<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

         Annual Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
                   For the Fiscal Year Ended December 31, 1999

                           Commission File No. 0-24133

                         FRANKLIN FINANCIAL CORPORATION

                             A Tennessee Corporation
                  (IRS Employer Identification No. 62-1376024)
                                230 Public Square
                            Franklin, Tennessee 37064
                                 (615) 790-2265

                 Securities Registered Pursuant to Section 12(b)
                     of the Securities Exchange Act of 1934:

                                      NONE

                 Securities Registered Pursuant to Section 12(g)
                     of the Securities Exchange Act of 1934:

                      Common Stock, no par value per share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and disclosure will not 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-K or any amendment to this
Form 10-K. [ ]

Revenues for the fiscal year ended December 31, 1999: $35,355,894

The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (11,937,740 shares) on March 15, 2000 was
approximately $8,833,928. As of such date, no organized trading market existed
for the common stock of the registrant. The aggregate market value was computed
by reference to the book value of the common stock of the registrant as of
December 31, 1999. For the purposes of this response, officers, directors and
holders of 5% or more of the registrant's common stock are considered the
affiliates of the registrant at that date.

The number of shares outstanding of the registrant's common stock, as of March
15, 2000: 31,054,187 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders scheduled to
be held on May 16, 2000 are incorporated by reference to Items 10, 11, 12 and 13
of this Report.

Transitional Small Business Disclosure Format (check one):  Yes [ ]; No  [X]




<PAGE>   2



                                     PART I

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         Certain statements in this Annual Report on Form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements generally can be identified by
the use of forward-looking terminology, such as "may," "will," "expect,"
"estimate," "anticipate," believe," "target," "plan," "project," or "continue"
or the negatives thereof or other variations thereon or similar terminology, and
are made on the basis of management's plans and current analyses of the Company,
its business and the industry as a whole. These forward looking statements are
subject to risk and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for fiscal 2000 and beyond to differ materially from those
expressed or implied in such forward-looking statements. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.

ITEM 1.  BUSINESS.

GENERAL

         Franklin Financial Corporation (the "Company") is a registered bank
holding company under the federal Bank Holding Company Act of 1956, as amended,
and owns 100% of the outstanding capital stock of Franklin National Bank,
Franklin, Tennessee (the "Bank"). The Company was incorporated under the laws of
the State of Tennessee on December 27, 1988, as a mechanism to enhance the
Bank's ability to serve its future customers' requirements for financial
services. 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 commenced business operations on December 1, 1989 in a
permanent facility located at 230 Public Square, Franklin, Tennessee 37064. The
approximately 12,000 square foot facility is being leased from Gordon E. Inman,
the Chairman of the Board of the Company. The Bank has four full service
branches: one located in the Williamson Square Shopping Center, which opened in
April 1994; one located in Spring Hill, Tennessee, which opened in January 1995;
one located in Brentwood, Tennessee, which opened in April 1995; and one located
in Fairview, Tennessee, which opened in May 1997. The Bank also leases 9,000 and
4,000 square foot facilities from Mr. Inman which house its mortgage banking
subsidiary, financial services subsidiary and insurance subsidiary sales
function.

         The Bank is a full service commercial bank, without trust powers. The
Bank offers a full range of interest bearing and non-interest bearing accounts;
including commercial and retail checking accounts, negotiable orders of
withdrawal ("NOW") accounts, money market accounts, individual retirement
accounts, regular interest bearing statement savings accounts, certificates of
deposit, commercial loans, real estate loans, commercial and consumer lines of
credit, letters of credit, mortgage loans, home equity loans and
consumer/installment loans. In addition, the Bank provides such consumer
services as travelers checks, cashiers checks, Mastercard and Visa accounts,
safe deposit boxes, direct deposit services, wire transfer services, cash
management services, debit cards, automatic teller machines, an internet banking
product and a 24-hour telephone inquiry system.



<PAGE>   3



         In August 1996, the Bank opened an insurance agency subsidiary,
Franklin Financial Insurance (formally Hometown Insurance Agency), which
operates from the Bank's Spring Hill location. The agency sells property,
business and life insurance. In October 1997, the Bank opened a financial
services subsidiary, Franklin Financial Securities. The financial services
subsidiary offers financial planning and securities broker services through Legg
Mason Financial Partners. In December 1997, the Bank opened a mortgage banking
subsidiary, Franklin Financial Mortgage. This subsidiary originates and services
mortgage loans.

         During January 1998, the Company's Board of Directors approved a
two-for-one stock split payable on February 17, 1998 to shareholders of record
at the close of business on February 2, 1998. During March 1998, the Company
also declared a four-for-one stock split payable June 3, 1998 to shareholders of
record at the close of business on May 20, 1998. All share data has been
retroactively restated as if both splits had occurred at the beginning of the
years presented.

MARKET AREA AND COMPETITION

         The primary service area for the Bank is centered around Franklin,
Tennessee and encompasses Williamson, Maury and Davidson Counties in Tennessee.
There are 58 banking offices within the primary service area of the Bank. Most
of these offices are affiliated with major bank holding companies.

         The Bank competes with existing area financial institutions other than
commercial banks and savings and loan associations, including insurance
companies, consumer finance companies, brokerage houses, credit unions and other
business entities which have recently been invading the traditional banking
markets. Due to the rapid growth of the Bank's market area, it is anticipated
that additional competition will continue from new entrants to the market.



                                      -2-
<PAGE>   4



DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL

         The following is a presentation of the average consolidated balance
sheet of the Company for the years ended December 31, 1999, 1998 and 1997. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:

                           AVERAGE CONSOLIDATED ASSETS


<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                             ------------------------------------
                                                                1999         1998          1997
                                                             --------      --------      --------
                                                                        (In thousands)

<S>                                                          <C>           <C>           <C>
Cash and due from banks ...............................      $ 10,550      $  9,335      $  7,435
                                                             --------      --------      --------
Interest-earning deposits .............................            --            --            --
Securities ............................................        90,366        70,173        54,206
Federal funds sold and reverse repurchases ............         3,805         3,482         3,018
Net loans .............................................       256,206       214,792       178,047
                                                             --------      --------      --------
         Total earning assets .........................       350,377       288,447       235,271
                                                             --------      --------      --------
Other assets ..........................................        12,974        10,505         8,627
                                                             --------      --------      --------
         Total assets .................................      $373,901      $308,287      $251,333
                                                             ========      ========      ========


</TABLE>
            AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                             ------------------------------------
                                                               1999          1998          1997
                                                             --------      --------      --------
                                                                        (In thousands)
<S>                                                          <C>           <C>           <C>
Non interest-bearing deposits .........................      $ 32,116      $ 29,103      $ 24,360
NOW deposits, including MMDA ..........................        82,091        63,818        48,411
Savings deposits ......................................        11,520         8,729         7,307
Time deposits .........................................       208,113       172,213       146,995
Repurchase Agreements .................................         2,594         3,596         3,670
Other borrowings ......................................        13,829         8,400         3,793
Other liabilities .....................................           388         1,157           827
         Total liabilities ............................       350,651       287,016       235,363
Stockholders equity ...................................        23,250        21,271        15,970
                                                             --------      --------      --------
         Total liabilities and stockholders' equity ...      $373,901      $308,287      $251,333
                                                             ========      ========      ========

</TABLE>


                                      -3-
<PAGE>   5



         The following is a presentation of an analysis of the net interest
earnings of the Company for the periods indicated with respect to each major
category of interest-earning asset and each major category of interest-earning
liability:

<TABLE>
<CAPTION>
                                                            Year Ended December 31, 1999
                                                -------------------------------------------------
                                                 Average         Interest         Average    Net
                                                 Amount           Earned          Yield      Yield
                                                ---------        --------         ------    -------
                                                               (Dollars in thousands)
<S>                                             <C>              <C>              <C>        <C>
                    ASSETS
Securities .................................    $ 90,366         $  5,311           5.88%
Federal funds sold and reverse repurchases..       3,805              195           5.12
Net loans ..................................     256,206(1)        25,185(2)        9.83
                                                ---------        --------
         Total earning assets ..............    $350,377         $ 30,691           8.76%    4.43%
                                                ========         ========

</TABLE>


<TABLE>
<CAPTION>
                                         Average      Interest          Average
                                         Amount         Paid           Rate Paid
                                        --------      -------          ---------
                                                 (Dollars in thousands)
<S>                                     <C>           <C>               <C>
               LIABILITIES

NOW deposits, including MMDA .......    $ 82,091      $  2,925          3.56%
Savings deposits ...................      11,520           298          2.59
Time deposits ......................     208,113        11,100          5.33
Other borrowings ...................      16,423           861          5.24
                                        --------      --------
Total interest-bearing liabilities..    $318,147      $ 15,184          4.77%
                                        ========      ========

</TABLE>

----------
(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $2,321,000 in loan fees and loan
    service fees.



<TABLE>
<CAPTION>
                                                              Year Ended December 31, 1998
                                                --------------------------------------------------------
                                                 Average         Interest          Average          Net
                                                 Amount           Earned            Yield          Yield
                                                --------         --------          -------         -----
                                                               (Dollars in thousands)
                        ASSETS
<S>                                             <C>                 <C>               <C>          <C>
Securities .................................    $ 70,173         $  4,101             5.84%
Federal funds sold and reverse repurchases..       3,482              196             5.63
Net loans ..................................     214,792(1)        22,141(2)         10.31
                                                --------         --------
         Total earning assets ..............    $288,447         $ 26,438             9.17%       4.61%
                                                ========         ========

</TABLE>



                                      -4-
<PAGE>   6




<TABLE>
<CAPTION>
                                         Average      Interest          Average
                                         Amount         Paid           Rate Paid
                                        --------      --------         ---------
             LIABILITIES                         (Dollars in thousands)
<S>                                     <C>           <C>               <C>
NOW deposits, including MMDA ........   $ 63,818      $  2,337          3.66%
Savings deposits ....................      8,729           226          2.59
Other time deposits .................    172,213         9,840          5.71
Other borrowings ....................     11,996           739          6.16
                                        --------      --------
Total interest-bearing liabilities ..   $256,756      $ 13,142          5.12%
                                        ========      ========

</TABLE>

----------

(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $2,211,000 in loan fees and loan
    service fees.


<TABLE>
<CAPTION>
                                                                    Year Ended December 31, 1997
                                                    -----------------------------------------------------------
                                                     Average         Interest            Average          Net
                                                     Amount           Earned              Yield          Yield
                                                    --------         --------           -------          ------
                                                                    (Dollars in thousands)
                         ASSETS

<S>                                                 <C>              <C>                  <C>            <C>
Securities ...................................      $ 54,206         $  3,489             6.44%
Federal funds sold and reverse repurchases ...         3,018              161             5.33
Net loans ....................................       178,047(1)        18,872(2)         10.60
                                                    --------         --------
         Total earning assets ................      $235,271         $ 22,522             9.57%          4.94%
                                                    ========         ========


</TABLE>

<TABLE>
<CAPTION>
                                             Average      Interest         Average
                                             Amount         Paid          Rate Paid
                                            --------      --------        ---------
<S>                                         <C>           <C>               <C>
                   LIABILITIES

NOW deposits, including MMDA .........      $ 48,411      $  1,825          3.77%
Savings deposits .....................         7,307           190          2.60
Other time deposits ..................       146,995         8,390          5.71
Other borrowings .....................         7,463           491          6.58
                                            --------      --------
Total interest-bearing liabilities ...      $210,176      $ 10,896          5.18%
                                            ========      ========

</TABLE>

----------
(1) Includes non-accrual loans of $0.
(2) Interest earned on net loans includes $1,782,000 in loan fees and loan
    service fees.


                                      -5-
<PAGE>   7



RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

         The effect on interest income, interest expense and net interest income
in the periods indicated, of changes in average balance and rate from the
corresponding prior period is shown below. The effect of a change in average
balance has been determined by applying the average rate in the earlier period
to the change in average balance in the later period, as compared with the
earlier period. The effect of change in rate has been determined by applying the
average balance in the earlier period to the change in average rate in the later
period, as compared with the earlier period. Changes resulting from average
balance/rate variances have been determined by applying the change in average
balance to the change in average rate in the later period, as compared with the
earlier period. The changes attributable to the combined impact of balance and
rate have all been allocated to the changes due to volume.


<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                              1999
                                                        compared with
                                                     Year Ended December 31,
                                                              1998
                                                  Increase (Decrease) due to:
                                         -------------------------------------------------
                                            Volume              Rate              Total
                                         ------------      ------------       ------------
                                                          (In thousands)
<S>                                      <C>               <C>                <C>
Interest earned on:
Securities ........................      $      1,187      $         23       $      1,210
Federal funds sold ................                17               (18)                (1)
Net loans .........................             4,071            (1,027)             3,044
                                         ------------      ------------       ------------
Total earning assets ..............             5,275            (1,022)             4,253
                                         ------------      ------------       ------------
Interest paid on:
NOW deposits, including MMDA ......               651               (64)               587
Savings deposits ..................                73                 0                 73
Time deposits .....................             1,915              (654)             1,261
Other borrowings ..................               232              (110)               122
                                         ------------      ------------       ------------
Total interest expense ............             2,871              (828)             2,043
                                         ------------      ------------       ------------
Change in net
  interest income .................      $      2,404      $       (194)      $      2,210
                                         ============      ============       ============


</TABLE>



                                      -6-
<PAGE>   8



<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                                       1998
                                                  compared with
                                              Year Ended December 31,
                                                       1997
                                           Increase (Decrease) due to:
                                         -------------------------------
                                         Volume       Rate         Total
                                         ------      ------       ------
                                                (In thousands)
<S>                                      <C>           <C>           <C>
Interest earned on:
Securities ........................      $  933        (321)         612
Federal funds sold ................          26           9           35
Net loans .........................       3,788        (519)       3,269
                                         ------      ------       ------
Total earning assets ..............       4,747        (831)       3,916
                                         ------      ------       ------

Interest paid on:
NOW deposits ......................         564         (52)         512
Savings deposits ..................          37          (1)          36
Time deposits .....................       1,441           9        1,450
Other borrowings ..................         279         (31)         248
                                         ------      ------       ------
Total interest expense ............       2,321         (75)       2,246
                                         ------      ------       ------
Change in net
    interest income ...............      $2,426      $ (756)      $1,670
                                         ======      ======       ======


</TABLE>



                                      -7-
<PAGE>   9



DEPOSITS

         The Bank offers a full range of interest bearing and non-interest
bearing accounts, including commercial and retail checking accounts, negotiable
order of withdrawal ("NOW") accounts, money market accounts, individual
retirement accounts, regular interest bearing statement savings accounts and
certificates of deposit with fixed and variable rates and a range of maturity
date options. The sources of deposits are residents, businesses and employees of
businesses within the Bank's market area, obtained through the personal
solicitation of the Bank's officers and directors, direct mail solicitation and
advertisements published in the local media. The Bank pays competitive interest
rates on time and savings deposits up to the maximum permitted by law or
regulation. In addition, the Bank has implemented a service charge fee schedule
competitive with other financial institutions in the Bank's market area,
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the like.

         The following tables present, for the periods indicated, the average
amount of and average rate paid on each of the following deposit categories:

<TABLE>
<CAPTION>
                                                  Year Ended
                                              December 31, 1999
                                       -----------------------------------
            Deposit Category           Average Amount    Average Rate Paid
            ----------------           --------------    -----------------
                                              (Dollars in thousands)
<S>                                     <C>               <C>
 Non interest-bearing
      demand deposits ..............      $ 32,116        Not Applicable
 NOW deposits, including MMDA ......      $ 82,091            3.56%
 Savings deposits ..................      $ 11,520            2.59%
 Time deposits .....................      $208,113            5.33%

</TABLE>


<TABLE>
<CAPTION>
                                                  Year Ended
                                              December 31, 1998
                                       ---------------------------------
       Deposit Category                Average Amount  Average Rate Paid
       ----------------                --------------  -----------------
                                           (Dollars in thousands)
<S>                                     <C>               <C>
Non interest-bearing
     demand deposits ..............      $ 29,103      Not Applicable
NOW deposits ......................      $ 63,818          3.66%
Savings deposits ..................      $  8,729          2.59%
Time deposits .....................      $172,213          5.71%


</TABLE>



                                      -8-
<PAGE>   10


<TABLE>
<CAPTION>
                                                 Year Ended
                                             December 31, 1997
                                      ----------------------------------
           Deposit Category           Average Amount   Average Rate Paid
           ----------------           --------------   -----------------
                                           (Dollars in thousands)
<S>                                      <C>               <C>
Non interest-bearing
     demand deposits ..............      $ 24,360      Not Applicable
NOW deposits ......................      $ 48,411          3.77%
Savings deposits ..................      $  7,307          2.60%
Time deposits .....................      $146,995          5.71%


</TABLE>

         The following table indicates amounts outstanding of time certificates
of deposit of $100,000 or more and respective maturities for the year ended
December 31, 1999:

<TABLE>
<CAPTION>
                                                    Time
                                                Certificates
                                                 of Deposit
                                                  --------
                                               (In thousands)
<S>                                               <C>
         3 months or less ..................      $ 85,266
         3-6 months ........................        42,622
         6-12 months .......................        23,069
         over 12 months ....................         4,824
                                                  --------
                Total ......................      $155,781
                                                  ========

</TABLE>

LOAN PORTFOLIO

         The Bank engages in a full complement of lending activities, including
commercial, consumer/installment and real estate loans.

         Commercial lending is directed principally towards businesses whose
demands for funds fall within the Bank's legal lending limits and which are
potential deposit customers of the Bank. This category of loans includes loans
made to individual, partnership or corporate borrowers, and obtained for a
variety of business purposes. Particular emphasis is placed on loans to small
and medium-sized businesses. The Bank's real estate loans consist of residential
and commercial first and second mortgage loans, as well as real estate
construction loans and real estate acquisition and development loans.

         The Bank's consumer loans consist primarily of installment loans to
individuals for personal, family and household purposes, including education and
automobile loans to individuals and pre-approved lines of credit.




                                      -9-
<PAGE>   11



         At December 31, 1999, loans within four broad categories exceeded 10%
of total loans: single family residential real estate loans ($69,992,000 or 26%
of total loans), commercial real estate loans ($51,385,000 or 19% of total
loans), commercial and industrial loans ($51,949,000 or 19% of total loans) and
residential construction loans ($38,982,000 or 14% of total loans). Management
believes that there is material borrower diversification within both the single
family residential real estate, commercial and commercial real estate loan
categories. The vast majority of these loans are secured by properties located
in the primary services area of the Bank (Williamson County and surrounding
counties).

         The following table presents various categories of loans and loans held
for sale contained in the Bank's loan portfolio for the periods indicated and
the total amount of all loans for such period:


<TABLE>
<CAPTION>
                                                             December 31,
                               -------------------------------------------------------------------------
    Type of Loan                  1999            1998            1997           1996            1995
    ------------               ---------       ---------       ---------       ---------       ---------
                                                            (In thousands)
<S>                            <C>             <C>             <C>             <C>             <C>
Domestic:
Commercial, financial ........ $  82,288       $  60,418       $  44,824       $  34,280       $  24,143
   and agricultural
Real estate-construction .....    38,982          29,335          33,708          23,307          13,073
Real estate-mortgage .........   130,483         132,327         100,989          86,999          62,895
Consumer loans ...............    19,670          18,006          15,001          13,230          12,016
                               ---------       ---------       ---------       ---------       ---------
   Total loans ...............   271,423         240,086         194,522         157,816         112,127
Less: deferred loan fees .....      (512)           (516)           (440)           (362)           (296)
   Allowance for possible
       loan losses ...........    (2,480)         (2,194)         (1,828)         (1,472)         (1,062)
                               ---------       ---------       ---------       ---------       ---------
Total (net of allowance) ..... $ 268,431       $ 237,376       $ 192,254       $ 155,982       $ 110,769
                               =========       =========       =========       =========       =========

</TABLE>


         The following is a presentation of an analysis of maturities of loans
as of December 31, 1999:


<TABLE>
<CAPTION>
                                               Due in 1         Due After 1 to        Due After
Type of Loan                                Year or Less           5 Years             5 Years             Total
------------                                   --------            --------            --------            --------
                                                                         (In thousands)
<S>                                            <C>                 <C>                 <C>                 <C>
Commercial, financial
   and agricultural ...............            $ 57,251            $ 24,965            $     72            $ 82,288
Real estate-construction ..........              37,080               1,902                  --              38,982
Real estate-mortgage ..............              62,110              55,587              12,786             130,483
Consumer loans ....................               7,084              12,568                  18              19,670
                                               --------            --------            --------            --------
Total .............................            $163,525            $ 95,022            $ 12,876            $271,423
                                               ========            ========            ========            ========

</TABLE>



                                      -10-
<PAGE>   12




         The following is a presentation of an analysis of sensitivities of
loans to changes in interest rates as of December 31, 1999 (in thousands):


<TABLE>
<S>                                                                        <C>
          Loans due after 1 year with
                   predetermined interest rates........................    $84,389
          Loans due after 1 year with
                   floating interest rates.............................    $23,509

</TABLE>


         The following table presents information regarding non-accrual, past
due and restructured loans at the dates indicated (in thousands):


<TABLE>
<CAPTION>
                                                                                 December 31,
                                                      ----------------------------------------------------------------
                                                         1999          1998          1997          1996         1995
                                                      --------      --------      --------      --------      --------
<S>                                                   <C>           <C>           <C>           <C>           <C>
Loans accounted for on a non-accrual basis:
         Number ................................             0             0             0             0             0
         Amount ................................      $     --      $     --      $     --      $     --      $     --
Accruing loans which are contractually
  past due 90 days or more as to principal
  and interest payments:
         Number ................................             4             4             0             0             0
         Amount ................................      $    769      $    195      $     --      $     --      $     --
Loans defined as "troubled debt
  restructurings":
         Number ................................             0             0             0             0             0
         Amount ................................      $     --      $     --      $     --      $     --      $     --


</TABLE>

         As of December 31, 1999, there are no loans classified by the
regulators as doubtful, substandard or special mention that have not been
disclosed in the above table, which (i) represent or result from trends or
uncertainties which management reasonably expects will materially impact future
operating results, liquidity, or capital resources, or (ii) represent material
credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.

         Accrual of interest is discontinued on a loan when management of the
Bank determines upon consideration of economic and business factors affecting
collection efforts that collection of interest is doubtful.




                                      -11-
<PAGE>   13


         Additional interest income of approximately $0 in 1999, $0 in 1998, $0
in 1997, $0 in 1996, and $423 in 1995 would have been recorded if all loans
accounted for on a non-accrual basis had been current in accordance with their
original terms. No interest income has been recognized during the five year
period ended December 31, 1999, on loans that have been accounted for on a
non-accrual basis.

         Although the Bank does not have any loans classified as non-accrual at
December 31, 1999, management has identified other possible credit problems as
follows (in thousands):

                    Special mention ............................      $1,482
                    Substandard ................................       2,078
                    Doubtful ...................................          74
                    Loss .......................................          --
                                                                      ------
                    Total ......................................      $3,634
                                                                      ======

These loans are performing loans but are classified due to payment
history, decline in the borrower's financial position or decline in collateral
value. Loans categorized as "special mention" are currently protected but are
potentially weak. These loans constitute an undue and unwarranted credit risk
but not to the point of justifying a classification of substandard. Loans
classified as "substandard" are inadequately protected by the current net worth
and paying capacity of the obligor or the value of the collateral pledged, if
any. Loans so classified must have a well-defined weakness or weakness that
jeopardizes the liquidation of the debt. Loans classified as "doubtful" have all
the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Loans classified as "loss" are considered
uncollectible and of such little value that their continuance as bankable assets
is not warranted. Management has provided specific allocations of the allowance
for possible loan losses of $94,000 relating to such loans. There are no other
loans which are not disclosed above, but where known information about possible
credit problems of borrowers causes management to have doubts as to the ability
of such borrowers to comply with the present loan repayment terms.





                                      -12-
<PAGE>   14



SUMMARY OF LOAN LOSS EXPERIENCE

         An analysis of the Bank's loss experience is furnished in the following
table for the periods indicated, as well as a breakdown of the allowance for
possible loan losses:


<TABLE>
<CAPTION>
                                                                    Years Ended December 31,
                                              ------------------------------------------------------------------
                                                1999           1998          1997          1996            1995
                                              -------        -------       -------        -------        -------
                                                                  (Dollars in thousands)
<S>                                           <C>            <C>           <C>            <C>            <C>
Balance at beginning
of period ..............................      $ 2,194        $ 1,828       $ 1,472        $ 1,062        $   762
Charge-offs:
Commercial, financial &
   agricultural ........................           25            112            36              4             --
Consumer loans .........................           66             47            40             18             38
Real estate-mortgage ...................           --             --            --             --             --
                                              -------        -------       -------        -------        -------
   Total charge-offs ...................           91            159            76             22             38
                                              -------        -------       -------        -------        -------
Recoveries:
Commercial, financial &
   agricultural ........................            9              2             1             --              4
Consumer loans .........................           18              8            11             12             14
   Total recoveries ....................           27             10            12             12             18
Net charge-offs ........................          (64)          (149)          (64)           (10)           (20)
                                              -------        -------       -------        -------        -------

Additions charged to operations ........          350            515           420            420            320
                                              -------        -------       -------        -------        -------

Balance at end of period ...............      $ 2,480        $ 2,194       $ 1,828        $ 1,472        $ 1,062
                                              =======        =======       =======        =======        =======

Ratio of net charge-offs during the
   period to average loans
   outstanding during the period .......          .02%           .07%          .04%           .01%           .02%
                                              =======        =======       =======        =======        =======



</TABLE>



                                      -13-
<PAGE>   15


         The allocation of the allowance for loan losses by loan category at
December 31 of the years indicated is presented below, along with percentage of
loans in each category to total loans:


<TABLE>
<CAPTION>
                                      1999              1998               1997              1996               1995
                               -----------------  ----------------   ----------------   ---------------   ---------------
                               AMOUNT    PERCENT  AMOUNT   PERCENT   AMOUNT   PERCENT   AMOUNT  PERCENT   AMOUNT  PERCENT
                               ------    -------  ------   -------   ------   -------   ------  -------   ------  -------
                                                                  (Dollars in Thousands)
<S>                            <C>        <C>     <C>        <C>     <C>        <C>     <C>       <C>     <C>         <C>
Commercial, financial
   and agricultural .....      $  882     30.3%   $  686     25.2%   $  489     23.1%   $  272    21.0%   $  189     21.6%
Real estate -
   construction .........         449     14.4       352     12.2       377     17.3       331    14.8       172     11.6
Real estate-mortgage ....         886     48.1       840     55.1       813     51.9       735    55.8       479     56.1
Consumer loans ..........         255      7.2       211      7.5       109      7.7        98     8.4        79     10.7
Unallocated .............           8      N/A       105      N/A        40      N/A        36     N/A       143      N/A
                               ------    -----    ------    -----    ------    -----    ------   -----    ------   ------
Total ...................      $2,480    100.0%   $2,194    100.0%   $1,828    100.0%   $1,472   100.0%   $1,062    100.0%
                               ======   ======    ======   ======    ======   ======    ======  ======    ======   ======

</TABLE>

LOAN LOSS RESERVE

         In considering the adequacy of the Company's allowance for possible
loan losses, management has focused on the fact that as of December 31, 1999,
30% of outstanding loans are in the category of commercial loans. Commercial
loans are generally considered by management as having greater risk than other
categories of loans in the Company's loan portfolio. However, approximately 94%
of these commercial loans at December 31, 1999 were made on a secured basis.
Management believes that the secured condition of the preponderant portion of
its commercial loan portfolio greatly reduces any risk of loss inherently
present in commercial loans.

         The Company's consumer loan portfolio is also well secured. At December
31, 1999, the majority of the Company's consumer loans were secured by
collateral primarily consisting of automobiles, boats and other personal
property. Management believes that these loans involve less risk than other
categories of loans.

         As of December 31, 1999, real estate mortgage loans constituted 48% of
outstanding loans. Approximately $59,663,000 or 46% of this category represents
first mortgage residential real estate mortgages where the amount of the
original loan generally does not exceed 80% of the appraised value of the
collateral. The remaining portion of this category consists primarily of
commercial real estate loans. Risk of loss for these loans is generally higher
than residential loans. Therefore, management has allocated a significant
portion of the allowance for loan losses to this category.

         The Company's Board of Directors monitors the loan portfolio quarterly
to enable it to evaluate the adequacy of the allowance for loan losses. The
loans are rated and the allowance established based on the assigned rating. The
provision for loan losses charged to operating expenses is based on this
established allowance. Factors considered by the Board in rating the loans
include delinquent loans, underlying collateral value, payment history and local
and general economic conditions affecting collectibility.



                                      -14-
<PAGE>   16

INVESTMENTS

         As of December 31, 1999, investment securities, including
mortgage-backed securities, comprised approximately 30% of the Bank's assets and
loans comprised approximately 62% of the Bank's assets. The Bank invests
primarily in obligations of the United States or obligations guaranteed as to
principal and interest by the United States, other taxable securities and in
certain obligations of states and municipalities. The majority of the
mortgage-backed securities are instruments of U.S. Government agencies. In
addition, the Bank enters into Federal Funds transactions with its principal
correspondent banks, and acts as a net seller of such funds. The sale of Federal
Funds amounts to a short-term loan from the Bank to another bank. Since the Bank
has been in a taxable position for the past several years and expects to be in a
taxable position in the future, more tax exempt securities have been purchased.

         The following tables present, for the periods indicated, the carrying
amount of the Bank's investment securities, including mortgage-backed
securities, separated by those available-for-sale and those held-to-maturity.
The Bank does not currently maintain a trading portfolio.


<TABLE>
<CAPTION>
                                                           December 31,
Investment                                    ------------------------------------
Category                                        1999          1998           1997
----------                                    --------      --------      --------
<S>                                           <C>           <C>           <C>

AVAILABLE-FOR-SALE:
Obligations of U.S. Treasury and
   other U.S. Agencies .................      $ 43,488      $ 25,881      $ 20,862
Obligations of States and Political
   Subdivisions ........................        14,149        14,254         4,189
Mortgage-backed securities .............        69,526        32,406        29,654
Other securities .......................           187            --           350
                                              --------      --------      --------
         Total .........................      $127,350      $ 72,541      $ 55,055
                                              ========      ========      ========

</TABLE>


<TABLE>
<CAPTION>
                                                       December 31,
Investment                                    ------------------------------
Category                                       1999         1998       1997
                                              ------      ------      ------
<S>                                           <C>         <C>         <C>
HELD-TO-MATURITY:
Obligations of U.S. Treasury and
   other U.S. Agencies .................      $    0      $1,354      $2,098
Obligations of States and Political
   Subdivisions ........................       2,809       2,817       2,974
Mortgage-backed securities .............         380         591         857
Other securities .......................           0          --          30
                                              ------      ------      ------
         Total .........................      $3,189      $4,762      $5,959
                                              ======      ======      ======

</TABLE>




                                      -15-
<PAGE>   17

         The following tables indicate for the year ended December 31, 1999, the
amount of investments due in (i) one year or less, (ii) one to five years, (iii)
five to ten years, and (iv) over ten years:


<TABLE>
<CAPTION>

Investment                                                               Weighted Average
Category                                                     Amount          Yield (1)
                                                            --------     ---------------
                                                             (Dollars in thousands)
<S>                                                         <C>               <C>
         AVAILABLE-FOR-SALE:
         Obligations of U.S. Treasury and other
            U.S. Agencies:
         O through 1 Yr ..............................      $  4,979          4.91%
         Over 1 through 5 Yrs ........................        15,644          5.13
         Over 5 through 10 Yrs .......................         9,433          4.97
         Over 10 Yrs .................................        13,432          7.73

         Obligations of States and Political
            Subdivisions:
         O through 1 Yr ..............................           249          5.50
         Over 1 through 5 Yrs ........................           562          6.29
         Over 5 through 10 Yrs .......................         1,328          6.10
         Over 10 Yrs .................................        12,010          6.79

         Other Securities:
         Over 10 Yrs .................................           187          7.69
         Mortgage-backed securities ..................        69,526          6.92
                                                            --------

            Total available-for-sale .................      $127,350          6.54%
                                                            ========      ========

</TABLE>

(1)  The Company has invested in tax exempt obligations. Yields are
     presented based on adjusted cost basis of securities
     available-for-sale. Yields based on carrying value would be lower since
     fair value exceeds adjusted cost. Yields on tax exempt obligations have
     been computed on a tax equivalent basis. Income from tax exempt
     obligations is exempt from federal income tax only, therefore only the
     federal statutory rate of 34% has been used to compute the tax
     equivalent yield.



                                      -16-
<PAGE>   18



<TABLE>
<CAPTION>

         Investment                                                  Weighted Average
         Category                                           Amount       Yield (1)
         ----------                                         ------   ---------------
                                                              (Dollars in thousands)
<S>                                                            <C>          <C>
         HELD-TO-MATURITY:
         Obligations of U.S. Treasury and other
            U.S. Agencies:
         O through 1 Yr ..............................      $    0             0%

         Obligations of States and Political
            Subdivisions:
         O through 1 Yr ..............................          75          8.00
         Over 1 through 5 Yrs ........................         370          8.67
         Over 5 through 10 Yrs .......................       2,087          7.15
         Over 10 Yrs .................................         277          7.25

         Mortgage-backed securities ..................         380          7.04
                                                            ------      --------

            Total held-to-maturity ...................      $3,189          7.34%
                                                            ======      ========


</TABLE>

(1)  The Company has invested in tax exempt obligations. Yields on tax
     exempt obligations have been computed on a tax equivalent basis. Income
     from tax exempt obligations is exempt from federal income tax only,
     therefore only the federal statutory rate of 34% has been used to
     compute the tax equivalent yield.


SELECTED FINANCIAL RATIOS

         Selected financial ratios for the periods indicated are as follows:


<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                                     -----------------------------------
                                                     1999            1998           1997
                                                     -----          -----          -----
<S>                                                   <C>            <C>            <C>
         Return on average assets ..........          1.20%          1.59%          1.55%
         Return on average equity ..........         19.23%         22.97%         24.35%
         Average equity to average .........
              assets ratio .................          6.22%          6.90%          6.35
         Dividend payout ratio .............         29.22%          6.24%            --%


</TABLE>



                                      -17-
<PAGE>   19



ASSET/LIABILITY MANAGEMENT

         It is the objective of the Bank to manage assets and liabilities to
provide a satisfactory, consistent level of profitability within the framework
of established cash, loan investment, borrowing and capital policies. Certain of
the officers of the Bank are responsible for monitoring policies and procedures
that are designed to ensure acceptable composition of the asset/liability mix,
stability and leverage of all sources of funds while adhering to prudent banking
practices. It is the overall philosophy of management to support asset growth
primarily through growth of core deposits, which include deposits of all
categories made by individuals, partnerships and corporations. Management of the
Bank seeks to invest the largest portion of the Bank's assets in commercial,
consumer and real estate loans.

         The Bank's asset/liability mix is monitored on a daily basis with a
monthly report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to the Bank's Board of Directors. The
objective of this policy is to control interest-sensitive assets and liabilities
so as to minimize the impact of substantial movements in interest rates on the
Bank's earnings.

CORRESPONDENT BANKING

                  Correspondent banking involves the providing of services by
one bank to another bank which cannot provide that service for itself from an
economic or practical standpoint. The Bank purchases correspondent services
offered by larger banks, including check collections, purchase of Federal Funds,
security safekeeping, investment services, coin and currency supplies, overline
and liquidity loan participations and sales of loans to or participations with
correspondent banks.

DATA PROCESSING

         The Bank has in-house data processing which provides a full range of
data processing services including an automated general ledger, deposit
accounting, commercial, real estate and installment lending data processing and
central information file ("CIF"). The Bank has an ATM processing agreement with
Intercept Systems, Inc.

FACILITIES

         The Bank subleases a two-story commercial facility (approximately
12,000 square feet) located in Franklin, Tennessee from the Company, which
houses the Bank's main office. The facility includes a main banking floor with 6
teller stations and 9 offices, and has an ATM (automated teller machine) and 2
drive-in windows. The second floor of the facility consists of the personnel
department, the marketing department, the call center, 4 executive offices and
the compliance office. The Bank also has an off-site ATM. The Company leases
these facilities from Gordon E. Inman, the Chairman of the Board of the Company.

         The Bank's Williamson Square branch is located in a 5,000 sq. foot
commercial building located on Highway 96 West at the Williamson Square Shopping
Center in Franklin. The branch banking floor includes 5 teller stations and 6
offices, and has an ATM (automated teller machine) and 2 drive-in windows.

         The Bank's Spring Hill branch is located in a 2,700 sq. foot building
in Spring Hill, Tennessee. The branch includes 4 offices and 3 teller stations,
2 drive-in windows and an ATM.


                                      -18-
<PAGE>   20



         The Bank's Brentwood branch is located in a 4,900 sq. foot leased
building in Brentwood, Tennessee. The branch has 6 offices, 4 teller stations, 4
drive-in windows and an ATM. A new branch office is being constructed in the
Brentwood area that is larger than the existing one and will replace the current
Brentwood branch when opened. The new branch facility is expected to open in the
second quarter of 2000.

         The Bank's Fairview branch is located in a 5,000 sq. foot building in
Fairview, Tennessee. The branch includes 4 offices, 4 teller stations, 2
drive-in windows and an ATM.

         The Bank leases facilities at four separate locations in Franklin which
house the Bank's financial services subsidiary, mortgage banking subsidiary,
insurance subsidiary, data processing, operations and administrative functions.
The Company leases these facilities from Gordon E. Inman, the Chairman of the
Board of the Company.

         The Bank is leasing office suites in Bartlett and Chattanooga,
Tennessee which house mortgage loan origination offices.

         The Bank has been approved to open a full service branch facility in
the Cool Springs area of Franklin. In October 1998, the Company purchased a
parcel of land and has begun construction of a permanent branch facility which
is expected to be completed in the second quarter of 2000. The Bank has also
been approved for a full service branch facility in the Fieldstone Farms area of
Franklin. In July 1999, the Company purchased a parcel of land and has begun
construction on the facility which is expected to open during the second quarter
of 2000.

EMPLOYEES

         The Company presently employs 170 persons on a full-time basis,
including 54 officers. The Company will hire additional persons as needed,
including additional tellers and financial service representatives.

MONETARY POLICIES

                  The results of operations of the Bank are affected by credit
policies of monetary authorities, particularly the Federal Reserve Board. The
instruments of monetary policy employed by the Federal Reserve Board include
open market operations in U.S. Government securities, changes in the discount
rate on member bank borrowings, changes in reserve requirements against member
bank deposits and limitations on interest rates which member banks may pay on
time and savings deposits. In view of changing conditions in the national
economy and in the money markets, as well as the effect of action by monetary
and fiscal authorities, including the Federal Reserve Board, no prediction can
be made as to possible future changes in interest rates, deposit levels, loan
demand or the business and earnings of the Bank.

SUPERVISION AND REGULATION

         The Company and the Bank operate in a highly regulated environment, and
their business activities are governed by statute, regulation and administrative
policies. The business activities of the Company and the Bank are closely
supervised by a number of federal regulatory agencies, including the Federal
Reserve Board, the Office of the Comptroller of the Currency ("OCC") and the
Federal Deposit Insurance Corporation ("FDIC").



                                      -19-
<PAGE>   21


         The Company is regulated by the Federal Reserve Board under the federal
Bank Holding Company Act, which requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before acquiring more than 5% of
the voting shares of any bank or all or substantially all of the assets of a
bank, and before merging or consolidating with another bank holding company. The
Federal Reserve Board (pursuant to regulation and published policy statements)
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary banks. In adhering to the Federal Reserve Board
policy the Company may be required to provide financial support to a subsidiary
bank at a time when, absent such Federal Reserve Board policy, the Company may
not deem it advisable to provide such assistance.

         Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, the Company or any other bank holding company located in Tennessee is
able to acquire a bank located in any other state, and a bank holding company
located outside Tennessee can acquire any Tennessee-based bank, in either case
subject to certain deposit percentage and other restrictions. The legislation
also provides that, unless an individual state has elected to prohibit
out-of-state banks from operating interstate branches within its territory,
adequately capitalized and managed bank holding companies will be able to
consolidate their multistate bank operations into a single bank subsidiary and
to branch interstate through acquisitions.

         De novo branching by an out-of-state bank is permitted only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state remains subject to applicable
state branching laws. Pursuant to the Riegle-Neal Interstate Banking and
Branching Efficiency Act, the State of Tennessee adopted legislation that
authorizes out-of-state banks to operate interstate branches within its
territory effective June 1, 1997.

         On November 12, 1999, the Gramm-Leach-Bliley Financial Services
Modernization Act was signed into law. The Financial Services Modernization Act
eliminates the barriers erected by the 1933 Glass-Steagall Act and amends the
Bank Holding Company Act of 1956, among other statutes. Further, it allows for
the affiliation of banking, securities and insurance activities in new financial
services organizations.

         A dominant theme of the new legislation is functional regulation of
financial services, with the primary regulator of the Company being the agency
which traditionally regulates the activity in which the Company wishes to
engage. For example, the Securities and Exchange Commission will regulate bank
securities transactions, and the various banking regulators will oversee banking
activities.

         The principal provisions of the Financial Services Modernization Act
will permit the Company, if it meets the standards for a "well- managed" and
"well-capitalized" institution and has at least a "satisfactory" Community
Reinvestment Act performance, to engage in any activity that is "financial in
nature," including security and insurance underwriting, investment banking, and
merchant banking investing in commercial and industrial companies. The Company,
if it satisfies the above criteria, can file a declaration of its status as a
"financial holding company" ("FHC") with the Federal Reserve, and thereafter
engage directly or through nonbank subsidiaries in the expanded range of
activities which the Financial Services Modernization Act identifies as
financial in nature. Further, the Company, if it elects FHC status, will be able
to pursue additional activities which are incidental or complementary in nature
to a financial activity, or which the Federal Reserve subsequently determines to
be financial in nature. The Financial Services Modernization Act will also allow
the Bank, with OCC approval, to control or hold an interest in a "financial
subsidiary" which may engage in, among other things, the activities specified in
the Financial Services Modernization Act as being financial in nature. Such a
subsidiary, though, is not permitted to engage in insurance underwriting or
annuity issuance, real estate development, investment activities, or





                                      -20-
<PAGE>   22

merchant banking activities. Further, any financial subsidiary that the Bank
created would generally be treated as an affiliate of the Bank, rather than as a
subsidiary for purposes of affiliate transaction restrictions of Sections 23A
and 23B of the Federal Reserve Act.

         It is expected that the Financial Services Modernization Act will
facilitate further consolidation in the financial services industry on both a
national and international basis, and will cause existing bank holding companies
to restructure their existing activities in order to take advantage of the new
powers granted and comply with their attendant requirements and conditions.

         A bank holding company which has not elected to become a FHC will
generally be prohibited from acquiring control of any company which is not a
bank and from engaging in any business other than the business of banking or
managing and controlling banks. However, these non-FHC bank holding companies
will still be able to engage in certain activities which have been identified by
the Federal Reserve Board to be so closely related to banking as to be a proper
incident thereto and thus permissible for bank holding companies.

         The permissible nonbanking activities, including those listed below,
are left unchanged by the Financial Services Modernization Act which does not
prohibit non-FHC bank holding companies from engaging in these activities.
Effective April 21, 1997, the Federal Reserve Board revised and expanded the
list of permissible non-banking activities, which includes the following
activities: extending credit and servicing loans; acting as investment or
financial advisor to any person, with certain limitations; leasing personal or
real property or acting as a broker with respect thereto; providing management
and employee benefits consulting advice and career counseling services to
non-affiliated banks and nonbank depository institutions; operating certain
nonbank depository institutions; performing certain trust company functions;
providing certain agency transactional services, including securities brokerage
services, riskless principal transactions, private placement services, and
acting as a futures commission merchant; providing data processing and data
transmission services; acting as an insurance agent or underwriter with respect
to limited types of insurance; performing real estate appraisals; arranging
commercial real estate equity financing; providing check-guaranty, collection
agency and credit bureau services; engaging in asset management, servicing and
collection activities; providing real estate settlement services; acquiring
certain debt which is in default; underwriting and dealing in obligations of the
United States, the states and their political subdivisions; engaging as a
principal in foreign exchange trading and dealing in precious metals; providing
other support services such as courier services and the printing and selling of
checks; and investing in programs designed to promote community welfare.

         In determining whether an activity is so closely related to banking as
to be permissible for bank holding companies, the Federal Reserve Board is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition and
gains in efficiency, that outweigh such possible adverse effects as undue
concentration of resources, decreased and unfair competition, conflicts of
interest and unsound banking practices. Generally, bank holding companies are
required to obtain prior approval of the Federal Reserve Board to engage in any
activity not previously approved by the Federal Reserve Board or to modify in
any material respect an activity for which Federal Reserve Board approval has
been obtained.

         As a national bank, the Bank is subject to the supervision of the OCC
and, to a limited extent, the FDIC and the Federal Reserve Board. With respect
to expansion, the OCC has approved several applications



                                      -21-
<PAGE>   23


submitted by banks in the State of Tennessee, allowing such banks to establish
branch offices outside the territorial limits of the counties in which the
national banks are located. Prior to such ruling, national banks were only
permitted to establish branch offices within the geographical limits of the
county in which their main office is situated (with the exception that (i) a
bank may branch into another county by acquiring the assets and deposits of a
closed state bank in such other county, and (ii) a bank may, in certain
situations, establish and operate as a branch bank any branch office previously
operated by an affiliate). The OCC's initial ruling on this matter was upheld in
federal court, as were similar rulings in other states. The Bank is also subject
to the Tennessee banking and usury laws restricting the amount of interest which
it may charge in making loans or other extensions of credit. In addition, the
Bank, as a subsidiary of the Company, is subject to restrictions under federal
law in dealing with the Company and other affiliates, if any. These restrictions
apply to extensions of credit to an affiliate, investments in the securities of
an affiliate and the purchase of assets from an affiliate.

         Loans and extensions of credit by national banks are subject to legal
lending limitations. Under federal law, a national bank may grant unsecured
loans and extensions of credit in an amount up to 15% of its unimpaired capital
and surplus to any person if the loans and extensions of credit are not fully
secured by collateral having a market value at least equal to their face amount.
In addition, a national bank may grant loans and extensions of credit to any one
person up to 10% of its unimpaired capital and surplus, provided that the
transactions are fully secured by readily marketable collateral having a market
value determined by reliable and continuously available price quotations at
least equal to the amount of funds outstanding. This 10% limitation is separate
from, and in addition to, the 15% limitation for unsecured loans. Loans and
extensions of credit may exceed the general lending limit if they qualify under
one of several exceptions. Such exceptions include certain loans or extensions
of credit arising from the discount of commercial or business paper, the
purchase of bankers' acceptances, loans secured by documents of title, loans
secured by U.S. obligations and loans to or guaranteed by the federal
government, and loans or extensions of credit which have the approval of the OCC
and which are made to a financial institution or to any agent in charge of the
business and property of the financial institution.

         Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the OCC. The Federal
Reserve Board and the OCC have issued risk-based capital guidelines for bank
holding companies and banks which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies on a consolidated basis with the banks owned by the
holding company. The OCC's risk capital guidelines apply directly to national
banks regardless of whether they are a subsidiary of a bank holding company.
Both agencies' requirements provide that banking organizations must have capital
equivalent to at least 8% of weighted risk assets. The risk weights assigned to
assets are based primarily on credit risks. Depending upon the riskiness of a
particular asset, it is assigned to a risk category.

         For example, securities with an unconditional guarantee by the United
States government are assigned to the lowest risk category, while a risk weight
of 50% is assigned to loans secured by owner-occupied one to four family
residential mortgages provided that certain conditions are met. The aggregate
amount of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk-weighted assets. At December 31, 1999, the
Company's consolidated total risk-based capital and Tier 1 ratios were 10.1% and
9.2% respectively. Both the Federal Reserve Board and the OCC have also
implemented minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital



                                      -22-
<PAGE>   24

adequacy of banks and bank holding companies. Under these rules, banking
institutions are required to maintain a ratio of at least 3% "Tier 1" capital to
total assets (net of goodwill, certain intangible assets, and certain deferred
tax assets). Tier 1 capital includes common stockholders equity, noncumulative
perpetual preferred stock and related surplus, and minority interests in the
equity accounts of consolidated subsidiaries.

         Both the risk-based capital guidelines and the leverage ratio are
minimum requirements. They are applicable to all banking institutions unless the
applicable regulatory authority determines that different minimum capital ratios
are appropriate for a particular institution based upon its circumstances.
Institutions operating at or near these ratios are expected to have
well-diversified risk, excellent control systems, high asset quality, high
liquidity, good earnings and in general, have to be considered strong banking
organizations, rated composite 1 under the CAMELS rating system for banks or the
BOPEC rating system for bank holding companies. The OCC requires that all but
the most highly rated banks and all banks with high levels of risk or
experiencing or anticipating significant growth will maintain ratios at least
100 to 200 basis points above the stated minimums. The Federal Reserve Board
requires bank holding companies without a BOPEC-1 rating to maintain a ratio of
at least 4% Tier I capital to total assets; furthermore, banking organizations
with supervisory, financial, operational, or managerial weaknesses, as well as
organizations that are anticipating or experiencing significant growth, are
expected to maintain capital ratios well above the 3% and 4% minimum levels.

         The FDIC adopted a rule substantially similar to that issued by the
Federal Reserve Board, establishing a minimum leverage ratio of 3% and providing
that FDIC-regulated banks with anything less than a CAMELS-1 rating must
maintain a ratio of at least 4%. In addition, the FDIC rule specifies that a
depository institution operating with less than the applicable minimum leverage
capital requirement will be deemed to be operating in an unsafe and unsound
manner unless the institution is in compliance with a plan, submitted to and
approved by the FDIC, to increase the ratio to an appropriate level. Finally,
the FDIC requires any insured depository institution with a leverage ratio of
less than 2% to enter into and be in compliance with a written agreement between
it and the FDIC (or the primary regulator, with the FDIC as a party to the
agreement). Such an agreement will nearly always contemplate immediate efforts
to acquire the capital required to increase the ratio to an appropriate level.
Institutions that fail to enter into or maintain compliance with such an
agreement will be subject to enforcement action by the FDIC.

         The OCC's guidelines provide that intangible assets are generally
deducted from Tier I capital in calculating a bank's risk-based capital ratio.
However, certain intangible assets which meet specified criteria ("qualifying
intangibles") are retained as part of Tier I capital. The OCC has modified the
list of qualifying intangibles, currently including only purchased credit card
relationships and mortgage and non-mortgage servicing assets, whether originated
or purchased and excluding any interest-only strips receivable related thereto.
Furthermore, the OCC's guidelines formerly provided that the amount of such
qualifying intangibles that may be included in Tier I was limited to a maximum
of 50% of total Tier I capital. The OCC has amended its guidelines to increase
the limitation on such qualifying intangibles from 50% to 100% of Tier I
capital, of which no more than 25% may consist of purchased credit card
relationships and non-mortgage servicing assets. Furthermore, banks may now
deduct from Tier I capital disallowed servicing assets on a basis that is net of
any associated deferred tax liability. Deferred tax liabilities netted this way
may not also be netted against deferred tax assets when determining the amount
of deferred tax assets that are dependent upon future taxable income.

         In addition, the OCC has adopted rules which clarify treatment of asset
sales with recourse not reported on a bank's balance sheet. Among assets
affected are mortgages sold with recourse under Fannie




                                      -23-
<PAGE>   25


Mae, Freddie Mac and Farmer Mac programs. The rules clarify that even though
those transactions are treated as asset sales for bank Call Report purposes,
those assets will still be subject to a capital charge under the risk-based
capital guidelines.

         The risk-based capital guidelines of the OCC, the Federal Reserve Board
and the FDIC explicitly include a bank's exposure to declines in the economic
value of its capital due to changes in interest rates to ensure that the
guidelines take adequate account of interest rate risk. Interest rate risk is
the adverse effect that changes in market interest rates may have on a bank's
financial condition and is inherent to the business of banking. The exposure of
a bank's economic value generally represents the change in the present value of
its assets, less the change in the value of its liabilities, plus the change in
the value of its interest rate off-balance sheet contracts. Concurrently, the
agencies issued a joint policy statement to bankers, effective June 26, 1996, to
provide guidance on sound practices for managing interest rate risk. In the
policy statement, the agencies emphasize the necessity of adequate oversight by
a bank's Board of Directors and senior management and of a comprehensive risk
management process. The policy statement also describes the critical factors
affecting the agencies' evaluations of a bank's interest rate risk when making a
determination of capital adequacy. The agencies' risk assessment approach used
to evaluate a bank's capital adequacy for interest rate risk relies on a
combination of quantitative and qualitative factors. Banks that are found to
have high levels of exposure and/or weak management practices will be directed
by the agencies to take corrective action.

         The OCC, the Federal Reserve Board and the FDIC recently added a
provision to the risk-based capital guidelines that supplements and modifies the
usual risk-based capital calculations to insure that institutions with
significant exposure to market risk maintain adequate capital to support that
exposure. Market risk is the potential loss to an institution resulting from
changes in market prices. The modifications are intended to address two types of
market risk: general market risk, which includes changes in general interest
rates, equity prices, exchange rates, or commodity prices, and specific market
risk, which includes particular risks faced by the individual institution, such
as event and default risks. The provision defines a new category of capital,
Tier 3, which includes certain types of subordinated debt. The provision
automatically applies only to those institutions whose trading activity, on a
worldwide consolidated basis, equals either (i) 10% or more of total assets or
(ii) $1 billion or more, although the agencies may apply the provision's
requirements to any institution for which application to the new standard is
deemed necessary or appropriate for safe banking practices. For institutions for
which the modifications apply, Tier 2 capital may not be included in the
calculation rendering the 8% credit risk ratio; the sum of Tier 2 and Tier 3
capital may not exceed 100% of Tier 1 capital; and Tier 3 capital is used in
both the numerator and denominator in the normal risk-based capital ratio
calculation to account for the estimated maximum amount that the value of all
positions in the institution's trading account, as well as all foreign exchange
and commodity positions, could decline within certain parameters set forth in a
model defined by the statute. Furthermore, beginning no later than January 1,
1999, covered institutions must "backtest," comparing the actual net trading
profit or loss for each of its most recent 250 days against the corresponding
measures generated by the statutory model. Once per quarter, the institution
must identify the number of times the actual net trading loss exceeded the
corresponding measures generated by the statutory model. Once per quarter, the
institution must identify the number of times the actual net trading loss
exceeded the corresponding measure and must then apply a statutory
multiplication factor based on the number for the next quarter's capital charge
for market risk.

         The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"Act"), enacted on December 19, 1991, provides for a number of reforms relating
to the safety and soundness of the deposit






                                      -24-
<PAGE>   26

insurance system, supervision of domestic and foreign depository institutions
and improvement of accounting standards. One aspect of the Act involves the
development of a regulatory monitoring system requiring prompt action on the
part of banking regulators with regard to certain classes of undercapitalized
institutions. While the Act does not change any of the minimum capital
requirements, it directs each of the federal banking agencies to issue
regulations putting the monitoring plan into effect. The Act creates five
"capital categories" ("well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized") which are defined in the Act and which will be used to
determine the severity of corrective action the appropriate regulator may take
in the event an institution reaches a given level of undercapitalization. For
example, an institution which becomes "undercapitalized" must submit a capital
restoration plan to the appropriate regulator outlining the steps it will take
to become adequately capitalized. Upon approving the plan, the regulator will
monitor the institution's compliance. Before a capital restoration plan will be
approved, any entity controlling a bank (i.e., a holding company) must guarantee
compliance with the plan until the institution has been adequately capitalized
for four consecutive calendar quarters. The liability of the holding company is
limited to the lesser of five percent of the institution's total assets or the
amount which is necessary to bring the institution into compliance with all
capital standards. In addition, "undercapitalized" institutions will be
restricted from paying management fees, dividends and other capital
distributions, will be subject to certain asset growth restrictions and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business.

         As an institution drops to lower capital levels, the extent of action
to be taken by the appropriate regulator increases, restricting the types of
transactions in which the institution may engage and ultimately providing for
the appointment of a receiver for certain institutions deemed to be critically
undercapitalized.

         The Act also provides that banks will have to meet new safety and
soundness standards. In order to comply with the Act, the Federal Reserve Board,
the OCC and the FDIC have adopted regulations defining operational and
managerial standards relating to internal controls, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits.

         Both the capital standards and the safety and soundness standards which
the Act seeks to implement are designed to bolster and protect the deposit
insurance fund.

         In response to the directive issued under the Act, the regulators have
established regulations which, among other things, prescribe the capital
thresholds for each of the five capital categories established under the Act.
The following table reflects the capital thresholds:


                                      -25-
<PAGE>   27



<TABLE>
<CAPTION>
                                                Total Risk-based                Tier 1 Risk-                  Tier 1
                                                    Capital                    Based Capital                 Leverage
                                                     Ratio                         Ratio                       Ratio
                                           -------------------------      ------------------------    ------------------------
<S>                                         <C>                            <C>                         <C>
Well capitalized (1)...................... less than or equal to 10%      less than or equal to 6%    less than or equal to 5%
Adequately capitalized (1)................ less than or equal to 8%       less than or equal to 4%    less than or equal to 4% (2)
Undercapitalized (4)...................... less than or equal to 8%       less than or equal to 4%    less than or equal to 4% (3)
Significantly undercapitalized (4)........ less than 6%                   less than 3%                less than 3%
Critically undercapitalized...............           --                             --                less than 2%

</TABLE>


(1)   An institution must meet all three minimums.
(2)   Greater than 3% for composite 1-rated institutions, subject to
      appropriate federal banking agency guidelines.
(3)   Less than 3% for composite 1-rated institutions, subject to appropriate
      federal banking agency guidelines.
(4)   An institution falls into this category if it is below the specified
      capital level for any of the three capital measures.
(5)   Ratio of tangible equity to total assets.

         As a national bank, the Bank is subject to examination and review by
the OCC. This examination is typically completed on-site at least every eighteen
months and is subject to off-site review as well. The Bank submits to the OCC
quarterly reports of condition, as well as such additional reports as may be
required by the national banking laws.

         As a bank holding company, the Company is required to file with the
Federal Reserve Board quarterly reports of its operations and such additional
information as the Federal Reserve Board may require pursuant to the Act. The
Federal Reserve Board may also make examinations of the Company and each of its
subsidiaries.

         The scope of regulation and permissible activities of the Company and
the Bank is subject to change by future federal and state legislation.

ITEM 2.  PROPERTIES.

MAIN OFFICE
         On January 5, 1989, the organizers of the Company entered into an
agreement with Gordon E. Inman, the Chairman of the Board of the Company, to
lease a two-story commercial building to house the Bank's office. Additional
space in this building was leased by the Company from Mr. Inman in May 1991 and
in June 1993. The two floors contain an aggregate of approximately 12,000 square
feet. The building is situated on approximately one-tenth acre located at 230
Public Square, Franklin, Tennessee 37064. On May 1, 1997 the Company amended the
original lease to include a 9,300 square foot building adjacent to the current
facility. The building, Franklin Financial Center, is located at 216 East Main
Street, Franklin, Tennessee 37064. On April 6, 1998 the Company again amended
the original lease to include a 4,000 square foot building which backs up to the
original property. This building, which houses the Bank's mortgage operations,
is located at 110 3rd Avenue, Franklin, TN 37064. On January 5, 1989, the
organizers of the Company also entered into a ground lease with Mr. Inman for
the lease of approximately .05 acres located adjacent to the proposed bank
office. The Company is using this parcel to accommodate the Banks drive-in
teller and bank window facility. Both leases provide for a term of 20 years,
with three five-year renewal options, with the lease terms commencing on May 15,
1989. The current monthly rental under these leases



                                      -26-
<PAGE>   28



total $37,495. The Company is subleasing the permanent facility and the adjacent
parcel to the Bank at a rate which includes reimbursement to the Company for
payment of rent, taxes, insurance, repairs and maintenance of the properties.

SPRING HILL BRANCH

         In May 1991, the Bank acquired a 3,000 square foot office building in
Spring Hill, Tennessee from Mr. Inman at a purchase price of $305,000. This
facility houses the Bank's Spring Hill branch.

WILLIAMSON SQUARE BRANCH

         In November 1993, the Bank entered into a 15 year lease from an
unrelated third party for a commercial building in the Williamson Square
Shopping Center on Highway 96E in Franklin, Tennessee. This facility houses the
Bank's Williamson Square branch. In January 1997, the Company purchased this
property for $980,000.

BRENTWOOD BRANCH

         In July 1994, the Bank entered into a long-term lease from an unrelated
third party for a commercial building in Brentwood, Tennessee. This facility
housed the Bank's Brentwood branch from April 1995 until February 2000. A new
4,900 square foot branch office has been constructed in the Brentwood area that
is larger than the existing one. This new branch facility opened in February
2000.

FAIRVIEW BRANCH

         In January 1997, the Bank purchased a parcel of land in Fairview,
Tennessee at a purchase price of $140,000. The Bank opened a branch office in a
mobile unit at this site in the second quarter of 1997. The Bank constructed a
5,000 sq. foot permanent facility at this location which opened the second
quarter of 1998.

ADDITIONAL BRANCHES

         The Bank has been approved to open a full service branch in the Cool
Springs area of Franklin. In October 1998, the Company purchased a parcel of
land in this area for $650,000. Expenditures related to the facility are
expected to be approximately $500,000, with completion expected in the second
quarter of 2000. The Bank has also been approved to open a full service branch
facility in the Fieldstone Farms area of Franklin. In July 1999, the Company
purchased a parcel of land in this area for $740,000 with additional
expenditures related to this facility expected to be approximately $700,000. The
expected completion date is during the second quarter of 2000.

ADMINISTRATIVE OFFICES

         In December 1993, the Bank entered into a six and one-half year lease
with Mr. Inman for office/warehouse space on Main Street in Franklin, Tennessee.
This lease was amended in January 1996 to include an additional 3,000 square
feet. The lease was amended in September 1998 to extend the term of the lease to
fifteen and one-half years. In August 1999, the lease was further amended to
include an additional 2,600 square feet. The lease, as amended, covers
approximately 9,600 square feet and, provides for monthly payments to Mr. Inman
of $9,100. The office/warehouse space houses "back office" functions for the
Bank, including data processing, proof and transit, bookkeeping, and accounting.

         The Bank also leases a building from Mr. Inman, the Home Loan Center,
which houses its mortgage origination functions. The lease provides monthly
payments to Mr. Inman of approximately $4,100.




                                      -27-
<PAGE>   29


         The Bank is leasing an office building from an unrelated third party in
downtown Franklin for future expansion. The monthly lease payments are
approximately $2,800.

ITEM 3.  LEGAL PROCEEDINGS.

         On November 24, 1998, the Bank, along with B & G Construction, Inc. and
two principals of B & G Construction, was sued by Manfred and Muriel Polk (the
"Polk Plaintiffs"). The lawsuit, styled Manfred Polk and Muriel Polk v. B & G
Construction, Inc., William H. Smith, George Bivens and Franklin National Bank,
In the United States District Court, Middle District of Tennessee, File No.
3-98-1089 Polk, alleges, among other things, that the Bank violated the civil
rights of the Plaintiffs by imposing an unacceptable condition to financing of
residential real estate proposed to be purchased by the Polk Plaintiffs. The
Polk Plaintiffs have demanded from the Bank and the other defendants $10 million
in compensatory damages and $15 million in punitive damages.

         The Bank filed a motion for summary judgment in August 17, 1999. On
March 27, 2000, the court ruled on the motion for summary judgment in favor of
the Bank. Accordingly, the Bank has been dismissed from this action, effective
March 27, 2000.

         On October 12, 1999, the Bank, along with William Hooper, was sued by
Milton C. Prowell, the Plaintiff ("Prowell"). The lawsuit, styled Milton C.
Prowell, An Individual & d/b/a: MC Prowell Landscaping v. William Hooper,
individually and as Agent for Franklin National Bank and Franklin National Bank,
In the Circuit Court for Maury County at Columbia, Tennessee, Civil Action #
8895 (the "Prowell Litigation") alleges, among other things, malicious
prosecution. William Hooper, a Williamson County Constable and two Maury County
Constables served a criminal complaint on Prowell, issued by the Williamson
County Court, for hindering Franklin National Bank, a secured creditor. William
Hooper and his company, All Points Auto Recovery, had previously been contracted
on a fee basis as an independent contractor by Franklin National Bank to recover
certain collateral on a defaulted note. Prowell has demanded from the Bank and
the other defendant $1.5 million in alleged compensatory and punitive damages.

         The Company believes that the claims of the plaintiff in the Prowell
Litigation are unfounded and completely without merit. The Bank denies all
liability with respect to these claims and intends vigorously to defend them.
The Prowell Litigation is at an early procedural stage, however, and it is not
possible at this time to determine the outcome of the action or the effect of
its resolution or the Company's financial condition on operating results.
Management of the Company and its legal counsel handling the defense of this
litigation believe that the Bank's defenses have merit; however, there can be no
assurance that this litigation will not have a material adverse effect on the
Company's results of operations for some period or the Company's financial
condition.

         Except as set forth above, 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.

         No matter was submitted during the fourth quarter ended December 31,
1999 to a vote of security holders of the Company.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         During the period covered by this report and to date, there has been no
established public trading market for the Company's common stock. As of March
15, 2000, the approximate number of holders of record of the Company's common
stock was 748.

         DIVIDENDS. In February 2000, the Company declared a $.0125 per share
cash dividend payable April 5, 2000 to shareholders of record on March 24, 2000.



                                      -28-
<PAGE>   30



         The Bank is restricted in its ability to pay dividends under the
national banking laws and by regulations of the OCC. Pursuant to 12 U.S.C. ss.
56, a national bank may not pay dividends from its capital. All dividends must
be paid out, of undivided profits, subject to other applicable provisions of
law. Payments of dividends out of undivided profits is further limited by 12
U.S.C. ss. 60(a), which prohibits a bank from declaring a dividend on its shares
of common stock until its surplus equals its shared capital, unless there has
been transferred to surplus not less than 1/10 of the Bank's net income of the
preceding two consecutive half year periods (in the case of an annual dividend).
Pursuant to 12 U.S.C. ss. 60(b), the approval of the OCC is required if the
total of all dividends declared by the Bank in any calendar year exceeds the
total of its net income for that year combined with its retained net income for
the preceding two years, less any required transfers to surplus.

         The company's credit facility restricts the payment of cash dividends
if the Bank's leverage ratio is less than 7%.

         RECENT SALES OF UNREGISTERED SECURITIES.

         On May 5, 1999, a director of the Company exercised warrants to
purchase 115,792 shares of common stock of the Company at a price of $0.3125 per
share. On November 19, 1999, another director of the Company exercised warrants
to purchase 385,952 shares of common stock of the Company at a price of $0.3125
per share.

         The issuances of securities described above were made in reliance on
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933 as transactions by an issuer not involving a public offering. All of the
securities were acquired by the recipients thereof for investment and with no
view toward the resale or distribution thereof. In each instance, the purchaser
had a pre-existing relationship with the Company, the offers and sales were made
without any public solicitation, the certificates bear restrictive legends and
appropriate stop transfer instructions have been or will be given to the
transfer agent. No underwriter was involved in the transactions and no
commissions were paid.







                                      -29-
<PAGE>   31



ITEM 6.           SELECTED FINANCIAL DATA.


<TABLE>
<CAPTION>
                                                           At or for the Year Ended December 31,
                                            --------------------------------------------------------------------
                                              1999           1998            1997           1996           1995
                                            --------       --------       --------       --------       --------
                                                                    (Dollars in thousands)
<S>                                         <C>            <C>            <C>            <C>            <C>
EARNINGS

Interest income                             $ 30,691       $ 26,438       $ 22,521       $ 16,710       $ 11,980
Interest expense                              15,185         13,142         10,896          7,731          6,024
Net interest income                           15,506         13,296         11,625          8,979          5,956
Provision for loan losses                        350            515            420            420            320
Non-interest income                            4,665          5,124          2,774          1,802          1,326
Non-interest expense                          13,006         10,251          7,841          6,359          5,277
Net income                                     4,470          4,886          3,888          2,565          1,123
Net income per share (basic)                $    .15       $    .17       $    .14       $    .09       $    .04
Net income per share (diluted)              $    .13       $    .15       $    .12       $    .08       $    .04

AVERAGE BALANCES

Assets                                      $373,901       $308,287       $251,333       $186,021       $137,070
Deposits                                     333,840        273,863        227,073        171,952        125,920
Loans, net                                   256,206        214,792        178,047        133,309         92,349
Earning assets                               350,377        288,447        235,271        173,339        126,408
Shareholders' equity                          23,250         21,271         15,970         12,159         10,002

BALANCE SHEET DATA

Assets                                      $430,400       $349,867       $274,433       $215,667       $162,361
Deposits                                     383,857        312,397        247,572        199,911        150,368
Loans, net                                   257,284        213,734        188,517        152,002        109,346
Earning assets                               403,057        326,473        256,225        201,913        148,741
Long-term obligations                          6,722          6,744            750             --             --
Shareholders' equity                          22,859         23,589         17,790         13,504         10,998
Book value per share                             .74            .77            .64            .49            .40
Dividends per share                              .04            .01             --             --             --

Shares outstanding (weighted)                 34,393         33,182         32,613         30,604         29,343

KEY RATIOS

Return on average assets                        1.20%          1.59%          1.55%          1.38%           .82%
Return on average shareholders' equity         19.23%         22.97%         24.35%         21.10%         11.23%
Shareholders' equity to total assets            5.31%          6.74%          6.48%          6.26%          6.77%


</TABLE>



                                      -30-
<PAGE>   32



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         DETAILS REGARDING THE COMPANY'S FINANCIAL PERFORMANCE ARE PRESENTED IN
THE FOLLOWING DISCUSSION, WHICH SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE HEREIN.

GENERAL

         Franklin National Bank represents virtually all the assets of Franklin
Financial Corporation. The Bank, located in Franklin, Tennessee, was opened in
December of 1989 and continues to experience substantial growth. The Bank has
five full service branches located throughout Williamson County and expects to
open two additional branches by the second quarter of 2000. In August 1996, the
Bank opened an insurance subsidiary, Franklin Financial Insurance (formerly
Hometown Insurance Agency). In October 1997, the Bank opened a financial
services subsidiary, Franklin Financial Securities. The subsidiary offers
financial planning and securities broker services through Legg Mason Financial
Partners. In December 1997, the Bank began operating its mortgage division as a
separate subsidiary, Franklin Financial Mortgage. Also in January 1998, the
mortgage subsidiary began a wholesale mortgage operation located in an office in
Bartlett, Tennessee and in August 1998, opened a retail mortgage origination
office in Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells
and services mortgage loans.

         In April 1999, the Bank entered into a memorandum of understanding with
the OCC, which obligates the Bank to take certain actions, including the
following: (i) adopt a strategic plan; (ii) hire additional administrative
personnel, including a full-time compliance officer and a full-time credit
administrator; (iii) appoint new board committees to oversee compliance and
community reinvestment act efforts; (iv) adopt and implement programs, policies,
procedures, and management information systems to improve consumer compliance
and loan administration; and (v) correct certain violations of the Home Mortgage
Disclosure Act. Management believes that the Bank has complied with all of the
requirements of the memorandum of understanding.

LIQUIDITY AND CAPITAL RESOURCES

         GENERAL. The Company maintains its liquidity through the management of
its assets and liabilities. Liquidity management involves meeting the funds flow
requirements of customers who may withdraw funds on deposit or have need to
obtain funds to meet their credit needs. Banks in general must maintain adequate
cash balances to meet daily cash flow requirements as well as satisfy reserves
required by applicable regulations. The cash balances held are one source of
liquidity. Other sources are provided by the investment portfolio, federal funds
sold, sale of loan participations, loan payments, brokered and public funds
deposits and the Company's ability to borrow funds as well as issue new capital.

         Liquidity is at an adequate level with cash and due from banks of
$12.7 million at December 31, 1999. Loans and securities scheduled to mature
within one year exceeded $168.8 million at December 31, 1999, which should
provide further liquidity. In addition, approximately $127.3 million of
securities are classified as available for sale to help meet liquidity needs
should they arise. The Company has lines of credit of $10.0 million with
lending institutions and the Bank is approved to borrow up to $10.0 million
in funds from the Federal Home Loan Bank and $33.5 million in federal funds
lines to assist with capital and liquidity needs. At December 31, 1999, the
Company had $7.3 million in borrowings against its line of credit and the
Bank had $5.0 million in federal funds purchased outstanding. Due to the
escalation of short-term



                                      -31-
<PAGE>   33

interest rates, the Bank has chosen to borrow against federal funds lines
instead of replacing some brokered deposits at higher costs. In February and
August 1998, the Bank entered into long-term convertible Federal Home Loan Bank
advances with an October 1 call option totaling $6.0 million. The Bank has $2.4
million outstanding in repurchase agreements to further develop its relationship
with a customer. The Bank had approximately $48.2 million in brokered deposits
at December 31, 1999 to help fund strong loan demand. The majority of these
deposits are $100,000 or less, but they are generally considered to be more
volatile than the Bank's core deposit base.

         Approximately $22.1 million in loan commitments are expected to be
funded within the next six months. Furthermore, the Bank has approximately $54.1
million of other loan commitments, primarily unused lines and letters of credit,
which may or may not be funded.

         CAPITAL EXPENDITURES. The Bank has been approved to open a full
service branch in the Cool Springs area of Franklin. In October 1998, the
Company purchased a parcel of land in this area for $650,000. Expenditures
related to the facility are expected to be approximately $500,000, with
completion expected in the first quarter of 2000. The Bank has been approved
to open a replacement branch facility in Brentwood, Tennessee, which opened
during the first quarter of 2000. The Brentwood facility will be leased with
annual payments of $124,000 and constructed to the Bank's specifications.
Accordingly, no renovation expenditures are expected. The Bank has also been
approved to open a full service branch facility in the Fieldstone Farms area
of Franklin. In July 1999, the Company purchased a parcel of land in this
area for $740,000 with additional expenditures related to this facility
expected to be approximately $700,000. The expected completion date is during
the second quarter of 2000. Total capital expenditures for 2000 are expected
to be approximately $1.7 million.

         Management monitors the Company's asset and liability positions in
order to maintain a balance between rate sensitive assets and rate sensitive
liabilities and at the same time maintain sufficient liquid assets to meet
expected liquidity needs. Management believes that the Company's liquidity is
adequate at December 31, 1999. Other than as set forth above, there are no
trends, demands, commitments, events or uncertainties that will result in or are
reasonably likely to result in the Company's liquidity increasing or decreasing
in any material way. The Company is not aware of any current recommendations by
the regulatory authorities which if they were to be implemented would have a
material effect on the Company's liquidity, capital resources, or results of
operations.

         CASH FLOWS. Net cash flow provided by operating activities was $18.7
million in 1999 compared to net cash flow used of $3.9 million in 1998, an
increase of $22.6 million. The increase in cash flow is due to the sale of
loans exceeding the loans originated for sale by $13.7 million in 1999 as
compared to the loans originated for sale exceeding the sale of loans by $7.9
million in 1998. The majority of this change is due to the increased sale of
loans in the mortgage banking segment. The increase in cash flow is offset
slightly by a decrease in net income of $416,000, coupled with decreases in
noncash items such as depreciation and other assets.

         Net cash used in investing activities was $99.2 million in 1999
compared to $64.2 million in 1998, representing a $35.0 million increase,
which was largely due to the banking segment. The increase in the change in
net loans of $45.5 million in 1999 compared to $37.6 million in 1998 was
offset by a decrease in federal funds sold of $8.2 million in 1999, compared
to an increase of $8.2 million in the prior year. The change in the net
investment portfolio also increased from $16.2 million in 1998 to $59.8
million in 1999.



                                      -32-
<PAGE>   34


         Net cash provided by financing activities was $80.1 million in 1999
compared to $70.5 million in 1998, a $9.6 million or 14% increase. The increase
is primarily due to an increase in deposits of $71.5 million in 1999 compared to
$64.8 million in the preceding year. The increase is attributed in part, to the
Company borrowing $5.6 million on its line of credit in 1999 as compared to
repaying $600,000 in 1998. During the first quarter of 1997, the Bank entered
into a $4.4 million repurchase agreement to further develop its relationship
with a customer, of which $1.0 million matured in 1999.

         INTEREST RATE SENSITIVITY. The following is an analysis of rate
sensitive assets and liabilities as of December 31, 1999:

<TABLE>
<CAPTION>
                                          0-3 MOS.        3-12 MOS.          1-5 YRS.    5 OR MORE YRS.      TOTAL
                                         ---------        ---------        ---------     --------------     ---------
<S>                                      <C>              <C>              <C>              <C>             <C>
Securities ........................      $   5,391        $  15,979        $  70,998        $  39,777       $ 132,145
Loans .............................        139,893           44,008           85,447            2,074         271,422
Federal funds sold ................             --               --               --               --              --
                                         ---------        ---------        ---------        ---------       ---------
Total rate sensitive assets .......        145,284           59,987          156,445           41,851         403,567
NOW deposits ......................         36,869               --               --               --          36,869
Savings deposits ..................         72,550               --               --               --          72,550
Time deposits .....................        120,576          106,645           10,118               --         237,339
Repurchase agreements .............          1,000               --            1,421               --           2,421
Other borrowings ..................         19,052               --               --               --          19,052

Total rate sensitive
   liabilities ....................        250,047          106,645           11,539               --         368,231
                                         ============================================================================
Excess (deficiency) of rate
   sensitive assets less
   rate sensitive liabilities .....      $(104,763)       $ (46,658)       $ 144,906        $  41,851       $  35,336
                                         =========        =========        =========        =========       =========
Excess (deficiency) as a
   percentage of earning
   assets .........................          (25.9)%          (11.5)%           35.9%            10.3%            8.8%

Cumulative excess
   (deficiency) ...................      $(104,763)       $(151,421)       $  (6,515)       $  35,336       $  35,336
                                         =========        =========        =========        =========       =========
Cumulative excess
   (deficiency) as a
   percentage of earnings
   assets .........................          (25.9)%          (37.4)%           (1.5)%            8.8%            8.8%

</TABLE>


         As indicated in the preceding table, the negative gap in the 0-3 month
and 3-12 month categories between rate sensitive assets and rate sensitive
liabilities would allow the Company to reprice its liabilities faster than its
assets in a falling rate environment which should have a positive effect on
earnings. However, in an increasing interest rate environment, the Company may
experience a short-term decrease in earnings. The above table has been prepared
based on principal payment due dates, contractual maturity dates or repricing
intervals on variable rate instruments. With regard to mortgage-backed
securities, the estimated prepayment date is used. Actual payments on
mortgage-backed securities are received monthly and therefore should occur
earlier than the contractual maturity date.



                                      -33-
<PAGE>   35



         CAPITAL ADEQUACY. Stockholders' equity at December 31, 1999, was $22.9
million or 5.3 % of total assets compared to $23.6 million or 6.7% of total
assets at December 31, 1998. See note 14 of the notes to consolidated financial
statements. As set forth in the following table, equity capital of the Company
and the Bank exceeded regulatory requirements as of December 31, 1999:


<TABLE>
<CAPTION>
                                                Minimum
                                For Capital    For "Well       Company
                                 Adequacy     Capitalized"   Consolidated      Bank's
                                 Purposes      Category         Actual         Actual
                                   ----          -----           ----          ------
<S>                                <C>            <C>             <C>            <C>
Leverage                           4.00%          5.00%           6.5%           8.1%
Tier 1 risk-based                  4.00%          6.00%           9.2%          11.4%
Total risk-based                   8.00%         10.00%          10.1%          12.3%


</TABLE>

FINANCIAL CONDITION

         Total assets have grown $80.5 million or 23.0% since December 31, 1998
to a total of $430.4 million at December 31, 1999. The growth during 1999 has
been funded by a $71.5 million increase in deposits, a $10.6 million increase in
other borrowings and net income of $4.5 million. Total deposits were $383.9
million at December 31, 1999.

         The Company continues to experience excellent loan demand as
demonstrated by the growth in net loans of $43.5 million or 20.4% since December
31, 1998. The allowance for loan losses increased $286,000, or 13.0%, from the
level at December 31, 1998, for a total of $2.5 million or approximately .9% of
total loans. The increase is primarily the result of growth in the loan
portfolio and not because of a decline in asset quality. The Company has seen
significant growth in construction and commercial real estate loans which carry
a higher reserve factor. Management believes that the level in the allowance for
loan losses is adequate at December 31, 1999. Management reviews in detail the
level of the allowance for loan losses on a quarterly basis. In addition,
Professional Bank Services, an external bank consulting firm, performs an annual
review of the loan portfolio to provide management an independent third-party
opinion regarding the adequacy of the allowance for loan losses. At December 31,
1999, the Bank had loans that were specifically classified as impaired of
approximately $298,000. The allowance for loan losses related to impaired loans
was $74,000 at December 31, 1999.

         At December 31, 1999 the cost of securities classified as
available-for-sale exceeded the fair value of the securities by $6.6 million. At
December 31, 1998, fair value of the securities classified as available-for-sale
exceeded the adjusted cost of securities by $257,000. As a result, unrealized
gain (loss) net of taxes of ($4.0 million) and $159,000 for year ended December
31, 1999 and the year ended December 31, 1998, respectively, is included in
"Other Comprehensive Income" in the statement of changes in stockholders'
equity. The change in unrealized gain (loss) is due to economic market
conditions and increase in interest rates during 1999. See notes 1 and 3 to the
consolidated financial statements.

         Total securities, including mortgage-backed securities, increased $23.2
million or 68.9% during 1999 due to overall Bank growth. Property and equipment
increased $1.0 million during 1999 primarily due to the purchase of land for the
branch facility in Fieldstone Farms. Accrued interest receivable increased
$688,000 during 1999 due to increases in the Bank's loan and securities
portfolios. Stockholders' equity decreased $1.1 million or 4.8% from December
31, 1998 to December 31, 1999. The $4.5 million increase




                                      -34-
<PAGE>   36


in stockholders' equity from earnings was partially offset by $1.3 million in
dividends declared and a $4.1 million decrease in other comprehensive income.

RESULTS OF OPERATIONS

FISCAL 1999 COMPARED WITH FISCAL 1998

         The Company had net income of $4.5 million in 1999 compared to $4.9
million in 1998. The Company had income before taxes of $6.8 million in 1999,
representing a 11.0% decrease from the $7.7 million recorded in 1998.

         Total interest income increased $4.3 million, or 16.1%, in 1999 as
compared to 1998, while total interest expense increased $2.0 million or
15.5% in 1999 as compared to 1998. The increase in total interest income is
attributable to an increase in average earning assets of $61.9 million, or
21.5%, in 1999, partially offset by a decrease in yield. The increase in
total interest is primarily due to the banking segment. Average interest
bearing liabilities increased $61.4 million or 23.9% in 1999. A slightly
lower interest rate environment in 1999 as compared to 1998, strong rate
competition, and fourth quarter 1999 deposit interest rate increase due to
year 2000 issues, resulted in a decrease in net yield from 4.61% in 1998 to
4.43% in 1999.

         The provision for loan losses was $350,000 in 1999 as compared to
$515,000 in 1998. Provisions for loan losses have been necessary due to
growth in the Bank's loan portfolio. Net charge-offs were $64,000 or .02% of
average loans outstanding in 1999, as compared to $149,000, or .07%, of
average loans outstanding in 1998.

         Total other income of $4.7 million in 1999 decreased $459,000, or 9.0%,
from 1998. The decrease was largely attributed to a decrease of $285,000, or
12.8% in loan origination fees related to the mortgage banking segment and a
decrease in security call option fees of $379,000 or 93.6% at the Bank. These
decreases were partially offset by an increase of $324,000 in service charges at
the Bank. The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," in 1998, which
superseded SFAS No. 122 "Accounting for Mortgage Servicing Rights." Mortgage
servicing income contributed $629,000 and $1.1 million in 1999 and 1998,
respectively, to the mortgage banking segment. Other service charges,
commissions and fees decreased $419,000, or 45.2%, primarily due to security
call option fees offset by income from the Bank's insurance subsidiary of
$236,000 in 1999 as compared to $131,000 in 1998. Income from the Bank's
securities subsidiary increased $119,000, or 43.5%, to $392,000 in 1999 as
compared to $273,000 in 1998.

         Total other expenses increased $2.8 million, or 26.9%, during 1999
as compared to 1998. Salaries and employee benefits increased $1.1 million,
or 18.7%, primarily due to additional personnel in the banking segment. The
Bank had 170 full time equivalent employees at December 31, 1999 as compared
to 156 a year earlier. Salaries and employee benefits for the mortgage
banking segment was $1.4 million in 1999 as compared to $1.1 million in 1998.
The increase is primarily due to an increase in support staff to handle
servicing and secondary marketing issues. Included in salaries and employee
benefits are commissions related to the mortgage banking segment of $300,000
in 1999 compared to $412,000 in 1998. Occupancy expense and furniture and
equipment expense increased $130,000, or 11.4%, and $143,000, or 17.7%,
respectively, from 1998 to 1999 primarily due to new facility and overall
Bank growth. Mortgage banking segment expenses increased $453,000 or 101% in
1999 as compared to 1998. The increase is primarily due to an increase in
mortgage servicing rights amortization and correspondent loan pricing fees on
wholesale loans originated. Gain (loss) on the sale of mortgage loans is a
realized loss of $447,000 in 1999 compared to a gain of $103,000 in 1998. The
primary reason for the loss is interest rate fluctuations. Other expenses
have increased as a result of the overall growth of the Bank.




                                      -35-
<PAGE>   37

FISCAL 1998 COMPARED WITH FISCAL 1997

         The Company had net income of $4.9 million in 1998 compared to $3.9
million in 1997. The Company had income before taxes of $7.7 million in 1998,
representing a 25% increase over the $6.1 million recorded in 1997.

         Total interest income increased $3.9 million, or 17%, in 1998 as
compared to 1997, while total interest expense increased $2.2 million or 21% in
1998 as compared to 1997. The increase in total interest income is attributable
to an increase in average earning assets of $53.2 million, or 22%, in 1998,
partially offset by a decrease in yield. Average interest bearing liabilities
increased $46.6 million or 22% in 1998. A slightly lower interest rate
environment in 1998 as compared to 1997 and strong rate competition resulted in
a decrease in net yield from 4.94% in 1997 to 4.61% in 1998.

         The provision for loan losses was $515,000 in 1998 as compared to
$420,000 in 1997. Provisions for loan losses have been necessary due to growth
in the Bank's loan portfolio. Net charge-offs were $149,000 or less than .07% of
average loans outstanding in 1998, as compared to $64,000, or .04%, of average
loans outstanding in 1997.

         Total other income of $5.2 million in 1998 increased $2.5 million, or
88%, from 1997. The increase was attributed to an increase of $295,000, or 27%,
in service charges on deposit accounts directly related to the increase in
deposit accounts and an increase of $1.1 million, or 97%, in the mortgage
banking segment. The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," in 1997, which
superseded SFAS No. 122 "Accounting for Mortgage Servicing Rights." Mortgage
servicing income contributed $1.1 million and $239,000 in 1998 and 1997,
respectively, to the mortgage banking segment. Other service charges,
commissions and fees increased $879,000, or 207%, primarily due to security call
option fees of $405,000 in 1998 as compared to $147,000 in 1997, income from the
Bank's insurance subsidiary of $131,000 in 1998 as compared to $53,000 in 1997
and income from the Bank's securities subsidiary of $273,000 in 1998 as compared
to $12,000 in 1997.

         Total other expenses increased $2.5 million, or 32%, during 1998 as
compared to 1997. Salaries and employee benefits increased $1.4 million or 31%
primarily due to additional personnel. The Bank had 156 full time equivalent
employees at December 31, 1998 as compared to 134 a year earlier. Salaries and
employee benefits for the mortgage banking segment was $1.1 million in 1998 as
compared to $697,000 in 1997. The increase is primarily due to an increase in
origination staff and support staff for the wholesale loan originations.
Included in salaries and employee benefits are commissions related to the
mortgage banking department of $412,000 in 1998 compared to $281,000 in 1997.
Occupancy expense and furniture and equipment expense increased $248,000, or
27%, and 131,000, or 19%, respectively, from 1997 to 1998 primarily due to the
new Fairview branch and Franklin Financial Insurance Center facilities. Mortgage
banking segment expenses increased $374,000 in 1998 as compared to 1997. The
increase is primarily due to an increase in mortgage servicing rights
amortization and correspondent loan pricing fees on wholesale loans originated.
Other expenses have increased as a result of the overall growth of the Bank.

ACCOUNTING PRONOUNCEMENTS

         In June 1998, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, was issued and will be effective for the Company in fiscal
year 2000. Management has not yet assessed the impact the adoption of this
Standard will have on the Company's financial statements.




                                      -36-
<PAGE>   38



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company's financial performance is subject to risk from interest
rate fluctuations. This interest rate risk arises due to differences between the
amount of interest-earning assets and the amount of interest-bearing liabilities
subject to repricing over a specified period and the amount of change in
individual interest rates. The liquidity and maturity structure of the Company's
assets and liabilities are important to the maintenance of acceptable net
interest income levels. An increasing interest rate environment negatively
impacts earnings as the Company's rate-sensitive liabilities generally reprice
faster than its rate-sensitive assets. Conversely, in a decreasing interest rate
environment, earnings are positively impacted. This potential asset/liability
mismatch in pricing is referred to as "gap" and is measured as rate sensitive
assets divided by rate sensitive liabilities for a defined time period. A gap of
1.0 means that assets and liabilities are perfectly matched as to repricing
within a specific time period and interest rate movements will not affect net
interest margin, assuming all other factors hold constant. Management has
specified gap guidelines for a one-year time horizon of between .7 and 1.3. At
December 31, 1999, the Company had a gap ratio of .6 for the one-year period
ending December 31, 2000. Thus, over the next twelve months, slightly more
rate-sensitive liabilities will reprice than rate-sensitive assets.

         A 200 basis point decrease in interest rates spread evenly during 2000
is estimated to cause an increase in net interest income of $544,000 as compared
to net interest income if interest rates were unchanged during 2000. In
comparison, a 200 basis point increase in interest rates spread evenly during
2000 is estimated to cause a decrease in net interest income of $544,000 as
compared to net interest income if rates were unchanged during 2000. This level
of variation is within the Company's acceptable limits. This simulation analysis
assumed that savings and checking interest rates had a low correlation to
changes in market rates of interest and that certain asset prepayments changed
as refinancing incentives evolved. Further, in the event of a change of such
magnitude in interest rates, the Company's asset and liability management
committee would likely take actions to further mitigate its exposure to the
change. However, given the uncertainty of specific conditions and corresponding
actions which would be required, the analysis assumed no change in the Company's
asset/liability composition.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following financial statements are filed with this report:

Independent Auditor's Report-Deloitte & Touche LLP
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity - Years ended
   December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998
   and 1997
Notes to Consolidated Financial Statements





                                      -37-
<PAGE>   39




FRANKLIN FINANCIAL
CORPORATION AND
SUBSIDIARY

Consolidated Financial Statements for each of the
Three Years in the Period Ended December 31, 1999
and Independent Auditors' Report



<PAGE>   40
INDEPENDENT AUDITORS' REPORT


Board of Directors
Franklin Financial Corporation and Subsidiary

We have audited the consolidated balance sheets of Franklin Financial
Corporation and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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 audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Franklin Financial Corporation
and Subsidiary as of December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.




/s/ DELOITTE & TOUCHE LLP


Nashville, Tennessee
March 6, 2000

<PAGE>   41

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS                                                                                              1999                    1998

<S>                                                                                           <C>                     <C>
Cash and cash equivalents (Notes 1 and 2)                                                     $  12,700,739           $  13,089,168
Federal funds sold                                                                                       --               8,229,000
Investment securities available-for-sale, at fair value (Notes 1 and 3)                          57,823,391              40,134,912
Mortgage-backed securities available-for-sale, at fair value (Notes 1 and 3)                     69,526,329              32,405,889
Investment securities held-to-maturity, fair value $2,813,070
  in 1999 and $4,395,168 in 1998 (Notes 1 and 3)                                                  2,808,453               4,170,665
Mortgage-backed securities held-to-maturity, fair value
$377,507 in 1999 and $602,166 in 1998 (Notes 1 and 3)                                               380,146                 591,450
Federal Home Loan and Federal Reserve Bank stock                                                  1,608,000               1,370,500
Loans held for sale (Notes 1 and 4)                                                              11,147,305              23,642,590

Loans (Notes 1 and 4)                                                                           259,763,411             215,927,533
Allowance for loan losses (Notes 1 and 5)                                                        (2,479,619)             (2,193,614)
                                                                                              -------------           -------------
            Net loans                                                                           257,283,792             213,733,919

Premises and equipment, net  (Notes 1 and 8)                                                      8,563,746               7,532,362
Accrued interest receivable                                                                       2,814,174               2,126,364
Mortgage servicing rights, net (Notes 1 and 6)                                                    1,584,578               1,256,593
Other assets (Notes 7 and 12)                                                                     4,159,290               1,584,032
                                                                                              -------------           -------------
TOTAL                                                                                         $ 430,399,943           $ 349,867,444
                                                                                              =============           =============

LIABILITIES AND STOCKHOLDERS' EQUITY

DEPOSITS:
  Noninterest-bearing                                                                         $  37,098,767           $  33,317,410
  Interest-bearing                                                                              346,758,272             279,079,559
                                                                                              -------------           -------------
            Total deposits (Note 9)                                                             383,857,039             312,396,969
Repurchase agreements (Note 1)                                                                    2,420,936               3,420,936
Other borrowings (Note 10)                                                                       19,051,613               8,423,840
Accrued interest payable                                                                          1,321,829               1,086,859
Other liabilities                                                                                   889,168                 950,064
                                                                                              -------------           -------------
            Total liabilities                                                                   407,540,585             326,278,668
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)
STOCKHOLDERS' EQUITY:
  Common stock, no par value - authorized, 500,000,000 shares; issued 31,052,683 and
    30,470,803 shares at December 31, 1999 and 1998, respectively                                11,344,844              11,091,517
  Retained earnings                                                                              15,502,311              12,338,051
  Accumulated other comprehensive (loss) income, net of tax                                      (3,987,797)                159,208
                                                                                              -------------           -------------
            Total stockholders' equity (Note 14)                                                 22,859,358              23,588,776
                                                                                              -------------           -------------

TOTAL                                                                                         $ 430,399,943           $ 349,867,444
                                                                                              =============           =============
</TABLE>

See notes to consolidated financial statements.


                                      -2-
<PAGE>   42

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------------------------------------------------
                                                                       1999                  1998                  1997

<S>                                                                <C>                  <C>                    <C>
INTEREST INCOME:
  Interest and fees on loans                                       $25,184,997          $ 22,140,914           $18,871,966
  Taxable securities                                                 4,612,768             3,655,304             3,193,657
  Tax-exempt securities                                                698,134               445,284               294,770
  Federal funds sold                                                   195,290               196,169               160,896
                                                                   -----------          ------------           -----------
            Total interest income                                   30,691,189            26,437,671            22,521,289

INTEREST EXPENSE:
  Certificates of deposit over $100,000                              5,601,123             5,268,052             4,442,619
  Other deposits                                                     8,722,758             7,134,683             5,962,588
  Federal Home Loan Bank advances                                      334,507               197,019                25,680
  Other borrowed funds                                                 526,791               541,916               465,249
                                                                   -----------          ------------           -----------
            Total interest expense                                  15,185,179            13,141,670            10,896,136
                                                                   -----------          ------------           -----------

NET INTEREST INCOME                                                 15,506,010            13,296,001            11,625,153
PROVISION FOR LOAN LOSSES (Note 5)                                     350,498               515,000               420,000
                                                                   -----------          ------------           -----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                 15,155,512            12,781,001            11,205,153

OTHER INCOME:
  Service charges on deposit accounts                                1,715,541             1,391,672             1,096,323
  Mortgage banking activities                                        1,945,402             2,229,942             1,132,835
  Gain on sale of investment securities                                103,650               301,840               121,089
  Other service charges, commissions and fees                          507,972               927,242               412,089
  Commissions on sale of annuities and brokerage activity              392,140               273,301                11,965
                                                                   -----------          ------------           -----------
            Total other income                                       4,664,705             5,123,997             2,774,301

OTHER EXPENSES:
  Salaries and employee benefits (Note 15)                           6,842,369             5,766,239             4,401,976
  Occupancy (Note 11)                                                1,279,074             1,148,688               901,174
  Mortgage banking                                                   1,060,295               450,195                76,584
  Furniture and equipment                                              947,828               805,067               673,752
  Communications and supplies                                          491,675               434,189               343,093
  Advertising and marketing                                            276,246               282,028               282,562
  FDIC and regulatory assessments                                      133,729               105,828                90,167
  Loss (gain) on sale of mortgage loans                                447,077              (102,971)                   --
  Other                                                              1,527,908             1,362,236             1,071,611
                                                                   -----------          ------------           -----------
            Total other expenses                                    13,006,201            10,251,499             7,840,919
                                                                   -----------          ------------           -----------
INCOME BEFORE INCOME TAXES                                           6,814,016             7,653,499             6,138,535
INCOME TAXES (Note 12)                                               2,343,569             2,767,001             2,250,064
                                                                   -----------          ------------           -----------
NET INCOME                                                         $ 4,470,447          $  4,886,498           $ 3,888,471
                                                                   ===========          ============           ===========
NET INCOME PER SHARE:
  Basic                                                            $      0.15          $       0.17           $      0.14
                                                                   ===========          ============           ===========
  Diluted                                                          $      0.13          $       0.15           $      0.12
                                                                   ===========          ============           ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic                                                             30,628,640            28,401,805            27,850,072
                                                                   ===========          ============           ===========
  Diluted                                                           34,392,719            33,181,868            32,612,828
                                                                   ===========          ============           ===========
</TABLE>

See notes to consolidated financial statements.


                                      -3-
<PAGE>   43

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------------------------------------------------------------------------------------

                                                                               Common Stock           Additional      Compre-
                                                                         -------------------------     Paid-in        hensive
                                                                          Shares         Amount        Capital        Income

<S>                                                                      <C>          <C>            <C>           <C>
BALANCE, DECEMBER 31, 1996                                               1,732,547    $  4,331,368   $ 5,253,987
Comprehensive income:
  Net income                                                                                                       $  3,888,471
  Other comprehensive income, net of tax:
    Unrealized holding gains on securities arising during the year
      (net of tax of $88,652)                                                                                           252,316
    Less:  Reclassification adjustment for gains included
      in net income (net of tax of $31,483)                                                                             (89,606)
                                                                                                                   ------------
  Other comprehensive income                                                                                            162,710
                                                                                                                   ------------
Comprehensive income                                                                                               $  4,051,181
                                                                                                                   ============
Change in par value of common stock from $2.50 to no par                        --       5,253,987    (5,253,987)
Two-for-one stock split                                                  1,732,547
Issuance of common stock                                                    30,087         234,276
Subsequent two-for-one stock split                                       3,495,181
                                                                        ----------    ------------   -----------
BALANCE, DECEMBER 31, 1997                                               6,990,362       9,819,631            --

  Net income                                                                                                       $  4,886,498
  Other comprehensive income, net of tax:
    Unrealized holding gains on securities arising during the year
      (net of tax of $59,305)                                                                                           168,790
    Less:  Reclassification adjustment for gains included
      in net income (net of tax of $78,241)                                                                            (223,362)
                                                                                                                   ------------
  Other comprehensive loss                                                                                              (54,572)
                                                                                                                   ------------
Comprehensive income                                                                                               $  4,831,926
                                                                                                                   ============
Four-for-one stock split                                                20,971,086
Issuance of common stock                                                 2,509,355       1,144,150
Tax benefit of stock options exercised                                                     127,736
Cash dividend declared; $0.01 per share
                                                                        ----------    ------------   -----------
BALANCE, DECEMBER 31, 1998                                              30,470,803      11,091,517            --
Comprehensive income:
  Net income                                                                                                          4,470,447
  Other comprehensive income, net of tax:
    Unrealized holding losses on securities arising during the
        year (net of tax of $2,791,350)                                                                              (4,215,414)
    Less:  Reclassification adjustment for gains included
      in net income (net of tax of $35,241)                                                                             (68,409)
Other comprehensive loss                                                                                             (4,147,005)
                                                                                                                   ------------
Comprehensive income                                                                                               $    323,442
                                                                                                                   ============
Exercise of stock options and warrants                                     581,880         236,988
Tax benefit of stock options exercised                                                      16,339
Cash dividend declared; $0.01 per share
Cash dividend declared; $0.0125 per share                                       --              --            --
                                                                        ----------    ------------   -----------
BALANCE, DECEMBER 31, 1999                                              31,052,683    $ 11,344,844   $        --
                                                                        ==========    ============   ===========

<CAPTION>



--------------------------------------------------------------------------------------------------------------------
                                                                                        Accumulated
                                                                                        Other Compre-
                                                                           Retained         hensive
                                                                           Earnings      Income (Loss)       Total

<S>                                                                     <C>             <C>              <C>
BALANCE, DECEMBER 31, 1996                                              $  3,867,790    $     51,070     $13,504,215
Comprehensive income:
  Net income                                                               3,888,471                       3,888,471
  Other comprehensive income, net of tax:
    Unrealized holding gains on securities arising during the year
      (net of tax of $88,652)
    Less:  Reclassification adjustment for gains included
      in net income (net of tax of $31,483)

  Other comprehensive income                                                                 162,710         162,710

Comprehensive income

Change in par value of common stock from $2.50 to no par                                                          --
Two-for-one stock split
Issuance of common stock                                                                                     234,276
Subsequent two-for-one stock split
                                                                        ------------    ------------     -----------
BALANCE, DECEMBER 31, 1997                                                 7,756,261         213,780      17,789,672
Comprehensive income:
  Net income                                                               4,886,498                       4,886,498
  Other comprehensive income, net of tax:
    Unrealized holding gains on securities arising during the year
      (net of tax of $59,305)
    Less:  Reclassification adjustment for gains included
      in net income (net of tax of $78,478)

  Other comprehensive loss                                                                   (54,572)        (54,572)

Comprehensive income

Four-for-one stock split
Issuance of common stock                                                                                   1,144,150
Tax benefit of stock options exercised                                                                       127,736
Cash dividend declared; $0.01 per share                                     (304,708)                       (304,708)
                                                                        ------------    ------------     -----------
BALANCE, DECEMBER 31, 1998                                                12,338,051         159,208      23,588,776
Comprehensive income:
  Net income                                                               4,470,447                       4,470,447
  Other comprehensive income, net of tax:
    Unrealized holding losses on securities arising during the
        year (net of tax of $2,791,350)
   Less:  Reclassification adjustment for gains included
      in net income (net of tax of $35,241)

Other comprehensive income                                                               (4,147,005)     (4,147,005)

Comprehensive income

Exercise of stock options and warrants                                                                       236,988
Tax benefit of stock options exercised                                                                        16,339
Cash dividend declared; $0.01 per share                                     (917,899)                       (917,899)
Cash dividend declared; $0.0125 per share                                   (388,288)             --        (388,288)
                                                                        ------------    ------------     -----------
BALANCE, DECEMBER 31, 1999                                              $ 15,502,311    $ (3,987,797)    $22,859,358
                                                                        ============    ============     ===========

</TABLE>


See notes to consolidated financial statements


                                      -4-
<PAGE>   44


FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-----------------------------------------------------------------------------------------------------------------------------------

                                                                             1999                   1998                    1997

<S>                                                                    <C>                    <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                           $   4,470,447          $   4,886,498           $   3,888,471
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      Depreciation, amortization and accretion                               934,473              1,023,785                 679,716
      Provision for loan losses                                              350,498                515,000                 420,000
      Deferred income taxes                                                   30,331                309,895                 (36,181)
      Loans originated for sale                                          (79,450,194)           (96,949,473)            (39,056,678)
      Proceeds from sale of loans                                         93,132,239             89,010,999              46,632,305
      Gain on sale of investment securities                                 (103,650)              (301,840)               (121,089)
      Loss (gain) on sale of loans                                           447,077               (141,109)                (92,202)
      Gain on sale of fixed assets                                                --                   (445)                   (234)
      Increase in accrued interest receivable                               (687,810)              (236,738)               (340,762)
      Increase in accrued interest payable                                   234,970                 30,001                 321,917
      Increase (decrease) in other liabilities                                47,056               (111,764)                 96,695
      Increase in other assets                                              (704,520)            (1,949,604)               (553,422)
                                                                       -------------          -------------           -------------
            Net cash provided by (used in) operating activities           18,700,917             (3,914,795)             11,838,536

CASH FLOWS FROM INVESTING ACTIVITIES:
  Decrease (increase) in federal funds sold                                8,229,000             (8,229,000)                233,000
  Proceeds from sales of securities available-for-sale                    10,529,143             80,045,418              34,646,948
  Proceeds from maturities of securities available-for-sale               13,744,394             16,342,143               8,875,201
  Proceeds from maturities of securities held-to-maturity                  1,570,736              1,185,289                 859,409
  Purchases of securities held-to-maturity                                        --                     --              (1,638,384)
  Purchases of securities available-for-sale                             (85,635,662)          (113,774,407)            (60,138,871)
  Purchases of Federal Home Loan and Federal Reserve Bank stock             (237,500)              (241,400)               (191,400)
  Net increase in loans                                                  (45,534,208)           (37,558,317)            (44,174,735)
  Purchases of premises and equipment, net                                (1,873,812)            (1,953,685)             (2,180,409)
                                                                       -------------          -------------           -------------
            Net cash used in investing activities                        (99,207,909)           (64,183,959)            (63,709,241)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in deposits                                                    71,460,070             64,825,260              47,660,883
  (Decrease) increase in repurchase agreements                            (1,000,000)            (1,000,000)              4,420,936
  Increase in other borrowings                                            10,627,773              5,394,299               1,979,541
  Dividends paid                                                          (1,222,607)                    --                      --
  Net proceeds from issuance of common stock                                 236,988              1,144,150                 234,276
  Tax benefit of stock options exercised                                      16,339                127,736                      --
                                                                       -------------          -------------           -------------
            Net cash provided by financing activities                     80,118,563             70,491,445              54,295,636
                                                                       -------------          -------------           -------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                        (388,429)             2,392,691               2,424,931
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              13,089,168             10,696,477               8,271,546
                                                                       -------------          -------------           -------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                 $  12,700,739          $  13,089,168           $  10,696,477
                                                                       =============          =============           =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for income taxes                           $   1,844,453          $   2,986,285           $   2,311,486
                                                                       =============          =============           =============
  Cash paid during the year for interest                               $  14,950,209          $  13,111,669           $  10,574,219
                                                                       =============          =============           =============
</TABLE>

See notes to consolidated financial statements.


                                      -5-
<PAGE>   45

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1999


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accounting policies of Franklin Financial Corporation and Subsidiary
      (the "Company") conform to generally accepted accounting principles and to
      general practices within the banking industry. The Company was
      incorporated on December 27, 1988 for the purpose of becoming a bank
      holding company. The Company's subsidiary bank opened for business on
      December 1, 1989.

      CONSOLIDATED SUBSIDIARY - The consolidated financial statements include
      the accounts of the Company's wholly-owned subsidiary, Franklin National
      Bank, Franklin, Tennessee (the "Bank") and its subsidiaries, Hometown Loan
      Company, Franklin Financial Insurance, Franklin Financial Mortgage and
      Franklin Financial Securities. Material intercompany transactions and
      balances have been eliminated.

      OPERATING SEGMENTS - The Company manages its business in two primary
      operating segments, the Bank and Franklin Financial Mortgage ("FFM").

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

      CASH AND CASH EQUIVALENTS include cash on hand and amounts due from banks.

      INVESTMENT AND MORTGAGE-BACKED SECURITIES - Securities are classified into
      three categories:  held-to-maturity, available-for-sale, and trading.

      Securities classified as held-to-maturity are stated at cost adjusted for
      amortization of premiums and accretion of discounts. The Company has the
      positive intent and ability to hold these securities to maturity.
      Securities classified as available-for-sale may be sold in response to
      changes in interest rates, liquidity needs and for other purposes.
      Available-for-sale securities are carried at fair value and include all
      debt and equity securities not classified as held-to-maturity or trading.
      Trading securities are those held principally for the purpose of selling
      in the near future and are carried at fair value. The Company does not
      currently maintain a trading portfolio.

      Unrealized holding gains and losses for available-for-sale securities are
      excluded from earnings and reported, net of any income tax effect, in
      accumulated other comprehensive income. Realized gains and losses for
      securities classified as either available-for-sale or held-to-maturity are
      reported in earnings based on the adjusted cost of the specific security
      sold.

      Premiums and discounts are recognized in interest income using the
      interest method over the period to maturity.

      LOANS - Loans are stated at the principal amount outstanding. Deferred
      loan fees and the allowance for loan losses are recorded as reductions of
      loans. Loan origination and commitment fees in excess of certain related
      costs are deferred and amortized as an adjustment of the related loan's
      yield over the contractual life of the loan. Interest income on loans is
      computed based on the outstanding loan balance.


                                      -6-
<PAGE>   46

      Loans are generally placed on nonaccrual status when a loan is
      specifically determined to be impaired or when principal or interest is
      delinquent for 90 days or more. Any unpaid interest previously accrued on
      those loans is reversed from income. Interest income generally is not
      recognized on specific impaired loans unless the likelihood of further
      loss is remote. Interest payments received on such loans are applied as a
      reduction of the loan principal balance. Interest income on other
      nonaccrual loans is recognized only to the extent of interest payments
      received.

      The allowance for loan losses is maintained at a level which, in
      management's judgment, is adequate to absorb credit losses inherent in the
      loan portfolio. The amount of the allowance is based on management's
      evaluation of the collectibility of the loan portfolio, including the
      nature of the portfolio, credit concentrations, trends in historical loss
      experience, specific impaired loans, and economic conditions. Allowances
      for impaired loans are generally determined based on collateral values or
      the present value of estimated cash flows. A loan is considered impaired
      when management has determined it is probable that all amounts due
      according to the contractual terms of the loan agreement will not be
      collected. The allowance is increased by a provision for loan losses,
      which is charged to expense and reduced by charge-offs, net of recoveries.

      FINANCIAL INSTRUMENTS - All derivative financial instruments held or
      issued by the Company are for purposes other than trading. Such
      instruments are entered into by the Company as hedges against exposure to
      interest rate risk. Such instruments are recorded at market value while
      the contracts are open with fees received recognized into income in the
      period the contract closes. The maximum term of such contracts used by the
      Company is 30 days.

      MORTGAGE BANKING ACTIVITIES - The Company originates and sells residential
      mortgage loans. Generally, such loans are sold at origination. Any loans
      held for sale are carried at the lower of cost or market value in the
      aggregate with respect to the entire portfolio.

      Servicing assets on loans sold are measured by allocating the previous
      carrying amount between the assets sold and the retained interests based
      on their relative fair values at the date of transfer. The Company's
      mortgage servicing rights are related to in-house origination serviced for
      others. The initial amount recorded as mortgage servicing rights is
      essentially the difference between the amount that can be realized when
      loans are sold, servicing released, as compared to loans sold, servicing
      retained.

      Mortgage servicing rights are amortized in proportion to, and over the
      period of, estimated net servicing revenues. Impairment of mortgage
      servicing rights is assessed based on the fair value of those rights.

      PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less
      accumulated depreciation and amortization. Depreciation has been computed
      on straight-line and accelerated methods, based on the estimated useful
      lives of the respective assets. Leasehold improvements are being amortized
      over the lease term on a straight-line basis.

      INCOME TAXES - The Company files a consolidated tax return with its
      subsidiary. Income taxes are allocated to members of the consolidated
      group on a separate return basis. Income taxes have been provided using
      the asset and liability method.

      SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - Securities sold under
      agreements to repurchase are treated as collateralized financing
      transactions and are recorded at the amounts at which the securities will
      subsequently be repurchased. It is the Company's policy to maintain
      collateral with a market value equal to or in excess of the principal
      amount borrowed under repurchase agreements. The Company monitors the
      market value of the underlying securities which collateralize the related
      liability on repurchase agreements, including accrued interest, and
      provides additional collateral when deemed appropriate.


                                      -7-
<PAGE>   47

      EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
      income by the weighted-average number of common shares outstanding during
      the year. Diluted earnings per common share is computed by dividing net
      income by the weighted-average number of common shares outstanding during
      the year plus additional potentially dilutive common shares calculated for
      stock options and warrants using the treasury stock method.

      COMPREHENSIVE INCOME - Comprehensive income is a more inclusive financial
      reporting methodology that includes disclosure of certain financial
      information that is not recognized in the calculation of net income, such
      as unrealized gains and losses on available-for-sale securities. It
      includes all changes in equity during a period except those resulting from
      investments by owners and distributions to owners.

      RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, SFAS No. 133,
      Accounting for Derivative Instruments and Hedging Activities was issued.
      In June 1999, SFAS No. 133 was amended by SFAS No. 137, Accounting for
      Derivative Instruments and Hedging Activities - Deferral of the Effective
      Date of FASB Statement No. 133.  SFAS No. 137 delays the effective date of
      SFAS No. 133 until fiscal years beginning after June 15, 2000.  The
      Company will adopt SFAS No. 133 effective January 1, 2001.  Management has
      not yet assessed the impact the adoption of this Standard will have on the
      Company's financial statements.

      Certain reclassifications have been made to the 1997 and 1998 amounts to
      conform to the 1999 presentation.

2.    RESTRICTED CASH BALANCES

      The Bank is required to maintain reserves, in the form of cash and
      deposits, with the Federal Reserve Bank against its deposit liabilities.
      Aggregate reserves of approximately $3,024,000 and $1,893,000 were
      maintained to satisfy federal regulatory requirements at December 31, 1999
      and 1998, respectively.

3.    INVESTMENT AND MORTGAGE-BACKED SECURITIES

      The following tables reflect the amortized cost and estimated fair values
      of debt, equity and mortgage-backed securities held at December 31, 1999
      and 1998. In addition, gross unrealized gains and losses are disclosed as
      of December 31, 1999 and 1998.

<TABLE>
<CAPTION>

                                                                        1999
                                    -----------------------------------------------------------------------------
                                                              GROSS              GROSS
                                      AMORTIZED            UNREALIZED          UNREALIZED               FAIR
AVAILABLE-FOR-SALE                      COST                  GAINS              LOSSES                 VALUE


<S>                                 <C>                   <C>                 <C>                   <C>
U.S. Treasury obligations           $ 24,571,107          $         --        $ (1,689,474)         $ 22,881,633
Obligations of U.S.
  government agencies                 21,966,656                 4,483          (1,364,628)           20,606,511
Obligations of state and
  political subdivisions              15,519,401                   427          (1,371,114)           14,148,714
Corporate                                289,317                    --            (102,784)              186,533
                                    ------------          ------------        ------------          ------------
Investment securities                 62,346,481                 4,910          (4,528,000)           57,823,391

Mortgage-backed securities            71,649,569                   920          (2,124,160)           69,526,329
                                    ------------          ------------        ------------          ------------
Total available-for-sale            $133,996,050          $      5,830        $ (6,652,160)         $127,349,720
                                    ============          ============        ============          ============
</TABLE>


                                      -8-
<PAGE>   48

<TABLE>
<CAPTION>

                                                                     1999
                                    ----------------------------------------------------------------------
                                                           GROSS               GROSS
                                     AMORTIZED          UNREALIZED           UNREALIZED            FAIR
HELD-TO-MATURITY                       COST                GAINS               LOSSES             VALUE

<S>                                 <C>                 <C>                  <C>                <C>
U.S. Treasury obligations           $       --          $       --           $       --         $       --
Obligations of U.S.
  government agencies                       --                  --                   --                 --
Obligations of state and
  political subdivisions             2,808,453              22,416              (17,799)         2,813,070
Corporate                                   --                  --                   --                 --
                                    ----------          ----------           ----------         ----------
Investment securities                2,808,453              22,416              (17,799)         2,813,070

Mortgage-backed securities             380,146                 172               (2,811)           377,507
                                    ----------          ----------           ----------         ----------

Total held-to-maturity              $3,188,599          $   22,588           $  (20,610)        $3,190,577
                                    ==========          ==========           ==========         ==========
</TABLE>


<TABLE>
<CAPTION>

                                                                     1998
                                    -----------------------------------------------------------------------
                                                           GROSS                GROSS
                                     AMORTIZED          UNREALIZED           UNREALIZED            FAIR
AVAILABLE-FOR-SALE                     COST                GAINS                LOSSES             VALUE

<S>                                 <C>                 <C>                  <C>                <C>
U.S. Treasury obligations           $16,001,994         $     3,878          $  (325,045)       $15,680,827
Obligations of U.S.
  government agencies                10,201,424              20,765              (21,752)        10,200,437
Obligations of state and
  political subdivisions             13,679,961             583,172               (9,485)        14,253,648
                                    -----------         -----------          -----------        -----------
Investment securities                39,883,379             607,815             (356,282)        40,134,912

Mortgage-backed securities           32,400,638              63,537              (58,286)        32,405,889
                                    -----------         -----------          -----------        -----------

Total available-for-sale            $72,284,017         $   671,352          $  (414,568)       $72,540,801
                                    ===========         ===========          ===========        ===========
</TABLE>


<TABLE>
<CAPTION>

                                                                      1998
                                    -----------------------------------------------------------------------
                                                           GROSS                GROSS
                                     AMORTIZED          UNREALIZED           UNREALIZED            FAIR
HELD-TO-MATURITY                        COST               GAINS                LOSSES             VALUE

<S>                                 <C>                 <C>                  <C>                <C>
U.S. Treasury obligations           $   502,152         $     2,179          $        --        $   504,331
Obligations of U.S.
  government agencies                   851,178               2,969                   --            854,147
Obligations of state and
  political subdivisions              2,817,335             219,355                   --          3,036,690
                                    -----------         -----------          -----------        -----------
Investment securities                 4,170,665             224,503                   --          4,395,168

Mortgage-backed securities              591,450              10,885                 (169)           602,166
                                    -----------         -----------          -----------        -----------

Total held-to-maturity              $ 4,762,115         $   235,388          $      (169)       $ 4,997,334
                                    ===========         ===========          ===========        ===========
</TABLE>


      Gross gains of $105,444, $319,254, and $148,280 and gross losses of
      $1,794, $17,414, and $27,191 were realized on sales of securities
      available for sale in 1999, 1998 and 1997, respectively.


                                      -9-
<PAGE>   49


      The amortized cost and fair value of debt securities at December 31, 1999,
      by contractual maturity are shown below. Expected maturities will differ
      from contractual maturities because borrowers may have the right to call
      or prepay obligations.


<TABLE>
<CAPTION>

                                             AVAILABLE-FOR-SALE                         HELD-TO-MATURITY
                                    ----------------------------------          ----------------------------------

                                      AMORTIZED                                  AMORTIZED
                                        COST               FAIR VALUE               COST               FAIR VALUE

<S>                                 <C>                   <C>                   <C>                   <C>
Due in one year or less             $  5,255,523          $  5,227,073          $     75,000          $     75,036
Due after 1-5 years                   16,871,629            16,206,293               370,134               381,061
Due after 5-10 years                  11,907,810            10,761,399             2,086,544             2,087,038
Due after ten years                   28,311,519            25,628,626               276,775               269,935
                                    ------------          ------------          ------------          ------------
                                      62,346,481            57,823,391             2,808,453             2,813,070
Mortgage-backed securities            71,649,569            69,526,329               380,146               377,507
                                    ------------          ------------          ------------          ------------
                                    $133,996,050          $127,349,720          $  3,188,599          $  3,190,577
                                    ============          ============          ============          ============
</TABLE>


      Fair value of securities is established by an independent pricing service
      as of the approximate dates indicated. Securities carried at $106,120,106
      and $51,859,206 at December 31, 1999 and 1998, respectively, were pledged
      to secure deposits and for other purposes.

      At December 31, 1999 and 1998, the Company did not hold investment
      securities of any single issuer, other than obligations of the U.S.
      Treasury and other U.S. government agencies, whose aggregate book value
      exceeded ten percent of stockholders' equity.

4.    LOANS

      Loans at December 31, 1999 and 1998 are summarized as follows:

<TABLE>
<CAPTION>

                                                     1999                    1998

<S>                                             <C>                     <C>
Commercial, financial and agricultural          $  82,287,934           $  60,417,742
Real estate - construction                         38,982,437              29,334,725
Real estate - mortgage                            130,482,480             132,326,776
Consumer                                           19,670,090              18,006,502
                                                -------------           -------------
                                                  271,422,941             240,085,745
Deferred loan fees                                   (512,225)               (515,622)
Allowance for possible loan losses                 (2,479,619)             (2,193,614)
                                                -------------           -------------

Total loans                                     $ 268,431,097           $ 237,376,509
                                                =============           =============
</TABLE>



      Direct and indirect loans to officers and directors during 1999 and 1998
      are as follows:


<TABLE>
<CAPTION>

                                           1999                  1998

<S>                                   <C>                   <C>
Balance at beginning of year          $ 2,122,107           $ 1,621,265
  New loan disbursements                1,630,370             1,885,494
  Repayments                             (899,389)           (1,384,652)
                                      -----------           -----------

Balance at end of year                $ 2,853,088           $ 2,122,107
                                      ===========           ===========
</TABLE>


                                      -10-
<PAGE>   50

      In addition, there were approximately $343,000 and $240,000 of undisbursed
      loan commitments to such parties at December 31, 1999 and 1998,
      respectively.

      During 1998, the Company began capitalization of servicing rights on
      certain commercial loans originated and sold with servicing retained. The
      total amount capitalized for these servicing rights was $215,145 and
      $186,820 in 1999 and 1998, respectively. Amortization of the servicing
      rights amounted to $38,677 and $11,748 during 1999 and 1998, respectively.

5.    ALLOWANCE FOR LOAN LOSSES

      Transactions in the allowance for loan losses were as follows:


<TABLE>
<CAPTION>

                                                                 1999                  1998                  1997

         <S>                                                 <C>                   <C>                   <C>
         Balance at beginning of year                        $ 2,193,614           $ 1,827,956           $ 1,471,904
         Provisions charged to operating expense                 350,498               515,000               420,000
         Loans charged off                                       (91,694)             (158,983)              (76,419)
         Recoveries on previously charged off loans               27,201                 9,641                12,471
                                                             -----------           -----------           -----------

         Balance at end of year                              $ 2,479,619           $ 2,193,614           $ 1,827,956
                                                             ===========           ===========           ===========
</TABLE>

      At December 31, 1999 and 1998, the Bank had loans that were specifically
      classified as impaired in the amount of approximately $298,000 and
      $131,000, respectively. The allowance for loan losses related to these
      impaired loans was approximately $74,000 and $33,000 at December 31, 1999
      and 1998, respectively. The average carrying value of impaired loans was
      approximately $367,000, $303,000 and $72,000 for the years ended December
      31, 1999, 1998 and 1997, respectively. Interest income of approximately
      $29,000, $13,000 and $12,000 was recognized on these impaired loans during
      the year ended December 31, 1999, 1998 and 1997, respectively.

6.    MORTGAGE BANKING

      The unpaid principal balances of mortgage loans serviced for others was
      approximately $124,112,688 and $76,866,500 at December 31, 1999 and 1998,
      respectively.

      Custodial balances maintained in connection with the foregoing loan
      servicing, and included in demand deposits, were approximately $2,089,000
      and $2,726,500 at December 31, 1999 and 1998, respectively.

      Mortgage servicing rights, net of amortization, totaled $1,584,578 and
      $1,256,593 in 1999 and 1998, respectively. Amortization of servicing
      rights amount to $296,846, $158,034, and $69,224 during 1999, 1998 and
      1997, respectively.

      For purposes of measuring impairment, the rights are stratified based on
      the predominant risk characteristics of loan type and loan term. The
      amount of impairment recognized, if any, is the amount by which the
      capitalized mortgage servicing rights for a stratum exceed their fair
      value.

7.    OTHER FINANCIAL INSTRUMENTS, COMMITMENTS AND CONTINGENCIES

      The Bank is a party to financial instruments with off-balance sheet risk
      in the normal course of business to meet the financing needs of its
      customers and to reduce its own exposure to fluctuation in interest rates.
      These financial instruments include commitments to extend credit, standby
      letters of credit, mortgage loans sold subject to repurchase provisions
      and futures contracts. Those instruments involve, to varying degrees,
      elements


                                      -11-
<PAGE>   51

      of credit and interest-rate risk in excess of the amount recognized in the
      consolidated balance sheets. The contract or notional amounts of those
      instruments reflect the extent of involvement the Bank has in those
      particular financial instruments.

      The Bank's exposure to credit loss in the event of nonperformance by the
      other party to the financial instrument for commitments to extend credit,
      standby letters of credit and loans sold subject to certain repurchase
      provisions is represented by the contractual or notional amount of those
      instruments. The Bank uses the same credit policies in making commitments
      and conditional obligations as it does for on-balance sheet instruments.
      For futures contracts, the contract or notional amounts do not represent
      exposure to credit loss. The Company controls the risk of its futures
      contracts through credit approvals, limits, and monitoring procedures.

<TABLE>
<CAPTION>

                                                                                                  CONTRACT OR
                                                                                                NOTIONAL AMOUNT
         <S>                                                                                    <C>
         Financial instruments whose contract amounts represent credit risk:
           Commitments to extend credit                                                           $ 66,540,337
           Credit card commitments                                                                     456,551
           Standby letters of credit                                                                 6,909,047
           Commitments to originate mortgages                                                        2,300,515
           Commitments to sell mortgages                                                             8,100,616
           Mortgage loans sold subject to repurchase provisions                                     13,511,886
</TABLE>

      Commitments to extend credit are agreements to lend to a customer as long
      as there is no violation of any condition established in the contract.
      Commitments generally have fixed expiration dates or other termination
      clauses and may require payment of a fee. Since many of the commitments
      will expire without being drawn upon, the total commitment amounts do not
      necessarily represent future cash requirements. The Bank evaluates each
      customer's creditworthiness individually. The amount of collateral
      obtained, if deemed necessary by the Bank upon extension of credit, is
      based on management's credit evaluation. Collateral held varies but may
      include accounts receivable, inventory, property, plant and equipment, and
      income-producing commercial properties.

      Standby letters of credit are conditional commitments issued by the Bank
      to guarantee the performance of a customer to a third party. Those
      guarantees are primarily issued to support public and private borrowing
      arrangements, including commercial paper, bond financing, and similar
      transactions. The credit risk involved in issuing letters of credit is
      essentially the same as that involved in extending loan facilities to
      customers.

      The Bank enters into various commitments to originate mortgage loans.
      These commitment obligations are considered in conjunction with the lower
      of cost or market valuation of loans held for sale.

      The Bank sells essentially all of its originated mortgage loans to
      governmental agencies and private investors. The Bank has entered into
      various commitments to sell mortgage loans as of December 31, 1999.

      The Company has, on occasion, written covered call options on U.S.
      Treasury Securities, which are contracts for delayed delivery of
      securities in which the seller agrees to make delivery at a specified
      future date of a specified instrument at a specified price or yield. Risks
      arise from the possible inability of counterparties to meet the terms of
      their contracts and from movements in securities values and interest
      rates. The Company uses such contracts in connection with its
      asset/liability management program in improving yield and managing
      interest rate exposure arising out of non-trading assets and liabilities.
      There were no outstanding positions held in U.S. Treasury note contracts
      at December 31, 1999 and 1998.

      The Bank primarily serves customers located in the Tennessee counties of
      Williamson, Maury and Davidson. As such, the Bank's loans, commitments and
      stand-by letters of credit have been granted to customers in that area.
      Concentration of credit by type of loan is presented in Note 4.


                                      -12-
<PAGE>   52

      In the normal course of business, the Company is involved in various legal
      proceedings. Management has concluded, based upon advice of counsel, that
      the result of these proceedings will not have a material effect on the
      Company's financial condition or results of operations.

8.    PREMISES AND EQUIPMENT

      Premises and equipment at December 31, 1999 and 1998 are summarized as
follows:

<TABLE>
<CAPTION>

                                                                         1999                   1998

            <S>                                                     <C>                    <C>
            Land                                                    $  1,822,249           $  1,086,122
            Buildings                                                  2,855,658              2,187,930
            Leasehold improvements - buildings                         3,631,482              3,586,441
            Furniture and equipment                                    3,786,435              3,361,520
                                                                    ------------           ------------
                                                                      12,095,824             10,222,013
            Less accumulated depreciation and amortization            (3,532,078)            (2,689,651)
                                                                    ------------           ------------

                                                                    $  8,563,746           $  7,532,362
                                                                    ============           ============
</TABLE>

9.    DEPOSITS

      A summary of deposits at December 31, 1999 and 1998 follows:

<TABLE>
<CAPTION>

                                                                         1999                   1998

            <S>                                                     <C>                    <C>
            Non-interest bearing demand                             $ 37,098,767           $ 33,317,410
            Interest-bearing demand                                   97,196,420             74,847,304
            Savings                                                   12,222,039             10,319,273
            Certificates of deposit of $100,000 or more              155,781,273            112,977,781
            Other time                                                81,558,540             80,935,201
                                                                    ------------           ------------

                                                                    $383,857,039           $312,396,969
                                                                    ============           ============
</TABLE>


      At December 31, 1999, the scheduled maturities of certificates of deposits
      and other time deposits are as follows:

<TABLE>
            <S>                                                                            <C>
            2000                                                                           $227,221,807
            2001                                                                              5,879,952
            2002                                                                              2,236,448
            2003                                                                                627,628
            Thereafter                                                                        1,373,978
                                                                                           ------------

                                                                                           $237,339,813
                                                                                           ============
</TABLE>

10.   OTHER BORROWINGS

      The Company has a $10,000,000 line of credit established with a lending
      institution secured by all of the outstanding capital stock of the Bank.
      The balance outstanding on the line at December 31, 1999 was $7,330,000.
      Interest floats at the lending bank's base rate, 7.315% at December 31,
      1999, and is payable quarterly. Principal payments are required annually
      on January 31 based on the outstanding principal balance. The Bank also
      has federal funds lines (or the equivalent thereof) with correspondent
      banks totaling approximately $33,500,000 at December 31, 1999. Federal
      funds lines of $5,000,000 were outstanding as of December 31, 1999.


                                      -13-
<PAGE>   53

      During 1997, the Company entered into a note payable with a lending
      institution in the amount of $753,639. Interest floats at the lending
      bank's base rate, 6.713% at December 31, 1999, and is payable monthly. The
      note is secured by the Williamson Square branch building. The amount
      outstanding at December 31, 1999 is $721,613.

      The Bank has a $10,000,000 line of credit with the Federal Home Loan Bank
      (FHLB) secured by a blanket pledge of 1-4 family residential mortgage
      loans. The arrangement is structured so that the carrying value of the
      loans pledged amounts to 150% of the principal balance of advances from
      the FHLB. At December 31, 1999, the bank had $6,000,000 outstanding in
      variable rate advances.

      The aggregate annual maturities of other borrowings during the five years
      ending December 31, 2004 are as follows:

<TABLE>
            <S>                                                                            <C>
            YEAR ENDING DECEMBER 31,

            2000                                                                           $12,378,000
            2001                                                                                50,400
            2002                                                                               623,213
            2003                                                                                    --
            2004                                                                                    --
            2005 and thereafter                                                              6,000,000
                                                                                           ------------
            Total                                                                          $ 19,051,613
                                                                                           ============
</TABLE>

11.   RELATED PARTY AND OTHER LEASES

      The Company has entered into agreements with the chairman of the board of
      the Company to lease certain banking facilities. Increases are made
      annually on property leased from the chairman based on the increase in the
      Consumer Price Index during the previous year. All but one of the leases
      provides for a term of twenty years with three, five year renewal options.
      The remaining lease provides for a term of six and one half years with
      four, five year renewal options. All leases are accounted for as operating
      leases. Net rent expense paid to the chairman amounted to $548,771 in
      1999, $489,255 in 1998, and $390,206 in 1997. Rent expense paid to
      unrelated parties amounted to $234,731 in 1999, $192,646 in 1998, and
      $148,806 in 1997.

      Future minimum lease payments, exclusive of any increases related to the
      Consumer Price Index, under these leases as of December 31, 1999 are as
      follows:


<TABLE>
<CAPTION>

                                                       RELATED
                                                        PARTY               OTHERS              TOTAL

            <S>                                       <C>                 <C>                 <C>
            2000                                      $  609,562          $  367,338          $  976,900
            2001                                         609,562             331,612             941,174
            2002                                         609,562             263,882             873,444
            2003                                         609,562             246,230             855,792
            2004                                         609,562             220,355             829,917
            Future years                               2,717,631             660,288           3,377,919
                                                      ----------          ----------          ----------

            Total                                     $5,765,441          $2,089,705          $7,855,146
                                                      ==========          ==========          ==========
</TABLE>


                                      -14-
<PAGE>   54

12.   INCOME TAXES

      Income taxes consist of the following:


<TABLE>
<CAPTION>

                                                          1999                1998                1997
            <S>                                       <C>                 <C>                 <C>
            Current:
             Federal                                  $ 1,882,211         $ 1,984,528         $ 1,911,915
             State                                        431,027             472,578             374,330
                                                      -----------         -----------         -----------
              Total current expense                     2,313,238           2,457,106           2,286,245
            Deferred:
             Federal                                       29,518             263,356             (30,754)
             State                                            813              46,539              (5,427)
                                                      -----------         -----------         -----------
              Total deferred expense (benefit)             30,331             309,895             (36,181)
                                                      -----------         -----------         -----------

            Total income taxes                        $ 2,343,569         $ 2,767,001         $ 2,250,064
                                                      ===========         ===========         ===========
</TABLE>

      Net deferred income tax assets and liabilities are included in other
      assets and other liabilities, respectively, on the balance sheet.
      Significant temporary differences between tax and financial reporting that
      give rise to net deferred tax assets (liabilities) at December 31, 1999
      and 1998 are as follows:

<TABLE>
<CAPTION>

                                                                              1999                1998
            <S>                                                           <C>                 <C>
            Deferred tax assets:
              Allowance for loan losses                                   $   961,527         $   844,341
              Unrealized loss on securities available-for-sale              2,658,533                  --
                                                                          -----------         -----------
                        Total deferred tax assets                           3,620,060             844,341

            Deferred tax liabilities:
              Mortgage servicing rights                                      (699,719)           (572,666)
              Accumulated depreciation                                       (274,526)           (280,303)
              FHLB stock dividends                                           (111,569)            (85,328)
              Unrealized gain on securities available-for-sale                     --             (97,576)
                                                                          -----------         -----------
                        Total deferred tax liabilities                     (1,085,814)         (1,035,873)
                                                                          -----------         -----------

            Net deferred tax asset (liability)                            $ 2,534,246         $  (191,532)
                                                                          ===========         ===========
</TABLE>

      Management believes that a valuation allowance against the deferred tax
      asset at December 31, 1999 is not considered necessary because it is more
      likely than not the deferred tax asset will be fully realized.


                                      -15-
<PAGE>   55

      A reconciliation of income taxes with the amount of income taxes computed
      by applying the federal statutory rate (34%) to pretax income follows:

<TABLE>
<CAPTION>

                                                                          1999                  1998                  1997

            <S>                                                       <C>                   <C>                   <C>
            Tax expense at statutory rate                             $ 2,316,765           $ 2,602,190           $ 2,087,102
            Increase (decrease) in taxes resulting from:
              Tax-exempt income                                          (237,366)             (151,397)             (100,222)
              State income taxes, net of federal tax benefit              220,950               290,425               247,058
              Disallowed interest expense                                  39,883                21,555                13,538
              Other, net                                                    3,337                 4,228                 2,588
                                                                      -----------           -----------           -----------

            Total income taxes                                        $ 2,343,569           $ 2,767,001           $ 2,250,064
                                                                      ===========           ===========           ===========
</TABLE>


13.   STOCK BASED COMPENSATION PLANS

      Organizers of the Company received warrants in connection with the
      Company's initial public offering granting the holders thereof the option
      to purchase 2,354,304 shares of common stock at $0.31 per share. In
      addition, the Company has an Incentive Stock Option Plan (the "Plan")
      which was adopted on April 19, 1990, by the Company's shareholders
      authorizing up to 200,000 shares for employees who are contributing
      significantly to the management or operation of the business of the
      Company as determined by the Company's Board of Directors or the committee
      administering the Plan. The Plan provides for the grant of options at the
      discretion of the Board of Directors of the Company or a committee
      designated by the Board of Directors to administer the Plan. The option
      exercise price must be at least 100% (110% in the case of a holder of 10%
      or more of the common stock) of the fair market value of the stock on the
      date the option is granted and the options are exercisable by the holder
      thereof in full at any time prior to their expiration in accordance with
      the terms of the Plan. Stock options granted pursuant to the Plan will
      expire on or before (1) the date which is the tenth anniversary of the
      date of the option is granted, or (2) the date which is the fifth
      anniversary of the date the option is granted in the event that the option
      is granted to a key employee who owns more than 10% of the total combined
      voting power of all classes of stock of the Company. All options granted
      prior to 1998 were immediately vested. In January 1998, certain options
      were granted and will vest evenly over five years. In 1996, an amendment
      to the plan increased the number of shares available for grant to 750,000
      shares and provided for the granting of non-qualified options to eligible
      employees and directors. The Plan provides for stock splits which would
      adjust the options outstanding, the option prices and the number of shares
      authorized by the Plan according to the terms of the stock split. As more
      fully discussed in Note 14, the Company declared a two-for-one stock split
      in 1997 and another two-for-one stock split in January 1998. Also, in May
      1998, the Company declared a four-for-one stock split. Based on these
      stock splits, the number of shares authorized under the Plan is currently
      12,000,000.

      All options expire within ten years from the date of grant except for
      120,000 options issued in 1995 which expire in five years and 904,000,
      800,000 and 200,000 options issued in 1997, 1998 and 1999, respectively,
      which expire in 15 years. The Company has continued to apply APB Opinion
      No. 25 and related interpretations in accounting for its plans.
      Accordingly, no compensation cost has been recognized for either plan. Had
      compensation cost for the plans been determined based on the fair value at
      the grant date for awards under those plans consistent with the method of
      Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
      for Stock-Based Compensation, the Company's net income and earnings per
      share would have been reduced to the pro forma amounts indicated below:


                                      -16-
<PAGE>   56

<TABLE>
<CAPTION>

                                                           1999                 1998                 1997

            <S>                                        <C>                  <C>                  <C>
            Net income
              As reported                              $ 4,470,447          $ 4,886,498          $ 3,888,471
              Pro forma                                  3,750,051            3,699,872            2,922,662
            Net income per share
              As reported:
                Basic                                  $      0.15          $      0.17          $      0.14
                Diluted                                       0.13                 0.15                 0.12
              Pro forma:
                Basic                                         0.12                 0.13                 0.11
                Diluted                                       0.11                 0.11                 0.10
</TABLE>


      In calculating the pro forma disclosures, the fair value of the options
      granted is estimated as of the date granted using the Black-Scholes option
      pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>

                                                              1999               1998               1997

<S>                                                        <C>                <C>               <C>
Dividend yield                                                0.9%               0.6%               N/A
Expected volatility                                            56%                46%                29%
Risk-free interest rate range                                 6.2%               5.5%           5.8% to 6.5%
Expected life                                              5-10 years         5-10 years          7 years
</TABLE>


      The weighted-average fair value of options, calculated using the
      Black-Scholes option pricing model, granted during 1999, 1998 and 1997 is
      $3.59, $1.56, and $0.59 per share, respectively.

      A summary of the status of the Company's stock option plans and warrants
      for each of the three years in the period ended December 31, 1999, and the
      changes during those years is presented below.


<TABLE>
<CAPTION>

                                                                                             WEIGHTED
                                                                         OPTIONS/             AVERAGE
                                                                         WARRANTS            EXERCISE
                                                                        OUTSTANDING            PRICE

            <S>                                                         <C>                  <C>
            Options and warrants outstanding
              at January 1, 1997                                         5,373,808           $   0.63
                Options granted                                          2,030,800               1.17
                Options exercised                                         (224,400)              0.84
                Options expired                                             (3,424)              0.35
                                                                         ---------

            Options and warrants outstanding
              at December 31, 1997                                       7,176,784               0.67
                Options granted                                          1,228,640               2.75
                Options and warrants exercised                          (2,478,872)              0.35
                                                                         ---------

            Options and warrants outstanding
              at December 31, 1998                                       5,926,552               1.24
                Options granted                                            323,475               5.75
                Options and warrants exercised                            (580,060)              0.39
                Options expired                                             (7,316)              2.96
                                                                         ---------

            Options outstanding at December 31, 1999                     5,662,651               1.66
                                                                         =========
</TABLE>


                                      -17-
<PAGE>   57

      The following table summarizes information about the stock options and
      warrants outstanding under the Company's plans at December 31, 1999:


<TABLE>
<CAPTION>

                                                 WEIGHTED        WEIGHTED
     RANGE OF                                    AVERAGE          AVERAGE
     EXERCISE                  NUMBER            EXERCISE        REMAINING             NUMBER
      PRICE                  OUTSTANDING          PRICE             LIFE             EXERCISABLE

   <S>                       <C>                 <C>             <C>                 <C>
   $0.31-$0.75                2,143,156           $ 0.68             5.73             2,143,156
   $0.76-$1.13                1,928,400           $ 1.13             9.31             1,928,400
   $1.14-$2.75                1,268,120           $ 2.75            11.12             1,149,624
      $5.75                     322,975           $ 5.75             8.59               279,000
                              ---------                                               ---------

                              5,662,651                                               5,500,180
                              =========                                               =========
</TABLE>



14.   CAPITAL

      During 1997, the shareholders approved a change in the Company's par value
      of common stock from $2.50 to no par. The change in par value did not
      affect any of the existing rights of shareholders and has been recorded as
      adjustments to additional paid in capital and common stock.

      Substantial restrictions are placed on the Company's subsidiary with
      respect to payment of dividends without prior regulatory approval. The
      extent of dividends which may be paid by a national bank is generally
      limited to net profits for any given year combined with the retained net
      profits of the two preceding years. Retained earnings totaling $13,906,447
      and $12,089,114 at December 31, 1999 and December 31, 1998, respectively,
      were subject to these restrictions with respect to payment of dividends.
      Cash dividends are also restricted, under the Company's line of credit,
      if the Bank's leverage capital ratio is less than 7%.

      The Company and the Bank are subject to various regulatory capital
      requirements administered by the federal banking agencies. Failure to meet
      minimum capital requirements can initiate certain mandatory - and possibly
      additional discretionary - actions by regulators that, if undertaken,
      could have a direct material effect on the Company's consolidated
      financial statements. Under capital adequacy guidelines and the regulatory
      framework for prompt corrective action, specific capital guidelines must
      be met that involve quantitative measures of assets, liabilities, and
      certain off-balance sheet items as calculated under regulatory accounting
      practices. Capital amounts and classifications are also subject to
      qualitative judgments by the regulators about components, risk weightings,
      and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require that the Company and the Bank maintain minimum amounts and ratios
      (set forth in the table below) of total and Tier I capital (as defined in
      the regulations) to risk-weighted assets (as defined), and of Tier I
      capital (as defined) to total average assets (as defined). Management
      believes, as of December 31, 1999 and 1998, that the Company and the Bank
      are in compliance with all capital adequacy requirements to which they are
      subject.

      As of December 31, 1999, the most recent notification from the regulatory
      agencies categorized the Bank as well capitalized under the regulatory
      framework for prompt corrective action. To be categorized as well
      capitalized, minimum total risk-based, Tier I risk-based, and Tier I
      leverage ratios must be maintained as set forth in the table. There are no
      conditions or events since that notification that management believes have
      changed the Bank's category.


                                      -18-
<PAGE>   58


  Actual capital amounts and ratios at December 31, 1999 and 1998, are as
follows:


<TABLE>
<CAPTION>

                                                                           TO BE WELL CAPITALIZED
                                                      FOR CAPITAL          UNDER PROMPT CORRECTIVE
                                                   ADEQUACY PURPOSES           ACTION PROVISIONS                ACTUAL
                                              --------------------------   ------------------------   -------------------------
             DECEMBER 31, 1999                  FRANKLIN                    FRANKLIN                   FRANKLIN
                                                NATIONAL        CON-        NATIONAL        CON-       NATIONAL        CON-
                                                  BANK        SOLIDATED       BANK        SOLIDATED      BANK        SOLIDATED

             <S>                              <C>            <C>           <C>            <C>         <C>           <C>
             Amount:
              Tier I to average
                assets                        $16,225,400    $16,320,280   $20,281,750        N/A     $33,020,124   $26,672,225
              Tier I to risk-
                weighted assets                11,564,172     11,600,812    17,346,258        N/A      33,020,124    26,672,225
              Total capital to risk-
                weighted assets                23,128,344     23,201,624    28,910,430        N/A      35,519,245    29,151,844

             Ratios:
              Tier I to average
                assets                                4.0%           4.0%          5.0%       N/A             8.1%          6.5%
              Tier I to risk-
                weighted assets                       4.0%           4.0%          6.0%       N/A            11.4%          9.2%
              Total capital to risk-
                weighted assets                       8.0%           8.0%         10.0%       N/A            12.3%         10.1%
</TABLE>


<TABLE>
<CAPTION>

                                                                           TO BE WELL CAPITALIZED
                                                      FOR CAPITAL          UNDER PROMPT CORRECTIVE
                                                   ADEQUACY PURPOSES           ACTION PROVISIONS                ACTUAL
                                              --------------------------   ------------------------   -------------------------
             DECEMBER 31, 1998                  FRANKLIN                    FRANKLIN                   FRANKLIN
                                                NATIONAL        CON-        NATIONAL        CON-       NATIONAL        CON-
                                                  BANK        SOLIDATED       BANK        SOLIDATED      BANK        SOLIDATED

             <S>                              <C>            <C>           <C>            <C>         <C>           <C>

            Amount:
              Tier I to average
                assets                        $13,222,960    $13,196,880    $16,528,700      N/A      $24,295,613   $23,286,405
              Tier I to risk-
                weighted assets                 9,584,440      9,617,444     14,376,660      N/A       24,295,613    23,286,405
              Total capital to risk-
                weighted assets                19,168,880     19,234,888     23,961,100      N/A       26,489,227    25,480,019

            Ratios:
              Tier I to average
                assets                               4.00%          4.00%          5.00%     N/A             7.34%         7.00%
              Tier I to risk-
                weighted assets                      4.00%          4.00%          6.00%     N/A            10.13%         9.68%
              Total capital to risk-
                weighted assets                      8.00%          8.00%         10.00%     N/A            11.05%        10.59%
</TABLE>

      In the calculation of basic and diluted earnings per share, net income is
      identical. Below is a reconciliation for the three years in the period
      ended December 31, 1999, of the difference between basic weighted average
      common shares outstanding and diluted weighted average common shares
      outstanding.

<TABLE>
<CAPTION>

                                                                 1999                1998                1997

            <S>                                               <C>                 <C>                 <C>
            Weighted average common shares - basic            30,628,640          28,401,805          27,850,072
            Effect of dilutive securities:
              Stock options                                    3,764,079           4,300,750           2,775,852
              Warrants                                                --             479,313           1,986,904
                                                              ----------          ----------          ----------

            Weighted average common shares - diluted          34,392,719          33,181,868          32,612,828
                                                              ==========          ==========          ==========
</TABLE>


                                      -19-
<PAGE>   59

      During March 1997, the Company declared a two-for-one common stock split
      which was payable on May 21, 1997, to shareholders of record on May 1,
      1997. During January 1998, the Company declared a two-for-one common stock
      split payable on February 19, 1998 to shareholders of record on February
      2, 1998.

      On March 25, 1998, the Company declared a four-for-one common stock split
      payable on June 3, 1998, to shareholders of record on April 20, 1998. All
      references to per share and weighted average share information in the
      consolidated financial statements reflect the stock splits.

15.   EMPLOYEE BENEFITS

      The Company has a 401(k) savings plan for all employees who have completed
      ninety days of service and are twenty-one years of age or more. The
      Company generally matches fifty percent of employee contributions to the
      plan up to a maximum of six percent of gross wages. The Company's
      contributions to the plan are included in salaries and employee benefits
      on the consolidated statements of income and amounted to $102,668,
      $78,658, and $56,815, in 1999, 1998 and 1997, respectively.

16.   FAIR VALUES OF FINANCIAL INSTRUMENTS

      The estimated fair values of the Company's financial instruments are as
      follows at December 31, 1999 and 1998:

<TABLE>
<CAPTION>

                                                                         1999                                    1998
                                                          ----------------------------------      ----------------------------------
                                                            CARRYING               FAIR             CARRYING                FAIR
                                                             AMOUNT                VALUE             AMOUNT                 VALUE

            <S>                                           <C>                   <C>               <C>                   <C>
            Financial assets:
              Cash and cash equivalents                   $ 12,700,739          $ 12,700,739      $ 13,089,168          $ 13,089,168
              Federal funds sold                                    --                    --         8,229,000             8,229,000
              Securities available-for-sale                127,349,720           127,349,720        72,540,801            72,540,801
              Securities held-to-maturity                    3,188,599             3,190,577         4,762,115             4,997,334
              Federal Home Loan and Federal
                Reserve Bank Stock                           1,608,000             1,608,000         1,370,500             1,370,500
              Loans                                        259,763,411           258,913,743       215,927,533           217,727,790
              Loans held for sale                           11,147,305            10,990,505        23,642,590            23,633,860
              Servicing rights                               1,749,298             2,219,578         1,431,665             1,431,665
              Accrued interest receivable                    2,814,174             2,814,174         2,126,364             2,126,364

            Financial liabilities:
              Deposits with defined maturities             237,339,814           237,217,165       193,912,983           194,650,266
              Deposits with undefined maturities           146,517,225           146,517,225       118,483,986           118,483,986
              Other borrowings and repurchase
                agreements                                  21,472,549            21,472,549        11,844,776            11,844,776
              Accrued interest payable                       1,321,829             1,321,829         1,086,859             1,086,859
              Off-balance sheet instruments                         --               125,514                --               473,354
</TABLE>

      The following methods and assumptions were used to estimate the fair value
      of each class of financial instruments for which it is practicable to
      estimate that value. These fair values are provided for disclosure
      purposes only and do not impact carrying values of financial statement
      amounts.

      Cash and Cash Equivalents - The carrying amounts reported in the balance
      sheet for cash and cash equivalents approximate those assets' fair values,
      which includes cash and due from banks.

      Federal Funds Sold - The carrying amount for federal funds sold
      approximates those assets' fair value. Investment Securities (including
      mortgage-backed securities) - Fair values for securities are based on
      quoted market prices, where available. If quoted market prices are not
      available, fair values are based on quoted market prices of comparable
      instruments.

      Federal Home Loan and Federal Reserve Bank Stock - The carrying amount for
      these securities approximates fair value.



                                      -20-
<PAGE>   60

      Loans - For variable-rate loans that reprice frequently and have no
      significant change in credit risk, fair values are based on carrying
      values. The fair values for other loans are estimated using discounted
      cash flow analyses, using interest rates currently offered for loans with
      similar terms to borrowers of similar credit quality.

      Loans Held for Sale - Fair values for loans held for sale are based on
      quoted market prices in the secondary market.

      Servicing Rights - The fair values of mortgage servicing rights and
      commercial servicing rights are estimated using discounted cash flows
      based on a current market interest rate.

      Accrued Interest - The carrying amounts of accrued interest approximate
      their fair values.

      Defined Maturity Deposits - The fair value for defined maturity deposits,
      primarily certificates of deposit, is calculated by discounting future
      cash flows to their present value. Future cash flows, consisting of
      principal and interest payments, are discounted using rates offered on
      similar instruments based on the remaining maturity.

      Undefined Maturity Deposits - The fair value of undefined maturity
      deposits is equal to the carrying value and includes demand deposits,
      savings accounts, NOW accounts and money market deposit accounts.

      Other Borrowings and Repurchase Agreements - The carrying amounts of other
      borrowings and repurchase agreements approximate their fair values.

      Off-Balance Sheet Instruments - Fair values for off-balance sheet lending
      commitments are based on fees currently charged to enter into similar
      agreements, taking into account the remaining terms of the agreements and
      the counterparties' credit standings. The fees charged for financial
      futures contracts are also representative of the fair value of such
      contracts.

17.   PARENT COMPANY ONLY FINANCIAL INFORMATION

      Financial information for Franklin Financial Corporation (parent company)
      as of December 31, 1999 and 1998 and for each of the three years in the
      period ended December 31, 1999 is as follows:

<TABLE>
<CAPTION>

            CONDENSED BALANCE SHEETS                          1999                 1998

            <S>                                           <C>                  <C>
            ASSETS

            Cash                                          $    146,532         $     87,187
            Investment in subsidiary                        29,108,492           24,847,999
            Other                                            3,345,729            2,385,118
                                                          ------------         ------------

            TOTAL                                         $ 32,600,753         $ 27,320,304
                                                          ============         ============

            LIABILITIES AND STOCKHOLDERS' EQUITY

            Liabilities                                   $ 10,140,176         $  3,731,528
            Stockholders' equity                            22,460,577           23,588,776
                                                          ------------         ------------

            TOTAL                                         $ 32,600,753         $ 27,320,304
                                                          ============         ============
</TABLE>


                                      -21-
<PAGE>   61

<TABLE>
<CAPTION>

            CONDENSED STATEMENTS OF INCOME                   1999                  1998                  1997

            <S>                                          <C>                   <C>                   <C>
            INCOME:
              Management fees and rental income          $    442,868          $    305,015          $    164,248
              Interest income                                   1,827                 1,918                 2,016
                                                         ------------          ------------          ------------
                                                              444,695               306,933               166,264
            EXPENSES:
              Interest expense                                258,267               232,861               218,336
              Salaries and employee benefits                  280,744               177,585                23,336
              Other                                           293,307               246,503               147,039
                                                         ------------          ------------          ------------
                                                              832,318               656,949               388,711
            LOSS BEFORE INCOME TAXES AND
              EQUITY IN UNDISTRIBUTED
              EARNINGS OF SUBSIDIARY                         (387,623)             (350,016)             (222,447)

            INCOME TAX BENEFIT                                151,791               118,999                75,631
                                                         ------------          ------------          ------------

            LOSS BEFORE EQUITY IN
              UNDISTRIBUTED EARNINGS
              OF SUBSIDIARY                                  (235,832)             (231,017)             (146,816)

            EQUITY IN UNDISTRIBUTED
              EARNINGS OF SUBSIDIARY                        4,706,279             5,117,515             4,035,287
                                                         ------------          ------------          ------------

            NET INCOME                                   $  4,470,447          $  4,886,498          $  3,888,471
                                                         ============          ============          ============
</TABLE>


                                      -22-
<PAGE>   62

<TABLE>
<CAPTION>

            CONDENSED STATEMENTS OF CASH FLOWS:                                      1999               1998               1997

            <S>                                                                  <C>                <C>                <C>
            CASH FLOWS FROM OPERATING ACTIVITIES:
              Net income                                                         $ 4,470,447        $ 4,886,498        $ 3,888,471
              Adjustments to reconcile net income
                to net cash used in operating activities:
                  Depreciation                                                        25,245             25,245             23,141
                  Equity in undistributed earnings of subsidiary                  (4,706,279)        (5,117,515)        (4,035,287)
                  Decrease (increase) in other assets                               (249,729)          (374,223)           (72,997)
                  Increase in other liabilities                                       65,213            117,632             15,167
                                                                                 -----------        -----------        -----------
                      Net cash used in operating activities                         (395,103)          (462,363)          (181,505)

            CASH FLOWS FROM INVESTING ACTIVITIES:
                Purchase of premises and equipment                                  (736,127)          (656,894)          (984,540)
                                                                                 -----------        -----------        -----------
                      Net cash used in investing activities                         (736,127)          (656,894)          (984,540)

            CASH FLOWS FROM FINANCING ACTIVITIES:
                Dividends paid                                                    (1,222,607)                --                 --
                Dividends paid from subsidiary                                     1,100,000                 --                 --
                Net proceeds from issuance of common stock                           253,327          1,271,886            234,276
                Purchase of subsidiary stock                                      (5,200,000)                --         (1,100,000)
                Proceeds from/(repayments) of borrowings, net                      6,259,855            (85,701)         1,979,541
                                                                                 -----------        -----------        -----------
                      Net cash provided by financing activities                    1,190,575          1,186,185          1,113,817
                                                                                 -----------        -----------        -----------

            NET INCREASE (DECREASE) IN CASH                                           59,345             66,928            (52,228)
            CASH AT BEGINNING OF YEAR                                                 87,187             20,259             72,487
                                                                                 -----------        -----------        -----------
            CASH AT END OF YEAR                                                  $   146,532        $    87,187        $    20,259
                                                                                 ===========        ===========        ===========
</TABLE>

18.   SEGMENT REPORTING

      The Company's reportable segments are determined based on management's
      internal reporting approach, which is by operating subsidiaries. The
      reportable segments of the Company are comprised of the Bank, excluding
      its subsidiaries, and the Mortgage Banking segment, Franklin Financial
      Mortgage. The Bank provides a variety of banking services to individuals
      and businesses through its branches in Brentwood, Franklin, Fairview and
      Spring Hill, Tennessee. Its primary deposit products are demand deposits,
      savings deposits, and certificates of deposit, and its primary lending
      products are commercial business, construction, real estate mortgage, and
      consumer loans. The Bank primarily earns interest income from loans and
      investments in securities. It earns noninterest income primarily from
      deposit and loan fees. The Mortgage Banking segment originates and sells
      residential mortgage loans. It sells loan originations into the secondary
      market, but retains much of the applicable servicing. As a result of the
      retained servicing, the Mortgage Banking segment capitalizes mortgage
      servicing rights into income and amortizes these rights over the estimated
      lives of the associated loans. Its primary revenue is noninterest income,
      but it also reports interest income earned on warehouse balances waiting
      for funding. The segment originates retail mortgage loans in the Franklin
      and Chattanooga areas of Tennessee. It also originates wholesale mortgage
      loans through correspondent relationships with other banks. The All Other
      segment consists of insurance and securities subsidiaries and the bank
      holding company operations which do not meet the quantitative thresholds
      for separate disclosure. The revenue earned by the insurance and
      securities subsidiaries is reported in noninterest income in the
      consolidated financial statements. No transactions with a single customer
      contributed 10% or more of the Company's total revenue. The accounting
      policies for each segment are the same as those used by the Company. The
      segments include overhead allocations and intercompany transactions that
      were recorded at estimated market prices. All intercompany transactions
      have


                                      -23-
<PAGE>   63

      been eliminated to determine the consolidated balances. The results of the
      two reportable segments and all other segments of the Company are included
      in the following table.


<TABLE>
<CAPTION>

                                                                                       1999
                                                -----------------------------------------------------------------------------------
                                                                    MORTGAGE
                                                     BANK           BANKING          ALL OTHER       ELIMINATIONS      CONSOLIDATED

     <S>                                        <C>              <C>               <C>               <C>               <C>
     Total interest income                      $ 29,348,735     $  1,408,262      $  1,101,827      $ (1,167,635)     $ 30,691,189
     Total interest expense                       14,994,547          876,803           258,267          (944,438)       15,185,179
                                                ------------     ------------      ------------      ------------      ------------
     Net interest income                          14,354,188          531,459           843,560          (223,197)       15,506,010
     Provision for loan losses                       370,000               --           (19,502)               --           350,498
                                                ------------     ------------      ------------      ------------      ------------
     Net interest income after provision          13,984,188          531,459           863,062          (223,197)       15,155,512
                                                ------------     ------------      ------------      ------------      ------------
     Total noninterest income                      2,077,235        1,945,402         4,677,563        (4,035,495)        4,664,705
     Total noninterest expense                     8,769,030        3,313,033         1,353,355          (429,217)       13,006,201
                                                ------------     ------------      ------------      ------------      ------------
     Income before taxes                           7,292,393         (836,172)        4,187,270        (3,829,475)        6,814,016
     Provision for income taxes                    2,824,309         (284,277)         (196,463)               --         2,343,569
                                                ------------     ------------      ------------      ------------      ------------
     Net income                                 $  4,468,084     $   (551,895)     $  4,383,733      $ (3,829,475)     $  4,470,447
                                                ============     ============      ============      ============      ============


     OTHER SIGNIFICANT ITEMS
     Total assets                               $415,805,650     $ 13,891,259      $ 33,074,400      $(32,371,366)     $430,399,943
     Depreciation, amortization and accretion        548,410          345,821            40,242                --           934,473

     Revenues from external customers
       Total interest income                      29,282,927        1,408,262                --                --        30,691,189
       Total noninterest income                    2,077,235        1,945,402           642,068                --         4,664,705
                                                ------------     ------------      ------------      ------------      ------------
         Total income                           $ 31,360,162     $  3,353,664      $    642,068      $         --      $ 35,355,894
                                                ============     ============      ============      ============      ============

     Revenues from affiliates
       Total interest income                    $     65,808     $         --      $  1,101,827      $ (1,167,635)     $         --
       Total noninterest income                           --               --         4,035,495        (4,035,495)               --
                                                ------------     ------------      ------------      ------------      ------------
         Total income                           $     65,808     $         --      $  5,137,322      $ (5,203,130)     $         --
                                                ============     ============      ============      ============      ============
</TABLE>


                                      -24-
<PAGE>   64


<TABLE>
<CAPTION>

                                                                                   1998
                                             ---------------------------------------------------------------------------------
                                                               MORTGAGE
                                                 BANK           BANKING        ALL OTHER        ELIMINATIONS      CONSOLIDATED

<S>                                          <C>              <C>             <C>               <C>               <C>
Total interest income                        $ 25,566,737     $   879,138     $      1,918      $    (10,122)     $ 26,437,671
Total interest expense                         12,918,931         619,653          232,861          (629,775)       13,141,670
                                             ------------     -----------     ------------      ------------      ------------
Net interest income                            12,647,806         259,485         (230,943)          619,653        13,296,001
Provision for loan losses                         515,000              --               --                --           515,000
                                             ------------     -----------     ------------      ------------      ------------
Net interest income after provision            12,132,806         259,485         (230,943)          619,653        12,781,001
                                             ------------     -----------     ------------      ------------      ------------
Total noninterest income                        2,489,877       2,229,942        5,826,706        (5,422,528)        5,123,997
Total noninterest expense                       7,824,860       1,810,205          921,449          (305,015)       10,251,499
                                             ------------     -----------     ------------      ------------      ------------
Income before taxes                             6,797,823         679,222        4,674,314        (4,497,860)        7,653,499
Provision for income taxes                      2,687,196         230,935         (151,130)               --         2,767,001
                                             ------------     -----------     ------------      ------------      ------------
Net income                                   $  4,110,627     $   448,287     $  4,825,444      $ (4,497,860)     $  4,886,498
                                             ============     ===========     ============      ============      ============

OTHER SIGNIFICANT ITEMS
Total assets                                 $324,907,020     $24,333,526     $ 27,123,876      $(26,496,978)     $349,867,444
Depreciation, amortization and accretion          804,040         188,273           31,472                --         1,023,785

Revenues from external customers
  Total interest income                        25,558,533         879,138               --                --        26,437,671
  Total noninterest income                      2,489,877       2,229,942          404,178                --         5,123,997
                                             ------------     -----------     ------------      ------------      ------------
    Total income                             $ 28,048,410     $ 3,109,080     $    404,178      $         --      $ 31,561,668
                                             ============     ===========     ============      ============      ============

Revenues from affiliates
  Total interest income                      $      8,204     $        --     $      1,918      $    (10,122)     $         --
  Total noninterest income                             --              --        5,422,528        (5,422,528)               --
                                             ------------     -----------     ------------      ------------      ------------
    Total income                             $      8,204     $        --     $  5,424,446      $ (5,432,650)     $         --
                                             ============     ===========     ============      ============      ============
</TABLE>



<TABLE>
<CAPTION>

                                                                                    1997
                                             ---------------------------------------------------------------------------------
                                                                MORTGAGE
                                                 BANK            BANKING       ALL OTHER        ELIMINATIONS      CONSOLIDATED

<S>                                          <C>              <C>             <C>               <C>               <C>
Total interest income                        $ 22,258,361     $    292,728    $      2,016      $    (31,816)     $ 22,521,289
Total interest expense                         10,709,616          115,983         218,336          (147,799)       10,896,136
                                             ------------     ------------    ------------      ------------      ------------
Net interest income                            11,548,745          176,745        (216,320)          115,983        11,625,153
Provision for loan losses                         420,000               --              --                --           420,000
                                             ------------     ------------    ------------      ------------      ------------
Net interest income after provision            11,128,745          176,745        (216,320)          115,983        11,205,153
                                             ------------     ------------    ------------      ------------      ------------
Total noninterest income                        1,576,849        1,132,835       4,264,152        (4,199,535)        2,774,301
Total noninterest expense                       6,783,471          890,672         331,644          (164,868)        7,840,919
                                             ------------     ------------    ------------      ------------      ------------
Income before taxes                             5,922,123          418,908       3,716,188        (3,918,684)        6,138,535
Provision for income taxes                      2,216,128          142,429        (108,493)               --         2,250,064
                                             ------------     ------------    ------------      ------------      ------------
Net income                                   $  3,705,995     $    276,479    $  3,824,681      $ (3,918,684)     $  3,888,471
                                             ============     ============    ============      ============      ============

OTHER SIGNIFICANT ITEMS
Total assets                                 $270,909,663     $  2,702,081    $ 21,330,849      $(20,509,790)     $274,432,803
Depreciation, amortization and accretion          569,713           86,162          23,841                --           679,716

Revenues from external customers
  Total interest income                        22,228,561          292,728              --                --        22,521,289
  Total noninterest income                      1,576,849        1,132,835          64,617                --         2,774,301
                                             ------------     ------------    ------------      ------------      ------------
    Total income                             $ 23,805,410     $  1,425,563    $     64,617      $         --      $ 25,295,590
                                             ============     ============    ============      ============      ============

Revenues from affiliates
  Total interest income                      $     29,799     $         --    $      2,016      $    (31,815)     $         --
  Total noninterest income                             --               --       4,199,535        (4,199,535)               --
                                             ------------     ------------    ------------      ------------      ------------
    Total income                             $     29,799     $         --    $  4,201,551      $ (4,231,350)     $         --
                                             ============     ============    ============      ============      ============
</TABLE>


                                      -25-
<PAGE>   65



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         There has been no occurrence requiring a response to this item.

                                    PART III

         The information relating to Items 10, 11, 12 and 13 of this Report will
be filed as an amendment to this Report on or before April 29, 2000 or the
Company will otherwise have filed a definitive proxy statement involving the
election of directors pursuant to Regulation 14A, which definitive proxy
statement will contain such information.


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

         (a)(1) FINANCIAL STATEMENTS AND AUDITORS' REPORT.

         The following financial statements are filed with this report:

                  Independent Auditor's Report - Deloitte & Touche LLP

                  Consolidated Balance Sheets - December 31, 1999 and 1998

                  Consolidated Statements of Income - Years ended
                           December 31, 1999, 1998 and 1997

                  Consolidated Statements of Changes in Stockholders' Equity -
                           Years ended December 31, 1999, 1998 and 1997

                  Consolidated Statements of Cash Flows - Years ended
                           December 31, 1999, 1998 and 1997

                  Notes to Consolidated Financial Statements

         (2) FINANCIAL STATEMENT SCHEDULES.

         All financial statement schedules of the Registrant have been omitted
as the required information is inapplicable or the information is presented in
the financial statements or related notes.

         (3) EXHIBITS. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are denominated by an asterisk
(*) were previously filed as a part of, and are hereby incorporated by reference
from either (i) a Registration Statement on Form S-18 under the Securities Act
of 1933 for the Registrant, Registration No. 33-21232-A (referred to as "S-18"),
(ii) the Annual Report on Form 10-K for the year ended December 31, 1989 for the
Registrant (referred to as "1989 10-K"), (iii) the Annual Report on Form 10-K
for the year ended December 31, 1990 for the Registrant (referred to as "1990
10-K"), (iv) the Annual Report on Form 10-K for the year ended December 31, 1991
for the Registrant (referred to as "1991 10-K"), (v) the Registration Statement
on Form S-2 (File No. 33-75678) of the Registrant (referred to as "S-2"), (vi)
the Quarterly Report on Form 10-QSB for the quarter ended September 30, 1994
(referred



<PAGE>   66



to as "1994 10-QSB"), (vii) the Quarterly Report on Form 10-QSB, the quarter
ended June 30, 1995 (referred to as "1995 10-QSB"), (viii) the Annual Report on
Form 10-KSB for the year ended December 31, 1995 (referred to as "1995 10-KSB"),
(ix) the Annual Report on Form 10-KSB for the year ended December 31, 1996
(referred to as "1996 10-KSB"), (x) the Annual Report on Form 10-KSB for the
year ended December 31, 1997 (referred to as "1997 10-KSB"), (xi) the Annual
Report on Form 10-KSB for the year ended December 31, 1998 (referred to as "1998
10-KSB"), and (xii) a Registration Statement on Form S-8 for the Registrant,
Registration No. 333-65359 (referred to as "S-8"). Except as otherwise
indicated, the exhibit number corresponds to the exhibit number in the
referenced document.

<TABLE>
<CAPTION>

EXHIBIT NO.                         DESCRIPTION OF EXHIBIT
-----------                         ----------------------
<S>                      <C>
     *3.1       -        Charter dated December 27, 1988 (S-18).

     *3.2       -        Amended and Restated Charter dated February 16, 1989 (S-18).

     *3.2.1     -        Articles of Amendment dated May 20, 1997 (1997 10-KSB).

     *3.2.2     -        Articles of Amendment dated May 19, 1998. (1998 10-KSB).

     *3.3       -        By-Laws adopted December 30, 1988 (S-18).

    *10.1       -        Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H.
                           Hardwick, III, Richard E. Herrington, Gordon E. Inman, D. Wilson Overton, Harold
                           W. Pierce, Edward M. Richey and Edward P. Silva, and Gordon E. Inman for lease
                           of offices at 230 Public Square, Franklin, Tennessee (S-18).

    *10.2       -        Lease Agreement dated January 5, 1989 among Steven G. Hall, Lawson H.
                           Hardwick, III, Richard E. Herrington, Gordon E. Inman, D. Wilson Overton, Harold
                           W. Pierce, Edward M. Richey and Edward P. Silva, and Gordon E. Inman for lease
                           of land at 216A and 216B East Main Street, Franklin, Tennessee (S-18).

    *10.8       -        1990 Incentive Stock Option Plan of Registrant, (1989 10-K).

    *10.8.1     -        Amendment No. 1 to 1990 Incentive Stock Option Plan (1995 10-KSB).

    *10.10      -        Second Amendment to Lease Agreement dated December 3, 1990 between Gordon E. Inman
                           and Franklin Financial Corporation for lease of additional office space in Franklin,
                           Tennessee (1991 10-K).

   *10.12.1     -        Loan Agreement dated December 29, 1995 by and between the Registrant and First
                           American National Bank (1995 10-KSB).

   *10.12.2     -        Second Master Promissory Note and Loan Agreement Modification dated December 29, 1995
                           by and between the Registrant and First American National Bank. (1995 10-KSB).


</TABLE>


<PAGE>   67


<TABLE>
<S>                      <C>


   *10.12.3       -       Third Loan Agreement Modification dated January 31, 1997 by and between the
                            Registrant and First American National Bank. (1996 10-KSB)

   *10.12.4       -       Master Promissory Note dated January 31, 1997 from the Registrant to First
                            American National Bank in the principal amount of $6,000,000. (1996 10-KSB)

   *10.13         -       Third amendment to Lease Agreement dated December 3, 1990 between Gordon B.
                            Inman and Franklin Financial Corporation for lease of additional office
                            space in Franklin, Tennessee (S-2).

   *10.14         -       Lease Agreement dated December 16, 1993 by and between Gordon E. Inman and
                            Franklin National Bank for lease of operations center at 334 Main Street,
                            Franklin, Tennessee (S-2).

   *10.14.1       -       First Amendment to Lease Agreement dated January 16, 1996 by and between
                            Gordon B. Inman and Franklin National Bank for lease of additional office space
                            in operations center. (1995 10-KSB).

    10.14.2       -       Third Amendment to Lease Agreement dated August 1, 1999 by and between Gordon E.
                            Inman and Franklin National Bank for lease of additional office space in
                            operations center.

   *10.15         -       Lease Agreement dated August 16, 1993 between CNL Income Fund V. Ltd. and
                            Franklin National Bank for lease of office space at the Williamson Square Center
                            in Franklin, Tennessee (S-2).

   *10.16         -       Agreement for Assignment of Lease, dated July 21, 1994, by and between First Union
                            National Bank of Tennessee and Franklin National Bank regarding lease
                            of property in Brentwood, Tennessee (1994 10-QSB).

    10.17         -       Employment Agreement dated January 1, 2000 by and between Franklin Financial
                            Corporation and Gordon E. Inman.

   *10.18         -       Fourth amendment to Lease Agreement dated December 3, 1990 between Gordon E.
                            Inman and Franklin Financial Corporation for lease of additional office
                            space in Franklin, Tennessee (1997 10-KSB).

   *10.19         -       Fifth amendment to Lease Agreement dated December 3, 1990 between Gordon E.
                            Inman and Franklin Financial Corporation for lease of additional office space in
                            Franklin, Tennessee. (1998 10-KSB).

   *10.20      -          FNB 2000 Stock Purchase Plan (S-8, Exhibit 4.1)

   *21.1       -          Subsidiaries of the Registrant (1990 10-K, Exhibit 22.1)

    23.1       -          Consent of Deloitte & Touche LLP.

    27.1       -          Financial Data Schedule (for SEC use only).


</TABLE>

         (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
             quarter ended December 31, 1999.


<PAGE>   68



                                   SIGNATURES

         Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                FRANKLIN FINANCIAL CORPORATION


Date: March 30, 2000            By:/s/ Richard E. Herrington
                                   ---------------------------------------------
                                   Richard E. Herrington
                                   President and Chief Executive Officer
                                   (principal executive and financial officer)


Date: March 30, 2000            By:/s/ Lisa Musgrove
                                   ---------------------------------------------
                                   Lisa Musgrove
                                   (principal accounting officer)


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
         Signature                                       Title                               Date
         ---------                                       -----                               ----

<S>                                                  <C>                                <C>


/s/ Richard E. Herrington
-------------------------------------                President, Chief                   March 30, 2000
Richard E. Herrington                                Executive Officer
                                                     and Director


/s/ Gordon E. Inman
-------------------------------------                Chairman of                        March 30, 2000
Gordon E. Inman                                      the Board


/s/ Charles R. Lanier
-------------------------------------                Director                           March 30, 2000
Charles R. Lanier


/s/ Wilson Overton
-------------------------------------                Director                           March 30, 2000
Wilson Overton


/s/ Edward M. Richey
-------------------------------------                Director                           March 30, 2000
Edward M. Richey


/s/ Edward P. Silva
-------------------------------------                Director                           March 30, 2000
Edward P. Silva


</TABLE>


<PAGE>   69


                         FRANKLIN FINANCIAL CORPORATION

                                  EXHIBIT INDEX




   EXHIBIT NUMBER            DESCRIPTION OF EXHIBIT
   --------------            ----------------------

       10.14.2      -        Third Amendment to Lease Agreement

       10.17        -        Employment Agreement of Gordon E. Inman

       23.1         -        Consent of Deloitte & Touche LLP

       27.1         -        Financial Data Schedule (for SEC use only)