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

                                   FORM 10-KSB

         Annual Report Pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934
                   For the Fiscal Year Ended December 31, 1998

                           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-KSB or any amendment to
this Form 10-KSB [X]

Revenues for the fiscal year ended December 31. 1998: $31,664,639

The aggregate market value of the common stock of the registrant held by
nonaffiliates of the registrant (11,623,988 shares) on March 15, 1999 was
approximately $8,996,967. 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, 1998. 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, 1999: 30,472,899 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 18, 1999 are incorporated by reference to Items 9, 10, 11 and 12
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 1999 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. DESCRIPTION OF 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 it's 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, a PC homebanking
product and a 24-hour telephone inquiry system.

         In August 1996, the Bank opened an insurance subsidiary, Franklin
Financial Insurance (formally Hometown Insurance Agency). It 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 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.





<PAGE>   3

         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 48 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, 1998, 1997 and 1996. This
presentation includes all major categories of interest-earning assets and
interest-bearing liabilities:

                           AVERAGE CONSOLIDATED ASSETS

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                   1998           1997           1996
                                                 --------       --------       --------
                                                            (In thousands)
<S>                                              <C>            <C>            <C>     
Cash and due from banks.......................   $  9,335       $  7,435       $  5,817
                                                 --------       --------       --------
Interest-earning deposits.....................         --             --              5

Securities....................................     70,173         54,206         38,417

Federal funds sold and reverse repurchases....      3,482          3,018          1,608

Net loans.....................................    214,792        178,047        133,309
                                                 --------       --------       --------
  Total earning assets........................    288,447        235,271        173,339
                                                 --------       --------       --------
Other assets..................................     10,505          8,627          6,865
                                                 --------       --------       --------
    Total assets..............................   $308,287       $251,333       $186,021
                                                 ========       ========       ========
</TABLE>

            AVERAGE CONSOLIDATED LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                   1998           1997           1996
                                                 --------       --------       --------
                                                            (In thousands)
<S>                                              <C>            <C>            <C>     
Non interest-bearing deposits.................. $  29,103       $ 24,360       $ 19,939

NOW deposits, including MMDA...................    63,818         48,411         33,741

Savings deposits...............................     8,729          7,307          7,005

Time deposits..................................   172,213        146,995        111,267

Repurchase agreements..........................     3,596          3,670             --

Other borrowings...............................     8,400          3,793          1,447

Other liabilities..............................     1,157            827            463
                                                 --------       --------       --------
  Total liabilities............................   287,016        235,363        173,862

Stockholders equity............................    21,271         15,970         12,159
                                                 --------       --------       --------
  Total liabilities and
     stockholders' equity......................  $308,287       $251,333       $186,021
                                                 ========       ========       ========
</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, 1998
                                     AVERAGE            INTEREST           AVERAGE      NET
            ASSETS                    AMOUNT             EARNED             YIELD       YIELD
            ------                    ------             ------             -----       -----
                                                (Dollars in thousands)
<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%
                                     ========          =======


<CAPTION>
                                      AVERAGE          INTEREST           AVERAGE 
     LIABILITIES                      AMOUNT             PAID            RATE PAID
     -----------                      ------             ----            ---------
                                                 (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 approximately $ 0.
(2) Interest earned on net loans includes $2,211,000 in loan fees and loan 
    service fees.




                                       -4-


<PAGE>   6

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31, 1997
                                     AVERAGE            INTEREST           AVERAGE      NET
            ASSETS                    AMOUNT             EARNED             YIELD       YIELD
            ------                    ------             ------             -----       -----
                                                (Dollars in thousands)

<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%
                                     ========          =======

<CAPTION>
                                      AVERAGE          INTEREST           AVERAGE 
     LIABILITIES                      AMOUNT             PAID            RATE PAID
     -----------                      ------             ----            ---------
<S>                                  <C>               <C>                  <C>  
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 approximately $ 0.
(2) Interest earned on net loans includes $1,782,000 in loan fees and loan 
    service fees.



                                       -5-
<PAGE>   7

 <TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31, 1996
                                     AVERAGE            INTEREST           AVERAGE      NET
            ASSETS                    AMOUNT             EARNED             YIELD       YIELD
            ------                    ------             ------             -----       -----
                                                (Dollars in thousands)

<S>                                  <C>                 <C>                <C>         <C>
Interest-earning
  deposits.......................    $      5           $    --             8.00%

 Securities......................      38,417             2,512             6.54

 Federal funds sold..............       1,608                85             5.29

 Net loans.......................     133,309(1)         14,113(2)         10.59
                                     --------          --------
    Total earning assets.........    $173,339           $16,710             9.64        5.18%
                                     ========          ========


<CAPTION>
                                      AVERAGE          INTEREST           AVERAGE 
     LIABILITIES                      AMOUNT             PAID            RATE PAID
     -----------                      ------             ----            ---------
                                                 (Dollars in thousands)
<S>                                  <C>               <C>                  <C>  
NOW deposits including
  MMDA............................   $ 33,741           $ 1,224             3.63%

Saving deposits...................      7,005               182             2.60

Other time deposits...............    111,267             6,247             5.61

Other borrowings..................      1,447                77             5.32
                                     --------           -------
Total interest-
   bearing liabilities............   $153,460           $ 7,730             5.04  
                                     ========           =======
</TABLE>


(1) Includes non-accrual loans of approximately $0.
(2) Interest earned on net loans includes $ 1,235,000 in loan fees and loan
    service fees.





                                       -6-


<PAGE>   8

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 balance of the change in interest income or expense and net
interest income has been attributed to a change in average balance/rate.

                          YEAR ENDED DECEMBER 31, 1998
                                  COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1997
                           INCREASE (DECREASE) DUE TO:

<TABLE>
<CAPTION>
                                                              RATE/
                                VOLUME         RATE          VOLUME           TOTAL
                                ------         -----          -----          ------
                                                  (In thousands)
<S>                             <C>             <C>             <C>             <C>
Interest earned on:

 Securities..................   $1,028          (321)           (95)            612

  Federal funds sold.........       25             9              1              35

  Net loans..................    3,894          (519)          (106)          3,269
                                ------         -----          -----          ------
 Total interest income.......    4,947          (831)          (200)          3,916
                                ------         -----          -----          ------
 Interest paid on:

   NOW deposits..............      581           (52)           (17)            512

   Savings deposits..........       37            (1)            --              36

   Time deposits.............    1,439             9              2           1,450

 Other borrowings............      298           (31)           (19)            248
                                ------         -----          -----          ------
 Total interest expense......    2,355           (75)           (34)          2,246
                                ------         -----          -----          ------
 Change in net
   interest income...........   $2,592         $(756)         $(166)         $1,670
                                ======         =====          =====          ======
</TABLE>









                                       -7-
<PAGE>   9

                          YEAR ENDED DECEMBER 31, 1997
                                  COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1996
                           INCREASE (DECREASE) DUE TO:

<TABLE>
<CAPTION>
                                VOLUME         RATE          VOLUME           TOTAL
                                ------         -----          -----          ------
                                                  (In thousands)
<S>                             <C>             <C>             <C>             <C>
Interest earned on:

Interest-earning deposits....   $   (1)        $  --          $   1              --

 Securities..................    1,033           (40)           (16)            977

  Federal funds sold.........       74             1              1              76

  Net loans..................    4,741            14              4           4,759
                                ------         -----          -----          ------
 Total interest income.......    5,847           (25)           (10)          5,812
                                ------         -----          -----          ------

 Interest paid on:

   NOW deposits..............      533            47             21             601

   Savings deposits..........        8            --             --               8

   Time deposits.............    2,002           107             34           2,143

 Other borrowings............      320            18             76             414
                                ------         -----          -----          ------
 Total interest expense......    2,863           172            131           3,166
                                ------         -----          -----          ------

 Change in net
   interest income...........   $2,984         $(197)         $(141)         $2,646
                                ======         =====          =====          ======
</TABLE>













                                       -8-




<PAGE>   10

                          YEAR ENDED DECEMBER 31, 1996
                                  COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1995
                           INCREASE (DECREASE) DUE TO:

<TABLE>
<CAPTION>
                                                              RATE/
                                VOLUME         RATE          VOLUME           TOTAL
                                ------         -----          -----          ------
                                                  (In thousands)
<S>                             <C>             <C>             <C>             <C>
Interest earned on:
   Interest-earning deposits... $   (6)        $   1          $  (1)         $   (6)

Taxable securities.............    396            16              3             415

 Federal funds sold............     (3)          (13)            --             (16)

 Net loans.....................  4,332             5              1           4,338
                                ------         -----          -----          ------
Total interest income..........  4,719             9              3           4,731
                                ------         -----          -----          ------

Interest paid on:
   NOW deposits................    438            23             13             474

   Savings deposits............     12             1             --              13

   Time deposits...............  1,644          (357)          (115)          1,172

   Other borrowings............     62            (4)            (9)             49
                                ------         -----          -----          ------

   Total interest expense......  2,156          (337)          (111)          1,708
                                ------         -----          -----          ------

   Change in net
      interest income.......... $2,563         $(329)         $(108)         $3,023
                                ======         =====          =====          ======
</TABLE>


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.




                                       -9-


<PAGE>   11

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

                                   YEAR ENDED
                                DECEMBER 31, 1998

<TABLE>
<CAPTION>
            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>


                                   YEAR ENDED
                                DECEMBER 31, 1997

<TABLE>
<CAPTION>
            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>


                                   YEAR ENDED
                                DECEMBER 31, 1996

<TABLE>
<CAPTION>
            DEPOSIT CATEGORY              AVERAGE AMOUNT         AVERAGE RATE PAID
            ----------------              --------------         -----------------
                                     (Dollars in thousands)
<S>                                         <C>                  <C>  
         Non interest-bearing
          demand deposits.................  $ 19,939                  Not Applicable

         NOW deposits.....................  $ 33,741                  3.63%

          Savings deposits................  $  7,005                  2.60%

          Time deposits...................  $111,267                  5.61%
</TABLE>


                                      -10-
<PAGE>   12

          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, 1998:

<TABLE>
<CAPTION>
                                                                TIME
                                                            CERTIFICATES
                                                             OF DEPOSIT
                                                             ----------
                                                            (In thousands)

<S>                                                         <C>     
                       3 months or less...................     $ 40,883
                       3-6 months........................        29,272
                       6-12 months.......................        35,556
                       over 12 months...................          7,267
                                                               --------
                           Total ..........................    $112,978
                                                               ========
</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.

         At December 31, 1998, loans within four broad categories exceeded 10%
of total loans: single family residential real estate loans ($79,057,000 or 33%
of total loans), commercial real estate loans ($43,668,000 or 18% of total
loans), commercial and industrial loans ($45,871,000 or 19% of total loans) and
residential construction loans ($29,335,000 or 12% 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).

                                      -11-
<PAGE>   13

          The following table presents various categories of loans 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                1998           1997           1996           1995          1994
           ------------              ---------      ---------      ---------      ---------      --------
                                                                (In thousands)
<S>                                  <C>            <C>            <C>            <C>            <C>     
Domestic
  Commercial, financial
    and agricultural                 $  58,857      $  43,343      $  33,198      $  24,143      $ 16,588
  Real estate-construction              29,335         33,708         23,307         13,073         9,594
  Real estate-mortgage                 110,245         98,733         84,101         61,472        39,844
  Consumer loans                        18,006         15,001         13,230         12,016         8,794
                                     ---------      ---------      ---------      ---------      --------
       Total portfolio loans           216,443        190,785        153,836        110,704        74,820
  Loans held for sale                   23,643          3,737          3,980          1,423         1,422
                                     ---------      ---------      ---------      ---------      --------
       Total loans                     240,086        194,522        157,816        112,127        76,242
Less: deferred loan fees                  (516)          (440)          (362)          (296)         (254)
       Allowance for possible
         loan losses                    (2,194)        (1,828)        (1,472)        (1,062)         (762)
                                     ---------      ---------      ---------      ---------      --------
Total (net of allowance)             $ 237,376      $ 192,254      $ 155,982      $ 110,769      $ 75,226
                                     =========      =========      =========      =========      ========
</TABLE>





The following is a presentation of an analysis of maturities of loans as of
December 31, 1998:

<TABLE>
<CAPTION>
                                         DUE AFTER
                              DUE IN 1      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            $ 41,357     $17,461     $    39     $ 58,857

Real estate-construction       28,717         618          --       29,335

Real estate-mortgage           61,288      48,442         515      110,245

Loans held for sale                --          --      23,643       23,643

Consumer loans                  6,668      11,307          31       18,006
                             --------     -------     -------     --------
Total                        $138,030     $77,828     $24,228     $240,086
                             ========     =======     =======     ========
</TABLE>



                                      -12-


<PAGE>   14

The following is a presentation of an analysis of sensitivities of loans to
changes in interest rates as of December 31, 1998 (in thousands):

<TABLE>
                  <S>                                                        <C>
                  Loans due after 1 year with
                         predetermined interest rates ....................   $67,247

                  Loans due after 1 year with
                         floating interest rates..........................   $34,809
</TABLE>

            The following table presents information regarding nonaccrual, past
due and restructured loans at the dates indicated:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                             1998    1997  1996   1995    1994
                                                                             ----    ----  ----   ----    ----
<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      0     0      0         1
  Amount.........................................................         $194,604   $ --  $ --   $ --    $3,000

Loans defined as "troubled debt restructurings":
  Number.........................................................                0      0     0      0         0
  Amount.........................................................         $     --   $ --  $ --   $ --    $   --
</TABLE>



      As of December 31, 1998, 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.

      Additional interest income of approximately $0 in 1998, $0 in 1997, $0 in
1996, $423 in 1995, and $21 in 1994 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, 1998, on loans that have been accounted for on a
non-accrual basis.



                                      -13-
<PAGE>   15

        Although the Bank does not have any loans classified as non-accrual at
December 31, 1998, management has identified other possible credit problems as
follows (in thousands):

<TABLE>
<S>                                               <C>  
                   Special mention.........       $  665
                   Substandard.............        2,996
                   Doubtful................           33
                   Loss....................           --
                                                  ------
                     Total                        $3,694
                                                  ======
</TABLE>

        These loans are performing loans but are classified due to payment
history, decline in the borrowers 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 sound
worth and paying capacity of the obligor or 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 $128,000 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.




                                      -14-

<PAGE>   16

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,
                                    -------------------------------------------------------------
                                     1998          1997          1996          1995         1994
                                    -------       -------       -------       -------       -----
                                                         (Dollars in thousands)
<S>                                 <C>           <C>           <C>           <C>         <C>  
 Balance at beginning
  of period                         $ 1,828       $ 1,472       $ 1,062       $   762       $ 585

 Charge-offs:
  Commercial, financial &
   agricultural                         112            36             4            --           1
  Consumer loans                         47            40            18            38           7
  Real estate-mortgage                   --            --            --            --          --
                                    -------       -------       -------       -------       -----
                                        159            76            22            38           8
                                    -------       -------       -------       -------       -----
 Recoveries:
  Commercial, financial &
   agricultural                           2             1            --             4           1
  Consumer loans                         08            11            12            14          10
                                    -------       -------       -------       -------       -----
                                         10            12            12            18          11
Net charge-offs                        (149)          (64)          (10)          (20)          3
                                    -------       -------       -------       -------       -----
Additions charged
  to operations                         515           420           420           320         174
                                    -------       -------       -------       -------       -----
Balance at end of period            $ 2,194       $ 1,828       $ 1,472       $ 1,062       $ 762
                                    =======       =======       =======       =======       =====
Ratio of net charge-offs during
 the period to average loans
 outstanding during the period          .07%          .04%          .01%          .02%       (.01)%
                                    =======       =======       =======       =======       =====
</TABLE>







                                      -15-
<PAGE>   17

          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>
                              1998                  1997                  1996                  1995                  1994
                       -----------------     -----------------     -------------------     -----------------   ----------------
                       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       $  686      25.2%     $  489      23.1%     $  272        21.0%     $  189      21.6%    $117       21.8%
Real estate -                                                                                                 
construction              352      12.2         377      17.3         331        14.8         172      11.6      146       12.6
Real estate-mortgage      840      55.1         813      51.9         735        55.8         479      56.1      334       54.1
Consumer loans            211       7.5         109       7.7          98         8.4          79      10.7      121       11.5
Unallocated               105       N/A          40       N/A          36         N/A         143       N/A       44        N/A
                       ------     -----      ------     -----      ------       -----      ------     -----     ----      ----- 
Total                  $2,194     100.0%     $1,828     100.0%     $1,472       100.0%     $1,062     100.0%    $762      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, 1998,
25% 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 85%
of these commercial loans at December 31, 1998 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, 1998, 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, 1998, real estate mortgage loans constituted 55% of
outstanding loans. Approximately $70,226,000 or 53% 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.



                                      -16-
<PAGE>   18

INVESTMENTS

         As of December 31, 1998, investment securities, including
mortgage-backed securities, comprised approximately 22% of the Bank's assets and
loans comprised approximately 68% 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
is now in a taxable position 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 has
no investment securities which are held-for-trading.

<TABLE>
<CAPTION>
                                                              December 31,
Investment                                         ---------------------------------------
Category                                            1998            1997            1996
--------                                           -------         -------         -------
                                                               (In thousands)
<S>                                                <C>             <C>             <C>    
        Available-for-sale:

          Obligations of U.S. Treasury
                and other U.S. Agencies            $25,881         $20,862         $13,384
          Obligations of States
                and Political Subdivisions          14,254           4,189           4,277

          Mortgage backed securities                32,406          29,654          20,042

          Other securities                              --             350             391
                                                   -------         -------         -------
                  Total                            $72,541         $55,055         $38,094
                                                   =======         =======         =======


<CAPTION>
                                                              December 31,
Investment                                         ---------------------------------------
Category                                            1998            1997            1996
--------                                           -------         -------         -------
                                                               (In thousands)
<S>                                                <C>             <C>             <C>    
        Held-to-maturity:

        Obligations of U.S. Treasury
                and other U.S. Agencies            $ 1,354         $ 2,098         $ 1,236

        Obligations of States
                and Political Subdivisions           2,817           2,974           2,496

        Mortgage backed securities                     591             857           1,432
        Other securities                                --              30              29
                                                   -------         -------         -------
                  Total                            $ 4,762         $ 5,959         $ 5,193
                                                   =======         =======         =======
</TABLE>



                                      -17-


<PAGE>   19

          The following tables indicate for the year ended December 31, 1998,
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:
0 through l Yr                          $ 4,266               5.70%
Over 1 through 5 Yrs                     11,432               4.37
Over 5 through 10 Yrs                     6,373               4.42
Over 10 Yrs                               3,810               7.55

Obligations of States and
Political Subdivisions:

Over 1 through 5 Yrs                        560               6.21
Over 5 through 10 Yrs                     1,599               6.77
Over 10 Yrs                              12,095               6.63

Mortgage-backed securities               32,406               6.40


  Total available-for-sale              $72,541               5.94%
                                        =======
</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.

                                                             

                                      -18-


<PAGE>   20

<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:

0 through l Yr                          $1,353                   5.70%

Obligations of States and
Political Subdivisions:

Over 1 through 5 Yrs                       445                  10.41
Over 5 through 10 Yrs                    1,977                   7.11
Over 10 Yrs                                395                   7.34

Mortgage-backed securities                 592                   7.46
                                        ------
  Total held-to-maturity                $4,762                   7.08
                                        ======
</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.

RETURN ON EQUITY AND ASSETS

             Returns on average consolidated assets and average consolidated
equity for the periods indicated are as follows:

<TABLE>
<CAPTION>
                                                     Years Ended December 31,
                                         -----------------------------------------------
                                          1998                1997                1996
                                         -------             -------             -------
<S>                                      <C>                 <C>                 <C>  
Return on average assets                   1.59%               1.55%               1.38%
Return on average equity                  22.97%              24.35%              21.10%
Average equity to average
 assets ratio                              6.90%               6.35%               6.54%
Dividend payout ratio                      6.24%              --                  --
</TABLE>






                                      -19-


<PAGE>   21

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 is required to purchase 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 facilities management office. The Bank also has an off-site ATM.

         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.

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

         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.




                                      -20-
<PAGE>   22

         The Bank leases facilities at three separate locations in Franklin
which house the Bank's financial services subsidiary, mortgage banking
subsidiary, insurance subsidiary, data processing, operations and administrative
functions.

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

         In October 1998 the Company purchased a parcel of land in the Cool
Springs area of Franklin and plans to construct a permanent branch facility on
the property during 1999.

EMPLOYEES

         The Company presently employs 156 persons on a full-time basis,
including 37 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 Comptroller of the Currency ("Comptroller") and the Federal
Deposit Insurance Corporation ("FDIC").

         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 and 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.



                                      -21-


<PAGE>   23

         A bank holding company is generally 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, there are
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. Effective April 21, 1997, the Federal
Reserve Board revised and expanded the list of permissible nonbanking
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 nonaffiliated 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
Comptroller and, to a limited extent, the FDIC and the Federal Reserve Board.
With respect to expansion, the Comptroller has approved several applications
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 Comptroller'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
Comptroller and which are made to a financial institution or to any agent in
charge of the business and property of the financial institution.

         

                                      -22-
<PAGE>   24

          Both the Company and the Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the Comptroller. The
Federal Reserve Board and the Comptroller 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 Comptroller'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, 1998, the
Company's consolidated total risk-based capital and Tier 1 ratios were 10.59%
and 9.68% respectively. Both the Federal Reserve Board and the Comptroller have
also implemented minimum capital leverage ratios to be used in tandem with the
risk-based guidelines in assessing the overall capital 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 Comptroller 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 that 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 Comptroller'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
Comptroller 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 Comptroller'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 Comptroller
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

          


                                      -23-
<PAGE>   25

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 Comptroller 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 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 Comptroller, 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 Comptroller, 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 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



                                      -24-


<PAGE>   26

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 Comptroller 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:

<TABLE>
<CAPTION>
                                               Total Risk-         Tier 1 Risk-         Tier 1
                                               Based Capital       Based Capital        Leverage
                                               Ratio               Ratio                Ratio
                                               -----               -----                -----
<S>                                            <C>                  <C>                   <C>
Well capitalized (1)                             >= 10%              >= 6%                >= 5%
Adequately capitalized (1)                        >= 8%              >= 4%                >= 4%
Undercapitalized (4)                               < 8%               < 4%                 < 4%(3)
Significantly undercapitalized (4)                 < 6%               < 3%                 < 3%
Critically undercapitalized                         --                 --                  < 2%(5)
</TABLE>


     (1)An institution must meet all three minimums.

     (2)>=3% for composite 1-rated institutions, subject to appropriate federal
     banking agency guidelines. 

     (3)<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 Comptroller. 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 Comptroller 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.



                                      -25-


<PAGE>   27
ITEM 2. DESCRIPTION OF PROPERTY.

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, Franklin Financial Insurance Center, 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 total $36,676. 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 long-term 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 houses the Bank's Brentwood branch, which opened in April 1995.

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.

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, as amended, covers approximately 7,000 square feet and,
provides for monthly payments to Mr. Inman of $5,500. The office/warehouse space
houses "back office" functions for the Bank, including data processing, proof
and transit, bookkeeping, and accounting.

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 "Plaintiff's"). 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 (the "Action"), 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 
Plaintiffs. The Plaintiffs have demanded from the Bank and the other defendants 
$10 million in compensatory damages and $15 million in punitive damages.

          The Bank has filed a motion to dismiss the Action on the grounds that 
the court lacks subject matter jurisdiction and that the Plaintiffs have failed 
to state a claim for relief. The court has not yet ruled on the pending motion 
to dismiss the Action.

          The Company believes that the claims of the Plaintiffs in the Action 
are unfounded and completely without merit. The Bank denies all liability with 
respect to these claims and intends vigorously to defend them. The Action 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 on the 
Company's financial condition or 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.

          
                                      -26-
<PAGE>   28

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

          No matter was submitted during the fourth quarter ended December 31,
1998 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, 1999, the approximate number of holders of record of the Company's common
stock was 733.

          Dividends. In October 1998, the Company declared a $.01 per share cash
dividend payable January 8, 1999 to shareholders of record on December 27, 1998.
The Company also declared a $.01 per share cash dividend on March 9, 1999
payable April 7, 1999 to shareholders of record on March 26, 1999.

          The Bank is restricted in its ability to pay dividends under the
national banking laws and by regulations of the Comptroller. 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
Comptroller 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 June 26, 1998, a director
of the Company exercised warrants to purchase 21,120 shares of common stock of
the Company at a price of $0.3125 per share. On December 23, 1998, three
directors of the Company exercised warrants to purchase an aggregate of 554,805
shares of common stock of the Company at a price of $0.3125 per share. In
December 1998, the Company issued an aggregate of 430 shares of common stock to
the directors of the Company and the Bank as compensation for their service as
directors during 1998.


          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.

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

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.

LIQUIDITY AND CAPITAL RESOURCES

          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.



                                      -27-
<PAGE>   29

          The Company has approximately $5.6 million in investment securities
and $138.0 million in loans which mature within the next year. The Bank has
$24.5 million in Federal funds lines with its correspondent banks to provide
liquidity when needed. The Company's investment portfolio consists of over $72.5
million of marketable securities classified as available-for-sale which could be
sold if additional liquidity is needed. The Company has lines of credit of $7.5
million with a lending institution and the Bank is approved to borrow up to
$10.0 million in funds from the Federal Home Loan Bank to assist with capital
and liquidity needs. The Bank has obtained approximately $48.3 million in
brokered deposits at December 31, 1998 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.

          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 fourth
quarter of 1999. The Bank has been approved to open a replacement branch
facility in Brentwood, Tennessee with an anticipated opening date of third
quarter 1999. 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 Nolensville and Belle Meade, Tennessee. To date,
no land has been acquired on which to locate these facilities. The Bank is
reviewing potential branch sites in the Green Hills area of Nashville, Tennessee
and the Fieldstone Farms area of Franklin, Tennessee. If these sites are chosen
and proper regulatory approval is received, the land and building expenditures
will be approximately $1.7 million and $1.5 million, respectively. No other
material capital expenditures are anticipated in 1999.

          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, 1998. 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.

          Net cash flow used by operating activities was $3.6 million in 1998
compared to net cash flow provided of $11.8 million in 1997, a decrease of $15.4
million. The decrease in cash flow is due to loans originated for sale exceeding
proceeds from sale of loans by $7.9 million in 1998 as compared to the sale of
loans exceeding the loans originated for sale by $7.6 million in 1997. The
majority of this change is due to the increased activity in the Bank's mortgage
subsidiary. The decrease in cash flow is offset slightly by an increase in net
income of $998,000, coupled with increases in noncash items such as depreciation
and other assets.

          Net cash used in investing activities was $64.2 million in 1998
compared to $ 63.7 million in 1997, representing a $500,000 increase. The
increase in federal funds sold of $8.2 million in 1998, compared to a decrease
of $233,000 in the prior year, accounted for $8.0 million of the increase,
offset by a decrease in the change in net loans of $37.6 million in 1998
compared to $44.2 million in 1997. The change in the net investment portfolio
also decreased from $17.4 million in 1997 to $16.2 million in 1998.

          Net cash provided by financing activities was $70.2 million in 1998
compared to $54.3 million in 1997, a $15.9 million or 29% increase. The increase
is primarily due to an increase in deposits of $64.8 million in 1998 compared to
$47.7 million in the preceding year. The increase is attributed in part, to the
Bank borrowing $6.0 million in convertible fixed rate advances from Federal Home
Loan Bank. The Company repaid $600,000 on its line of credit in 1998 as compared
to borrowing $1.2 million in 1997. During the first quarter of 1997, the Bank
entered into a $4.4 million repurchase agreement to further develop it's
relationship with a customer, of which $1.0 million matured in 1998.



                                      -28-
<PAGE>   30

          The following is an analysis of rate sensitive assets and liabilities
as of December 31, 1998:

<TABLE>
<CAPTION>
                                                                                             5 YRS.
                                        0-3 MOS.          3-12 MOS.         1-5 YRS.        OR MORE           Total
                                       ---------          --------          -------         -------          -------
                                                                     (Dollars in thousands)
<S>                                    <C>                  <C>              <C>             <C>              <C>   
Securities                             $   3,144            10,322           39,117          26,090           78,673
Loans                                    128,868            39,914           70,555             749          240,086
Federal funds sold                         8,229                --               --              --            8,229
                                       ---------          --------          -------          ------          -------
Total rate sensitive assets              140,241            50,236          109,672          26,839          326,988
                                       ---------          --------          -------          ------          -------
NOW deposits                              31,757                --               --              --           31,757
Savings deposits                          53,410                --               --              --           53,410
Time deposits                             67,257           113,705           12,951              --          193,913
Repurchase agreements                      1,000                --            2,421              --            3,421
Other borrowings                           2,424                --               --           6,000            8,424
                                       ---------          --------          -------          ------          -------
Total rate sensitive
  liabilities                            155,848           113,705           15,372           6,000          290,925
                                       ---------          --------          -------          ------          -------
Excess (Deficiency) of rate
  sensitive assets less rate
  sensitive liabilities                $ (15,607)          (63,469)          94,300          20,839           36,063
                                       =========          ========          =======          ======          =======
Excess (Deficiency) as a
  percentage of earning assets             -4.8%            -19.4%             28.8%            6.4%            11.0%

Cumulative Excess
  (Deficiency)                         $ (15,607)          (79,076)          15,244          36,063           36,063
                                       =========          ========          =======          ======          =======
Cumulative Excess
  (Deficiency) as a
  percentage of earning assets             -4.8%            -24.2%              4.6%           11.0%            11.0%
</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.

          Stockholders' equity at December 31, 1998, was $23.6 million or 6.7%
of total assets compared to $17.8 million or 6.5% of total assets at December 
31, 1997. The increase primarily reflects the net income earned during 1998. See
note 15 of the Notes to Consolidated Financial Statements.



                                      -29-
<PAGE>   31

<TABLE>
<CAPTION>
                                                           MINIMUM
                                     FOR CAPITAL          FOR "WELL        COMPANY'S
                                      ADEQUACY           CAPITALIZED"     CONSOLIDATED       BANK'S
                                      PURPOSES             CATEGORY          ACTUAL          ACTUAL
<S>                                    <C>                   <C>              <C>             <C>  
Leverage                               4.00%                 5.00%            7.00%           7.34%
Tier 1 risk-based                      4.00%                 6.00%            9.68%          10.13%
Total risk-based                       8.00%                10.00%           10.59%          11.05%
</TABLE>


FINANCIAL CONDITION

          Total assets have grown $75.4 million or 27% since December 31, 1997
to a total of $349.9 million at December 31, 1998. The growth during 1998 has
been funded by a $64.8 million increase in deposits, a $5.4 million increase in
other borrowings and net income of $4.9 million. Total deposits were $312.4
million at December 31, 1998.

          The Company continues to experience excellent loan demand as
demonstrated by the growth in net loans of $25.2 million or 13% from December
31, 1997. The allowance for loan losses increased $366,000 or 20% from the level
at December 31, 1997, for a total of $2.2 million or approximately 1% of total
loans. The increase is primarily the result of growth in the loan portfolio and
not because of a decline in asset quality. Management believes that the level in
the allowance for loan losses is adequate at December 31, 1998. 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 a 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, 1998, the Bank had loans that were specifically
classified as impaired in the amount of approximately $33,100. The allowance for
loan losses related to impaired loans was $25,400 at December 31, 1998.

          At December 31, 1998 and 1997, fair value of the securities classified
as available-for-sale exceeded the adjusted cost of securities by $257,000 and
$345,000, respectively. As a result unrealized gain net of taxes of $159,000 and
$214,000 for the years ended December 31, 1998 and 1997, respectively, is
included in Other Comprehensive Income in the Statement of Changes in
Stockholders' Equity. See notes 1 and 3 to the Consolidated Financial
Statements.

          Total securities, including mortgage-backed securities, increased
$16.3 million or 27% during 1998 due to overall Bank growth. Property and
equipment increased $1.2 million during 1998 primarily due to the construction
of the Bank's Fairview branch facility and the purchase of land on which to
locate the Cool Springs branch facility. Accrued income receivable increased
$237,000 in 1998 due to increases in the Bank's loan and securities portfolios.
Stockholders' equity increased $5.8 million or 33% from December 31, 1997
primarily as a result of earnings of $4.9 million and issuance of common stock
due to the exercise of stock options and warrants totalling $1.1 million.

RESULTS OF OPERATIONS

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.

          

                                      -30-
<PAGE>   32

          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.
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.

          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 mortgage banking activities.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinquishments of Liabilities," in 1997, which superceded SFAS No.
122 "Accounting for Mortgage Servicing Rights." Mortgage servicing rights
contributed $1.1 million and $239,000 in 1998 and 1997, respectively, to
mortgage banking activities. 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. 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 primarily due to the new Fairview branch and
Franklin Financial Insurance Center facilities. Other expenses have increased as
a result of the overall growth of the Bank.

FISCAL 1997 COMPARED WITH FISCAL 1996

          The Company had net income of $3.9 million in 1997 compared to $2.6
million in 1996. The Company had income before taxes of $6.1 million in 1997,
representing a 53% increase over the $4.0 million recorded in 1996.

          Total interest income increased $5.8 million or 35% in 1997 as
compared to 1996, while total interest expense increased $3.2 million or 41% in
1997 as compared to 1996. The increase in total interest income is attributable
to an increase in average earning assets of $61.9 million or 36% in 1997.
Average interest bearing liabilities increased $56.7 million or 37% in 1997. The
Bank's "negative gap" position in the short term (one year or less) and a
slightly higher interest rate environment in 1997 as compared to 1996 resulted
in a decrease in net yield from 5.18% in 1996 to 4.94% in 1997."Negative gap" is
used to describe the interest rate risk position when a Bank's rate sensitive
liabilities are repricing faster than rate sensitive assets.

          The provision for loan losses was $420,000 in 1997 and 1996.
Provisions for loan losses have been necessary due to growth in the Bank's loan
portfolio. Net charge-offs were $64,000 or less than .04% of average loans
outstanding in 1997.

          Total other income of $2.8 million in 1997 increased $973,000 or 54%
from 1996. The increase was attributed to an increase of $195,000 or 22% in
service charges on deposit accounts directly related to the increase in deposit
accounts and an increase of $601,000 or 113% in mortgage banking activities. The
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinquishments of Liabilities," in 1997, which superceded SFAS No. 122
"Accounting for Mortgage Servicing Rights." Mortgage servicing rights
contributed $239,000 and $106,000 in 1997 and 1996, respectively, to



                                      -31-
<PAGE>   33

mortgage banking activities. Other service charges, commissions and fees
increased $144,000 or 52% primarily due to security call option fees of $147,000
in 1997 as compared to $21,000 in 1996.

          Total other expenses increased $1.5 million or 23% during 1997 as
compared to 1996. Salaries and employee benefits increased $880,000 or 25%
primarily due to additional personnel. The Bank had 134 full time equivalent
employees at December 31, 1997 as compared to 101 a year earlier. Included in
salaries and employee benefits are commissions related to the mortgage banking
department of $281,000 in 1997 compared to $144,000 in 1996. Occupancy expense
and furniture and equipment expense increased $83,000 or 10% and 120,000 or 22%,
respectively, from 1996 primarily due to the new Fairview branch and Franklin
Financial Center facilities. Other expenses have increased as a result of the
overall growth of the Bank.

YEAR 2000

          A critical issue affecting companies that rely extensively on 
electronic data processing systems, such as the Company, is the Year 2000 
issue. The Year 2000 issue has arisen due to the widespread use of computer 
programs that rely on two-digit date codes to perform computations or 
decision-making functions. Many of these programs may fail as a result of their 
inability to properly interpret date codes beginning January 1, 2000. For 
example, such programs may misinterpret "00" as the year 1900 rather than 2000. 
In addition, some equipment, begin controlled by microprocessor chips, may not 
deal appropriately with the year "00." This could result in a system failure or 
miscalculations causing disruptions of operations, including, among other 
things, a temporary inability to process transactions or engage in similar 
normal business activities.

          The FFIEC (Federal Financial Institutions Examination Council) has 
issued guidelines for financial institutions to follow with respect to Year 
2000 compliance. The Company's Year 2000 action plans are based primarily on 
the guidelines and timetables outlined in this guidance. During 1997, the 
Company formed an internal task force, chaired by the Vice President of 
Information Systems, to address the Year 2000 issue, including a comprehensive 
review of the Company's systems and to insure that the Company take any 
necessary measures for Year 2000 compliance. The Company has (1) performed 
assessments of Year 2000 issues, (2) substantially completed testing and 
validation of internal and external mission critical systems, (3) begun 
customer awareness of Year 2000, and (4) begun contingency planning. Management 
reports to the Board of Directors at least quarterly on the status of Year 
2000. The Company believes that since the majority of its equipment is 
relatively new and since software utilized by the Company is provided by 
third-parties, the Year 2000 issue will not pose significant internal 
operational problems or generate additional material expenditures. Management 
currently does not expect Year 2000 issues to have a material impact on its 
financial position or results of operations. The Company spent approximately 
$10,000 on Year 2000 issues in 1998 and expects expenditures to be 
approximately $110,000 in 1999. These expenditures include independent 
third-parties utilized for testing and contingency planning validation.

          In the second and third quarter of 1998, the Company performed an 
inventory of its computer and embedded systems. The Company uses external 
provided standardized software for its processing needs. During assessment, the 
Company identified eight mission critical software systems. The Company plans 
to finalize its assessment and testing of mission critical embedded systems by 
March 31, 1999. The Company has identified essential and non-essential systems 
and processes. The Company has initiated communications with suppliers and 
vendors to determine the potential impact of such third-parties' Year 2000 
compliance status. These third-parties include suppliers, telephone and utility 
providers and other financial institutions.

          The Company began testing of mission critical software systems in the 
third quarter of 1998 and has completed testing of these mission critical 
systems. The Company tested critical dates outlined in the FFIEC guidelines. 
The Company initiated certification requests from mission critical vendors 
seeking assurance that these systems will be Year 2000 compliant. The Company 
validated test results of mission critical systems internally and through an 
independent third-party during the first quarter of 1999. Testing of key 
computer hardware was completed in the first quarter of 1999.

          An area of concern by the Company is the effect of Year 2000 issues 
on deposit and loan customers. Members of the Company's management have given 
Year 2000 issue speeches to local groups to try to heighten awareness of Year 
2000 issues. The Company plans to use statement stuffers and other forms of 
communication to try to raise customer awareness. The Company also has a Year 
2000 statement on its website. Failure of certain customers to address Year 
2000 related issues could have a significant impact on the ability of these 
customers to continue operations. The Company's loan portfolio could be 
negatively impacted if customers are unable to repay loan agreements as a 
result of failure to address Year 2000 issues. In the second quarter of 1998, 
the Company began reviews of loan relationships to determine the potential 
effect of Year 2000 issues on the customers' operations. The Company reviews 
loan relationships in excess of $1,000,000, individual loans in excess of 
$750,000 and any other loan the primary lender feels necessary to review. The 
primary focus of this review was to determine the readiness of the customer to 
address Year 2000 issues and the impact of such readiness on the customer's 
ability to repay loans. Management identified a small number of customers which 
could be potentially impacted by Year 2000 issues, addressed the concern with 
these customers and continues to monitor their status. The Company now includes 
Year 2000 compliance requirements in its standard loan agreements. Although the 
Company has taken steps to address customer Year 2000 issues, there can be no 
assurance that these customers will be Year 2000 compliant.

          The Company is in the process of preparing its Year 2000 contingency 
plan. The contingency plan, testing of the plan and independent validation of 
such testing is scheduled to be complete by June 30, 1999. Contingency plans 
will be prepared to provide a minimum acceptable level of service should an 
unforeseen Year 2000 issue arise.

          Although the Company has taken extensive steps to address Year 2000 
related issues, there can be no assurance that unforeseen difficulties or costs 
will not arise. In addition, there can be no assurance that the systems of 
other companies on which the Company's systems rely will be modified on a 
timely basis, or that the failure by another company to properly modify its 
systems will not negatively impact the Company's systems or operations. The 
Company's Year 2000 compliance program is an ongoing process involving 
continual evaluation and may be subject to change in response to new 
developments.

ACCOUNTING PRONOUNCEMENTS

          In 1998, The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. This statement
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of income. The Company
presented this information in the Consolidated Statement of Changes in
Stockholders' Equity.

          During fiscal 1998, the Company adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. This standard requires
disclosure of segment information in a company's financial statements. The
Company has only one reportable segment and therefore, substantially all of the
assets, liabilities, and operations presented in the consolidated financial
statements are attributable to Franklin National Bank. 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 deposits, and
its primary lending products are commercial business, real estate mortgage, and
consumer loans.

           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.



                                      -32-
<PAGE>   34

ITEM 7.  FINANCIAL STATEMENTS.

The following financial statements are filed with this report:

Independent Auditor's Report-Deloitte & Touche, LLP 
Independent Auditor's Report-Heathcott & Mullaly, P.C. 
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1998, 1997 and 1996 
Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 
and 1996 
Notes to Consolidated Financial Statements







                                      -33-
<PAGE>   35


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, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of the Company for the year ended December 31,
1996 were audited by other auditors whose report, dated March 13, 1997,
expressed an unqualified opinion on those statements.

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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

NASHVILLE, TENNESSEE

March 15, 1999

<PAGE>   36

                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Franklin Financial Corporation

We have audited the consolidated statements of income, changes in stockholders'
equity, and cash flows for the year ended December 31, 1996 of Franklin
Financial Corporation and Subsidiary. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Franklin Financial Corporation and Subsidiary for the year ended December 31,
1996, in conformity with generally accepted accounting principles.

/s/Heathcott & Mullaly, P.C.

Brentwood, Tennessee
March 13, 1997


<PAGE>   37
FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS                                                                                        1998               1997

<S>                                                                                      <C>                <C>          
Cash and cash equivalents (Notes 1 and 2)                                                $  13,089,168      $  10,696,477
Federal funds sold                                                                           8,229,000                 --
Investment securities available-for-sale, at fair value (Notes 1 and 3)                     40,134,912         25,400,895
Mortgage-backed securities available-for-sale, at fair value (Notes 1 and 3)                32,405,889         29,653,954
Investment securities held-to-maturity, fair value $4,395,168
  in 1998 and $5,231,690 in 1997 (Notes 1 and 3)                                             4,170,665          5,102,525
Mortgage-backed securities held-to-maturity, fair value
  $602,166 in 1998 and $862,890 in 1997 (Notes 1 and 3)                                        591,450            856,646
Federal Home Loan and Federal Reserve Bank stock                                             1,370,500          1,129,100
Loans held for sale (Note 1)                                                                23,642,590          3,736,909
Loans (Notes 1 and 4)                                                                      215,927,533        190,344,656
Allowance for loan losses (Notes 1 and 5)                                                   (2,193,614)        (1,827,956)
                                                                                         -------------      -------------
            Net loans                                                                      213,733,919        188,516,700

Premises and equipment, net  (Notes 1 and 9)                                                 7,532,362          6,305,752
Accrued interest receivable                                                                  2,126,364          1,889,626
Other assets (Notes 7 and 13)                                                                2,840,625          1,144,219
                                                                                         -------------      -------------
TOTAL                                                                                    $ 349,867,444      $ 274,432,803
                                                                                         =============      =============

LIABILITIES AND STOCKHOLDERS' EQUITY

DEPOSITS:

  Noninterest-bearing                                                                    $  33,317,410      $  28,112,630
  Interest-bearing                                                                         279,079,559        219,459,079
                                                                                         -------------      -------------
            Total deposits (Note 10)                                                       312,396,969        247,571,709
Repurchase agreements (Note 6)                                                               3,420,936          4,420,936
Other borrowings (Note 11)                                                                   8,423,840          3,029,541
Accrued interest payable                                                                     1,086,859          1,056,858
Other liabilities                                                                              950,064            564,087
                                                                                         -------------      -------------
            Total liabilities                                                              326,278,668        256,643,131
COMMITMENTS AND CONTINGENCIES (Notes 8 and 12)
STOCKHOLDERS' EQUITY:

  Common stock, no par value - authorized, 500,000,000 shares; issued 30,470,803 and
    6,990,362 shares at December 31, 1998 and 1997, respectively                            11,091,517          9,819,631
  Retained earnings                                                                         12,338,051          7,756,261
  Accumulated other comprehensive income                                                       159,208            213,780
                                                                                         -------------      -------------
            Total stockholders' equity (Note 15)                                            23,588,776         17,789,672
                                                                                         -------------      -------------
TOTAL                                                                                    $ 349,867,444      $ 274,432,803
                                                                                         =============      =============
</TABLE>

See notes to consolidated financial statements.






                                      -2-
<PAGE>   38

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                            1998            1997           1996 
<S>                                                     <C>             <C>             <C>        
INTEREST INCOME:
  Interest and fees on loans                            $22,140,914     $18,871,966     $14,112,610
  Taxable securities                                      3,655,304       3,193,657       2,236,597
  Tax-exempt securities                                     445,284         294,770         275,667
  Federal funds sold                                        196,169         160,896          84,539
  Deposits in financial institutions                             --              --             427
                                                        -----------     -----------     -----------
            Total interest income                        26,437,671      22,521,289      16,709,840

INTEREST EXPENSE:
  Certificates of deposit over $100,000                   5,268,052       4,442,619       2,947,262
  Other deposits                                          7,134,683       5,962,588       4,705,616
  Federal Home Loan Bank advances                           197,019          25,680           9,260
  Other borrowed funds                                      541,916         465,249          68,447
                                                        -----------     -----------     -----------
            Total interest expense                       13,141,670      10,896,136       7,730,585
                                                        -----------     -----------     -----------
NET INTEREST INCOME                                      13,296,001      11,625,153       8,979,255
PROVISION FOR LOAN LOSSES (Note 5)                          515,000         420,000         420,000
                                                        -----------     -----------     -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES      12,781,001      11,205,153       8,559,255

OTHER INCOME:
  Service charges on deposit accounts                     1,391,672       1,096,323         901,214
  Mortgage banking activities                             2,229,942       1,132,835         531,620
  Gain on sale of investment securities                     301,840         121,089          88,933
  Other service charges, commissions and fees             1,303,514         424,054         279,769
                                                        -----------     -----------     -----------
            Total other income                            5,226,968       2,774,301       1,801,536

OTHER EXPENSES:
  Salaries and employee benefits (Note 16)                5,766,239       4,401,976       3,521,772
  Occupancy (Note 12)                                     1,148,688         901,174         818,550
  Furniture and equipment                                   805,067         673,752         553,734
  Communications and supplies                               434,189         343,093         290,761
  Advertising and marketing                                 282,028         282,562         224,083
  FDIC and regulatory assessments                           105,828          90,167          67,387
  Other                                                   1,812,431       1,148,195         882,518
                                                        -----------     -----------     -----------
            Total other expenses                         10,354,470       7,840,919       6,358,805
                                                        -----------     -----------     -----------
INCOME BEFORE INCOME TAXES                                7,653,499       6,138,535       4,001,986
INCOME TAXES (Note 13)                                    2,767,001       2,250,064       1,436,501
                                                        -----------     -----------     -----------
NET INCOME                                              $ 4,886,498     $ 3,888,471     $ 2,565,485
                                                        ===========     ===========     ===========
NET INCOME PER SHARE:

  Basic                                                 $      0.17     $      0.14     $      0.09
                                                        ===========     ===========     ===========
  Diluted                                               $      0.15     $      0.12     $      0.08
                                                        ===========     ===========     ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:

  Basic                                                  28,401,805      27,850,072      27,620,624
                                                        ===========     ===========     ===========
  Diluted                                                33,181,868      32,612,828      30,604,324
                                                        ===========     ===========     ===========
</TABLE>

See notes to consolidated financial statements.




                                      -3-
<PAGE>   39

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                           ACCUMULATED
                                                 COMMON STOCK        ADDITIONAL    COMPRE-                OTHER COMPRE-
                                            ---------------------     PAID-IN      HENSIVE      RETAINED     HENSIVE 
                                              SHARES      AMOUNT      CAPITAL      INCOME       EARNINGS     INCOME       TOTAL
<S>                                         <C>        <C>          <C>         <C>           <C>          <C>        <C>         
BALANCE, JANUARY 1, 1996                    1,723,235  $ 4,308,088  $5,161,989                $ 1,302,305  $ 225,599  $ 10,997,981
Comprehensive income:
  Net income                                                                    $ 2,565,485     2,565,485                2,565,485
  Other comprehensive income, net of tax:
    Unrealized holding losses on
      securities arising during the year
      (net of tax of $38,199)                                                      (108,719)                                      
    Less: Reclassification adjustment for
      gains included in net income 
      (net of tax of $23,123)                                                       (65,810)                                      
                                                                                -----------                                        
  Other comprehensive loss                                                         (174,529)                (174,529)     (174,529)
                                                                                -----------                                        
Comprehensive income                                                            $ 2,390,956                                       
                                                                                ===========                                        
Issuance of common stock                        9,312       23,280      91,998                                             115,278
                                           ----------  -----------  ----------                -----------  ---------  ------------
BALANCE, DECEMBER 31, 1996                  1,732,547    4,331,368   5,253,987                  3,867,790     51,070    13,504,215
Comprehensive income:

  Net income                                                                    $ 3,888,471     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)                                                       252,316                                       
    Less: Reclassification adjustment for
      gains included in net income 
      (net of tax of $31,483)                                                       (89,606)                                      
                                                                                -----------                                        
  Other comprehensive income                                                        162,710                  162,710       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                                                         234,276
Subsequent two-for-one stock split          3,495,181                                                                             
                                           ----------  -----------  ----------                -----------  ---------  ------------
BALANCE, DECEMBER 31, 1997                  6,990,362    9,819,631          --                  7,756,261    213,780    17,789,672
Comprehensive income:
  Net income                                                                    $ 4,886,498     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)                                                                   168,790                                        
    Less: Reclassification adjustment for
      gains included in net income
      (net of tax of $78,478)                                                      (223,362)                                       
                                                                                -----------                                        
  Other comprehensive loss                                                          (54,572)                 (54,572)      (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                                                       1,144,150
Tax benefit of stock options exercised                     127,736                                                         127,736
Cash dividend declared; $0.01 per share                                                          (304,708)                (304,708)
                                           ----------  -----------  ----------                -----------  ---------  ------------
BALANCE, DECEMBER 31, 1998                 30,470,803  $11,091,517  $       --                $12,338,051  $ 159,208  $ 23,588,776
                                           ==========  ===========  ==========                ===========  =========  ============
</TABLE>




See notes to consolidated financial statements.


                                      -4-
<PAGE>   40


FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                            1998                1997                1996
<S>                                                                   <C>                  <C>                 <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                          $   4,886,498        $  3,888,471        $  2,565,485
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
      Depreciation, amortization and accretion                            1,023,785             679,716             537,628
      Provision for loan losses                                             515,000             420,000             420,000
      Deferred income taxes                                                 309,895             (36,181)            (34,548)
      Loans originated for sale                                         (96,949,473)        (39,056,678)        (25,152,056)
      Proceeds from sale of loans                                        89,010,999          46,632,305          25,755,653
      Gain on sale of investment securities                                (301,840)           (121,089)            (88,933)
      Gain on sale of loans                                                (141,109)            (92,202)           (124,390)
      Gain on sale of fixed assets                                             (445)               (234)             (1,950)
      Increase in accrued interest receivable                              (236,738)           (340,762)           (237,659)
      Increase in accrued interest payable                                   30,001             321,917             219,952
      Increase (decrease) in other liabilities                              192,944              96,695             (12,500)
      Increase in other assets                                           (1,949,604)           (553,422)            (30,258)
                                                                      -------------        ------------        ------------
            Net cash (used in) provided by operating activities          (3,610,087)         11,838,536           3,816,424

CASH FLOWS FROM INVESTING ACTIVITIES:
  (Increase) decrease in federal funds sold                              (8,229,000)            233,000             299,000
  Decrease in interest-bearing deposits
    in financial institutions                                                    --                  --              93,237
  Proceeds from sales of securities available-for-sale                   80,045,418          34,646,948           5,075,657
  Proceeds from maturities of securities available-for-sale              16,342,143           8,875,201          16,312,362
  Proceeds from maturities of securities held-to-maturity                 1,185,289             859,409           1,079,547
  Purchases of securities held-to-maturity                                       --          (1,638,384)         (2,832,353)
  Purchases of securities available-for-sale                           (113,774,407)        (60,138,871)        (27,559,776)
  Purchases of Federal Home Loan and Federal Reserve Bank stock            (241,400)           (191,400)           (240,700)
  Net increase in loans                                                 (37,558,317)        (44,174,735)        (46,112,890)
  Purchases of premises and equipment, net                               (1,953,685)         (2,180,409)           (337,961)
                                                                      -------------        ------------        ------------
            Net cash used in investing activities                       (64,183,959)        (63,709,241)        (54,223,877)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in deposits                                                   64,825,260          47,660,883          49,542,790
  (Decrease) increase in repurchase agreements                           (1,000,000)          4,420,936                  --
  Increase in other borrowings                                            5,394,299           1,979,541           1,050,000
  Dividends declared                                                       (304,708)                 --                  --
  Net proceeds from issuance of common stock                              1,144,150             234,276             115,278
  Tax benefit of stock options exercised                                    127,736                  --                  --
                                                                      -------------        ------------        ------------
            Net cash provided by financing activities                    70,186,737          54,295,636          50,708,068
                                                                      -------------        ------------        ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                 2,392,691           2,424,931             300,615
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                             10,696,477           8,271,546           7,970,931
                                                                      -------------        ------------        ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                $  13,089,168        $ 10,696,477        $  8,271,546
                                                                      =============        ============        ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for income taxes                          $   2,986,285        $  2,311,486        $  1,422,279
                                                                      =============        ============        ============
  Cash paid during the year for interest                              $  13,111,669        $ 10,574,219        $  7,510,633
                                                                      =============        ============        ============
</TABLE>

See notes to consolidated financial statements.





                                      -5-
<PAGE>   41

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998

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


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The accounting policies of Franklin Financial Corporation (the "Company")
      and Subsidiary 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 - During fiscal 1998, the Company adopted Statement of
      Financial Accounting Standards ("SFAS") No. 131, Disclosures About
      Segments of An Enterprise and Related Information. This Standard requires
      disclosure of segment information in a company's financial statements. The
      Company has only one reportable segment under the quantitative guidelines
      of SFAS No. 131 therefore, substantially all of the assets, liabilities,
      and operations presented in the consolidated financial statements are
      attributable to Franklin National Bank. 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 deposits, and its primary lending products are commercial business,
      real estate mortgage, and consumer loans.

      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.





                                      -6-
<PAGE>   42

      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 being 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.

      Loans are generally placed on nonaccrual 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 possible 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, consisting principally of covered call options
      written on U.S. Treasury securities, are held or issued 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.

      Effective January 1, 1997, the Company adopted the provisions of SFAS No.
      125, Accounting for Transfers and Servicing of Financial Assets and
      Extinquishments of Liabilities. This statement, which did not have a
      material effect on the Company's consolidated financial statements,
      requires that servicing assets be measured by allocating the previous
      carrying amount between the assets sold and the retained interests based
      on their relative fair values at 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.





                                      -7-
<PAGE>   43

      EARNINGS PER SHARE - Earnings per share ("EPS") for all periods have been
      computed in accordance with SFAS No. 128, 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 - In 1998, the Company adopted SFAS No. 130,
      Reporting Comprehensive Income. This statement requires the reporting of
      comprehensive income in addition to net income from operations.
      Comprehensive income is a more inclusive financial reporting methodology
      that includes disclosure of certain financial information that
      historically has not been recognized in the calculation of net income. As
      permitted by this Statement, the Company has presented this information in
      the Consolidated Statement of Changes in Stockholders' Equity.

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

2.    RESTRICTED CASH BALANCES

      The subsidiary 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 the subsidiary of approximately
      $1,893,000 were maintained to satisfy federal regulatory requirements at
      December 31, 1998.

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, 1998
      and 1997. In addition, gross unrealized gains and losses are disclosed as
      of December 31, 1998 and 1997.

 <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>



                                      -8-
<PAGE>   44

 

<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>


<TABLE>
<CAPTION>
                                                                  1997
                                     -----------------------------------------------------------------
                                                           GROSS           GROSS
                                         AMORTIZED       UNREALIZED      UNREALIZED           FAIR
       AVAILABLE-FOR-SALE                   COST           GAINS           LOSSES            VALUE
<S>                                     <C>               <C>            <C>              <C>        
       U.S. Treasury obligations        $13,679,288       $ 60,974       $    (587)       $13,739,675
       Obligations of U.S.                
         government agencies              7,094,010         38,726         (10,851)         7,121,885

       Obligations of state and           
         political subdivisions           4,068,251        124,613          (3,816)         4,189,048
       Corporate notes                      330,237         20,050              --            350,287
                                        -----------       --------       ---------        -----------
       Investment securities             25,171,786        244,363         (15,254)        25,400,895

       Mortgage-backed securities        29,538,260        182,313         (66,619)        29,653,954
                                        -----------       --------       ---------        -----------
       TOTAL AVAILABLE-FOR-SALE         $54,710,046       $426,676       $ (81,873)       $55,054,849
                                        ===========       ========       =========        ===========
</TABLE>




<TABLE>
<CAPTION>
                                                                  1997
                                     -----------------------------------------------------------------
                                                           GROSS           GROSS
                                         AMORTIZED       UNREALIZED      UNREALIZED           FAIR
       HELD-TO-MATURITY                     COST           GAINS           LOSSES            VALUE
<S>                                     <C>               <C>            <C>              <C>        
       U.S. Treasury obligations        $   507,307       $     --       $      (7)       $   507,300
       Obligations of U.S.                
         government agencies            1,590,710         13,603              --          1,604,313

       Obligations of state and           
         political subdivisions           2,974,508        113,084              --          3,087,592
       Corporate notes                       30,000          2,485              --             32,485
                                        -----------       --------       ---------        -----------
       Investment securities              5,102,525        129,172              (7)         5,231,690

       Mortgage-backed securities           856,646          8,499          (2,255)           862,890
                                        -----------       --------       ---------        -----------
       TOTAL HELD-TO-MATURITY           $ 5,959,171       $137,671       $  (2,262)       $ 6,094,580
                                        ===========       ========       =========        ===========
</TABLE>

      Gross gains of $319,254, $148,280, and $90,077 and gross losses of
      $17,414, $27,191, and $1,144 were realized on sales of securities
      available for sale in 1998, 1997 and 1996, respectively.





                                      -9-
<PAGE>   45


      The amortized cost and fair value of debt securities at December 31, 1998,
      by contractual maturity are shown below. Expected maturities will differ
      from contractual maturities because borrowers may have the right to call
      or prepay obligations.

   <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                    $ 4,245,152          $ 4,265,957          $ 1,353,329         $ 1,358,478
Due after 1-5 years                         12,125,147           11,992,362              445,349             488,071
Due after 5-10 years                         8,077,634            7,972,147            1,977,228           2,109,648
Due after ten years                         15,435,446           15,904,446              394,759             438,971
                                           -----------          -----------          -----------         -----------
                                            39,883,379           40,134,912            4,170,665           4,395,168
Mortgage-backed securities                  32,400,638           32,405,889              591,450             602,166
                                           -----------          -----------          -----------         -----------
                                           $72,284,017          $72,540,801          $ 4,762,115         $ 4,997,334
                                           ===========          ===========          ===========         ===========
</TABLE>

      Fair value of securities is established by an independent pricing service
      as of the approximate dates indicated. Securities carried at $51,859,206
      and $51,283,039 at December 31, 1998 and 1997, respectively, were pledged
      to secure deposits and for other purposes.

      At December 31, 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, 1998 and 1997 are summarized as follows:

 <TABLE>
<CAPTION>
                                                         1998                 1997
<S>                                                 <C>                  <C>          
       Commercial, financial and agricultural       $  58,857,043        $  43,343,432
       Real estate - construction                      29,334,725           33,708,093
       Real estate - mortgage                         110,244,885           98,732,668
       Consumer                                        18,006,502           15,000,838
                                                    -------------        -------------
                                                      216,443,155          190,785,031
       Deferred loan fees                                (515,622)            (440,375)
                                                    -------------        -------------
       Total loans                                  $ 215,927,533        $ 190,344,656
                                                    =============        =============
</TABLE>

      Direct and indirect loans to officers and directors during 1998 and 1997
      are as follows:

 
<TABLE>
<CAPTION>
                                                         1998                1997
<S>                                                 <C>                  <C>          
       Balance at beginning of year                 $   1,621,265        $   1,496,491
         New loan disbursements                         1,885,494            1,255,483
         Repayments                                    (1,384,653)          (1,130,709)
                                                    -------------        -------------
       Balance at end of year                       $   2,122,106        $   1,621,265
                                                    =============        =============
</TABLE>


      In addition, there were approximately $240,274 of undisbursed loan
      commitments to such parties at December 31, 1998.






                                      -10-
<PAGE>   46

      During 1998, the Company capitalized servicing rights on certain
      commercial loans originated and sold with servicing retained in accordance
      with SFAS No. 125. The total amount capitalized for these servicing rights
      was $186,820 as of December 31, 1998, and amortization of the servicing
      rights amount to $11,748 during 1998.

5.    ALLOWANCE FOR LOAN LOSSES

      Transactions in the allowance for loan losses were as follows:

 
<TABLE>
<CAPTION>
                                                            1998               1997               1996
<S>                                                     <C>                <C>                <C>        
       Balance at beginning of year                     $ 1,827,956        $ 1,471,904        $ 1,061,609
       Provisions charged to operating expense              515,000            420,000            420,000
       Loans charged off                                   (158,983)           (76,419)           (22,167)
       Recoveries on previously charged off loans             9,641             12,471             12,462
                                                        -----------        -----------        -----------
       Balance at end of year                           $ 2,193,614        $ 1,827,956        $ 1,471,904
                                                        ===========        ===========        ===========
</TABLE>

      At December 31, 1998 and 1997, the Bank had loans that were specifically
      classified as impaired in the amount of approximately $33,000 and $29,800,
      respectively. The allowance for loan losses related to impaired loans
      amount to $25,421 and $25,000 at December 31, 1998 and 1997, respectively.

6.    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.    MORTGAGE BANKING

      The unpaid principal balances of mortgage loans serviced for others was
      approximately $76,866,500 and $32,836,000 at December 31, 1998 and 1997,
      respectively.

      Custodial escrow balances maintained in connection with the foregoing loan
      servicing, and included in demand deposits, were approximately $2,726,500
      and $611,000 at December 31, 1998 and 1997, respectively.

      As discussed in Note 1, the Company adopted SFAS No. 125 in 1997. Mortgage
      servicing rights, net of amortization, totaled $1,256,593 and $332,765 in
      1998 and 1997, respectively. Amortization of servicing rights amount to
      $158,034, $69,224, and $42,914 during 1998, 1997 and 1996, respectively.

      For purposes of measuring impairment, the rights are stratified based on
      the following predominant risk characteristics of the underlying loans:
      loan type, interest rate, loan size, origination date, loan term and
      collateral location. The amount of impairment recognized, if any, is the
      amount by which the capitalized mortgage servicing rights for a stratum
      exceed their fair value.

8.    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 




                                      -11-
<PAGE>   47

      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 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                                                                   $ 52,928,120
    Credit card commitments                                                                             339,063
    Standby letters of credit                                                                         5,437,055
    Commitments to originate mortgages                                                                6,505,323
    Commitments to sell mortgages                                                                    20,790,187
</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 a majority of its originated loans to governmental agencies
      and private investors. The Bank has entered into various commitments to
      sell mortgage loans as of December 31, 1998.

      Derivative financial instruments, consisting principally of covered call
      options written on U.S. Treasury Securities, 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 Bank 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.
      Such positions held in U.S. Treasury note contracts at December 31, 1998
      and 1997, were approximately $-0- and $10,000,000, respectively. Deferred
      gains primarily representing premiums received of $-0- and $26,000 at
      December 31, 1998 and 1997, respectively, are included in other
      liabilities on the consolidated balance sheets.





                                      -12-
<PAGE>   48

      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.

      In the normal course of business, the Bank 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.

9.    PREMISES AND EQUIPMENT

      Premises and equipment at December 31, 1998 and 1997 are summarized as
      follows:


<TABLE>
<CAPTION>
                                                                 1998               1997
<S>                                                         <C>                 <C>        
       Land                                                 $  1,086,122        $   429,227
       Buildings                                               2,187,930          1,635,562
       Leasehold improvements - buildings                      3,586,441          3,454,914
       Furniture and equipment                                 3,361,520          2,859,749
                                                            ------------        -----------
                                                              10,222,013          8,379,452
       Less accumulated depreciation and amortization         (2,689,651)        (2,073,700)
                                                            ------------        -----------
                                                            $  7,532,362        $ 6,305,752
                                                            ============        ===========
</TABLE>


10.   DEPOSITS

      A summary of deposits at December 31, 1998 and 1997 follows:


<TABLE>
<CAPTION>
                                                                1998                1997
<S>                                                         <C>                 <C>        
       Non-interest bearing demand                          $ 33,317,410        $ 28,112,630
       Interest-bearing demand                                74,847,304          56,059,953
       Savings                                                10,319,273           8,050,119
       Certificates of deposit of $100,000 or more           112,977,781          86,605,572
       Other time                                             80,935,201          68,743,435
                                                            ------------        ------------
                                                            $312,396,969        $247,571,709
                                                            ============        ============
</TABLE>


      At December 31, 1998, the scheduled maturities of certificates of deposits
      and other time deposits are as follows:

<TABLE>
<S>                                                   <C>         
       1999                                           $180,961,279
       2000                                              8,916,198
       2001                                              1,636,226
       2002                                                619,407
       Thereafter                                        1,779,872
                                                      ------------
                                                      $193,912,982
                                                      ============
</TABLE>

11.   OTHER BORROWINGS

      The Company has a $7,500,000 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, 1998 was $1,680,000.
      Interest floats at the lending bank's base rate, 6.9% at December 31,
      1998, and is payable quarterly. Principal payments are required annually
      on January 31 based on the outstanding principal balance. 




                                      -13-
<PAGE>   49

      The Bank also has federal funds lines (or the equivalent thereof) with
      correspondent banks totaling approximately $24,500,000 at December 31,
      1998. No amounts were outstanding as of December 31,1998.

      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, 6.9% at December 31, 1998, and is payable monthly. The
      note is secured by the Williamson Square branch building. The amount
      outstanding at December 31, 1998 is $743,840.

      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, 1998, the bank had outstanding $6,000,000 in
      convertible fixed rate advances.

12.   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 $489,255 in
      1998, $390,206 in 1997, and $300,028 in 1996. Rent expense paid to
      unrelated parties amounted to $192,646 in 1998, $148,806 in 1997, and
      $244,041 in 1996.

      Minimum lease payments, exclusive of any increases related to the Consumer
      Price Index, are as follows:

<TABLE>
<CAPTION>
                                        RELATED
                                         PARTY            OTHERS            TOTAL
<S>                                    <C>                <C>              <C>       
       1999                            $  506,109         $188,039         $  694,148
       2000                               473,109          169,756            642,865
       2001                               440,108          161,192            601,300
       2002                               440,109          133,537            573,646
       2003                               440,109           88,200            528,309
       Future years                     2,402,259          110,250          2,512,509
                                       ----------         --------         ----------
       Total lease commitments         $4,701,803         $850,974         $5,552,777
                                       ==========         ========         ==========
</TABLE>

13.   INCOME TAXES

      Income taxes consist of the following:

<TABLE>
<CAPTION>
                                                     1998              1997               1996
<S>                                               <C>              <C>                <C>        
       Current:
         Federal                                  $1,984,528       $ 1,911,915        $ 1,222,898
         State                                       472,578           374,330            248,151
                                                  ----------       -----------        -----------
           Total current expense                   2,457,106         2,286,245          1,471,049
       Deferred:
         Federal                                     263,356           (30,754)           (27,239)
         State                                        46,539            (5,427)            (7,309)
                                                  ----------       -----------        -----------
           Total deferred expense (benefit)          309,895           (36,181)           (34,548)
                                                  ----------       -----------        -----------
       Total income taxes                         $2,767,001       $ 2,250,064        $ 1,436,501
                                                  ==========       ===========        ===========
</TABLE>



                                      -14-
<PAGE>   50


      Net deferred income tax liabilities and assets are included in other
      liabilities and other assets, respectively, on the balance sheet.
      Significant temporary differences between tax and financial reporting that
      give rise to net deferred tax assets (liabilities) are as follows at
      December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                      1998               1997
<S>                                                               <C>                  <C>      
       Deferred tax assets:
         Allowance for loan losses                                $   844,341          $ 661,174
                                                                  -----------          ---------
                   Total deferred tax assets                          844,341            661,174

       Deferred tax liabilities:
         Mortgage servicing rights                                   (572,666)          (133,106)
         Accumulated depreciation                                    (280,303)          (253,841)
         FHLB stock dividends                                         (85,328)           (58,288)
         Unrealized gain on securities available-for-sale             (97,576)          (132,525)
                                                                  -----------          ---------
                   Total deferred tax liabilities                  (1,035,873)          (577,760)
                                                                  -----------          ---------
       Net deferred tax (liability) asset                         $  (191,532)         $  83,414
                                                                  ===========          =========
</TABLE>

      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>
                                                                    1998                 1997                 1996

<S>                                                             <C>                  <C>                  <C>        
       Tax expense at statutory rate                            $ 2,602,190          $ 2,087,102          $ 1,360,675
       Increase (decrease) in taxes resulting from:
         Tax-exempt income                                         (151,397)            (100,222)             (93,727)
         State income taxes, net of federal tax benefit             290,425              247,058              158,956
         Disallowed interest expense                                 21,555               13,538               13,899
         Other, net                                                   4,228                2,588               (3,302)
                                                                -----------          -----------          -----------
       Total income taxes                                       $ 2,767,001          $ 2,250,064          $ 1,436,501
                                                                ===========          ===========          ===========
</TABLE>

14.   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
      granted 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 





                                      -15-
<PAGE>   51

      declared which would adjust the options outstanding and the number of
      shares authorized by the Plan according to the terms of the stock split.
      As more fully discussed in Note 15, 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 and
      800,000 options issued in 1997 and 1998, 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 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:

<TABLE>
<CAPTION>
                                                          1998                  1997                  1996
<S>                                              <C>                   <C>                   <C>          
       Net income
         As reported                             $   4,886,498         $   3,888,471         $   2,565,485
         Pro forma                                   3,699,872             2,922,662             2,068,800
       Net income per share 
         As reported:
           Basic                                 $        0.17         $        0.14         $        0.09
           Diluted                                        0.15                  0.12                  0.08
         Pro forma:                                   
           Basic                                          0.13                  0.11                  0.08
           Diluted                                        0.11                  0.10                  0.07
</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>
                                                   1998              1997            1996
<S>                                             <C>              <C>                <C>    
       Dividend yield                             0.6%               N/A                 1%
       Expected volatility                         46%               29%                28%
       Risk-free interest rate range              5.5%           5.8% to 6.5%         6.50%
       Expected life                            5-10 years         7 years           9 years
</TABLE>



                                      -16-
<PAGE>   52


      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, 1998, 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, 1996                        3,598,976          $   0.43
           Options granted                         1,894,240              0.78
           Options exercised                        (119,408)             0.69
                                                   ---------  
       Options and warrants outstanding
         at December 31, 1996                      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
                                                   ========= 
</TABLE>


      The weighted-average fair value of options, calculated using the
      Black-Scholes option pricing model, granted during 1998, 1997 and 1996 is
      $1.56, $0.59, and $0.33 per share, respectively.

      The following table summarizes information about the stock options and
      warrants outstanding under the Company's plans at December 31, 1998:


<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          2,695,912          $   0.61           5.65       2,695,912

       $0.76-$1.13          1,954,000          $   1.13          10.28       1,954,000

       $1.14-$2.75          1,276,640          $   2.75          12.10       1,120,000
                           ----------                                        ---------
                            5,926,552          $   1.24           8.57       5,769,912
                            =========                                        =========
</TABLE>


15.   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 




                                      -17-
<PAGE>   53

      net profits for any given year combined with the retained net profits of
      the two preceding years. Cash dividends are also restricted, under the
      credit arrangement, 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, 1998 and 1997, that the Company and the Bank
      are in compliance with all capital adequacy requirements to which they are
      subject.

      As of December 31, 1998, 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.

      Actual capital amounts and ratios at December 31, 1998 and 1997, are as
      follows:

<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>           
       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>







                                      -18-
<PAGE>   54

 <TABLE>
<CAPTION>
                                                                      TO BE WELL CAPITALIZED
                                             FOR CAPITAL             UNDER PROMPT CORRECTIVE
                                          ADEQUACY PURPOSES             ACTION PROVISIONS                 ACTUAL
                                  --------------------------------    ----------------------   -------------------------------
DECEMBER 31, 1997                   FRANKLIN                          FRANKLIN                  FRANKLIN
                                     NATIONAL           CON-           NATIONAL      CON-        NATIONAL           CON-
                                       BANK           SOLIDATED          BANK      SOLIDATED       BANK           SOLIDATED
<S>                               <C>               <C>               <C>                     <C>               <C>           
       Amount:
         Tier I to average
           assets                  $   10,766,274    $   10,805,361    $   13,457,843    N/A   $   19,537,987    $   17,542,616
         Tier I to risk-
           weighted assets              7,718,760         7,757,600        11,578,140    N/A       19,537,987        17,542,616
         Total capital to risk-
           weighted assets             15,437,520        15,515,200        19,296,900    N/A       21,365,943        19,370,572

       Ratios:
         Tier I to average
           assets                           4.00%             4.00%             5.00%    N/A            7.26%             6.49%
         Tier I to risk-
           weighted assets                  4.00%             4.00%             6.00%    N/A           10.12%             9.05%
         Total capital to risk-
           weighted assets                  8.00%             8.00%            10.00%    N/A           11.07%             9.99%
</TABLE>


      In the calculation of basic and diluted EPS, net income is identical.
      Below is a reconciliation for the three years in the period ended December
      31, 1998, of the difference between basic weighted average common shares
      outstanding and diluted weighted average common shares outstanding.


<TABLE>
<CAPTION>
                                                        1998           1997           1996
<S>                                                 <C>            <C>            <C>       
       Weighted average common shares - basic       28,401,805     27,850,072     27,620,624
       Effect of dilutive securities:
         Stock options                               4,300,750      2,775,852        696,004
         Warrants                                      479,313      1,986,904      2,287,696
                                                    ----------     ----------     ----------
       Weighted average common shares - diluted     33,181,868     32,612,828     30,604,324
                                                    ==========     ==========     ==========
</TABLE>


      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 have been adjusted to reflect the stock
      splits on a retroactive basis.

16.   EMPLOYEE BENEFITS

      The Company has a 401(k) savings plan for all employees who have completed
      ninety days of service and are eighteen years of age or more. The Company
      generally matches fifty percent of employee contributions to the plan up
      to a maximum of three 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 $78,658, $56,815, and
      $45,249, in 1998, 1997 and 1996, respectively.






                                      -19-
<PAGE>   55

17.   FAIR VALUES OF FINANCIAL INSTRUMENTS

      The estimated fair values of the Company's financial instruments are as
      follows at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                             1998                             1997
                                                 ----------------------------  - ------------------------------
                                                  CARRYING           FAIR           CARRYING          FAIR
                                                   AMOUNT            VALUE           AMOUNT           VALUE
<S>                                             <C>              <C>              <C>              <C>         
       Financial assets:
         Cash and cash equivalents              $ 13,089,168     $ 13,089,168     $ 10,696,477     $ 10,696,477
         Federal funds sold                        8,229,000        8,229,000               --               --
         Securities available-for-sale            72,540,801       72,540,801       55,054,849       55,054,849
         Securities held-to-maturity               4,762,115        4,997,334        5,959,171        6,094,580
         Federal Home Loan and Federal
           Reserve Bank Stock                      1,370,500        1,370,500        1,129,100        1,129,100
         Loans                                   215,927,533      217,727,790      190,344,656      189,267,872
         Loans held for sale                      23,642,590       23,633,860        3,736,909        3,736,909
         Servicing rights                          1,431,665        1,431,665          332,765          332,765
         Accrued interest receivable               2,126,364        2,126,364        1,889,626        1,889,626

       Financial liabilities:
         Deposits with defined maturities        193,912,983      194,650,266      155,349,007      155,273,202
         Deposits with undefined maturities      118,483,986      118,483,986       92,222,704       92,222,704
         Other borrowings                         11,844,776       11,844,776        7,450,477        7,450,477
         Accrued interest payable                  1,086,859        1,086,859        1,056,858        1,056,858
         Off-balance sheet instruments                    --           68,002               --           99,436
</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.
      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.
      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 - The carrying amounts of other borrowings 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 





                                      -20-
<PAGE>   56

      and the counterparties' credit standings. The fees charged for financial 
      futures contracts are also representative of the fair value of such 
      contracts.

18.   PARENT COMPANY ONLY FINANCIAL INFORMATION

      Financial information for Franklin Financial Corporation (parent company)
      as of December 31, 1998 and 1997 and for each of the three years in the
      period ended December 31, 1998 is as follows:

<TABLE>
<CAPTION>
       CONDENSED BALANCE SHEETS

       ASSETS                                              1998                   1997
<S>                                                    <C>                    <C>        
       Cash                                            $    87,187            $    20,259
       Investment in subsidiary                         24,847,999             19,785,056
       Other                                             2,385,118              1,379,247
                                                       -----------            -----------
       TOTAL                                           $27,320,304            $21,184,562
                                                       ===========            ===========

       LIABILITIES AND STOCKHOLDERS' EQUITY

       Liabilities                                     $ 3,731,528            $ 3,394,890
       Stockholders' equity                             23,588,776             17,789,672
                                                       -----------            -----------
       TOTAL                                           $27,320,304            $21,184,562
                                                       ===========            ===========
</TABLE>




<TABLE>
<CAPTION>
       CONDENSED STATEMENTS OF INCOME                                       1998             1997             1996
<S>                                                                    <C>              <C>              <C>        
       INCOME:
         Management fees and rental income                             $   305,015      $   164,248      $    72,000
         Interest income                                                     1,918            2,016            6,379
                                                                       -----------      -----------      -----------
                                                                           306,933          166,264           78,379
       EXPENSES:
         Interest expense                                                  232,861          218,336           32,335
         Salaries and employee benefits                                    177,585           23,336           34,868
         Other                                                             246,503          147,039           82,495
                                                                       -----------      -----------      -----------
                                                                           656,949          388,711          149,698
       LOSS BEFORE INCOME TAXES AND
         EQUITY IN UNDISTRIBUTED
         EARNINGS OF SUBSIDIARY                                           (350,016)        (222,447)         (71,319)

       INCOME TAX BENEFIT                                                  118,999           75,631           24,207
                                                                       -----------      -----------      -----------

       LOSS BEFORE EQUITY IN
         UNDISTRIBUTED EARNINGS
         OF SUBSIDIARY                                                    (231,017)        (146,816)         (47,112)

       EQUITY IN UNDISTRIBUTED
         EARNINGS OF SUBSIDIARY                                          5,117,515        4,035,287        2,612,597
                                                                       -----------      -----------      -----------
       NET INCOME                                                      $ 4,886,498      $ 3,888,471      $ 2,565,485
                                                                       ===========      ===========      ===========
</TABLE>


                                      -21-
<PAGE>   57

<TABLE>
<CAPTION>
       CONDENSED STATEMENTS OF CASH FLOWS:                                 1998             1997             1996
<S>                                                                    <C>              <C>              <C>        
       CASH FLOWS FROM OPERATING ACTIVITIES:
         Net income                                                    $ 4,886,498      $ 3,888,471      $ 2,565,485
         Adjustments to reconcile net income
           to net cash (used in) provided by operating activities:
             Depreciation                                                   25,245           23,141               --
             Equity in undistributed earnings of subsidiary             (5,117,515)      (4,035,287)      (2,612,597)
             Decrease (increase) in other assets                          (374,223)         (72,997)          44,721
             Increase in other liabilities                                 422,340           15,167          125,526
                                                                       -----------      -----------      -----------
                 Net cash (used in) provided by
                   operating activities                                   (157,655)        (181,505)         123,135

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

       CASH FLOWS FROM FINANCING ACTIVITIES:
           Dividends payable                                              (304,708)              --               --
           Net proceeds from issuance of common stock                    1,271,886          234,276          115,278
           Purchase of subsidiary stock                                         --       (1,100,000)      (1,400,000)
           (Repayments) proceeds of/from borrowings, net                   (85,701)       1,979,541        1,050,000
                                                                       -----------      -----------      -----------
                 Net cash provided by (used in)
                    financing activities                                   881,477        1,113,817         (234,722)
                                                                       -----------      -----------      -----------

       NET INCREASE (DECREASE) IN CASH                                      66,928          (52,228)        (111,587)
       CASH AT BEGINNING OF YEAR                                            20,259           72,487          184,074
                                                                       -----------      -----------      -----------
       CASH AT END OF YEAR                                             $    87,187      $    20,259      $    72,487
                                                                       ===========      ===========      ===========

</TABLE>






                                      -22-
<PAGE>   58


ITEM  8.  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 9, 10, 11 and 12 of this Report will
be filed as an amendment to this Report on or before April 30, 1999 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 13.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)           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 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") and (xi) 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.

 Exhibit No.               Description of Exhibit
 -----------               ----------------------

*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.

*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).




                                      -23-
<PAGE>   59

*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).

*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).

*10.15     -- 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 17, 1995 by and between
              Franklin Financial Corporation and Gordon E. Inman (1995 10-QSB).

*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.

*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.

 23.2      -- Consent of Heathcott & Mullaly P.C.


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

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
ended December 31, 1998.



                                      -24-
<PAGE>   60

                                   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 26, 1999              By: /s/ Richard E. Herrington
                                      ----------------------------------------
                                      Richard E. Herrington
                                      President and Chief Executive Officer
                                     (principal executive and financial officer)

Date: March 26, 1999              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 26, 1999
-------------------------------------   Executive Officer
Richard E. Herrington                   and Director

/s/ Gordon E. Inman                     Chairman of the Board                    March 26, 1999
-------------------------------------         
Gordon E. Inman                         

/s/ Charles R. Lanier                   Director                                 March 26, 1999
-------------------------------------
Charles R. Lanier

/s/ D. Wilson Overton                   Director                                 March 26, 1999
-------------------------------------
D. Wilson Overton

/s/ Edward M. Richey                    Director                                 March 26, 1999
-------------------------------------
Edward M. Richey

/s/ Edward P. Silva                     Director                                 March 26, 1999
-------------------------------------
Edward P. Silva
</TABLE>





<PAGE>   61

                                  EXHIBIT INDEX

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

3.2.2         Articles of Amendment dated May 19, 1998.

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.

23.1          Consent of Deloitte & Touche LLP.

23.2          Consent of Heathcott & Mullaly, P.C.

27.1          Financial Data Schedule (for SEC use only).