest expense                                  2,371,171            2,034,140
                                                                        --------------------------------

              Net earnings before income taxes                              707,125              353,912

Income tax expense (note 8)                                                 252,284              137,137
                                                                        --------------------------------

Net income                                                              $   454,841          $   216,775
                                                                        ================================

Income per weighted average common share                                $      0.84          $      0.41
                                                                        ================================

Weighted average common shares outstanding                                  539,027              529,318
                                                                        ================================
</TABLE>



           See accompanying notes to consolidated financial statements

                                      F-3


                                     
<PAGE>   35



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

           Consolidated Statements of Changes in Stockholders' Equity

                 For the Years Ended December 31, 1998 and 1997
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                                           
                                        Common                                        Accumulated
                                        Stock        Additional                          Other
                          Common        Stated        Paid-In          Retained      Comprehensive
                          Shares        Value         Capital          Earnings          Income            Total
                          -------       ------       ----------       ----------     -------------      ----------
<S>                       <C>           <C>          <C>              <C>            <C>                <C>
Balance January
 1,1997                   525,717       $5,258       $1,761,552       $1,679,960       $ (49,862)       $3,396,908

Net income                      -            -                -          216,775               -           216,775

Other
 comprehensive
 income
                                -            -                -                -         101,941           101,941
Issue common stock,
   net of costs
   of issuance             13,310          132          154,948                -               -           155,080
                          ----------------------------------------------------------------------------------------
Balance December
   31, 1997               539,027        5,390        1,916,500        1,896,735          52,079         3,870,704

Net income                      -            -                -          454,841               -           454,841

Other
   comprehensive
   income                       -            -                -                -          75,020            75,020
                          ----------------------------------------------------------------------------------------
Balance December
 31,1998                  539,027       $5,390       $1,916,500       $2,351,576       $ 127,099        $4,400,565
                          ========================================================================================
</TABLE>



           See accompanying notes to consolidated financial statements

                                      F-4
                                   
<PAGE>   36



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                           December 31, 1998 and 1997
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                           1998                  1997
                                                                        -----------          -----------
<S>                                                                     <C>                  <C>
Cash Flows from Operating Activities:
   Net income                                                           $   454,841          $   216,775
   Adjustments to reconcile net income to net cash
       provided by operating activities:
     Deferred income taxes                                                  (90,736)             (51,312)
     Provision for loan losses                                              240,000              215,000
     Provision for depreciation and amortization                            236,925              216,547
     Securities (gain)                                                      (37,318)              (8,342)
     (Increase) in interest receivable                                      (85,727)            (208,856)
     Decrease (increase) in other assets                                      3,957              (23,384)
     Increase in other liabilities                                          483,308              101,273
                                                                        --------------------------------
  Net cash provided by operating activities                               1,205,250              457,701
                                                                        --------------------------------

Cash Flows from Investing Activities:
    Purchase of investment securities held to maturity                   (2,975,686)                   -
    Proceeds from calls and maturity of held to maturity securities       2,699,156              518,743
    Purchase of investment securities available for sale                (23,024,574)          (8,719,001)
    Proceeds from calls and maturities of available for sale securities  10,792,245            1,849,892
    Proceeds from sale of available for sale securities                   3,410,361            3,452,109
    Net (increase) in loans                                             (10,644,175)         (13,145,042)
    Capital expenditures                                                   (688,702)            (628,790)
                                                                        --------------------------------
  Net cash (used) in investing activities                               (20,431,375)         (16,672,089)
                                                                        --------------------------------

Cash Flows from Financing Activities:
    Net increase in demand deposits, NOW accounts,
      IRA and savings accounts                                            4,884,189            3,191,292
    Net increase in certificates of deposit                              13,693,554           10,218,966
    Net increase in securities sold under repurchase agreements             245,451            1,041,679
    Repayment of long-term debt                                            (220,000)            (185,000)
    Issue common stock                                                            -              199,650
    Stock issuance costs                                                          -              (44,570)
                                                                        --------------------------------
   Net cash provided by financing activities                             18,603,194           14,422,017
                                                                        --------------------------------
Increase (decrease) in cash and cash equivalents                           (622,931)          (1,792,371)
Cash and cash equivalents beginning of year                               7,425,582            9,217,953
                                                                        --------------------------------
Cash and cash equivalents end of year (note 1)                          $ 6,802,651          $ 7,425,582
                                                                        ================================

Supplemental Disclosure of Cash Flow Information:
   Cash paid during the period for:
      Interest                                                          $ 3,791,760          $ 2,905,786
                                                                        ================================
      Income taxes                                                      $   209,635          $   258,826
                                                                        ================================
</TABLE>


           See accompanying notes to consolidated financial statements

                                      F-5
                                    
<PAGE>   37



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                 Consolidated Statements of Comprehensive Income

                           December 31, 1998 and 1997
-------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                               1998               1997
                                                                               ----               ----
<S>                                                                     <C>                  <C>

Net income                                                              $   454,841          $   216,775
                                                                        --------------------------------

Other comprehensive income, before tax:

 Unrealized gains on securities available for sale:

    Unrealized holding gains arising during the period                      158,319              177,732

    Less: reclassification adjustment for gains included in
      Income                                                                (37,318)             (13,311)
                                                                        --------------------------------
Other comprehensive income                                                  121,001              164,421

  Income taxes related to other comprehensive income                        (45,981)             (62,480)
                                                                        --------------------------------
  Other comprehensive income, net of income taxes                            75,020              101,941
                                                                        --------------------------------
Total comprehensive income                                              $   529,861          $   318,716
                                                                        ================================
</TABLE>






           See accompanying notes to consolidated financial statements

                                      F-6


                                   
<PAGE>   38



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

1.       Summary of Significant Accounting Policies

                  The accounting policies of Volunteer Bancorp, Inc. (the
                  Company) conform to generally accepted accounting principles
                  and to general practices within the banking industry. The
                  following is a summary of the significant policies.

         a.       Principles of Consolidation

                  The consolidated financial statements include the accounts of
                  the Company and its subsidiary, Citizens Bank of East
                  Tennessee, formerly known as Citizens Bank of Sneedville, (the
                  Bank), of which the Company owns 133,300 (100.0%) shares of
                  the Bank's 133,300 issued and outstanding shares of voting
                  common stock at December 31, 1998 and 1997. All material
                  intercompany accounts and transactions have been eliminated
                  in consolidation.

         b.       Investment Securities

                  Statement of Financial Accounting Standards (SFAS) No. 115,
                  "Accounting for Certain Investments in Debt and Equity
                  Securities" requires investments in equity securities that
                  have a readily determinable fair value and investments in debt
                  securities to be classified into three categories, as follows:
                  held to maturity debt securities, trading securities, and
                  securities available for sale.

                  Classification of a debt security as held to maturity is based
                  on the Company's positive intent and ability to hold such
                  security to maturity. Securities held to maturity are stated
                  at cost adjusted for amortization of premiums and accretion of
                  discounts, unless there is a decline in value which is
                  considered to be other than temporary, in which case the cost
                  basis of such security is written down to market and the
                  amount of the write-down is included in earnings.

                  Securities that are bought and held principally for the
                  purpose of selling them in the near term are classified as
                  trading account securities, which are valued at market with
                  unrealized gains and losses included in earnings. Gains or
                  losses on sales and adjustments to market value of trading
                  account securities are included in non-interest income in the
                  income statements.

                  Securities classified as available for sale are reported at
                  market value with unrealized gains and losses excluded from
                  earnings and reported, net of tax, in a separate component of
                  stockholders' equity and include all securities not classified
                  as trading account securities or securities held to maturity.
                  These include securities used as part of the Company's
                  asset/liability strategy which may be sold in response to
                  changes in interest rates, prepayment risk, the need or desire
                  to increase regulatory capital, and other similar factors.
                  Gains or losses on sale of securities available for sale are
                  recognized at the time of sale, based upon specific
                  identification of the security sold, and are included in
                  non-interest income in the income statements.

                                     F-7
<PAGE>   39
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


                  Interest income on investments is computed on the par value of
                  the outstanding investment. Amortization of discounts and
                  accretion of premiums is recorded as an adjustment to interest
                  income utilizing the effective yield method.

         c.       Loans, Less Allowance for Possible Loan Losses

                  Statement of Financial Accounting Standards (SFAS) No. 114,
                  "Accounting By Creditors For Impairment Of A Loan," as amended
                  by SFAS No. 118, "Accounting By Creditors For Impairment Of A
                  Loan - Income Recognition And Disclosures" state that an
                  impaired loan is generally any loan, excluding certain
                  homogeneous small balance credits such as credit card
                  indebtedness, that is not performing in accordance with its
                  contractual terms. SFAS No. 114 requires that impairment on a
                  loan be measured by the difference between carrying value and
                  the present value of expected future cash flows discounted at
                  the loan's effective interest rate, the loan's observable
                  market price, or the collateral's value if the loan is
                  collateral dependent. The amount of a loan's impairment or
                  changes therein require charges to earnings. SFAS No. 118
                  allows a creditor to use existing methods for the recognition
                  of interest income on an impaired loan.

                  SFAS No. 125, "Accounting for Transfers and Servicing of
                  Financial Assets and the Extinguishment of Liabilities,"
                  establishes, among other things, new criteria for determining
                  whether a transfer of financial assets for cash or other
                  considerations should be accounted for as a sale or as a
                  pledge of collateral in a secured borrowing. There are certain
                  criteria that must be met for the transfer to be recorded as a
                  sale: The transferred assets have been isolated from the
                  transferor - put presumptively beyond the reach of the
                  transferor and its creditors, even in bankruptcy or other
                  receivership. Each transferee obtains the right - free of
                  conditions that constrain it from taking advantage of that
                  right - to pledge or exchange the transferred assets. If these
                  criteria are not met, the transfer must be recorded as a
                  secured borrowing. SFAS No. 125 also addresses repurchase
                  agreements that might allow the transferor to maintain control
                  over the transferred asset. If such an agreement exists, a
                  transfer should be accounted for as a secured borrowing if (a)
                  the assets to be repurchased are substantially the same, (b)
                  they can be repurchased on substantially the agreed terms, (c)
                  repurchase will occur before maturity at a fixed and
                  determinable price, and (d) the agreement was entered into
                  concurrently with the transfer.

                  Loans are stated at the principal amount outstanding reduced
                  by unearned interest and an allowance for loan losses.
                  Unearned interest on loans, which relates principally to
                  installment loans, is recognized by the sum of the months'
                  digits method, which, in the current case, approximates the
                  level yield method. Interest on all other loans is computed on
                  the outstanding loan balance.

                  The allowance method is used by the Company to provide for
                  possible loan losses. Accordingly, all loan losses are charged
                  to the allowance for possible loan losses and all recoveries
                  are credited to it. Loans are charged against the allowance
                  when management believes that the 

                                     F-8
<PAGE>   40

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

                  collection of the principal is unlikely. The allowance is an
                  amount that management believes will be adequate to absorb
                  possible losses on existing loans that may become
                  uncollectible. The provision for possible loan losses charged
                  to operating expense is the amount management considers
                  necessary to bring the allowance to an adequate level based on
                  past loan loss experience and other factors which, in
                  management's judgment, deserve current recognition in
                  estimating possible loan losses. Such other factors considered
                  by management include growth and composition of the loan
                  portfolio, the relationship of the allowance for possible loan
                  losses to outstanding loans and current economic conditions
                  that may affect the borrower's ability to repay.

                  Accrual of interest is discontinued on a loan when management
                  believes, after considering economic and business conditions
                  and collection efforts, that the borrower's financial
                  condition is such that the collection of interest is doubtful.

         d.       Loan Fees

                  Loan fees are credited to income at the time of loan
                  origination. Direct origination costs for loans are charged to
                  expenses when incurred. The results of using this accounting
                  method do not differ materially from generally accepted
                  accounting principles requiring the use of the level interest
                  yield method.

         e.       Premises and equipment

                  Premises and equipment are stated at cost. Depreciation is
                  computed primarily by the straight line method over the
                  estimated useful lives of the related assets. Gain or loss on
                  items retired or otherwise disposed of is credited or charged
                  to operations and cost and related accumulated depreciation
                  are removed from the asset and accumulated depreciation
                  accounts.

                  Expenditures for major renewals and improvements of premises
                  and equipment are capitalized and those for maintenance and
                  repairs are charged to earnings as incurred.

         f.       Other Real Estate

                  Real estate acquired in foreclosure or in settlement of debt
                  or repossessed in substance is carried at the lower of cost or
                  fair market value less estimated costs to sell. Fair market
                  value at the time of foreclosure or settlement of debt is
                  based on a current appraisal of the property. Any reduction in
                  carrying value to fair market value at the time the property
                  is acquired is accounted for as a loan loss. Management
                  evaluates the fair market value of individual properties in
                  other real estate periodically and any subsequent write-downs
                  of the carrying value of the properties are charged to losses
                  on other real estate and credited directly to the carrying
                  value of individual properties.


                                     F-9
<PAGE>   41
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

                  If an individual property is in condition for use or sale at
                  the time of foreclosure, any subsequent holding costs are
                  included in expense as incurred. If an individual property is
                  not in condition for use or sale at the time of foreclosure,
                  completion and holding costs are capitalized until the
                  property is in condition for use or sale.

                  All legal fees and other direct costs incurred in foreclosure
                  are expensed as incurred.

         g.       Income Taxes

                  The Company reports taxable income utilizing the cash method
                  of accounting whereby expenses are recognized when paid and
                  income is recognized when received. Deferred income taxes are
                  provided on all significant timing differences between income
                  determined for financial and tax reporting purposes
                  principally related to the methods used to report income and
                  expenses, depreciation, and the provision for possible loan
                  losses.

                  The Company and the Bank file consolidated income tax returns.
                  Therefore, the provision arising from the operations of the
                  Bank is payable to the Company as the amounts are utilized in
                  the consolidated income tax returns. The amount due the
                  Company at December 31, 1998 and 1997 was approximately
                  $28,000 and $88,000, respectively.

         h.       Goodwill

                  The Company's acquisition during 1995 and 1994 of 18,360
                  shares of subsidiary Bank stock held by minority shareholders
                  of the Bank was accounted for by the purchase method of
                  accounting and resulted in the recording of goodwill in the
                  amount of $261,226. Total costs for the 18,360 shares amounted
                  to $559,306. Goodwill represents the excess cost over the fair
                  value of the assets acquired of the subsidiary and is being
                  amortized on the straight-line method over a 15 year life.

         i.       Cash Flows

                  For purposes of reporting cash flows, cash and cash
                  equivalents include cash on hand, amounts due from banks and
                  federal funds sold.

         j.       Advertising Cost

                  All advertising costs are expensed when incurred. Other
                  advertising expense was $65,797 and $58,709 for the years
                  ended December 31, 1998 and 1997, respectively. There was no
                  direct-response advertising costs incurred for 1998 or 1997.


                                     F-10
<PAGE>   42
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------



         k.       Stock Based Compensation

                  During 1997, the Company adopted SFAS No. 123, Accounting for
                  Stock Based Compensation." The Company utilizes the fair value
                  method of determining compensation for stock based plans
                  wherein compensation cost is measured at the grant date at
                  fair value and is recognized over the service period.

         l.       Risk Factors

                  The Company's operations are affected by various risk factors,
                  including interest-rate risk, credit risk, and risk from
                  geographic concentrations of lending activities. Management
                  attempts to manage interest-rate risk through various
                  asset/liability management techniques designed to match
                  maturities of assets and liabilities. Loan policies and
                  administration are designed to provide assurance that loans
                  will only be granted to credit-worthy borrowers, although
                  credit losses are expected to occur because of subjective
                  factors and factors beyond the control of the Company. In
                  addition, most of the Company's lending activities are within
                  the geographic area where it is located. As a result, the
                  Company and its borrowers may be vulnerable to the
                  consequences of changes in the local economy.

         m.       Estimates

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the reported
                  amount of assets and liabilities and disclosure of contingent
                  assets and liabilities at the date of the financial statements
                  and the reported amounts of revenues and expenses during the
                  reporting period. Actual results may differ from those
                  estimates.

                  The determination of the allowance for loan losses is a
                  material estimate that is particularly susceptible to material
                  change. While management uses available information to
                  recognize losses on loans, further reductions in the carrying
                  amount of loans may be necessary based on changes in local
                  economic conditions. In addition, regulatory agencies, as an
                  integral part of their examination process, periodically
                  review the estimated losses on loans. Such agencies may
                  require the Bank to recognize additional losses based on their
                  judgements about information available to them at the time of
                  their examination.




                                     F-11
<PAGE>   43
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


         n.       Accumulated Other Comprehensive Income

                  Comprehensive income is the change in the Company's equity
                  during a period from transactions and other events except
                  those resulting from investments by investors and
                  distributions to those investors. Comprehensive income
                  includes net income and other changes in assets and
                  liabilities that are not reported in net income, but instead
                  reported as a separate component of stockholders' equity.

                  Accumulated other comprehensive income is the cumulative
                  amount of revenues, expenses, and gains and losses that under
                  Generally Accepted Accounting Principles are included as a
                  component of stockholders' equity, but excluded from net
                  income. The net unrealized gain on investment securities
                  available for sale is the only item of other comprehensive
                  income currently recognized by the Company.

         2.       Investment Securities

                  The carrying value of investment securities classified as
                  available for sale at December 31, are as follows:

<TABLE>
<CAPTION>
                                                                           Available for Sale
                                                 ---------------------------------------------------------------------------
                                                                            December 31, 1998
                                                 ---------------------------------------------------------------------------
                                                                         Gross               Gross
                                                  Amortized           Unrealized          Unrealized               Carrying
                                                    Cost                 Gains               Losses                  Value
                                                    ----                 -----               ------                  -----
          <S>                                    <C>                  <C>                 <C>                    <C>
          Securities of U.S. Treasury            $ 3,416,093          $  59,982                      -           $ 3,476,075

          Securities of U.S. Government
           agencies                               18,072,976             84,047                (30,156)           18,126,867

          Obligations of states and
           political subdivisions                  4,132,232             94,640                 (3,514)            4,223,358

          Restricted securities:
           Federal Home Loan Bank stock              261,800                  -                      -               261,800
                                                 ---------------------------------------------------------------------------
                                                 $25,883,101          $ 238,669           $    (33,670)          $26,088,100
                                                 ===========================================================================
</TABLE>




                                     F-12
<PAGE>   44
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------




<TABLE>
<CAPTION>
                                                                  Available for Sale
                                       ---------------------------------------------------------------------------
                                                                  December 31, 1997
                                       ---------------------------------------------------------------------------
                                                                                   Gross                 Gross
                                        Amortized          Unrealized            Unrealized             Carrying
                                           Cost               Gains                Losses                Value
                                           ----               -----                ------                -----
<S>                                    <C>                 <C>                  <C>                    <C>
Securities of U.S. Treasury            $ 3,927,935          $  39,025           $     (2,967)          $ 3,963,993

Securities of U.S. Government
 agencies                               12,996,723             57,546                (12,030)           13,042,239

Obligations of states and
 political subdivisions                    100,000              2,424                      -               102,424
                                       ---------------------------------------------------------------------------
                                       $17,024,658          $  98,995           $    (14,997)          $17,108,656
                                       ===========          =========           ============           ===========
</TABLE>


The Bank is a member of the Federal Home Loan Bank (FHLB) and as such is
required to maintain an investment in the capital stock of the FHLB of
Cincinnati. The FHLB stock is carried at cost which approximates the market
value of the stock. The amount of stock required to be held by the Bank is
adjusted annually based on a determination made by the FHLB of Cincinnati.

The amortized cost and approximate market value of investment securities
classified as held to maturity at December 31, follows:

<TABLE>
<CAPTION>
                                                                          Held to Maturity
                                             ---------------------------------------------------------------------------
                                                                          December 31, 1998
                                             ---------------------------------------------------------------------------
                                                                     Gross                 Gross              Estimated
                                              Amortized           Unrealized            Unrealized              Market
                                                 Cost                Gains                 Losses               Value
                                                 ----                -----                 ------               -----
<S>                                          <C>                  <C>                   <C>                  <C>
Securities of U.S. Government agencies       $ 1,362,477          $  10,450             $        -           $ 1,372,927
                                             ===========================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                        Held to Maturity
                                             ---------------------------------------------------------------------------
                                                                        December 31, 1997
                                             ---------------------------------------------------------------------------
                                                                     Gross                 Gross              Estimated
                                              Amortized           Unrealized            Unrealized              Market
                                                 Cost                Gains                 Losses               Value
                                                 ----                -----                 ------               -----
<S>                                          <C>                  <C>                   <C>                  <C>

Securities of U.S. Government agencies       $ 1,085,104          $   8,563             $  (10,429)          $ 1,083,238
                                             ===========================================================================
</TABLE>

                                     F-13
<PAGE>   45
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

The components of the net unrealized (loss) gain on investment securities
available for sale at December 31, recorded as a component of stockholders'
equity are as follows:

<TABLE>
<CAPTION>
                                                                            1998                 1997
                                                                            ----                 ----
<S>                                                                     <C>                  <C>
Gross unrealized gains                                                  $   238,669          $    98,995

Gross unrealized losses                                                     (33,670)             (14,997)
                                                                        --------------------------------
    Gross unrealized (loss) gain, net                                       204,999               83,998

Deferred tax effect                                                         (77,900)             (31,919)
                                                                        --------------------------------
Net unrealized (loss) gain                                              $   127,099          $    52,079
                                                                        ================================
</TABLE>


The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                             Available for Sale                         Held to maturity
                                             ------------------                         ----------------
                                                            Estimated                                   Estimated
                                        Amortized             Market             Amortized                Market
                                          Cost                Value                 Cost                  Value
                                          ----                -----                 ----                  -----
<S>                                    <C>                  <C>                 <C>                    <C>
Due in one year or less                $ 1,918,077            $1,937,839        $          -           $         -

Due after one year and through
   five years                            4,136,466             4,188,192             250,292               252,364

Due after five years and through
   ten years                            13,892,620            14,025,348             998,750             1,000,553

Due after ten years                      5,674,138             5,674,921             113,435               120,010
                                       -----------           -----------        ------------           -----------
                                       $25,621,301           $25,826,300        $  1,362,477           $ 1,372,927
                                       ===========           ===========        ============           ===========
</TABLE>








                                      F-14
<PAGE>   46

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

         The following table presents the gross realized gains and losses on
         investment securities transactions for the years ended December 31,
         1998 and 1997.

<TABLE>
<CAPTION>
                                                      Realized gains                Realized Losses
                                                 ------------------------          ------------------

                                                   1998            1997             1998       1997
                                                   ----            ----             ----       ----
          <S>                                    <C>              <C>              <C>        <C>
          Available for sale securities          $36,475          $15,998          $     -    $(7,656)
                                                                                              -------
          Held to maturity securities            $   843                -                -          -
                                                 -------          -------          -------    -------
                                                 $37,318          $15,998          $     -    $(7,656)
                                                 =======          =======          =======    =======
</TABLE>

         At December 31, 1998 a net gain of $37,318 was realized , or a gain of
         $23,152 net of a tax expense of $14,166. At December 31, 1997, a net
         gain of $8,342 was realized, or a gain of $5,176 net of a tax expense
         of $3,166.

         Investment securities with amortized cost of approximately $13,489,000
         and market value of approximately $13,626,000 at December 31, 1998 were
         pledged to secure public deposits and for other purposes required or
         permitted by law. In 1997, investment securities with amortized cost of
         approximately $9,041,000 and market value of approximately $9,074 were
         pledged.

3.       Loans and Allowances for Possible Loan Losses

         The Bank makes commercial, consumer, and real estate loans to its
         customers, located principally within the Bank's primary markets, which
         consists of Hancock, Hawkins and surrounding counties. Although the
         Bank has a diversified loan portfolio, a substantial portion of its
         debtors' ability to honor their contracts is dependent upon economic
         conditions within its primary markets.

         Loans are either secured or unsecured based upon the financial
         condition of the borrower. The loans are expected to be repaid from
         cash flow or proceeds from the sale of selected assets of the borrower;
         however, the Bank is exposed to risk of loss on loans due to a
         borrower's difficulties, which may arise from any number of factors
         including problems within the respective industry or economic
         conditions, including those within the Bank's primary market.









                                      F-15
<PAGE>   47
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


         Loans, less allowance for possible loan losses at December 31, are
         summarized as follows:

<TABLE>
<CAPTION>
                                                                1998                1997
                                                                ----                ----
          <S>                                              <C>                  <C>
          Commercial, financial and agricultural           $ 7,989,632          $ 5,376,340

          Real estate - construction                         5,597,515            5,715,776

          Real estate - mortgage                            32,684,835           27,044,460

          Consumer                                          12,874,979           10,492,473

          Other                                                 82,688               54,354
                                                           --------------------------------
                                                            59,229,649           48,683,403

          Less unearned interest                               205,041              213,197
                                                           --------------------------------
                                                            59,024,608           48,470,206

          Less allowance for possible loan losses              810,563              660,336
                                                           --------------------------------
                                                           $58,214,045          $47,809,870
                                                           ================================
</TABLE>


         Loans at December 31, 1998 are scheduled to mature as follows:

<TABLE>
<CAPTION>
                                Commercial,
                                 Financial &      Real Estate       Real Estate
                                Agricultural      Construction        Mortgage         Consumer         Other
                                ------------      ------------     ------------      -----------       -------
          <S>                   <C>               <C>              <C>               <C>               <C>
          One year or less       $5,315,722       $5,466,576       $11,382,416       $ 4,716,473       $71,956
          After one
            through five          2,218,779          130,939        13,675,970         7,970,036        10,732
            years
          After five
            years through
            ten years               455,131                -         1,341,188           188,470             -
          After ten years                 -                -         6,285,261                 -             -
                                 -----------------------------------------------------------------------------

          Total                  $7,989,632       $5,597,515       $32,684,835       $12,874,979       $82,688
                                 =============================================================================
</TABLE>

         At December 31, 1998, fixed and variable rate loans were as follows:

<TABLE>
                              <S>                                   <C>        
                              Fixed rate loans                      $40,023,454
                              Variable rate loans                    19,206,195
                                                                    -----------
                                                                    $59,229,649
                                                                    ===========
</TABLE>

                                      F-16
<PAGE>   48

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

     Non-performing assets at December 31, were as follows:

<TABLE>
<CAPTION>
                                             1998            1997
                                             ----            ----
          <S>                               <C>            <C>
          Loans past due over 90 days       $418,124       $186,477
          Non-accrual loans                   19,163         70,159
          Other real estate owned             51,923         89,946
                                            -----------------------
                                            $489,210       $346,582
                                            =======================
</TABLE>


         Foregone interest income on the above non-accrual loans was $3,979 and
         $6,118 at December 31, 1998 and 1997, respectively.

         At December 31, 1998 and 1997, the Bank had loans to its executive
         officers, directors and their affiliates of $1,125,4860 and $771,400,
         respectively. At December 31, 1998 and 1997, the Bank had commitments
         to extend credit to its executive officers, directors and their
         affiliates of $1,336,928 and $1,259,978, respectively. All such loans
         and commitments were made in the ordinary course of business on
         substantially the same terms as those prevailing at the time for
         comparable transactions with unrelated parties. An analysis of related
         party loans from January 1 to December 31 is as follows:

<TABLE>
<CAPTION>
                                       1998              1997
                                       ----              ----
          <S>                       <C>                <C>
          Balance January 1         $   771,400        $ 466,927
          Payments received            (583,705)        (185,972)
          Advances made                 937,791          490,445
                                    ----------------------------
          Balance December 31       $ 1,125,486        $ 771,400
                                    ============================
</TABLE>

         Transactions in the allowance for possible loan losses of the Bank for
         the years ended December 31, are summarized as follows:

<TABLE>
<CAPTION>
                                                          1998              1997
                                                          ----              ----
          <S>                                           <C>              <C>
          Balance - beginning of year                   $ 660,336        $ 457,432
          Provisions charged to operating expense         240,000          215,000
          Loans charged-off                               (95,005)         (17,730)
          Recoveries                                        5,232            5,634
                                                        --------------------------
          Balance - end of year                         $ 810,563        $ 660,336
                                                        ==========================
</TABLE>

         As of December 31, 1998 and 1997, the Bank's recorded investment in
         impaired loans and disclosures related thereto were not material.


                                      F-17
<PAGE>   49

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

4.       Premises and Equipment, Net

         The detail of premises and equipment, net at December 31, is as
         follows:

<TABLE>
<CAPTION>
                                                 1998              1997
                                                 ----              ----
          <S>                                 <C>              <C>
          Land                                $  486,668       $  446,503
          Buildings                            3,081,470        2,620,959
          Furniture and equipment              1,285,407        1,167,114
                                              ---------------------------
                                               4,853,545        4,234,576
          Less accumulated depreciation          736,694          587,385
                                              ---------------------------
                                              $4,116,851       $3,647,191
                                              ===========================
</TABLE>

         Depreciation related to premises and equipment for the years ended
         December 31, 1998 and 1997 was $219,042 and $198,663, respectively.

         The Bank leases two parcels of real estate in Rogersville . One parcel
         is leased through April 1, 2000, with an option to renew for two
         additional years. The other parcel is leased on an annual basis with
         one year renewal options through May 1, 2000. In addition, certain
         computer and other equipment was leased during 1998 under various long
         term operating leases. Total rental expense for these leases was
         $40,445 and $11,054 for December 31, 1998 and 1997, respectively.

         Future minimum rental commitments under noncancellable leases are as
         follows:

<TABLE>
<CAPTION>
                              Year           Amount 
                              ----          --------
                             <S>            <C>
                              1999          $226,342
                              2000           220,042
                              2001           217,942
                              2003           198,093
                                            --------
                             Total          $862,419
                                            ========
</TABLE>

         During 1997, in connection with the construction of the main office in
         Rogersville, Tennessee, the Bank purchased approximately $97,000 of
         furniture and equipment from an entity owned by a shareholder/director
         of the Company. All such purchases were made into ordinary course of
         business on substantially the same terms as those prevailing at the
         time for comparable transactions with unrelated parties.



                                      F-18
<PAGE>   50

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


5.       Deposits

         Deposits at December 31, are summarized as follows:

<TABLE>
<CAPTION>
                                                             1998              1997
                                                             ----              ----
          <S>                                             <C>               <C>
          Demand deposits                                 $ 9,991,890       $ 8,816,803
          NOW and money market accounts                    14,837,878        12,636,336
          Savings                                           3,602,455         2,584,451
          Individual retirement accounts                    2,163,368         1,674,149
          Certificates of deposits - under $100,000        41,564,463        33,405,347
          Certificates of deposits - over $100,000         15,505,078         9,970,303
                                                          -----------------------------
                                                          $87,665,132       $69,087,389
                                                          =============================
</TABLE>

         The amounts and scheduled maturities of certificate accounts at
         December 31, are as follows:

<TABLE>
<CAPTION>
                                                     1998               1997
                                                     ----               ----
          <S>                                     <C>               <C>
          Within one year                         $51,086,589       $39,137,586
          After one but within two years            5,254,958         3,569,053
          After two but within three years            727,994           662,011
          After three but within four years                 -             7,000
                                                  -----------------------------
                                                  $57,069,541       $43,375,650
                                                  =============================
</TABLE>

         Demand deposits reclassified as loans (overdrafts) aggregated
         approximately $12,600 and $3,600 at December 31, 1998 and 1997,
         respectively.

         Deposits of executive officers, directors and their affiliates
         aggregated approximately $1,132,000 and $1,265,000 at December 31, 1998
         and 1997, respectively.

6.       Long-term debt

         The Company's long-term debt, due an unaffiliated national bank,
         consists of a single note payable in the amount of $3,045,000 and
         $3,265,000 at December 31, 1998 and 1997, respectively. The interest
         rate on the note adjusts quarterly and is equal to the three-months
         London Interbank Offered Rate (Three Month LIBOR) plus 1.95% per annum
         or at the option of the Company the rate on the note is equal to the
         lender's index rate as such rate changes from time to time. The Company
         may change interest rate options at any time with prior notice to the
         lender. Interest is payable quarterly. At December 31, 1998 the rate on
         the note was 7.169% per annum. Principal is payable annually commencing
         January 31, 1997 and each January 31 thereafter as follows:

                                      F-19
<PAGE>   51

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                    January 31,          Principal Due
                    -----------          -------------
               <S>                       <C>
                       1999                  255,000
                       2000                  295,000
                       2001                  325,000
                       2002                  360,000
                       2003                  395,000
                       2004                  435,000
                       2005                  470,000
               2006 (Final Maturity)         510,000
                                          ----------
                                          $3,045,000
                                          ==========
</TABLE>

         The loan is secured by all of the stock of Citizens Bank of East
         Tennessee owned by the Company.

7.       Other Non-Interest Expenses

         The major components of other non-interest expense at December 31, are
         summarized as follows:

<TABLE>
<CAPTION>
                                                      1998           1997
                                                      ----           ----
<S>                                                 <C>            <C> 
          Directors fees                            $ 49,800       $ 48,700
          Advertising                                 65,798         58,709
          Professional services                       96,493         84,023
          Postage and courier                         54,219         36,005
          Other                                      392,500        345,776
                                                    -----------------------
             Total other non-interest expense       $658,810       $573,213
                                                    =======================
</TABLE>

         The increase in salaries and employee benefits, occupancy expense,
         furniture and equipment expenses and other non-interest expense for
         1998 is due primarily to the increased costs associated with the growth
         of the Bank

8.       Income Taxes

         The components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                 1998                 1997
                                                 ----                 ----
<S>                                          <C>                  <C> 
                  Current                    $   343,020          $   188,449
                  Deferred                       (90,736)             (51,312)
                                             --------------------------------
                                             $   252,284          $   137,137
                                             ================================
</TABLE>

                                      F-20
<PAGE>   52

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


         The sources of deferred income taxes and the tax effect of each are as
         follows:

<TABLE>
<CAPTION>
                                                 1998               1997
                                                 ----               ----
          <S>                                 <C>                <C>
          Accrual to cash conversion          $(51,747)          $ 20,377
          Provision for loan losses            (57,045)           (77,022)
          Accelerated depreciation              11,235              8,123
          Other, net                             6,821             (2,790)
                                              ---------------------------
                                              $(90,736)          $(51,312)
                                              ===========================
</TABLE>

         A reconciliation of the provision for income taxes as shown in the
         statements of earnings with that which would be computed by applying
         the statutory Federal income tax rate of 34 percent to income before
         income taxes is as follows:

<TABLE>
<CAPTION>
                                                1998               1997
                                                ----               ----
          <S>                                 <C>                <C>
          Tax expense at statutory rate       $240,422           $120,330
          Increase (decrease) in taxes 
           resulting from:
            Tax-exempt interest                (23,821)            (4,627)
            Amortization of goodwill             6,080              6,080
            State income taxes net of
               Federal income tax               28,804             14,629
            Other, net                             799                725
                                              ---------------------------
                                              $252,284           $137,137
                                              ===========================
</TABLE>


         The components of the net deferred tax asset/liability recognized by
         the Company at December 31, are as follows:

<TABLE>
<CAPTION>
                                                                        1998                 1997
                                                                        ----                 ----
<S>                                                                   <C>                 <C> 
          Deferred tax liabilities:
            Accrual to cash conversion                                $       -           $ (37,572)

            Unrealized gain on securities available for sale            (77,900)            (31,919)
            Accumulated depreciation                                    (50,197)            (38,962)
           Other, net                                                    (4,031)                  -
                                                                      -----------------------------
                 Total liabilities                                     (132,128)           (108,453)
                                                                      -----------------------------
          Deferred tax assets:
            Accrual to cash conversion                                   14,175                   -
            Allowances for loan losses                                  141,157              84,112
            Other, net                                                        -               2,790
                                                                      -----------------------------
                  Total assets                                          155,332              86,902
                                                                      -----------------------------
          Net deferred tax asset/liability                            $  23,204           $ (21,551)
                                                                      =============================
</TABLE>

                                      F-21


<PAGE>   53

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


9.       Commitments and Contingencies

         In the normal course of business, the Company makes various commitments
         and incurs certain contingent liabilities that are not presented in the
         accompanying balance sheet. The commitments and contingent liabilities
         may include various guarantees, commitments to extend credit, standby
         letters of credit, and litigation. The Company'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 these
         instruments. The Company uses the same credit policies in making
         commitments and conditional obligations as it does for on-balance-sheet
         instruments. Unless noted otherwise, the Company does not require
         collateral or other security to support financial instruments with
         credit risk.

         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. Since some commitments are expected to expire without being
         drawn upon, the total commitment amounts do not necessarily represent
         future cash requirements. The Company evaluates each customer's credit
         worthiness on a case-by-case basis. The amount of collateral obtained
         if deemed necessary by the Company upon extension of credit is based on
         management's credit evaluation of the counter-party. Collateral held
         varies but may include accounts receivable, inventory, property, plant,
         and equipment.

         Standby letters of credit are conditional commitments issued by the
         Company to guarantee the performance of a customer to a third party.
         Those guarantees are primarily issued to support public and private
         borrowing arrangements. Most guarantees expire within one year with
         some having automatic one year renewals cancelable by the Company. The
         credit risk in issuing letters of credit is essentially the same as
         that involved in extending loans to customers.

         The following table summaries the Company's significant commitments and
         contingent liabilities at December 31:

<TABLE>
<CAPTION>
                                                   1998                1997
                                                   ----                ----
          <S>                                   <C>                 <C>
          Commitments to extend credit          $6,207,812          $5,102,970
          Standby letters of credit                 82,000             184,000
                                                ----------          ----------
                                                $6,289,812          $5,286,970
                                                ==========          ==========
</TABLE>

         In the opinion of management, no material adverse effect on the
         financial position of the Company and its subsidiary is anticipated as
         a result of these items.

10.      Restricted Cash

         The Bank is required to maintain a minimum cash reserve with the
         Federal Reserve Bank and/or in vault cash. The minimum requirement at
         December 31, 1998 and 1997 was $402,000 and $287,000, respectively.

                                      F-22
<PAGE>   54

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

11.      Stockholder's Equity

         The Bank is subject to certain restrictions on the amount of dividends
         that it may declare without prior regulatory approval.

12.      Regulatory Matters

         The Bank is subject to various regulatory capital requirements
         administered by the federal banking agencies. Failure to meet minimum
         capital requirements can initiate certain mandatory and possible
         additional discretionary - actions by regulators that, if undertaken,
         could have a direct material effect on the Bank's financial statements.
         The regulations require a bank to meet specific capital adequacy
         guidelines that involve quantitative measures of the Bank's assets,
         liabilities, and certain off-balance-sheet items as calculated under
         regulatory accounting practices. The Bank's capital classification is
         also subject to qualitative judgments by the regulators about
         components, risk weights, and other factors.

         Quantitative measures established by regulation to ensure capital
         adequacy require the Bank to maintain minimum amounts and ratios (set
         forth in the table below) of Tier I capital as defined in the
         regulations) to total average assets (as defined), and minimum ratios
         of Tier I and total capital (as defined) to risk-weighted assets (as
         defined). To be considered adequately capitalized (as defined) under
         the regulatory framework for prompt corrective action, the Bank must
         maintain minimum Tier I leverage, Tier I risk-based, and total
         risk-based ratios as set forth in the table. The Bank's actual capital
         amounts and ratios, at December 31, are also presented in the tables
         below.

<TABLE>
<CAPTION>
                                                                    December 31, 1998
                                     --------------------------------------------------------------------------------------
                                                 Capital Adequacy                         Prompt Corrective Action
                                     ----------------------------------------       ---------------------------------------
                                         Required                 Actual                Required                Actual
                                         --------                 ------                --------                ------
                                     Amount      Ratio      Amount      Ratio       Amount      Ratio      Amount      Ratio
                                     ------      -----      ------      -----       ------      -----      ------      -----
          <S>                        <C>         <C>        <C>         <C>         <C>         <C>        <C>         <C> 
          Tier I Capital
           (to average assets)       $3,825       4.00%     $7,046       7.37%      $3,825       4.00%     $7,046       7.37%
                                     ======      =====      ======      =====       ======      =====      ======      =====

          Tier I Capital (to
           risk-weighted assets)     $2,377       4.00%     $7,046      11.86%      $2,377       4.00%     $7,046      11.86%
                                     ======      =====      ======      =====       ======      =====      ======      =====

          Total Capital (to
           risk-weighted assets)     $4,754       8.00%     $7,790      13.11%      $4,754       8.00%     $7,790      13.11%
                                     ======      =====      ======      =====       ======      =====      ======      =====
</TABLE>




                                      F-23
<PAGE>   55
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                      December 31, 1997
                                             -----------------------------------

                                    Capital Adequacy                  Prompt Corrective Action
                                -------------------------            --------------------------
                                Required           Actual            Required            Actual
                                --------           ------            --------            ------
                           Amount    Ratio   Amount     Ratio    Amount    Ratio   Amount     Ratio
                           ------    -----   ------     -----    ------    -----   ------     -----
<S>                        <C>       <C>     <C>         <C>     <C>       <C>     <C>        <C>
Tier I Capital
 (to average assets)       $3,036    4.00%   $6,639      8.75%   $3,036    4.00%   $6,639     8.75%
                           ======    ====    ======     =====    ======    ====    ======     =====

Tier I Capital (to
 risk-weighted assets)     $1,949    4.00%   $6,639     13.63%   $1,949    4.00%   $6,639    13.63%
                           ======    ====    ======     =====    ======    ====    ======    =====

Total Capital (to
 risk-weighted assets)     $3,898    8.00%   $7,249     14.88%   $3,898    8.00%   $7,249    14.88%
                           ======    ====    ======     =====    ======    ====    ======    =====
</TABLE>


     Bases solely upon the foregoing ratios the Bank would be considered "well
     capitalized" within applicable Federal banking regulatory guidelines.

     In addition, the Bank has committed to State banking regulators, in
     connection with the approval to open branches during 1996 in Rogersville
     and Church Hill, Tennessee that it would, among other things, maintain a
     Tier I capital plus loan loss reserve to asset ratio of not less than 10%
     during the first three years after approval. This condition was modified by
     State banking regulators on September 19, 1997 to require the Bank to
     maintain a Tier I leverage ratio of no less than 8% for the three years
     subsequent to commencing operation in Hawkins County, Tennessee. The actual
     Tier I leverage ratio maintained by the Bank was 8.51% on an end of period
     basis at December 31, 1997. The actual tangible capital maintained by the
     Bank at December 31, 1997 after the Rogersville and Church Hill branches
     were opened was $6,639 million, which was consistent with the approval
     regarding opening the branches.

     The Company is a "small one-bank holding company" within the meaning of
     regulations promulgated by the Board of Governors of the Federal Reserve
     System. Accordingly, the Company's capital compliance, for bank holding
     company purposes, will be measured solely with respect to the Bank and not
     on a consolidated basis.

     Management believes, as of December 31, 1998, that the Bank and Company
     meet all capital requirements to which they are subject and that they are
     in compliance with all conditions and commitments to banking regulators
     regarding the approval and opening of branches in Rogersville and Church
     Hill, Tennessee. However, events beyond the control of the Company, such as
     a downturn in the local economy, could adversely affect future earnings
     and, consequently, the ability of the Company to meet its future minimum
     capital requirements.


                                      F-24
<PAGE>   56

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


13.      Condensed Financial Information

         Following is condensed financial information of Volunteer Bancorp, Inc.
         (parent company only):

                            Condensed Balance Sheets
<TABLE>
<CAPTION>

                                                              December 31
                                                      --------------------------
                                                         1998            1997
                                                      ----------      ----------
    <S>                                               <C>             <C>
    Assets:
       Cash                                           $   82,458      $  180,079
       Investment in subsidiary                        7,173,016       6,691,103
       Goodwill                                          184,908         202,791
       Deferred income taxes                              14,267          16,228
       Tax benefit receivable                             28,471          88,253
                                                      ----------      ----------
                                                      $7,483,120      $7,178,454
                                                      ==========      ==========

    Liabilities and stockholders' equity
       Long-term debt                                 $3,045,000      $3,265,000
       Accrued interest payable                           37,555          42,750
       Stockholders' equity                            4,400,565       3,870,704
                                                      ----------      ----------
                                                      $7,483,120      $7,178,454
                                                      ==========      ==========
</TABLE>


                        Condensed Statements of Earnings

<TABLE>
<CAPTION>
                                                       Years Ended December 31
                                                      --------------------------

                                                         1998            1997
                                                      ---------       ---------
    <S>                                               <C>             <C>
    Income:
       Dividends from subsidiary                      $ 240,721       $ 269,628
                                                      ---------       ---------
    Expenses:
       Interest                                         235,528         264,149
       Professional services                             53,275          44,041
       Other expenses                                    10,990          10,894
                                                      ---------       ---------
          Total expense                                 299,793         319,084
                                                      ---------       ---------
       (Loss) before tax benefit and equity in
            undistributed subsidiary income             (59,072)        (49,456)
       Tax benefit                                      107,020         114,335
       Equity in undistributed subsidiary income        406,893         151,896
                                                      ---------       ---------
          Net income                                  $ 454,841       $ 216,775
                                                      =========       =========
</TABLE>



                                      F-25
<PAGE>   57

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
                                                              Years Ended December 31
                                                              -----------------------

                                                               1998             1997
                                                               ----             ----
    <S>                                                      <C>             <C>
    Operating Activities:
       Net income (loss)                                     $ 454,841       $ 216,775
       Adjustment to reconcile net income to net cash
          provided by operating activities:
       Equity in undistributed subsidiary earnings            (406,893)       (151,896)
       Deferred income taxes                                     1,961           2,080
       Amortization                                             17,883          17,884
      Decrease (increase)  in other assets                      59,782          32,684
      (Decrease) in other liabilities                           (5,195)         (5,476)
                                                             ---------       ---------
       Net cash provided (used) by operating activities        122,379         112,051
                                                             ---------       ---------
    Financing activities:
       Repayment of note payable                              (220,000)       (185,000)
       Issue common stock, net of issuance costs                    --         155,080
                                                             ---------       ---------
       Net cash(used) provided by financing activities        (220,000)        (29,920)
                                                             ---------       ---------
    Change in cash and equivalents                             (97,621)         82,131
    Cash and equivalents - beginning                           180,079          97,948
                                                             ---------       ---------
    Cash and equivalents - ending                            $  82,458       $ 180,079
                                                             =========       =========
</TABLE>


                  Condensed Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                              Years Ended December 31
                                                              -----------------------

                                                                 1998          1997
                                                               --------      --------

    <S>                                                        <C>           <C>
    Net income                                                 $454,841      $216,775
                                                               --------      --------

    Other comprehensive income:
      Company's share of subsidiary's other comprehensive
       income, net of tax                                        75,020       101,941
                                                               --------      --------

    Total comprehensive income                                 $529,861      $318,716
                                                               ========      ========
</TABLE>

     The Company is a legal entity separate and distinct from its banking
     subsidiary. The principal sources of cash flow for the Company, to pay
     dividends and service Company debt, are dividends from its banking
     subsidiary. There are statutory and regulatory limitations on the payment
     of dividends from banking subsidiaries to their parent companies as well as
     statutory and regulatory restrictions on the payment of dividends by the
     Company (note 11 and 12).



                                      F-26
<PAGE>   58

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------

14.      Fair Value of Financial Instruments

         The fair value of financial instruments at December 31, are as follows:

<TABLE>
<CAPTION>
                                                     1998                             1997
                                                     ----                             ----

                                         Carrying          Fair            Carrying          Fair
                                           Value           Value             Value           Value
                                           -----           -----             -----           -----
    <S>                                <C>              <C>              <C>              <C>
    Financial assets:
        Cash and due from banks        $ 2,287,388      $ 2,287,388      $ 2,583,960      $ 2,583,960

        Federal funds sold               4,515,263        4,515,263        4,841,622        4,841,622
        Investment securities:
           Derivatives                          --               --          500,000          493,558

           All others                   27,450,577       27,461,027       17,693,760       17,698,336
                                       -----------      -----------      -----------      -----------
             Total investment
               securities               27,450,577       27,461,027       18,193,760       18,191,894
                                       -----------      -----------      -----------      -----------
        Loans, net                      58,214,045       58,145,300       47,809,870       47,543,696
                                       -----------      -----------      -----------      -----------
                                       $92,467,273      $92,408,978      $73,429,212      $73,161,172
                                       ===========      ===========      ===========      ===========
    Financial liabilities:
        Deposits                       $87,665,132      $87,924,335      $69,087,389      $69,172,494
        Securities sold under
          repurchase agreements          1,462,130        1,462,130        1,216,679        1,216,679

        Long-term debt                   3,045,000        3,045,000        3,265,000        3,265,000
                                       -----------      -----------      -----------      -----------
                                       $92,172,262      $92,431,465      $73,569,068      $73,654,173
                                       ===========      ===========      ===========      ===========
    Unrecognized financial
        instruments:

    Commitments to extend
        credit                         $        --      $        --      $        --      $        --

        Standby letters of credit      $        --      $        --      $        --      $        --
                                       -----------      -----------      -----------      -----------
                                       $        --      $        --      $        --      $        --
                                       ===========      ===========      ===========      ===========
</TABLE>


                                      F-27
<PAGE>   59
                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

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

         The following methods and assumptions were used to estimate the fair
         value of each class of financial instrument for which it is practicable
         to estimate that value:

              Cash and Federal funds sold:
                  For these short-term instruments, the carrying value is a
                  reasonable estimate of fair value.

              Investment securities:
                  Fair value equals quoted market price, if available. If a
                  quoted market price is not available, fair value is estimated
                  using quoted market prices for similar securities.

              Loans, net
                  The fair value of fixed rate loans is estimated by discounting
                  expected future cash flows using current rates at which
                  similar fixed rate loans would be made to borrowers with
                  similar credit ratings and for the same remaining maturities.
                  The carrying value of variable rate loans is assumed to
                  approximate fair value.

              Deposits:
                  The fair value of demand deposits, IRAs, savings accounts and
                  NOW and money market accounts is the amount payable on demand
                  at the reporting date. The fair value of fixed-rate-maturity
                  certificates of deposits is estimated using the rates
                  currently offered for deposits of similar remaining maturities
                  using a discounted cash flow method.

              Securities sold under repurchase agreements:
                  The fair value of fixed-rate term securities sold under
                  repurchase agreements is estimated using the rates currently
                  in effect offered for repurchase agreements of similar
                  remaining maturities using a discounted cash flow method.

              Long-term debt:
                  Rates currently available to the Company for debt with similar
                  terms and maturities are used to estimate fair value of
                  existing debt using a discounted cash flow method.

              Commitments to extend credit and standby letters of credit:
                  The fair value of commitments is estimated by considering the
                  fees currently charged to enter into similar agreements,
                  taking into account the remaining terms of the agreements and
                  the present creditworthiness of the counter parties. For fixed
                  rate loan commitments, fair value also considers current level
                  of interest rates and the committed rates. The fair value of
                  letters of credit is based on fees currently charged for
                  similar agreements. For this caption, the "carrying amount"
                  represents the accrual or deferred income (fees) arising from
                  the related unrecognized financial instruments.



                                      F-28
<PAGE>   60

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


14.      Profit-Sharing Plan

         The Company's subsidiary, The Citizens Bank of East Tennessee, has a
         profit-sharing retirement plan. All employees who meet certain age and
         length of service requirements are eligible to participate on a
         voluntary basis. Benefits, which become 20% vested after two years, 40%
         after three years, 60% after four years, 80% after five years, and 100%
         after six years, are paid on death, disability or retirement.

         The Board of Directors has discretion in establishing the amount of the
         Bank's contributions to the plan, if any. Participants may make
         voluntary, after-tax contributions up to 20% of their compensation up
         to $10,000 per year. The participants are fully vested in any voluntary
         contributions they make. The Bank did not made any contributions to the
         plan for the year ended December 31, 1998 and 1997.

16.      Securities Sold Under Repurchase Agreements

         At December 31, 1998 and 1997, the book value of the securities sold
         under repurchase agreements, including accrued interest, was $1,808,718
         and $1,250,069, respectively. The maximum amount outstanding during
         1998 and 1997 was $1,790,341 and $1,217,588, respectively. The daily
         average of outstanding agreements during 1998 and 1997 was $1,680,071
         and $708,385, respectively. The securities underlying the agreements
         are maintained under the Bank's control.

17.      Reclassification

         Certain reclassifications have been made to the December 31, 1997
         financial statements in order to conform with the presentation of the
         December 31, 1998 financial statements.

18.      Impact of Recently Issued Accounting Standards

         SFAS No. 125, "Accounting for Transfers and Servicing of Financial
         Assets and the Extinguishment of Liabilities," establishes, among other
         things, new criteria for determining whether a transfer of financial
         assets in exchange for cash and other consideration should be accounted
         for as a sale or as a pledge of collateral in a secured borrowing. SFAS
         No. 125 also establishes new accounting requirements for pledged
         collateral. As issued, SFAS No. 125 is generally effective for
         transactions occurring after December 31, 1996 and should be applied on
         a prospective basis. This statement supercedes SFAS No. 122 and itself
         amends various previous pronouncements of the Financial Accounting
         Standards Board. Adoption by the Company on January 1, 1997 did not
         have a material impact upon the Company's earnings or financial
         position.



                                      F-29
<PAGE>   61

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------



19.      Selected Quarterly Financial Data (Unaudited)

         Summarized below are selected financial data regarding results of
         operations for the periods indicated.

<TABLE>
<CAPTION>
                                       First         Second           Third           Fourth
                                     Quarter         Quarter         Quarter          Quarter            Year
                                    --------------------------------------------------------------------------
                                                                      1998
                                    --------------------------------------------------------------------------

    <S>                             <C>             <C>             <C>             <C>             <C>
    Total interest income           $1,586,534      $1,723,426      $1,830,710      $1,876,498      $7,017,168

    Net interest income                669,556         740,739         788,820         807,236       3,006,351

    Provision for loan losses           60,000          60,000          60,000          60,000         240,000

    Non-interest income                 64,462          74,471          86,321          86,691         311,945

    Non-interest expense               570,462         600,828         587,172         612,709       2,371,171

    Income before income taxes         103,556         154,382         227,969         221,218         707,125

    Net income                      $   60,009      $  101,255      $  148,048      $  145,529      $  454,841
                                    ==========      ==========      ==========      ==========      ==========
    Weighted average common
      shares outstanding               539,027         539,027         539,027         539,027         539,027
                                    ==========      ==========      ==========      ==========      ==========
    Net income per
      weighted average common
      share outstanding             $     0.11      $     0.19      $     0.27      $     0.27      $     0.84
                                    ==========      ==========      ==========      ==========      ==========
</TABLE>








                                      F-30
<PAGE>   62

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997
--------------------------------------------------------------------------------




<TABLE>
<CAPTION>
                                       First         Second           Third           Fourth
                                      Quarter        Quarter         Quarter          Quarter          Year
                                    --------------------------------------------------------------------------
                                                                      1997
                                    --------------------------------------------------------------------------

    <S>                             <C>             <C>             <C>             <C>             <C>
    Total interest income           $1,205,000      $1,326,213      $1,415,040      $1,515,295      $5,461,548

    Net interest income                513,586         578,625         632,127         665,799       2,390,137

    Provision for loan losses           45,000          50,000          60,000          60,000         215,000

    Non-interest income                 52,331          53,096          54,319          53,169         212,915

    Non-interest expense               463,599         527,129         510,941         532,471       2,034,140

    Income before income taxes          57,318          54,592         115,505         126,497         353,912

    Net income                      $   35,685      $   32,833      $   70,751      $   77,506      $  216,775
                                    ==========      ==========      ==========      ==========      ==========
    Weighted average common
      shares outstanding               525,717         525,729         527,651         532,303         529,318
                                    ==========      ==========      ==========      ==========      ==========
    Net income per
      weighted average common
      share outstanding             $     0.07      $     0.06      $     0.13      $     0.15      $     0.41
                                    ==========      ==========      ==========      ==========      ==========
</TABLE>









                                      F-31
<PAGE>   63



                          INDEPENDENT AUDITOR'S REPORT




Our audit was made for the purpose of forming an opinion of the consolidated
financial statements taken as a whole. The consolidating information represented
on the following pages is presented for purposes of additional analysis and is
not a required part of the consolidated financial statements. Such information
has been subjected to the auditing procedures applied in the audit of the
consolidated financial statements and, in our opinion, the information is fairly
stated in all material respects in relation to the consolidated financial
statements taken as a whole.










January 15, 1999
Nashville, Tennessee







                                      F-32
<PAGE>   64


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                           Consolidating Balance Sheet
                                December 31, 1998
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                            Citizens                          Consolidated
                                                           Volunteer          Bank                             Volunteer
                                                            Bancorp,         of East                          Bancorp, Inc
                   ASSETS                                     Inc.          Tennessee                             and
                                                            (Parent)       (Subsidiary)      Eliminations     Subsidiary
                                                            --------       ------------      ------------     ----------
    <S>                                                    <C>             <C>              <C>               <C>
    Cash and due from banks                                $   82,458      $ 2,287,388      $   (82,458)      $ 2,287,388
    Federal funds sold                                             --        4,515,263               --         4,515,263
    Investment in subsidiary                                7,173,016               --       (7,173,016)               --
    Investment securities                                          --       27,450,577               --        27,450,577
    Loans, net                                                     --       58,214,045               --        58,214,045
    Accrued interest receivable                                    --          905,237               --           905,237
    Premises and equipment                                         --        4,116,851               --         4,116,851
    Goodwill                                                  184,908               --               --           184,908
    Deferred income taxes                                      14,267            8,937                             23,204
    Other assets                                               28,471          143,722          (28,471)          143,722
                                                           ----------      -----------      -----------       -----------
         Total assets                                      $7,483,120      $97,642,020      $(7,283,945)      $97,841,195
                                                           ==========      ===========      ===========       ===========


     LIABILITIES AND STOCKHOLDERS' EQUITY
                                         

    Liabilities:
      Deposits                                             $       --      $87,747,590      $   (82,458)      $87,665,132
      Long-term debt                                        3,045,000               --               --         3,045,000
      Accrued interest payable                                 37,555          902,344               --           939,899
      Securities sold under repurchase
         agreements                                                --        1,462,130               --         1,462,130
      Other liabilities                                            --          356,940          (28,471)          328,469
                                                           ----------      -----------      -----------       -----------
         Total liabilities                                  3,082,555       90,469,004         (110,929)       93,440,630
                                                           ----------      -----------      -----------       -----------
    Stockholders' equity:
      Capital stock                                             5,390          666,500         (666,500)            5,390
      Additional paid-in capital                            1,916,500        5,068,016       (5,068,016)        1,916,500
      Retained earnings                                     2,351,576        1,311,401       (1,311,401)        2,351,576
     Accumulated other comprehensive
      income                                                  127,099          127,099         (127,099)          127,099
                                                           ----------      -----------      -----------       -----------
      Total stockholders' equity                            4,400,565        7,173,016       (7,173,016)        4,400,565
                                                           ----------      -----------      -----------       -----------
      Total liabilities and stockholders'
        equity                                             $7,483,120      $97,642,020      $(7,283,945)      $97,841,195
                                                           ==========      ===========      ===========       ===========
</TABLE>



                                      F-33
<PAGE>   65


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                           Consolidating Balance Sheet
                                December 31, 1997
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                           Citizens                          Consolidated
                                            Volunteer        Bank                             Volunteer
                                             Bancorp,       of East                          Bancorp, Inc
             ASSETS                           Inc.         Tennessee                              and
             ------                         (Parent)      (Subsidiary)     Eliminations       Subsidiary
                                            --------      ------------     ------------       ----------

    <S>                                    <C>            <C>              <C>               <C>
    Cash and due from banks                $  180,079      $ 2,583,960      $  (180,079)      $ 2,583,960
    Federal funds sold                             --        4,841,622               --         4,841,622
    Investment in subsidiary                6,691,103               --       (6,691,103)               --
    Investment securities                          --       18,193,760               --        18,193,760
    Loans, net                                     --       47,809,870               --        47,809,870
    Accrued interest receivable                    --          819,510               --           819,510
    Premises and equipment                         --        3,647,191               --         3,647,191
    Goodwill                                  202,791               --               --           202,791
    Other assets                              104,481          147,679         (104,481)          147,679
                                           ----------      -----------      -----------       -----------
         Total assets                      $7,178,454      $78,043,592      $(6,975,663)      $78,246,383
                                           ==========      ===========      ===========       ===========


    LIABILITIES AND STOCKHOLDERS' EQUITY

    Liabilities:
      Deposits                             $       --      $69,267,468      $  (180,079)      $69,087,389
      Long-term debt                        3,265,000               --               --         3,265,000
      Accrued interest payable                 42,750          678,092               --           720,842
      Securities sold under repurchase
        agreements                                 --        1,216,679               --         1,216,679
      Other liabilities                            --          152,471          (88,253)           64,218
      Deferred income taxes                        --           37,779          (16,228)           21,551
                                           ----------      -----------      -----------       -----------
        Total liabilities                   3,307,750       71,352,489         (284,560)       74,375,679
                                           ----------      -----------      -----------       -----------
    Stockholders' equity:
      Capital stock                             5,390          666,500         (666,500)            5,390
      Additional paid-in capital            1,916,500        5,068,016       (5,068,016)        1,916,500

      Retained earnings                     1,896,735          904,508         (904,508)        1,896,735
      Accumulated other comprehensive
        income                                 52,079           52,079          (52,079)           52,079
                                           ----------      -----------      -----------       -----------
        Total stockholders' equity          3,870,704        6,691,103       (6,691,103)        3,870,704
                                           ----------      -----------      -----------       -----------
        Total liabilities and
          stockholders' equity             $7,178,454      $78,043,592      $(6,975,663)      $78,246,383
                                           ==========      ===========      ===========       ===========
</TABLE>


                                      F-34
<PAGE>   66

                             VOLUNTEER BANCORP, INC.
                       Consolidating Statement of Earnings
                                December 31, 1998
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                           Citizens                          Consolidated
                                            Volunteer        Bank                               Volunteer
                                             Bancorp,       of East                          Bancorp, Inc
                                              Inc.         Tennessee                              and
                                            (Parent)      (Subsidiary)     Eliminations       Subsidiary
                                            --------      ------------     ------------       ----------
<S>                                         <C>           <C>              <C>               <C>
    Interest income:
      Interest and fees on loans              $        --       $ 5,362,173       $        --       $5,362,173
      Interest on federal funds                        --           302,849                --          302,849
      Interest and dividends on
         investments:
        Taxable                                        --         1,276,541                --        1,276,541
        Exempt from federal income taxes               --            75,605                --           75,605
                                              -----------       -----------       -----------       ----------
          Total interest income                        --         7,017,168                --        7,017,168
                                              -----------       -----------       -----------       ----------
    Interest expense:
      Interest on deposits                             --         3,674,533                --        3,674,533
      Interest on other borrowed funds            235,528           100,756                --          336,284
                                              -----------       -----------       -----------       ----------
        Total interest expense                    235,528         3,775,289                --        4,010,817
                                              -----------       -----------       -----------       ----------
    Net interest income                          (235,528)        3,241,879                --        3,006,351
    Provision for possible loan losses                 --           240,000                --          240,000
                                              -----------       -----------       -----------       ----------
    Net interest income after loan
      provision                                  (235,528)        3,001,879                --        2,766,351
                                              -----------       -----------       -----------       ----------
    Non-interest income:
      Equity in earnings of subsidiary            647,614                --          (647,614)              --
      Service charges                                  --           149,560                --          149,560
      Other income                                     --           162,385                --          162,385
                                              -----------       -----------       -----------       ----------
                                                  647,614           311,945          (647,614)         311,945
                                              -----------       -----------       -----------       ----------
    Non-interest expense:
      Salaries and benefits                            --         1,251,557                --        1,251,557
      Other                                        64,265         1,055,349                --        1,119,614
                                              -----------       -----------       -----------       ----------
                                                   64,265         2,306,906                --        2,371,171
                                              -----------       -----------       -----------       ----------
    Income before taxes                           347,821         1,006,918          (647,614)         707,125
    Income tax (benefit) expense                 (107,020)          359,304                --          252,284
                                              -----------       -----------       -----------       ----------
    Net income                                $   454,841       $   647,614       $  (647,614)      $  454,841
                                              ===========       ===========       ===========       ==========
</TABLE>



                                      F-35
<PAGE>   67

                            VOLUNTEER BANCORP, INC.
                       Consolidating Statement of Earnings
                                December 31, 1997
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                            Citizens                          Consolidated
                                             Volunteer        Bank                               Volunteer
                                              Bancorp,       of East                          Bancorp, Inc
                                               Inc.         Tennessee                              and
                                             (Parent)      (Subsidiary)     Eliminations       Subsidiary
                                             --------      ------------     ------------       ----------
<S>                                          <C>           <C>              <C>               <C>
    Interest income:
      Interest and fees on loans              $        --       $ 4,141,546       $        --       $4,141,546
      Interest on federal funds                        --           202,199                --          202,199
      Interest and dividends on
        investments:
        Taxable                                        --         1,112,803                --        1,112,803
        Exempt from federal income taxes               --             5,000                --            5,000
                                              -----------       -----------       -----------       ----------
          Total interest income                        --         5,461,548                --        5,461,548
                                              -----------       -----------       -----------       ----------
    Interest expense:
      Interest on deposits                             --         2,764,396                --        2,764,396
      Interest on other borrowed funds            264,149            42,866                --          307,015
                                              -----------       -----------       -----------       ----------
        Total interest expense                    264,149         2,807,262                --        3,071,411
                                              -----------       -----------       -----------       ----------
    Net interest income                          (264,149)        2,654,286                --        2,390,137
    Provision for possible loan losses                 --           215,000                --          215,000
                                              -----------       -----------       -----------       ----------
    Net interest income after loan
       provision                                 (264,149)        2,439,286                --        2,175,137
                                              -----------       -----------       -----------       ----------
    Non-interest income:
      Equity in earnings of subsidiary            421,524                --          (421,524)              --
      Service charges                                  --           105,057                --          105,057
      Other income                                     --           107,858                --          107,858
                                              -----------       -----------       -----------       ----------
                                                  421,524           212,915          (421,524)         212,915
                                              -----------       -----------       -----------       ----------
    Non-interest expense:
      Salaries and benefits                            --         1,094,241                --        1,094,241
      Other                                        54,935           884,964                --          939,899
                                              -----------       -----------       -----------       ----------
                                                   54,935         1,979,205                --        2,034,140
                                              -----------       -----------       -----------       ----------
    (Loss) income before taxes                    102,440           672,996          (421,524)         353,912
    Income tax (benefit) expense                 (114,335)          251,472                --          137,137
                                              -----------       -----------       -----------       ----------
    Net income                                $   216,775       $   421,524       $  (421,524)      $  216,775
                                              ===========       ===========       ===========       ==========
</TABLE>



                                      F-36
<PAGE>   68

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                      Consolidating Statement of Cash Flows
                                December 31, 1998
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            Citizens                          Consolidated
                                             Volunteer        Bank                               Volunteer
                                              Bancorp,       of East                          Bancorp, Inc
                                               Inc.         Tennessee                              and
                                             (Parent)      (Subsidiary)     Eliminations       Subsidiary
                                             --------      ------------     ------------       ----------
<S>                                          <C>           <C>              <C>               <C>
    Cash Flows From Operating
          Activities
      Net income                               $ 454,841       $    647,614       $(647,614)      $    454,841
      Adjustments to reconcile net
        income to net cash provided by
        operating activities:
        Subsidiary earnings undistributed       (406,893)                --         406,893                 --
        Deferred income taxes                      1,961            (92,697)             --            (90,736)
        Provision for loan losses                     --            240,000              --            240,000
        Depreciation and amortization             17,883            219,042              --            236,925
        Securities (gains)                            --            (37,318)             --            (37,318)
        Decrease (increase) in other
          assets                                  59,782            (81,770)        (59,782)           (81,770)
        Increase in other liabilities             (5,195)           428,721          59,782            483,308
                                               ---------       ------------       ---------       ------------
      Net cash provided by operating
          activities                             122,379          1,323,592        (240,721)         1,205,250
                                               ---------       ------------       ---------       ------------
    Cash Flows From Investing
        Activities:
      (Increase) in investment securities             --         (9,098,498)             --         (9,098,498)
      (Increase) in loans                             --        (10,644,175)             --        (10,644,175)
      Capital expenditures                            --           (688,702)             --           (688,702)
                                               ---------       ------------       ---------       ------------
     Net cash (used) by investing
        activities                                    --        (20,431,375)             --        (20,431,375)
                                               ---------       ------------       ---------       ------------
    Cash Flows From Financing
        Activities:
      Increase in deposits                            --         18,480,122          97,621         18,577,743
      Increase in securities sold under
       repurchase agreements                          --            245,451              --            245,451
      Dividends paid                                  --            240,721        (240,721)                --
      Repayment of long-term debt               (220,000)                --              --           (220,000)
                                               ---------       ------------       ---------       ------------
      Net cash (used) provided from
       financing activities                     (220,000)        18,966,294        (143,100)        18,603,194
                                               ---------       ------------       ---------       ------------
    Change in cash and equivalents               (97,621)          (141,489)       (383,821)          (622,931)
    Cash and equivalents - beginning             180,079          7,425,582        (180,079)         7,425,582
                                               ---------       ------------       ---------       ------------
    Cash and equivalents - ending              $  82,458       $  7,284,093       $(563,900)      $  6,802,651
                                               =========       ============       =========       ============
</TABLE>



                                      F-37
<PAGE>   69

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                      Consolidating Statement of Cash Flows
                                December 31, 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                            Citizens                          Consolidated
                                             Volunteer        Bank                               Volunteer
                                              Bancorp,       of East                          Bancorp, Inc
                                               Inc.         Tennessee                              and
                                             (Parent)      (Subsidiary)     Eliminations       Subsidiary
                                             --------      ------------     ------------       ----------
<S>                                          <C>           <C>              <C>               <C>
    Cash Flows From Operating
       Activities
      Net income                             $ 216,775       $    421,524       $(421,524)      $    216,775
      Adjustments to reconcile net
       income to net cash provided by
        operating activities:
       Subsidiary earnings undistributed      (151,896)                --         151,896                 --
       Deferred income taxes                     2,080            (53,392)             --            (51,312)
       Provision for loan losses                    --            215,000              --            215,000
       Depreciation and amortization            17,884            198,663              --            216,547
       Securities (gains)                           --             (8,342)             --             (8,342)
       (Increase) in other assets               32,684           (232,240)        (32,684)          (232,240)
       Increase in other liabilities            (5,476)            74,065          32,684            101,273
                                             ---------       ------------       ---------       ------------
      Net cash provided by operating
        activities                             112,051            615,278        (269,628)           457,701
                                             ---------       ------------       ---------       ------------
    Cash Flows From Investing
        Activities:
        (Increase) in investment securities         --         (2,898,257)             --         (2,898,257)
        (Increase) in loans                         --        (13,145,042)             --        (13,145,042)
        Capital expenditures                        --           (628,790)             --           (628,790)
                                             ---------       ------------       ---------       ------------
      Net cash (used) by investing
        activities                                   0        (16,672,089)              0        (16,672,089)
                                             ---------       ------------       ---------       ------------

    Cash Flows From Financing
        Activities:
      Increase in deposits                          --         13,492,389         (82,131)        13,410,258
      Increase in securities sold under
        repurchase agreements                       --          1,041,679              --          1,041,679
      Issue common stock                       155,080                 --              --            155,080
      Dividends paid                                --           (269,628)        269,628                 --
      Repayment of long-term debt             (185,000)                --              --           (185,000)
                                             ---------       ------------       ---------       ------------
      Net cash provided from financing
        activities                             (29,920)        14,264,440         187,497         14,422,017
                                             ---------       ------------       ---------       ------------
    Change in cash and equivalents              82,131         (1,792,371)        (82,131)        (1,792,371)
    Cash and equivalents - beginning            97,948          9,217,953         (97,948)         9,217,953
                                             ---------       ------------       ---------       ------------
    Cash and equivalents - ending            $ 180,079       $  7,425,582       $(180,079)      $  7,425,582
                                             =========       ============       =========       ============
</TABLE>


                                      F-38
<PAGE>   70

                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                  Consolidating Statements Comprehensive Income
                           December 31, 1998 and 1997
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                   December 31, 1998
-------------------------------------------------------------------------------------------------------------
                                                                   Citizens                      Consolidated
                                                    Volunteer        Bank                          Volunteer
                                                     Bancorp,      of East                       Bancorp, Inc
                                                       Inc.       Tennessee                           and
                                                     (Parent)    (Subsidiary)    Eliminations     Subsidiary
                                                     --------    ------------    ------------     ----------
<S>                                                  <C>         <C>             <C>              <C>
    Net income                                       $454,841      $ 647,614       $(647,614)      $ 454,841
                                                     --------      ---------       ---------       ---------
     Other comprehensive income, before tax
     Unrealized gains on securities available
       for sale:
     Unrealized holding gains arising during
       the period                                          --             --         158,319         158,319
     Less: reclassification adjustments for
       gains included in net income                        --        (37,318)             --         (37,318)
                                                     --------      ---------       ---------       ---------
     Other comprehensive income                            --        121,001              --         121,001
     Income taxes                                          --        (45,981)             --         (45,981)
                                                     --------      ---------       ---------       ---------
     Other comprehensive income net of
       income taxes                                        --         75,020              --          75,020
     Company's share of subsidiary's other
       comprehensive income, net of tax                75,020             --         (75,020)             --
                                                     --------      ---------       ---------       ---------
     Total comprehensive income                      $529,861      $ 722,634       $(722,634)      $ 529,861
                                                     ========      =========       =========       =========


                                                     December 31, 1997
-------------------------------------------------------------------------------------------------------------
     Net income                                      $216,775      $ 421,524       $(421,524)      $ 216,775
                                                     --------      ---------       ---------       ---------
     Other comprehensive income, before tax
     Unrealized gains on securities available
       for sale:
     Unrealized holding gains arising during
       the period                                          --             --         177,732         177,732
     Less: reclassification adjustments for
       gains included in net income                        --        (13,311)             --         (13,311)
                                                     --------      ---------       ---------       ---------
     Other comprehensive income                            --        164,421              --         164,421
     Income taxes                                          --        (62,480)             --         (62,480)
                                                     --------      ---------       ---------       ---------
     Other comprehensive income net of
       income taxes                                        --        101,941              --         101,941
     Company's share of subsidiary's other
       comprehensive income, net of tax               101,941             --        (101,941)             --
                                                     --------      ---------       ---------       ---------
     Total comprehensive income                      $318,716      $ 523,465       $(523,465)      $ 318,716
                                                     ========      =========       =========       =========
</TABLE>




                                      F-39
<PAGE>   71


         In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                           VOLUNTEER BANCORP, INC.

                                           By: /s/ Reed D. Matney
                                               President

                                           Date: March 27, 1999

         In accordance with the requirements of the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
        Signature                           Capacity                                            Date
        ---------                           --------                                            ----

<S>                                         <C>                                                 <C> 
 /s/ William E. Phillips                    Chairman of the Board and Director                  March 27, 1999


 /s/ H. Lyons Price                         Secretary/Treasurer and Director                    March 27, 1999
                                            (principal financial and accounting officer)


 /s/ Reed D. Matney                         President and Director                              March 27, 1999
                                            (principal executive officer)


 /s/ Carlin Greene                          Director                                            March 27, 1999

 /s/ Douglas Price                          Director                                            March 27, 1999

 /s/ Gary Varnell                           Director                                            March 27, 1999

 /s/ Truett Pierce                          Director                                            March 27, 1999

 /s/ George Brooks                          Director                                            March 27, 1999

/s/ Shirley Price                           Director                                            March 27, 1999

 /s/ Eddie Freeman                          Director                                            March 27, 1999

 /s/ Neil Miller                            Director                                            March 27, 1999

 /s/ Lawrence Gray                          Director                                            March 27, 1999

 /s/ Scott Collins                          Director                                            March 27, 1999

 /s/ Leon Gladson                           Director                                            March 27, 1999
</TABLE>