<PAGE>   1
                                   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, 1997
                                       OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         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, 1997
WERE $5,674,463.

         THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 20, 1998 IS APPROXIMATELY
$5,979,390. (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 29, 1998,
COMMON STOCK, $.01 PAR VALUE, 539,027.
                    Documents Incorporated by Reference: NONE



<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 $78 million at December 31, 1997, 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>
                                                 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>




                                      - 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, 1997                December 31, 1996
                                                             versus                           versus
                                                        December 31, 1996                December 31, 1995
                                                       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 ..............    $1,330      $(48)     $ 1,282      $ 1,201      $ 21      $ 1,222
U.S. Treasury and other U.S. 
   government agency securities ............       156        13          169          329        33          362
States and municipal securities ............         3         0            3           (7)       (4)         (11)
Federal funds sold .........................       (29)        4          (25)         119       (14)         105
                                               -------      ----      -------      -------      ----      -------
         Total interest income .............     1,460       (31)       1,429        1,643        35        1,678
                                               -------      ----      -------      -------      ----      -------

Increase (decrease) in(2):
Demand deposits ............................        44         5           49           65        14           79
Savings deposits ...........................        18        (0)          18           27         0           27
Individual retirement accounts .............        72        (2)          70           55         3           58
Time certificates ..........................       669         8          677          802        22          824
Securities sold under repurchase agreements         32         0           32           11         0           11
Note payable ...............................       (14)      (12)         (26)          91       (13)          78
                                               -------      ----      -------      -------      ----      -------
         Total interest expense ............       821        (1)         820        1,052        25        1,077
                                               -------      ----      -------      -------      ----      -------

Increase (decrease) in net
  interest income ..........................   $   639      $(30)     $   609      $   591      $ 10      $   601
                                               =======      ====      =======      =======      ====      =======
</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 securities sold under repurchase agreements is allocated 100% as
a change in volume for 1996.

(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.


                                      - 4 -

<PAGE>   5



         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.

         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, 1997, the Company had
a negative cumulative repricing gap within one year of approximately $29.3
million, or approximately 40.82% 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, 1997 and 1996. 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, 1997
                                             ------------------------------------------------------------------------------
                                              Within        After 3 months   After 12 months
                                             3 months      Within 12 months   Within 5 years    After 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>



                                      - 5 -

<PAGE>   6



<TABLE>
<CAPTION>
                                                                            December 31, 1996
                                             ------------------------------------------------------------------------------
                                              Within        After 3 months   After 12 months
                                             3 months      Within 12 months   Within 5 years    After 5 years         Total
                                             --------      ----------------   --------------    -------------         -----
(Dollars in thousands)
<S>                                          <C>               <C>               <C>                <C>              <C>    
EARNING ASSETS:
Loans ...................................   $ 13,186          $  5,994          $ 15,335           $ 1,082          $35,597
Investment Securities:                    
     Available for Sale .................          0               754             5,696             7,069           13,519
     Held to maturity ...................      1,087                 0               251               266            1,604
Federal funds sold ......................      6,446                 0                 0                 0            6,446
                                            --------          --------          --------           -------          -------
         Total earning assets ...........   $ 20,719          $  6,748          $ 21,282           $ 8,417          $57,166
                                            ========          ========          ========           =======          =======
                                          
INTEREST-BEARING LIABILITIES:             
Interest-bearing deposits ...............   $ 27,560          $ 18,146          $  2,071           $     0          $47,777
Securities sold under repurchase ........ 
agreements ..............................        175                 0                 0                 0              175
Long-term debt ..........................      3,450                 0                 0                 0            3,450
                                            --------          --------          --------           -------          -------
         Total interest-bearing           
           liabilities ..................   $ 31,185          $ 18,146          $  2,071           $     0          $51,402
                                            ========          ========          ========           =======          =======
Net repricing gap .......................   ($10,466)         $(11,398)         $ 19,211           $ 8,417          $ 5,764
                                            ========          ========          ========           =======          -------
Rate sensitivity gap:                     
Net repricing gap as a percentage         
  of total earning assets ...............    -18.31%           -19.94%             33.61%            14.72%           10.08%
                                            ========          ========          ========           =======          =======
Cumulative gap ..........................   $(10,466)         $(21,864)         $ (2,653)          $ 5,764
                                            ========          ========          ========           =======          
Cumulative gap as a percentage of         
  total earning assets ..................    -18.31%           -38.25%            -4.64%             10.08%         
                                            ========          ========          ========           =======           
</TABLE>
                                       
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.




                                     - 6 -

<PAGE>   7



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,
1997 and 1996.



<TABLE>
<CAPTION>
                                                                1997            1996
                                                               -------         -------
(In Thousands)
<S>                                                            <C>             <C>    
Non interest-bearing deposits:
Individuals, partnerships and corporations ..................  $ 8,570         $ 7,531
U. S. Government and states and political subdivisions ......       83              37
Certified and official checks ...............................      164             332
                                                               -------         -------
  Total non interest-bearing deposits .......................    8,817           7,900
                                                               -------         -------

Interest-bearing deposits:
Interest-bearing demand accounts ............................   12,636          11,151
Savings accounts ............................................    2,585           1,861
Individual retirement accounts ..............................    1,674           1,609
Certificates of deposit, less than $100,000 .................   33,405          24,507
Certificates of deposit, greater than $100,000 ..............    9,970           8,649
                                                               -------         -------
  Total interest-bearing deposits ...........................   60,270          47,777
                                                               -------         -------

  Total deposits ............................................  $69,087         $55,677
                                                               =======         =======
</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,
                                         ------------------------------------------------------------
                                                        1997                          1996
                                         -----------------------------     --------------------------
(In Thousands)
<S>                                      <C>                                                <C>      
Non interest-bearing deposits .........  $ 7,710                            $ 6,655
Savings deposits ......................    2,222                 2.97%        1,614             2.97%
Individual retirement accounts ........    4,382                 5.61%        3,095             5.69%
Time deposits .........................   35,101                 5.78%       23,521             5.75%
Interest-bearing demand deposits ......   11,742                 3.60%       10,526             3.55%
                                         -------                            -------
         Total deposits ...............  $61,157                            $45,411            
                                         =======                            =======
</TABLE>


         At December 31, 1997 and 1996, time deposits greater than $100,000
aggregated approximately $10.0 million and $8.6 million, respectively. The
following table indicates, as of December 31, 1997 and 1996, the dollar amount
of $100,000 or more deposits by the time remaining until maturity:


<TABLE>
<CAPTION>
                                       1997                                    1996
                    ---------------------------------------    -----------------------------------
                                           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     $3,199     5,625     1,146     $9,970     $3,262     4,967     420     $8,649
                      ======     =====     =====     ======     ======     =====     ===     ======
</TABLE>


                                      - 7 -

<PAGE>   8



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,
1997 and 1996.



<TABLE>
<CAPTION>
                                 1997            1996
                               --------        --------
(In Thousands)
<S>                            <C>             <C>     
Investment securities:
  Available for sale ........  $ 17,109        $ 13,519
  Held to maturity ..........     1,085           1,604
Federal funds sold ..........     4,842           6,446
Loans:
  Real estate ...............    32,760          23,398
  Commercial and other ......    15,923          12,199
                               --------        --------
    Total loans .............    48,683          35,597
   Less unearned income .....      (213)           (260)
                               --------        --------
  Loans, net of unearned
    income ..................    48,470          35,337
                               --------        --------
Interest earning assets .....  $ 71,506        $ 56,906
                               ========        ========
</TABLE>


INVESTMENT PORTFOLIO

         At year end 1997, 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, 1997 and
1996.

<TABLE>
<CAPTION>

                                                        1997          1996
                                                       -------      --------
(In Thousands)
<S>                                                    <C>           <C>    
Held to maturity:
U.S. Treasury Securities                               $     0       $     0
Obligations of U.S. Government agencies                  1,085         1,604
Obligations of states and political subdivisions             0             0
                                                       -------       -------
                                                       $ 1,085       $ 1,604
                                                       =======       =======
Available for sale:
U.S. Treasury securities                               $ 3,964       $ 4,410
Obligations of U.S. Government agencies                 13,042         9,006
Obligations of states and political subdivisions           103           103
                                                       -------       -------
                                                       $17,109       $13,519
                                                       =======       =======
</TABLE>



                                      - 8 -

<PAGE>   9



         The following table presents the maturity distribution of the amortized
cost and estimated market value of the Company's investment portfolio at
December 31, 1997 and 1996. 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>
                                                             1997                                        1996
                                              --------------------------------------      ---------------------------------
                                                           Estimated        Weighted                   Estimated   Weighted
                                              Amortized      Market          Average      Amortized     Market      Average
                                                Cost          Value           Yield        Cost          Value       Yield
                                                ----          -----           -----        ----          -----       -----
(Dollars in Thousands)
<S>                                            <C>           <C>                          <C>           <C>              
Held to maturity:
-----------------
Obligations of U.S. 
  Government agencies:
  Due within 1 year .......................... $   500       $   494                      $   250       $   251          
  Due after 1 year but within 5 years ........     250           247                        1,001           987          
  Due after 5 years but within
    10 years .................................     200           199                          200           196          
  Due after 10 years .........................     135           143                          153           162          
                                               -------       -------                      -------       -------            
     Total ................................... $ 1,085       $ 1,083          5.64%       $ 1,604       $ 1,596       5.85%
                                               =======       =======                      =======       =======            
Available for sale:
-------------------
U.S. Securities:
  Due within 1 year .......................... $   493       $   498                      $   500       $   504          
  Due after 1 year but within 5 years ........   3,435         3,466                        3,883         3,906          
                                               -------       -------                      -------       -------            
    Total ....................................   3,928         3,964          6.19%         4,383         4,410       6.21%
                                               -------       -------                      -------       -------            
Obligations of U.S. Government
agencies:
  Due within 1 year ..........................     704           702                          248           250          
  Due after 1 year but within 5 years ........   2,726         2,745                        1,797         1,791          
  Due after 5 years but within 10 years ......   9,567         9,595                        7,071         6,965          
                                               -------       -------                      -------       -------            
   Total .....................................   12997        13,042          6.29%         9,116         9,006       6.63%
                                               -------       -------                      -------       -------            
Obligations of states and political
subdivisions:
  Due after 5 years but within 10 years ......     100           103          5.00%           100           103       4.99%
                                               -------       -------                      -------       -------            
Total ........................................ $17,025       $17,109          6.26%       $13,599       $13,519       6.50%
                                               =======       =======                      =======       =======            
</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 $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.
The Company's investment securities portfolio of $15,122,740 at December 31,
1996, consisted of $1,603,847 of securities held to maturity, which are carried
at amortized cost and $13,518,893 of securities available for sale which are
carried at market value. In addition, unrealized gains on investment securities
available for sale were $51,909 and unrealized losses were $132,332.



                                      - 9 -

<PAGE>   10



         As reflected in Note 2 to Consolidated Financial Statements, the
investment securities held to maturity had unrealized gains of $8,563 and
unrealized losses of $10,429 at December 31, 1997, compared to $9,264 unrealized
gains and $16,955 unrealized losses at year end December 31, 1996.

         At December 31, 1997, the Company had approximately $250,000 of
structured notes in the held to maturity category, which constitutes
approximately 1.4% 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 loss in these securities was approximately $3,000 or 28.8% of total
gross unrealized losses 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.

         At December 31, 1997, the Company had two inverse floaters issued by
the Federal Home Loan Bank totaling $500,000 in the held to maturity category.
These notes represented approximately 2.75% of the investment portfolio. The
unrealized loss of approximately $6,000 associated with these notes represented
approximately 57.5% of the Company's gross unrealized losses in the held to
maturity category. These notes have uncertain cash flows which are driven by
interest rate movements and may expose the Company to greater market risk than
traditional medium-term notes. In addition, these notes contain quarterly call
and repricing features which may expose the Company to greater prepayment and
interest rate risks. These notes were acquired by the former management of the
Company based on the assumption of continued falling interest rates. A continued
rise in interest rates would increase the unrealized losses associated with
these notes. It is management's intent to hold these notes to maturity. The
market risk associated with these inverse floaters is not considered material to
the Company's financial position, results of operations or liquidity.

LOAN PORTFOLIO

         Total loans of $48,683,000 at December 31, 1997, reflected an increase
of $13,086,000 compared to total loans for the year ended December 31, 1996.
Residential real estate loans, which historically have had low loss experience,
increased $4,890,000 or 39.8%. Construction and land development loans, loans
secured by farmland and commercial real estate loans increased by $4,472,000 or
40.2%. Commercial and industrial loans and agricultural loans increased by
$1,376,000 or 34.4%. 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 $2,638,000 , or 33.6%. 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 Hancock 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, 1997 and 1996.


<TABLE>
<CAPTION>
                                            1997        1996
                                           -------     -------
(In Thousands)
<S>                                        <C>         <C>    
Real estate loans:
  Construction and land development ..     $ 5,716     $ 3,214
  Secured by farmland and improvements       2,508       2,278
  Secured by residential properties ..      17,171      12,281
  Commercial real estate loans .......       7,365       5,625
                                           -------     -------
     Total real estate loans .........      32,760      23,398
                                           -------     -------
Loans to farmers .....................         547         596
Commercial and industrial loans ......       4,829       3,404
Installment loans ....................       8,304       6,388
Other consumer loans .................       2,189       1,467
All other loans ......................          54         344
                                           -------     -------
    Total loans.......................     $48,683     $35,597
                                           =======     =======
</TABLE>





                                     - 10 -
<PAGE>   11

         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, 1997
                                    ------------------------------------------
                                                  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      $ 5,689     $    27        $    0     $ 5,716
Real estate mortgage loans ....      10,041      12,520         4,483      27,044
Commercial and industrial loans       3,681       1,148             0       4,829
Agricultural loans ............         369         178             0         547
All other loans ...............       3,832       6,524           191      10,547
                                    -------     -------         ------     -------

  Total loans .................     $23,612     $20,397         $4,674     $48,683
                                    =======     =======         ======     =======
</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.


Real estate, commercial and industrial and agricultural loans maturing after one
year as of December 31, 1997 (in thousands):

<TABLE>

<S>                                              <C>    
Fixed rate .................................     $13,958
Floating rate ..............................       4,603
                                                 -------
                                                 $18,561
                                                 -------
Other loans maturing after one year:

Fixed rate .................................     $ 6,501
Floating rate ..............................           9
                                                 -------
                                                 $ 6,510
                                                 -------
         Total loans maturing after one year     $25,071
                                                 =======
</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



                                     - 11 -
<PAGE>   12



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.

         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.


                                     - 12 -
<PAGE>   13



         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 $660,336 at year end 1997, or
1.36% of loans outstanding, net of unearned income, compared to $57,432 or 1.29%
at year end 1996. The following table presents data related to the Company's
reserve for loan losses for the years ended December 31, 1997 and 19965.


<TABLE>
<CAPTION>
                                                                                              1997        1996
                                                                                              -----       -----
(Dollars In Thousands)

<S>                                                                                           <C>         <C>  
Balance at beginning of period ..........................................................     $ 457       $ 401
Charge offs:
  Commercial, financial and agricultural ................................................        (4)        (30)
  Real estate mortgage ..................................................................         0           0
  Installment loans to individuals ......................................................       (14)        (49)
                                                                                              -----       -----
                                                                                                (18)        (79)
                                                                                              -----       -----
Recoveries:
  Commercial, financial and agricultural ................................................         1          19
  Real estate mortgage ..................................................................         0           0
  Installment loans to individuals ......................................................         5          16
                                                                                              -----       -----
                                                                                                  6          35
                                                                                              -----       -----
Net charge offs .........................................................................       (12)        (44)
                                                                                              -----       -----
Additions to charged to operations ......................................................       215         100
                                                                                              -----       -----
Balance at end of period ................................................................     $ 660       $ 457
                                                                                              =====       =====

Ratio of net charge offs during the period to average loans outstanding during the period      0.03%       0.15%
                                                                                              =====       =====
Average allowance for loan losses to average total loans ................................      1.30%       1.51%
                                                                                              =====       =====
</TABLE>

         At December 31, 1997 and 1996, the allowance for loan losses was
allocated as follows:

<TABLE>
<CAPTION>
                                                                                        1997                       1996
                                                                              ------------------------     ------------------------ 
                                                                                          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 ...............................         $165          11.04%         $ 70          12.20%
Real estate mortgage .................................................            0          67.29%          168          65.73%
Installment loans to individuals .....................................          495          21.67%          219          22.07%
                                                                               ----         ------          ----         ------
   Total .............................................................         $660         100.00%         $457         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.



                                     - 13 -
<PAGE>   14





<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                          -----------------
Nonperforming assets (Dollars in thousands):                                              1997         1996
                                                                                          ----         ----
<S>                                                                                       <C>            <C>
Nonaccrual loans ................................................................         $ 70           $98
Restructured loans ..............................................................            0             0
Other loans past due 90 days or more to principal or interest payments ..........          186            84
Nonperforming loans as a percentage of net loans before allowance for loan losses         0.53%         0.52%
Allowance for loan losses as a percentage of nonperforming loans ................       257.81%       251.10%
</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
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>
                                                               1997          1996
                                                              -----          -----
<S>                                                           <C>            <C>   
Average loans to average deposits ...................         68.98%         63.08%
</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



                                     - 14 -
<PAGE>   15



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.


<TABLE>
<CAPTION>
                                                                                     December 31, 1997     December 31, 1996
                                                                                     -----------------     -----------------
(Dollars in Thousands)
<S>                                                                                        <C>                <C>     
CAPITAL:
Tier I capital:
         Stockholders' common equity .............................................         $  3,871           $  3,397
         Less unrealized (loss) gain in securities ...............................               52                (50)
         Less disallowed intangibles .............................................             (203)              (221)
                                                                                           --------           --------
                  Total Tier I capital ...........................................            3,616              3,226
Tier II capital:
         Qualifying allowance for loan losses ....................................              609                457
                                                                                           --------           --------
                  Total capital ..................................................         $  4,225           $  3,683
                                                                                           ========           ========
Risk-adjusted assets .............................................................         $ 48,725           $ 37,066
Quarterly average assets .........................................................         $ 76,127           $ 60,836
RATIOS:
Tier I capital to risk-adjusted assets ...........................................             7.42%              8.70%
Tier II capital to risk-adjusted assets ..........................................             1.25%              1.23%
Total capital to risk-adjusted assets ............................................             8.67%              9.94%
Leverage   Tier I capital to quarterly average assets less disallowed intangibles              4.83%              5.31%
</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.




                                     - 15 -
<PAGE>   16



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 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.




                                     - 16 -
<PAGE>   17



         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 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



                                     - 17 -
<PAGE>   18



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.

         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





                                     - 18 -
<PAGE>   19



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.

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.



                                     - 19 -
<PAGE>   20



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 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, 1997, the Company had a total of 41 employees with 37
of those employed on a full-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


                                     - 20 -
<PAGE>   21



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company conducted public offering of its Common Stock in 1997 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 31, 1997
and was for the price of $15.00 per share.

         There were 480 holders of record of the Common Stock as of March 20,
1998.

         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. The application by the Bank to establish an
additional branch in Rogersville and a new branch in Church Hill, Tennessee was
approved by the Commissioner of the Department of Financial Institutions (the
"DFI") subject to certain conditions including, among others, that the Bank will
not be allowed to pay dividends to shareholders other than for the purpose of
holding company debt reduction for a period of 2 years without prior written
consent from the Commissioner of the DFI.

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, 1997 and 1996.

         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 1997 was $216,775 increasing $132,255 compared with net
income of $84,520 for 1996. The Company's return on average assets was 0.31% for
1997 or 1.94 times the return on average assets of 0.16% for 1996. The Company's
return on average equity improved to 6.09% for 1997 compared with 2.88% for
1996.

         The Company's net income for 1997 and 1996 were impacted by the
following:

         --       The yield on average interest earnings assets was 8.64% for
                  1997 increasing 0.20% from 8.44% for 1996.

         --       Average earning assets increased $15,424,000 to $63,227,000
                  for 1997 compared to $47,803,000 for 1996.

         --       Yield on average interest bearing liabilities increased 0.06%
                  from 5.29% in 1996 to 5.35% for 1997.

         --       Average interest bearing liabilities increased $14,916,000 to
                  $57,437,000 for 1997 compared to $42,521,000 for 1996.




                                     - 21 -
<PAGE>   22

         --       Average interest earning assets to average total assets
                  increased slightly from 90.56% for 1996 to 91.19% for 1997.

         --       Average interest bearing liabilities to average total
                  assets increased from 80.55% for 1986 to 82.84% for 1997.

         As a result of the foregoing net interest income as a percentage of
average interest earning assets increased from 3.73% for 1996 to 3.78% for 1997.
Accordingly, net interest income for 1997 of $2,390,137 was only $607,008
greater than net interest income of $1,783,129 for 1997.

         Net interest income for 1997 was positively impacted by a decrease in
interest expense of $26,000 on parent company only borrowings. Of this decrease
of $26,000 approximately $14,000 was attributable to a decrease in average
borrowings. Average parent company only borrowings were $3,281,000 for 1997 or a
decrease of $169,000 compared to 1996 of $3,450,000. The remaining decrease of
$12,000 was attributable to a decrease in the average rate on such outstanding
borrowings from 8.41% for 1996 to 8.05% for 1997. 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.




                                     - 22 -
<PAGE>   23



         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, 1997 and 1996.



<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 $310,722 from $1,723,418 for 1996 to
$2,034,140 for 1997. However, non-interest expense as a percentage of average
assets decreased by 0.33% from 3.26% in 1996 to 2.93% for 1997.





                                     - 23 -
<PAGE>   24


         The following table presents non-interest expense for 1997 compared to
1996 as a percentage of average assets and the changes therein (in thousands):



<TABLE>
<CAPTION>
                                          1997                           1996                
                                          ----                           ----                 Increase     % Increase
                                               % Average                      % Average      (Decrease)     (Decrease)
  Non-interest Expense            Amount         Assets          Amount         Assets        1997/1996     1997/1996
                                  ------         ------          ------         ------        ---------     ---------

<S>                               <C>             <C>              <C>           <C>             <C>           <C>   
Salaries and employee             $1,094          1.58%            $976          1.85%           $118          12.09%
benefits
Occupancy, net                       160          0.23%             103          0.20%             57          55.34%
Furniture and equipment              206          0.30%             142          0.27%             64          45.07%
Directors fees                        49          0.07%              49          0.09%              0           0.00%
Advertising                           59          0.09%              67          0.13%             -8         -11.94%
FDIC insurance                         7          0.01%               2         0.004%              5         250.00%
Office supplies                       29          0.04%              30          0.06%             -1          -3.33%
Professional services                 40          0.06%              85          0.16%            -45         -52.94%
Telephone                             34          0.05%              29          0.05%              5          17.24%
Postage and courier                   84          0.12%              49          0.09%             35          71.43%
Other                                272          0.39%             192          0.36%             80          41.67%
                                  ------          ----           ------         -----            ----          ----- 
                                  $2,034          2.93%          $1,724         3.264%           $310          17.98%
                                  ======          ====           ======         =====            ====          ===== 
</TABLE>



         Non-interest expenses increased 17.98% in absolute terms from 1996 to
1997 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 1997 by 55.34%
primarily attributable to the opening of the Bank's new main office facilities
in Rogersville in 1997. 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 1997 was $215,000 or $115,000 greater
than the provision for loan losses of $100,000 for 1996. 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 $33,783 from $179,132 in 1996 to $212,915
in 1997.

         Income tax expense increased $82,814 from $54,323 in 1996 to $137,137
in 1997.

FINANCIAL POSITION

Company total assets grew 23.43% or $14.85 million during 1997 to $78.25 million
at year end 1997 from $63.39 million at year end 1996. This growth is primarily
attributable to growth of $14.45 million in deposits and securities sold under
repurchase agreements during 1996 to $70.30 million at year end 1997 from $55.85
million at year end 1996.

         Portfolio securities grew $3.07 million in 1997 to $18.19 million at
year end 1997 from $15.12 million at year end 1997 while federal funds decreased
$1.60 million during 1997.

         Loans increased $13.13 million during 1997 to $48.47 million at year
end 1997 compared to $35.34 million at year end 1996. Of this growth real estate
mortgage loans grew $9.36 million in 1997 and consumer loans grew $2.64 million
in 1997. Real estate mortgage loans represented 67.59% of gross outstanding
loans at year end 1997. Consumer loans represented 21.65% of gross outstanding
loans at year end 1997.




                                     - 24 -
<PAGE>   25



         Deposits and securities sold under repurchase agreements grew $14.45
million in 1997 from $55.85 million at year end 1996 to $70.30 million at year
end 1997.

CAPITAL REQUIREMENTS

         The Company's equity capital was $3.87 million at year end 1997
compared to $3.40 million at year end 1996. This increase of approximately
$470,000 consists of the Company's net income for 1997 of $216,775, an increase
in the unrealized gain net of tax on securities available for sale of $101,941,
and the issuance of new common shares for the balance net of applicable expenses
of sale of approximately $155,000. No dividends were paid by the Company during
1997 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 is 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.

         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
8.75% and 10.26% on an end of period basis at December 31, 1997 and 1996,
respectively. The actual tangible capital maintained by the Bank at December 31,
1997 and 1996 after the Rogersville and Church Hill branches were opened was
$6,639 and $6,488 million, respectively, 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. The Company has committed to State banking regulators that
it would raise an additional $1 million of equity capital by October 28, 1996.
At October 28, 1996 the Company had raised $1,070,137.

         Management believes, as of December 31, 1997, 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, 1997.

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.




                                     - 25 -
<PAGE>   26



         During 1997 the Company increased available for sale securities by
$3.59 million from $13.52 million at year end 1996 to $17.11 million at year end
1997.

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, 1997 the Company had a cumulative one year negative
gap of (40.82%) or a net of $29.275 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," maturing in 1998 and are 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 $256,636
at year end 1997 compared to $181,926 at year end 1996 representing an increase
of $74,710. Non-performing loans as a percentage of net loans before the
allowance for loan losses was 0.53% at year end 1997 and 0.51% at year end 1996.
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 257.8% at
year end 1997 and 251.4% at year end 1996. The Company had no material
restructured loans in 1997 or 1996. 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.




                                     - 26 -
<PAGE>   27



         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.

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, 1997 and 1996..............................................F-2

         Consolidated Statements of Earnings for the years ended December 31, 1997 and 1996.....................F-3

         Consolidated Statements of Changes in Stockholders' Equity for the years ended
                  December 31, 1997 and 1996....................................................................F-4

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

         Notes to Consolidated Financial Statements.............................................................F-6
</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 (48) 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 (57) has served as a Director since 1994. Mr. Price is
employed as the Executive for Hawkins County, Tennessee.

         WILLIAM E. PHILLIPS (50) 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 (63) has served as the Secretary/Treasurer and Director
since 1994. Mr. Price was employed by First Union National Bank of Tennessee
until June 1993.



                                     - 27 -
<PAGE>   28



         GARY E. VARNELL (51) 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 (70) has served as a Director of the Company since
1994. Dr. Truett practices medicine in Sneedville, Tennessee.

         GEORGE L. BROOKS (68) has served as a Director of the Company since
1994. Mr. Brooks retired from Citizens Union Bank in 1993 and resides in
Rogersville, Tennessee.

         SHIRLEY A. PRICE (63) has served as a Director of the Company since
1994. Ms. Price is an insurance agent in Rogersville, Tennessee.

         LEON GLADSON (72) has served as a Director of the Company since 1994.
Mr. Gladson is a retired businessman and resides in Rogersville, Tennessee.

         EDDIE FREEMAN (45) 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 (78) has served as a Director of the Company since 1994.
Mr. Miller is a farmer in Rogersville, Tennessee.

         M. CARLIN GREENE (55) 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 (49) has served as a Director of the Company since
1994. Mr. Collins is the Hancock County Clerk & Master in Sneedville, Tennessee.

         LAWRENCE E. GRAY (53) 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 1997 the Board of Directors of the Company held one meeting. The
Directors of the Company also serve as directors of the Bank. The Board of
Directors of the Bank held 12 meetings in 1997. No director attended less than
75% of the meetings held by the Company or the Bank during 1997. 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.




                                     - 28 -
<PAGE>   29



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, 1997, 1996,
and 1995.

<TABLE>
<CAPTION>
                                                                          Annual 
                                                                       Compensation
                                                                       ------------
Name and Position                               Year                     Salary ($)
-----------------                               ----                   ------------
<S>                                             <C>                        <C>   
Reed Matney                                     1997                       72,000
Chief Executive Officer and President           1996                       66,000
                                                1995                       65,000
</TABLE>


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         As of March 20, 1998, 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                        16.26%
          Rt. 2 Box 157
          Sneedville, TN  37869

          William E. Phillips(1)                                   21,735                         4.03
          312 Main Street
          Rogersville, TN 37857

(ii)      William E. Phillips(1)                                   21,735                         4.03

          Lawrence E. Gray(2)                                      18,581                         3.45

          Shirley A. Price                                          7,937                         1.47

          Reed D. Matney                                            8,323                         1.54

          Leon Gladson                                              3,663                            *

          Eddie Freeman                                             1,832                            *

          G. Douglas Price(3)                                      15,874                         3.00

          Gary E. Varnell(4)                                       16,200                         3.00

          Scott F. Collins                                          1,587                            *

          H. Lyons Price                                            6,105                         1.13

          George L. Brooks                                          6,105                         1.13

          M. Carlin Greene                                          9,158                         1.70

          Dr. Truett H. Pierce(5)                                  12,211                         2.26

          Neil D. Miller                                           11,090                         2.06

(iii)     Directors and executive officers                        140,401                        26.05%
          as a group (14 persons)
</TABLE>



                                     - 29 -
<PAGE>   30
-------------
*        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.

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.* 
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,
1997.




                                     - 30 -
<PAGE>   31




                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Volunteer Bancorp, Inc.
Rogersville, Tennessee

We have audited the accompanying consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows 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, 1997 and 1996, 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.

February 5, 1998
Nashville, Tennessee

                                      F - 1

<PAGE>   32



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                           Consolidated Balance Sheets

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                 1997               1996
                                                                                ------             ------
<S>                                                                           <C>                <C>
                                   ASSETS

Cash and due from banks (note 10)                                             $ 2,583,960        $ 2,771,810
Federal funds sold                                                              4,841,622          6,446,143
Investment securities available for sale (amortized
   cost of $17,024,658 and $13,599,316, respectively) (note 2)                 17,108,656         13,518,893
Investment securities held to maturity (estimated market
   value of $1,083,238 and $1,596,156, respectively) (note 2)                   1,085,104          1,603,847
Loans, less allowance for possible loan losses of $660,336 and
    $457,432 in 1997 and 1996, respectively (note 3)                           47,809,870         34,879,828
Accrued interest receivable                                                       819,510            610,654
Premises and equipment, net (note 4)                                            3,647,191          3,217,064
Other real estate                                                                  89,946             82,846
Goodwill (note 1)                                                                 202,791            220,675
Other assets                                                                       57,733             41,449
                                                                              -------------------------------
    Total assets                                                              $78,246,383        $63,393,209
                                                                              ===============================

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits (notes 2 and 5)
   Non-interest bearing                                                       $ 8,816,803        $ 7,900,466
   Interest bearing                                                            60,270,586         47,776,665
                                                                              -------------------------------
     Total deposits                                                            69,087,389         55,677,131
Accrued interest payable                                                          720,842            555,217
Securities sold under repurchase agreements (note 17)                           1,216,679            175,000
Other accrued taxes, expenses and liabilities                                      64,218            128,570
Long-term debt (note 6)                                                         3,265,000          3,450,000
Deferred income taxes (note 8)                                                     21,551             10,383
                                                                              -------------------------------
     Total liabilities                                                         74,375,679         59,996,301
                                                                              -------------------------------
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 at December 31,
          1997; 525,717 shares issued and outstanding, at
          December 31, 1996                                                         5,390              5,258
   Additional paid-in capital                                                   1,916,500          1,761,552
   Retained earnings                                                            1,896,735          1,679,960
   Unrealized (loss) gain on securities available for sale, net (note 2)           52,079            (49,862)
                                                                              -------------------------------
     Total stockholders' equity                                                 3,870,704          3,396,908
                                                                              -------------------------------
        Total liabilities and stockholders' equity                            $78,246,383        $63,393,209
                                                                              ===============================
</TABLE>



           See accompanying notes to consolidated financial statements


                                      F - 2

<PAGE>   33



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                       Consolidated Statements of Earnings

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                      1997           1996
                                                                     ------          -----
<S>                                                                <C>             <C>
Interest income:
    Interest and fees on loans                                     $4,141,546      $2,859,280
    Interest on federal funds                                         202,199         227,391
    Interest on investment securities:
           Taxable                                                  1,112,803         943,940
           Exempt from Federal income tax                               5,000           3,125
                                                                   ---------------------------
              Total interest income                                 5,461,548       4,033,736
                                                                   ---------------------------

Interest expense:
    Interest on deposits                                            2,764,396       1,950,458
    Interest on other borrowed funds                                  307,015         300,149
                                                                   ---------------------------
              Total interest expense                                3,071,411       2,250,607
                                                                   ---------------------------
Net interest income                                                 2,390,137       1,783,129
Provisions for possible loan losses (note 3)                          215,000         100,000
                                                                   ---------------------------
Net interest income after provision for possible loan losses        2,175,137       1,683,129
                                                                   ---------------------------

Non-interest income:
    Service charges on deposit accounts                               105,057          67,238
    Other fees and commissions                                         78,015          82,419
    Securities gain (loss) (note 2)                                     8,342          13,311
    Other non-interest income                                          21,501          16,164
                                                                   ---------------------------
              Total non-interest income                               212,915         179,132
                                                                   ---------------------------

Non-interest expense:
    Salaries and employee benefits (note 7)                         1,094,241         975,967
    Occupancy expenses, net (note 4)                                  160,188         103,302
    Furniture and equipment expense                                   206,498         141,988
    Other non-interest expense (note 7)                               573,213         502,161
                                                                   ---------------------------
              Total non-interest expense                            2,034,140       1,723,418
                                                                   ---------------------------

              Net earnings before income taxes                        353,912         138,843

Income tax expense (note 8)                                           137,137          54,323
                                                                   ---------------------------

Net income                                                         $  216,775      $   84,520
                                                                   ===========================

Net income per weighted average common share                       $     0.41      $     0.17
                                                                   ===========================

Weighted average common shares outstanding                            529,318         483,884
                                                                   ===========================
</TABLE>


           See accompanying notes to consolidated financial statements


                                      F - 3

<PAGE>   34



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

           Consolidated Statements of Changes in Stockholders' Equity

                 For the Years Ended December 31, 1997 and 1996
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                      Unrealized
                                                                                                        Gain
                                                   Common                                             (Loss) on
                                                   Stock         Additional                           Securities
                                   Common          Stated         Paid-In           Retained          Available
                                   Shares          Value          Capital           Earnings          for Sale          Total
                                   ------          -----          -------           --------          --------          -----
<S>                                <C>             <C>           <C>               <C>              <C>              <C>
Balance January 1, 1996            446,252         $4,463        $  967,697        $1,595,440       $   64,786       $2,632,386
Net income                               -              -                 -            84,520                -           84,520
Unrealized (loss)                        -              -                 -                 -         (114,648)        (114,648)
Issue common stock,
  net of costs of issuance          79,465            795           793,855                 -                -          794,650
                                  ----------------------------------------------------------------------------------------------
Balance December 31, 1996          525,717          5,258         1,761,552         1,679,960          (49,862)       3,396,908
Net income                               -              -                 -           216,775                -          216,775
Unrealized gain                          -              -                 -                 -          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
                                  ==============================================================================================
</TABLE>



           See accompanying notes to consolidated financial statements


                                      F - 4

<PAGE>   35



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                  1997                1996
                                                                                 ------               -----
<S>                                                                          <C>                  <C>
Cash Flows from Operating Activities:
   Net income                                                                $    216,775         $     84,520
   Adjustments to reconcile net income to net cash
       provided by operating activities:
     Deferred income taxes                                                        (51,312)             (78,533)
     Provision for loan losses                                                    215,000              100,000
     Provision for depreciation and amortization                                  216,547              127,977
     Securities (gain)                                                             (8,342)             (13,311)
     (Increase) in interest receivable                                           (208,856)            (176,099)
     Decrease (increase) in other assets                                          (23,384)             131,544
     Increase in other liabilities                                                101,273              526,943
                                                                            -----------------------------------
  Net cash provided by operating activities                                       457,701              703,041
                                                                            -----------------------------------
Cash Flows from Investing Activities:
    Purchase of investment securities held to maturity                                  -             (250,000)
    Proceeds from calls and maturity of held to maturity securities               518,743            2,168,951
    Purchase of investment securities available for sale                       (8,719,001)          (9,863,209)
    Proceeds from calls and maturities of available for sale securities         1,849,892            2,200,000
    Proceeds from sale of available for sale securities                         3,452,109              501,875
    Net (increase) in loans                                                   (13,145,042)         (13,405,225)
    Capital expenditures                                                         (628,790)          (1,340,055)
                                                                            ------------------------------------
  Net cash (used) in investing activities                                     (16,672,089)         (19,987,663)
                                                                            ------------------------------------

Cash Flows from Financing Activities:
    Net increase in demand deposits, NOW accounts,
      IRA and savings accounts                                                  3,191,292            4,282,036
    Net increase in certificates of deposit                                    10,218,966           16,882,921
    Net increase in securities sold under repurchase agreements                 1,041,679              175,000
    Repayment of long-term debt                                                  (185,000)                   -
    Issue common stock                                                            199,650              794,650
    Stock issuance costs                                                          (44,570)                   -
                                                                            -----------------------------------
   Net cash provided by financing activities                                   14,422,017           22,134,607
                                                                            -----------------------------------
Increase (decrease) in cash and cash equivalents                               (1,792,371)           2,849,985
Cash and cash equivalents beginning of year                                     9,217,953            6,367,968
                                                                            -----------------------------------
Cash and cash equivalents end of year (note 1)                               $  7,425,582         $  9,217,953
                                                                            ===================================
Supplemental Disclosure of Cash Flow Information:
   Cash paid during the period for:
      Interest                                                               $  2,905,786         $  2,025,438
                                                                            ===================================
      Income taxes                                                           $    258,826         $          -
                                                                            ===================================

</TABLE>


           See accompanying notes to consolidated financial statements


                                      F - 5

<PAGE>   36


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




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, 1997 and
         1996. 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 - 6

<PAGE>   37


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




         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 - 7

<PAGE>   38


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




         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 - 8

<PAGE>   39


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




         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, 1997 and
         1996 was approximately $88,000 and $120,000, 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.

<TABLE>
<CAPTION>

                                                 1997               1996
                                                 ----               ----
<S>                                           <C>                <C>
Cash and due from banks                       $2,583,690         $2,771,810
Federal funds sold                             4,841,622          6,446,143
                                             -------------------------------
                                              $7,425,312         $9,217,953
                                             ===============================
</TABLE>




                                      F - 9

<PAGE>   40


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




     j.  Advertising Cost

         All advertising costs are expensed when incurred. Other advertising
         expense was $58,709 and $66,767 for the years ended December 31, 1997
         and 1996, respectively. There was no direct-response advertising costs
         incurred for 1997 or 1996.

     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 - 10

<PAGE>   41


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



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, 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>



<TABLE>
<CAPTION>
                                                            Available for Sale
                                                  --------------------------------------
                                                            December 31, 1996
                                                            -----------------
                                                           Gross        Gross
                                           Amortized     Unrealized   Unrealized    Carrying
                                             Cost          Gains        Losses       Value
                                             ----          -----        ------       -----
<S>                                       <C>             <C>         <C>         <C>
Securities of U.S. Treasury               $4,382,998      $38,182     $ (10,884)  $ 4,410,296
Securities of U.S. Government agencies     9,116,318       10,597      (121,448)    9,005,467
Obligations of states and political
     subdivisions                            100,000        3,130             -       103,130
                                        ------------------------------------------------------
                                         $13,599,316      $51,909     $(132,332)  $13,518,893
                                        ======================================================
</TABLE>








                                     F - 11

<PAGE>   42


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



     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, 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
                                         =================================================

                                                          Held to Maturity
                                               -----------------------------------
                                                         December 31, 1996
                                                         -----------------
                                                        Gross       Gross       Estimated
                                          Amortized   Unrealized  Unrealized      Market
                                            Cost        Gains       Losses        Value
                                            ----        -----       ------        -----

Securities of U.S. Government agencies   $1,603,847   $9,264      $(16,955)    $1,596,156
                                         =================================================
</TABLE>



     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>
                                                    1997           1996
                                                    ----           ----
<S>                                              <C>            <C>
Gross unrealized gains                           $ 98,995       $  51,909
Gross unrealized losses                           (14,997)       (132,332)
                                                 --------------------------
   Gross unrealized (loss) gain, net               83,998         (80,423)
Deferred tax effect                               (31,919)         30,561
                                                 --------------------------
Net unrealized (loss) gain                       $ 52,079       $ (49,862)
                                                 ==========================
</TABLE>


     The amortized cost and estimated market value of debt securities at
     December 31, 1997, 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.



                                     F - 12

<PAGE>   43


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------

<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                         $ 1,197,042        $ 1,200,076         $  500,240         $  493,799
Due after one year and through
   five years                                     6,160,734          6,211,130            250,461            247,214
Due after five years and through
   ten years                                      9,666,882          9,697,450            200,000            199,280
Due after ten years                                       -                  -            134,403            142,945
                                               ----------------------------------------------------------------------
                                                $17,024,658        $17,108,656         $1,085,104         $1,083,238
                                               ======================================================================
</TABLE>



     The following table presents the gross realized gains and losses on
     investment securities transactions for the years ended December 31, 1997
     and 1996.

<TABLE>
<CAPTION>

                                    Realized gains           Realized Losses
                                 -------------------      ----------------------
                                   1997        1996          1997          1996
                                   ----        ----          ----          ----
<S>                              <C>         <C>          <C>          <C>
Available for sale securities    $15,998     $13,311      $(7,656)            -
Held to maturity securities            -           -            -             -
                                 -----------------------------------------------
                                 $15,998     $13,311      $(7,656)     $      -
                                 ===============================================
</TABLE>



     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. At December 31, 1996, a net gain of
     $13,311 was realized, or a gain of $8,258 net of a tax expense of $5,053.

     Investment securities with amortized cost of approximately $9,041,000 and
     market value of approximately $9,074,000 at December 31, 1997 were pledged
     to secure public deposits and for other purposes required or permitted by
     law. In 1996, investment securities with amortized cost of approximately
     $6,802,000 and market value of approximately $6,760,975 were pledged.





                                     F - 13

<PAGE>   44


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




At December 31, 1997, the Bank had two Federal Home Loan Bank (FHLB) debt
securities which are defined as being derivatives. Pertinent facts of each
security are as follows:

         FHLB inverse floater, $250,000 par, final maturity September 2, 1998
         was purchased on September 2, 1993 at par. The interest rate was fixed
         at 6.25% until September 9, 1994 at which time it is adjusted quarterly
         at 10% minus the three month dollar London Interbank Offered Rate
         (LIBOR) with a 10% cap and a -0-% floor. It is callable on any
         quarterly interest payment date at 100. The interest rate at December
         31, 1997 was 4.338% and the approximate market value was $247,500. The
         interest rate at December 31, 1996 was 4.5% and the approximate market
         value was $250,000.

         FHLB inverse floater, $250,000 par, final maturity September 29, 1998
         was purchased on September 29, 1993 at par. The interest rate was fixed
         at 6.25% until September 29, 1994 at which time it is adjusted
         quarterly at 10.5% minus the three month dollar LIBOR with an 8.25% cap
         and a -0-% floor. It is callable on any quarterly interest payment date
         at 100. The interest rate at December 31, 1997 was 4.738% and the
         approximate market value was $246,058. The interest rate at December
         31, 1996 was 4.949% and the approximate market value was $243,800.

     Management has elected, based upon its intent and ability, to hold these
     derivative securities to maturity. These inverse floaters were acquired by
     prior management because of their then attractive yields with the
     expectation that interest rates would remain stable or continue falling.

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 - 14

<PAGE>   45


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




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

<TABLE>
<CAPTION>

                                                    1997                   1996
                                                    ----                   ----
<S>                                             <C>                   <C>
Commercial, financial and agricultural          $  5,376,340          $  4,000,113
Real estate - construction                         5,715,776             3,213,578
Real estate - mortgage                            27,044,460            20,184,713
Consumer                                          10,492,473             7,853,323
Other                                                 54,354               345,218
                                               ------------------------------------
                                                  48,683,403            35,596,945
Less unearned interest                               213,197               259,685
                                               ------------------------------------
                                                  48,470,206            35,337,260
Less allowance for possible loan losses              660,336               457,432
                                               ------------------------------------
                                                 $47,809,870           $34,879,828
                                               ====================================
</TABLE>


     Loans at December 31, 1997 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     $4,049,528    $5,689,342    $10,041,282   $ 3,848,279   $34,005
After one through
  five years          1,326,812        26,434     12,520,197     6,514,324     9,588
After five years
  through ten
  years                       -             -        716,217       129,870    10,761
After ten years               -             -      3,766,764             -         -
                   ------------------------------------------------------------------
Total                $5,376,340    $5,715,776    $27,044,460   $10,492,473   $54,354
                   ==================================================================
</TABLE>


     At December 31, 1997, fixed and variable rate loans were as follows:

<TABLE>

<S>                                   <C>
Fixed rate loans                      $33,771,336
Variable rate loans                    14,912,067
                                      -----------
                                      $48,683,403
                                      ===========
</TABLE>


                                     F - 15
<PAGE>   46



                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------




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

<TABLE>
<CAPTION>
                                                1997              1996
                                                ----              ----
<S>                                           <C>               <C>
Loans past due over 90 days                   $186,477          $ 84,007
Non-accrual loans                               70,159            97,919
Other real estate owned                         89,946            82,846
                                              --------------------------
                                              $346,582          $264,772
                                              ==========================
</TABLE>


     Foregone interest income on the above non-accrual loans was $6,118 and
     $5,902 at December 31, 1997 and 1996, respectively.

     At December 31, 1997 and 1996, the Bank had loans to its executive
     officers, directors and their affiliates of $771,400 and $466,927,
     respectively. At December 31, 1997 and 1996, the Bank had commitments to
     extend credit to its executive officers, directors and their affiliates of
     $1,259,978 and $1,298,120, 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>
                                               1997               1996
                                               ----               ----
<S>                                         <C>                <C>
Balance January 1                           $ 466,927          $ 433,217
Payments received                            (185,972)          (242,037)
Advances made                                 490,445            275,747
                                           ------------------------------
Balance December 31                         $ 771,400          $ 466,927
                                           ==============================
</TABLE>

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

<TABLE>
<CAPTION>
                                                1997             1996
                                                ----             ----
<S>                                           <C>              <C>   
Balance - beginning of year                   $457,432         $401,066
Provisions charged to operating expense        215,000          100,000
Loans charged-off                              (17,730)         (79,228)
Recoveries                                       5,634           35,594
                                              --------------------------
Balance - end of year                         $660,336         $457,432
                                              ==========================
</TABLE>


     As of December 31, 1997 and 1996, the Bank's recorded investment in
     impaired loans and disclosures related thereto were not material.


                                     F - 16

<PAGE>   47


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



4.   Premises and Equipment, Net

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


<TABLE>
<CAPTION>

                                               1997              1996
                                               ----              ----
<S>                                      <C>               <C>
Land                                     $  446,503        $   162,637
Buildings                                 2,620,959            941,133
Furniture and equipment                   1,167,114            679,516
Construction in progress                          -          1,825,639
                                         -----------------------------
                                          4,234,576          3,608,925
Less accumulated depreciation               587,385            391,861
                                         -----------------------------
                                         $3,647,191         $3,217,064
                                         =============================
</TABLE>


     Depreciation related to premises and equipment for the years ended December
     31, 1997 and 1996 was $198,663 and $110,094, respectively.

     The Bank leased its loan production office and Rogersville Branch on an
     annual basis. These leases were canceled when the main office in
     Rogersville, Tennessee opened in 1997. Total rental expense for these
     locations was $11,054 and $20,000 for December 31, 1997 and 1996,
     respectively.

     Construction in progress at December 31, 1996 consists of costs incurred to
     date for land acquisition, site preparation and general construction costs
     for a permanent office in Rogersville, Tennessee.

     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 in the ordinary course of business on
     substantially the same terms as those prevailing at the time for comparable
     transactions with unrelated parties.




                                     F - 17

<PAGE>   48


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



5.   Deposits

     Deposits at December 31, are summarized as follows:


<TABLE>
<CAPTION>
                                                      1997              1996
                                                      ----              ----
<S>                                               <C>               <C>
Demand deposits                                   $ 8,816,803       $ 7,900,466
NOW and money market accounts                      12,636,336        11,150,876
Savings                                             2,584,451         1,860,585
Individual retirement accounts                      1,674,149         1,608,520
Certificates of deposits - under $100,000          33,405,347        24,507,417
Certificates of deposits - over $100,000            9,970,303         8,649,267
                                                  ------------------------------
                                                  $69,087,389       $55,677,131
                                                  ==============================
</TABLE>


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

<TABLE>
<CAPTION>
                                                       1997             1996
                                                       ----             ----
              <S>                                  <C>              <C>
              Within one year                      $39,137,586      $31,085,189
              After one but within two years         3,569,053        1,650,146
              After two but within three years         662,011          421,349
              After three but within four years          7,000                -
                                                   -----------------------------
                                                   $43,375,650      $33,156,684
                                                   =============================
</TABLE>


     Demand deposits reclassified as loans (overdrafts) aggregated approximately
     $12,600 and $3,600 at December 31, 1997 and 1996, respectively.

     Deposits of executive officers, directors and their affiliates aggregated
     approximately $1,132,000 and $1,342,000 at December 31, 1997 and 1996,
     respectively.

6.   Long-term debt

     The Company's long-term debt consists of a single note payable in the
     amount of $3,265,000 due an unaffiliated national bank. 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, 1997 the rate on the note was 7.731%
     per annum. Principal is payable annually commencing January 31, 1997 and
     each January 31 thereafter as follows:


                                     F - 18

<PAGE>   49


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>

          January 31,                 Principal Due
          -----------                 -------------
          <S>                         <C>
             1998                        220,000
             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
                                      ----------
                                      $3,265,000
                                      ==========
</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>

                                               1997               1996
                                               ----               ----
<S>                                         <C>                <C>
Directors fees                              $ 48,700           $ 48,600
Advertising                                   58,709             66,767
Professional services                         84,023             85,164
Postage and courier                           36,005             48,569
Other                                        345,776            253,061
                                            ---------------------------
   Total other non-interest expense         $573,213           $502,161
                                            ===========================
</TABLE>


     The increase in salaries and employee benefits, occupancy expense,
     furniture and equipment expenses and other non-interest expense for 1997 is
     due primarily to the increased costs associated with operating and fully
     staffing the new main office in Rogersville, Tennessee which became
     operational during 1997.




                                     F - 19

<PAGE>   50


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



8.   Income Taxes

     The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>
                                      1997            1996
                                      ----            ----
<S>                                <C>             <C>
Current                            $188,449        $132,856
Deferred                            (51,312)        (78,533)
                                   -------------------------
                                   $137,137        $ 54,323
                                   =========================
</TABLE>


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

<TABLE>
<CAPTION>
                                     1997            1996
                                     ----            ----
<S>                               <C>             <C>
Accrual to cash conversion        $ 20,377        $(82,961)
Provision for loan losses          (77,022)        (21,397)
Accelerated depreciation             8,123          12,067
State tax loss carryover                 -          16,274
Other, net                          (2,790)         (2,516)
                                  -------------------------
                                  $(51,312)       $(78,533)
                                  =========================
</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>
                                                  1997           1996
                                                  ----           ----
<S>                                             <C>             <C>
Tax expense (benefit) at statutory rate         $120,330        $47,207
Increase (decrease) in taxes resulting from:
  Tax-exempt interest                             (4,627)        (6,601)
  Amortization of goodwill                         6,080          6,080
  State income taxes net of
     Federal income tax                           14,629          6,236
  Other, net                                         725          1,401
                                                ------------------------
                                                $137,137        $54,323
                                                ========================
</TABLE>



                                     F - 20

<PAGE>   51


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



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

<TABLE>
<CAPTION>
                                                       1997           1996
                                                       ----           ----
<S>                                                  <C>             <C>
Deferred tax liabilities:
  Accrual to cash conversion                         $(37,572)       (17,195)
  Unrealized gain on securities available for sale    (31,919)             -
  Accumulated depreciation                            (38,962)       (30,839)
                                                     ------------------------
       Total liabilities                             (108,453)       (48,034)
                                                     ------------------------
Deferred tax assets:
  Allowances for loan losses                           84,112          7,090
  Unrealized loss on securities available for sale          -         30,561
  Other, net                                            2,790              -
                                                     ------------------------
        Total assets                                   86,902         37,651
                                                     ------------------------
Net deferred tax liability                           $(21,551)      $(10,383)
                                                     ========================
</TABLE>


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.



                                     F - 21

<PAGE>   52


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



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

<TABLE>
<CAPTION>
                                              1997               1996
                                              ----               ----
<S>                                       <C>                <C>
Commitments to extend credit              $5,102,970         $4,004,362
Standby letters of credit                    184,000            170,000
                                          ------------------------------
                                          $5,286,970         $4,174,362
                                          ==============================
</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,
     1997 and 1996 was $287,000 and $213,000, respectively.

11.  Stockholder's Equity

     The Bank is subject to certain restrictions on the amount of dividends that
     it may declare without prior regulatory approval. The Bank is 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 (note 6).

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.


                                     F - 22

<PAGE>   53


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



     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, 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)            $3,139    4.00%       $6,639     8.46%        $3,139    4.00%      $6,639    8.46%
                                ======    ====        ======     ====         ======    ====       ======    ====
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>

<TABLE>
<CAPTION>
                                                             December 31, 1996
                                                --------------------------------------------
                                          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)           $2,431    4.00%     $6,488     10.66%    $2,431    4.00%    $6,488    10.66%
                                ======    ====      ======     =====     ======    ====     ======    ===== 
Tier I Capital (to risk-
      weighted assets)          $1,483    4.00%     $6,488     17.50%    $1,483    4.00%    $6,488    17.50%
                                ======    ====      ======     =====     ======    ====     ======    ===== 
Total Capital (to risk-
     weighted assets)           $2,965    8.00%     $6,945     18.74%    $2,965    8.00%    $6,945    18.74%
                                ======    ====      ======     =====     ======    ====     ======    ===== 
</TABLE>


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



                                     F - 22

<PAGE>   54


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



     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 8.75% and 10.26% on an end
     of period basis at December 31, 1997 and 1996, respectively. The actual
     tangible capital maintained by the Bank at December 31, 1997 and 1996 after
     the Rogersville and Church Hill branches were opened was $6,639 and $6,488
     million, respectively, 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. The Company has committed to State banking
     regulators that it would raise an additional $1 million of equity capital
     by October 28, 1996. At October 28, 1996 the Company had raised $1,070,137.

     Management believes, as of December 31, 1997, 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>   55


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



13.  Condensed Financial Information

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

                            Condensed Balance Sheets


<TABLE>
<CAPTION>
                                                          December 31
                                                      ------------------
                                                    1997              1996
                                                    ----              ----
<S>                                             <C>               <C>
Assets:
   Cash                                         $  180,079        $   97,948
   Investment in subsidiary                      6,691,103         6,437,266
   Goodwill                                        202,791           220,675
   Deferred income taxes                            16,228            18,308
   Tax benefit receivable                           88,253           120,937
                                               -----------------------------
                                                $7,178,454        $6,895,134
                                               =============================

Liabilities and stockholders' equity
   Long-term debt                               $3,265,000        $3,450,000
   Accrued interest payable                         42,750            48,226
   Stockholders' equity                          3,870,704         3,396,908
                                               -----------------------------
                                                $7,178,454        $6,895,134
                                               =============================
</TABLE>



                         Condensed Statement of Earnings

<TABLE>
<CAPTION>

                                                  Years Ended December 31
                                                  -----------------------
                                                   1997             1996
                                                   ----             ----
<S>                                             <C>               <C>
Income:
   Dividends from subsidiary                    $269,628          $292,795
                                               ---------------------------
Expenses:
   Interest                                      264,149           289,321
   Professional services                          44,041            66,950
   Other expenses                                 10,894            10,123
                                               ----------------------------
      Total expense                              319,084           366,394
                                               ----------------------------
   (Loss) before tax benefit and equity in
           undistributed subsidiary income       (49,456)          (73,599)
   Tax benefit                                   114,335           132,297
   Equity in undistributed subsidiary income     151,896            25,822
                                               ----------------------------
      Net income                                $216,775          $ 84,520
                                               ============================
</TABLE>





                                     F - 25

<PAGE>   56


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------


                        Condensed Statement of Cash Flows

<TABLE>
<CAPTION>

                                                               Years Ended December 31
                                                               -----------------------

                                                               1997               1996
                                                               ----               ----
<S>                                                         <C>                <C>
Operating Activities:
   Net income (loss)                                        $  216,775         $  84,520
   Adjustment to reconcile net income to net cash
      provided by operating activities:
   Equity in undistributed subsidiary earnings                (151,896)          (25,822)
   Deferred income taxes                                         2,080             7,592
   Amortization                                                 17,884            17,883
  Decrease (increase) in other assets                           32,684           (51,383)
  (Decrease) in other liabilities                               (5,476)           (3,480)
                                                            -----------------------------
   Net cash provided (used) by operating activities            112,051            29,310
                                                            -----------------------------
Investing activities:
   Capital contribution to subsidiary bank                           -          (800,000)
                                                            -----------------------------
Financing activities:
   Repayment of note payable                                  (185,000)                -
   Issue common stock, net of issuance costs                   155,080           794,650
                                                            -----------------------------
   Net cash(used) provided by financing activities             (29,920)          794,650
                                                            -----------------------------
Change in cash and equivalents                                  82,131            23,960
Cash and equivalents - beginning                                97,948            73,988
                                                            -----------------------------
Cash and equivalents - ending                               $  180,079         $  97,948
                                                            =============================
</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>   57


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



14.  Fair Value of Financial Instruments

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

<TABLE>
<CAPTION>
                                                  1997                           1996
                                                  ----                           ----
                                       Carrying           Fair         Carrying          Fair
                                        Value            Value           Value           Value
                                        -----            -----           -----           -----
<S>                                  <C>             <C>             <C>              <C>
Financial assets:
    Cash and due from banks          $ 2,583,960     $ 2,583,960     $ 2,771,810      $ 2,771,810
    Federal funds sold                 4,841,622       4,841,622       6,446,143        6,446,143
    Investment securities:
       Derivatives                       500,000         493,558         500,000          493,000
       All others                     17,693,760      17,698,336      14,622,740       14,622,049
                                     ------------------------------------------------------------
         Total investment
           securities                 18,193,760      18,191,894      15,122,740       15,115,049
                                     ------------------------------------------------------------
    Loans, net                        47,809,870      47,543,696      34,879,828       34,644,611
                                     ------------------------------------------------------------
                                     $73,429,212     $73,161,172     $59,220,521      $58,977,613
                                     ============================================================
Financial liabilities:
    Deposits                         $69,087,389     $69,172,494     $55,677,131      $55,759,105
    Securities sold under
      repurchase agreements            1,216,679       1,216,679         175,000          175,000
    Long-term debt                     3,265,000       3,265,000       3,450,000        3,450,000
                                     ------------------------------------------------------------
                                     $73,569,068     $73,654,173     $59,302,131      $59,384,105
                                     ============================================================
Unrecognized financial
    instruments:
    Commitments to extend
        credit                       $         -     $         -     $         -      $         -
    Standby letters of credit        $         -     $         -     $         -      $         -
                                     ------------------------------------------------------------
                                     $         -     $         -     $         -      $         -
                                     ============================================================
</TABLE>



                                     F - 27

<PAGE>   58


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



     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.

         Investments:
              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>   59


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



15.  Profit-Sharing Plan

     The Company's subsidiary, The Citizens Bank of East Tennessee, adopted a
     profit-sharing retirement plan on July 1, 1996. 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 $9,500 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, 1997 and 1996.

16. Stock Based Employee Compensation

     On December 31, 1997, the Company awarded each full time employee 20 shares
     of the Company's voting common stock as a bonus for past services. The
     awarded shares are fully vested and were awarded without any restrictions.
     In the aggregate, 740 shares were awarded to employees and compensation
     expenses based upon the fair value of $15.00 per share was recognized in
     the aggregate amount of $11,100. There is no obligation or commitment on
     behalf of the Company to award any shares of its common stock to employees
     in the future.

17.  Securities Sold Under Repurchase Agreements

     At December 31, 1997 and 1996, the book value of the securities sold under
     repurchase agreements, including accrued interest, was $1,250,069 and
     $488,854, respectively. The maximum amount outstanding during 1997 and 1996
     was $1,217,588 and $428,804, respectively. The daily average of outstanding
     agreements during 1997 and 1996 was $708,385 and $315,006, respectively.
     The securities underlying the agreements are maintained under the Bank's
     control.

18.  Reclassification

     Certain reclassifications have been made to the December 31, 1996 financial
     statements in order to conform with the presentation of the December 31,
     1997 financial statements.




                                     F - 29

<PAGE>   60


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



19.  Impact of Recently Issued Accounting Standards

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an
     amendment to Statement No. 65" ("SFAS No. 122"), on May 12, 1995. SFAS No.
     122 provides guidance for recognition of mortgage servicing rights ("MSR")
     as an asset when a mortgage loan is sold or securitized and servicing
     rights retained, regardless of how those servicing rights were acquired.
     This eliminates the previously existing accounting distinction between
     rights to service mortgage loans for others that are acquired through loan
     origination activities and those acquired through purchase transactions.
     Impairment of the recorded MSR is to be measured periodically using a
     current fair value approach applied to each stratum of the disaggregated
     mortgage-servicing portfolio. Provisions of SFAS No. 122 were effective for
     fiscal years beginning after December 15, 1995. The adoption of SFAS No.
     122 did not have a material impact upon the financial position or results
     of operations of the Company.

     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.

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 addresses
     situations where information indicates that a company might be unable to
     recover, through future operations or sale, the carrying amount of
     long-lived assets, identified intangibles and goodwill related to those
     assets. This Statement is effective for fiscal years beginning after
     December 31, 1995. The adoption of SFAS No. 121 did not have a material
     impact upon the financial position or results of operation of the Company.





                                     F - 30

<PAGE>   61


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------



20.  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
                               -------------------------------------------------------------------------------------
                                                                        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         
  (benefit) expense                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>   62


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1997 and 1996
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                   First           Second             Third            Fourth
                                  Quarter          Quarter           Quarter           Quarter              Year
                                -----------------------------------------------------------------------------------
                                                                       1996
                                -----------------------------------------------------------------------------------
<S>                             <C>               <C>              <C>                <C>                <C>          
Total interest income           $839,652          $962,576         $1,075,026         $1,156,482         $4,033,736
Net interest income              367,367           425,788            497,035            492,939          1,783,129
Provision for loan losses         15,000            15,000             32,500             37,500            100,000
Non-interest income               38,747            43,036             49,758             47,591            179,132
Non-interest expense             451,556           412,783            427,972            431,107          1,723,418
Income before income taxes       
  (benefit)                      (60,442)           41,041             86,321             71,923            138,843
Net (loss) income               $(38,464)         $ 25,157         $   53,366         $   44,461         $   84,520
                                ===================================================================================
Weighted average common
  shares outstanding             448,565           465,980            494,619            525,717            483,884
                                ===================================================================================
Net (loss) income per
  weighted average common
  share outstanding             $ (0.09)          $   0.05         $     0.11         $     0.09         $     0.17
                                ===================================================================================

</TABLE>

     The sum of the net (loss) income per weighted average common share
     outstanding per quarter may not equal the net (loss) or income per weighted
     average common share outstanding for the year because of rounding effects
     within the quarters.





                                     F - 32

<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.







February 5, 1998
Nashville, Tennessee







                                     F - 33

<PAGE>   64



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



<TABLE>
<CAPTION>

                                                                   Citizens                            Consolidated
                                                Volunteer           Bank                                Volunteer
                   ASSETS                        Bancorp,          of East                             Bancorp, Inc
                                                  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
  Net unrealized gain on securities
     available for sale                            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>   65


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                           Consolidating Balance Sheet
                                December 31, 1996
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

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

Cash and due from banks                        $   97,948        $ 2,771,810     $   (97,948)          $ 2,771,810
Federal funds sold                                      -          6,446,143               -             6,446,143
Investment in subsidiary                        6,437,266                  -      (6,437,266)                    -
Investment securities                                   -         15,122,740               -            15,122,740
Loans, net                                              -         34,879,828               -            34,879,828
Accrued interest receivable                             -            610,654               -               610,654
Premises and equipment                                  -          3,217,064               -             3,217,064
Goodwill                                          220,675                  -               -               220,675
Other assets                                      139,245            124,295        (139,245)              124,295
                                               --------------------------------------------------------------------
     Total assets                              $6,895,134        $63,172,534     $(6,674,459)          $63,393,209
                                               ====================================================================

  LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:
  Deposits                                     $        -        $55,775,079 $       (97,948)          $55,677,131
  Long-term debt                                3,450,000                  -               -             3,450,000
  Accrued interest payable                         48,226            506,991               -               555,217
 Securities sold under repurchase
     agreements                                         -            175,000               -               175,000
  Other liabilities                                     -            249,507        (120,937)              128,570
  Deferred income taxes                                 -             28,691         (18,308)               10,383
                                               --------------------------------------------------------------------
     Total liabilities                          3,498,226         56,735,268        (237,193)           59,996,301
                                               --------------------------------------------------------------------
Stockholders' equity:
  Capital stock                                     5,258            666,500        (666,500)                5,258
  Additional paid-in capital                    1,761,552          5,068,016      (5,068,016)            1,761,552
  Retained earnings                             1,679,960            752,612        (752,612)            1,679,960
  Net unrealized gain on securities
     available for sale                          (49,862)            (49,862)         49,862               (49,862)
                                               --------------------------------------------------------------------
     Total stockholders' equity                 3,396,908          6,437,266      (6,437,266)            3,396,908
                                               --------------------------------------------------------------------
     Total liabilities and
        stockholders' equity                   $6,895,134        $63,172,534     $(6,674,459)          $63,393,209
                                               =====================================================================
</TABLE>





                                     F - 35

<PAGE>   66



                             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
                                                  ------------------------------------------------------------------
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>   67


                             VOLUNTEER BANCORP, INC
                       Consolidating Statement of Earnings
                                December 31, 1996
-------------------------------------------------------------------------------

<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                   $       -         $2,859,280        $       -           $2,859,280

  Interest on federal funds                            -            227,391                -              227,391
  Interest and dividends on
    investments:
    Taxable                                            -            943,940                -              943,940
    Exempt from federal income taxes                   -              3,125                -                3,125
                                               ------------------------------------------------------------------
      Total interest income                            -          4,033,736                -            4,033,736
                                               ------------------------------------------------------------------
Interest expense:
  Interest on deposits                                 -          1,950,458                -            1,950,458
  Interest on other borrowed funds               289,321             10,828                -              300,149
                                               ------------------------------------------------------------------
    Total interest expense                       289,321          1,961,286                -            2,250,607
                                               ------------------------------------------------------------------
Net interest income                             (289,321)         2,072,450                -            1,783,129
Provision for possible loan losses                     -            100,000                -              100,000
                                               ------------------------------------------------------------------
Net interest income after loan
   provision                                    (289,321)         1,972,450               -             1,683,129
                                               ------------------------------------------------------------------
Non-interest income:
  Equity in earnings of subsidiary               318,617                  -         (318,617)                   -
  Service charges                                      -             67,238                -               67,238
  Other income                                         -            111,894                -              111,894
                                               ------------------------------------------------------------------
                                                 318,617            179,132         (318,617)             179,132
                                               ------------------------------------------------------------------
Non-interest expense:
  Salaries and benefits                                -            975,967                -              975,967
  Other                                           77,073            670,378                -              747,451
                                               ------------------------------------------------------------------
                                                  77,073          1,646,345                -            1,723,418
                                               ------------------------------------------------------------------
(Loss) income before taxes                       (47,777)           505,237         (318,617)             138,843
Income tax (benefit) expense                    (132,297)           186,620                -               54,323
                                               ------------------------------------------------------------------
Net income                                     $  84,520         $  318,617        $(318,617)          $   84,520
                                               ==================================================================
</TABLE>




                                     F - 37

<PAGE>   68



                     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)
    Decrease (increase) in other                   32,684          (232,240)        (32,684)             (232,240)
       assets
    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                                         -       (16,672,089)              -           (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 (used) 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>   69


                     VOLUNTEER BANCORP, INC. AND SUBSIDIARY
                      Consolidating Statement of Cash Flows
                                December 31, 1996
-------------------------------------------------------------------------------


<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                                     $  84,520       $    318,587       $(318,587)         $     84,520
  Adjustments to reconcile net
     income to net cash provided by
       operating activities:
    Subsidiary earnings undistributed              (25,822)                 -          25,822                     -
    Deferred income taxes                            7,592            (86,125)              -               (78,533)
    Provision for loan losses                            -            100,000               -               100,000
    Depreciation and amortization                   17,883            110,094               -               127,977
    Securities (gains)                                   -            (13,311)              -               (13,311)
    (Increase) in other assets                     (51,383)          (106,355)        113,183               (44,555)
    Increase in other liabilities                   (3,480)           643,606        (113,183)              526,943
                                                 -------------------------------------------------------------------
  Net cash provided by operating
        activities                                  29,310            966,496        (292,765)              703,041
                                                 -------------------------------------------------------------------
Cash Flows From Investing Activities:
    Contribution of capital to
       subsidiary                                 (800,000)                 -         800,000                     -
    (Increase) in investment securities                  -         (5,242,383)              -            (5,242,383)
    (Increase) in loans                                  -        (13,405,225)              -           (13,405,225)
    Capital expenditures                                 -         (1,340,055)              -            (1,340,055)
                                                 -------------------------------------------------------------------
  Net cash (used) by investing
     activities                                   (800,000)       (19,987,663)        800,000           (19,987,663)
                                                 -------------------------------------------------------------------

Cash Flows From Financing
   Activities:
    Increase in deposits                                 -         21,188,917         (23,960)           21,164,957
   Increase in securities sold under
       repurchase agreements                             -            175,000               -               175,000
    Issue common stock                             794,650                  -               -               794,650
    Dividends paid                                       -           (292,765)        292,765                     -
    Capital contribution from parent                     -            800,000        (800,000)                    -
                                                 -------------------------------------------------------------------
  Net cash provided from financing
       activities                                  794,650         21,871,152        (531,195)           22,134,607
                                                 -------------------------------------------------------------------
Change in cash and equivalents                      23,960          2,849,985         (23,960)            2,849,985
Cash and equivalents - beginning                    73,988          6,367,968         (73,988)            6,367,968
                                                 -------------------------------------------------------------------
Cash and equivalents - ending                    $  97,948       $  9,217,953       $ (97,948)         $  9,217,953
                                                 ===================================================================
</TABLE>




                                     F - 39



<PAGE>   70




         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, 1998

         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, 1998


 /s/ H. Lyons Price                         Secretary/Treasurer and Director                    March 27, 1998
                                            (principal financial and accounting officer)


 /s/ Reed D. Matney                         President and Director                              March 27, 1998
                                            (principal executive officer)


 /s/ Carlin Greene                          Director                                            March 27, 1998


 /s/ Douglas Price                          Director                                            March 27, 1998


 /s/ Gary Varnell                           Director                                            March 27, 1998


 /s/ Truett Pierce                          Director                                            March 27, 1998


 /s/ George Brooks                          Director                                            March 27, 1998


 /s/ Shirley Price                          Director                                            March 27, 1998


 /s/ Eddie Freeman                          Director                                            March 27, 1998


 /s/ Neil Miller                            Director                                            March 27, 1998


 /s/ Lawrence Gray                          Director                                            March 27, 1998


 /s/ Scott Collins                          Director                                            March 27, 1998


 /s/ Leon Gladson                           Director                                            March 27, 1998
</TABLE>