<PAGE>   1




                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB



MARK ONE

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
                For the quarterly period ended SEPTEMBER 30, 1998

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
 EXCHANGE ACT OF 1934 
               For the transition period from ________ to ________

                         Commission File Number 0-24161

                           MURFREESBORO BANCORP, INC.
                           --------------------------
             (Exact Name of Registrant As Specified in Its Charter)

          Tennessee                                      62-1694317
(State or Other Jurisdiction of              (IRS Employer Identification No.)
Incorporation or Organization)

              615 Memorial Boulevard, Murfreesboro, Tennessee 37129
              -----------------------------------------------------
              (Address of principal executive offices and Zip Code)

                                 (615) 890-1111
                                 --------------
              (Registrant's telephone Number, including area code)

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       
   ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.

Common stock outstanding:  907,609 shares at November 12, 1998.



<PAGE>   2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


                           MURFREESBORO BANCORP, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                               SEPTEMBER 30, 1998



                                 C O N T E N T S
<TABLE>
<CAPTION>

                                                                         Page
                                                                        Number
                                                                        ------

<S>                                                                     <C>
Consolidated Balance Sheets .........................................      2

Consolidated Statements of Operations ...............................     3-4

Consolidated Statement of Cash Flows ................................      5

Notes to Consolidated Financial Statements ..........................      6

</TABLE>


                                       1


<PAGE>   3


                           MURFREESBORO BANCORP, INC.

                           CONSOLIDATED BALANCE SHEETS

                 AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
                                   (UNAUDITED)

                       (Tabular amounts are in thousands)

<TABLE>
<CAPTION>

         ASSETS
                                                                              Sept. 30,            Dec.31,
                                                                                1998                1997
                                                                             (Unaudited)
<S>                                                                           <C>                  <C>
Cash and due from banks                                                         $1,270              $1,006
Federal funds sold                                                              22,536               7,704
-----------------------------------------------------------------------------------------------------------
   Total cash and cash equivalents                                              23,806               8,710
-----------------------------------------------------------------------------------------------------------

Securities available for sale                                                   18,089              14,732
Securities held to maturity                                                      5,894                  --
-----------------------------------------------------------------------------------------------------------
   Total investment securities                                                  23,983              14,732
-----------------------------------------------------------------------------------------------------------

Loans, less allowance for possible loan losses
   of $403,000 and $68,000, respectively                                        31,843               5,333
Premises and equipment, net                                                      1,592               1,558
Accrued interest receivable                                                        534                 149
Other assets                                                                       120                 128
-----------------------------------------------------------------------------------------------------------
   Total assets                                                                $81,878             $30,610
===========================================================================================================

         LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Deposits                                                                       $68,560             $21,765
Securities sold under agreements to repurchase                                   4,650                  --
Accrued interest payable                                                           184                  74
Other liabilities                                                                  112                  81
-----------------------------------------------------------------------------------------------------------
   Total liabilities                                                            73,506              21,920
-----------------------------------------------------------------------------------------------------------

Contingencies                                                                       --                  --

Shareholders' equity :
Preferred stock, no assigned value or rights, 1,000,000 shares authorized,
   no shares issued or outstanding                                                  --                  --
Common stock, $5.00 par value, 2,000,000 shares authorized
   and 907,609 shares issued and outstanding                                     4,538               4,538
Additional paid-in capital                                                       4,530               4,530
Deficit                                                                           (769)               (369)
-----------------------------------------------------------------------------------------------------------
   Realized shareholders' equity                                                 8,299               8,699
Accumulated other comprehensive income                                              73                  (9)
-----------------------------------------------------------------------------------------------------------
   Total shareholders' equity                                                    8,372               8,690
-----------------------------------------------------------------------------------------------------------
   Total liabilities and shareholders' equity                                  $81,878             $30,610
===========================================================================================================
</TABLE>


See notes to consolidated financial statements.



                                        2


<PAGE>   4


                           MURFREESBORO BANCORP, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                                   (UNAUDITED)

           (Tabular amounts are in thousands except per share amounts)

<TABLE>

<S>                                                                          <C>
Interest income:
   Interest and fees on loans                                                $1,200
   Interest on taxable investment securities                                  1,002
   Interest on federal funds sold                                               188
-----------------------------------------------------------------------------------
     Total interest income                                                    2,390
-----------------------------------------------------------------------------------
Interest expense:
   Interest on negotiable order of withdrawal accounts                          555
   Interest on money market demand accounts                                     170
   Interest on savings deposits                                                   3
   Interest on certificates of deposit                                          805
-----------------------------------------------------------------------------------
     Total interest expense on deposits                                       1,533
   Interest on securities sold under agreement to repurchase                     26
-----------------------------------------------------------------------------------
     Total interest expense                                                   1,559
-----------------------------------------------------------------------------------
     Net interest income                                                        831

Provision for possible loan losses                                              335
-----------------------------------------------------------------------------------
     Net interest income after provision for possible loan losses               496
-----------------------------------------------------------------------------------

Non-interest income:
   Service charges on deposits                                                   82
   Other fees and commissions                                                     8
   Other non-interest income                                                     15
-----------------------------------------------------------------------------------
     Total non-interest income                                                  105
-----------------------------------------------------------------------------------
Non-interest expense:
   Salaries and employee benefits                                               487
   Occupancy expenses, net                                                       54
   Furniture and equipment expense                                               62
   Other non-interest expense                                                   398
-----------------------------------------------------------------------------------
     Total non-interest expense                                               1,001
-----------------------------------------------------------------------------------
     Loss before income taxes                                                  (400)

Income tax benefit                                                               --
-----------------------------------------------------------------------------------
         Net loss                                                             $(400)
===================================================================================
         Loss per share - basic ( no dilutive items outstanding)             $(0.44)
===================================================================================
</TABLE>


See notes to consolidated financial statements.



                                        3


<PAGE>   5



                           MURFREESBORO BANCORP, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998
                                   (UNAUDITED)

           (Tabular amounts are in thousands except per share amounts)

<TABLE>
<S>                                                                        <C>
Interest income:
   Interest and fees on loans                                                $587
   Interest on taxable investment securities                                  374
   Interest on federal funds sold                                              80
---------------------------------------------------------------------------------
     Total interest income                                                  1,041
---------------------------------------------------------------------------------
Interest expense:
   Interest on negotiable order of withdrawal accounts                        241
   Interest on money market demand accounts                                    71
   Interest on savings deposits                                                 1
   Interest on certificates of deposit                                        358
---------------------------------------------------------------------------------
     Total interest expense on deposits                                       671
   Interest on securities sold under agreement to repurchase                   24
---------------------------------------------------------------------------------
     Total interest expense                                                   695
---------------------------------------------------------------------------------
     Net interest income                                                      346

Provision for possible loan losses                                            106
---------------------------------------------------------------------------------
     Net interest income after provision for possible loan losses             240
---------------------------------------------------------------------------------

Non-interest income:
   Service charges on deposits                                                 46
   Other fees and commissions                                                   4
   Other non-interest income                                                    9
---------------------------------------------------------------------------------
     Total non-interest income                                                 59
---------------------------------------------------------------------------------
Non-interest expense:
   Salaries and employee benefits                                             181
   Occupancy expenses, net                                                     22
   Furniture and equipment expense                                             23
   Other non-interest expense                                                 154
---------------------------------------------------------------------------------
     Total non-interest expense                                               380
---------------------------------------------------------------------------------
     Loss before income taxes                                                 (81)

Income tax benefit                                                             --
---------------------------------------------------------------------------------
         Net loss                                                            $(81)
=================================================================================
         Loss per share - basic (no dilutive items outstanding)            $(0.09)  
=================================================================================
</TABLE>


See notes to consolidated financial statements.




                                        4


<PAGE>   6


                           MURFREESBORO BANCORP, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                                   (UNAUDITED)

                       (Tabular amounts are in thousands)

<TABLE>
<S>                                                                           <C>
Operating activities:
   Net loss                                                                     $(400)
   Adjustments to reconcile net earnings to net cash provided by 
     (used in) operating activities:
     Provision for loan losses                                                    335
     Provision for depreciation, amortization and accretion, net                   81
     Changes in assets and liabilities:
        Increase in accrued interest receivable                                  (385)
        Increase in other assets                                                   (5)
        Increase in accrued interest payable                                      110
        Decrease in other liabilities                                              29
-------------------------------------------------------------------------------------
     Net cash used by operating activities                                       (235)
-------------------------------------------------------------------------------------

Investing activities:
   Purchase of securities available for sale                                  (11,515)
   Purchase of securities held to maturity                                     (7,405)
   Maturities and calls of securities available for sale                        8,250
   Maturities and calls of securities held to maturity                          1,500
   Increase in loans, net                                                     (26,845)
   Additions to premises and equipment                                            (99)
-------------------------------------------------------------------------------------
   Net cash used by investing activities                                      (36,114)
-------------------------------------------------------------------------------------

Financing activities:
   Net increase in deposits                                                    46,795
   Net increase in securities sold under agreement to repurchase                4,650
-------------------------------------------------------------------------------------
   Net cash provided by financing activities                                   51,445
-------------------------------------------------------------------------------------

Net decrease in cash and cash equivalents                                      15,096

Cash and cash equivalents at the beginning of the period                        8,710
-------------------------------------------------------------------------------------


Cash and cash equivalents at the end of the period                            $23,806
=====================================================================================

Supplemental disclosure of cash flow information:

Cash paid during the year for:

        Interest                                                               $1,174
=====================================================================================
Non-cash transactions:

        Decrease in unrealized loss on securities available for sale              $82
=====================================================================================
</TABLE>


See notes to consolidated financial statements.



                                        5



<PAGE>   7


                           MURFREESBORO BANCORP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1998

                                   (UNAUDITED)


        (1) BASIS OF PRESENTATION
            The unaudited consolidated financial statements include the accounts
            of Murfreesboro Bancorp, Inc. and its subsidiary Bank of
            Murfreesboro. The accompanying consolidated financial statements
            have been prepared without audit, pursuant to the rules and
            regulations of the Securities and Exchange Commission. Certain
            information and footnote disclosures normally included in financial
            statements prepared in accordance with generally accepted accounting
            principles have been condensed or omitted pursuant to such rules and
            regulations. In the opinion of management, the consolidated
            financial statements contain all adjustments and disclosures
            necessary to summarize fairly the financial position of the Company
            as of September 30, 1998 and December 31, 1997, the results of
            operations for the nine months and quarter ended September 30, 1998,
            comprehensive earnings for the nine months and quarter ended
            September 30, 1998 and changes in cash flows for the nine months
            ended September 30, 1998. All significant intercompany transactions
            have been eliminated. The interim consolidated financial statements
            should be read in conjunction with the notes to the consolidated
            financial statements presented in the Company's Form 10-SB. The
            results of the interim periods are not necessarily indicative of the
            results to be expected for the complete fiscal year. The Company was
            basically inactive during the first nine months of 1997 so no
            meaningful comparative financial data is presented for the nine
            months and quarter ended September 30, 1997.

       (2)  COMPREHENSIVE INCOME

           Statement of Financial Accounting Standards ("SFAS") No. 130,
           "Reporting Comprehensive Income," was adopted by the Company on
           January 1, 1998. SFAS 130 establishes standards for reporting
           comprehensive income. Comprehensive income includes net income and
           other comprehensive net income which is defined as non-owner related
           transactions in equity. The following table sets forth the amounts of
           other comprehensive income included in equity along with the related
           tax effect for the three months and nine months ended September 30,
           1998, respectively.

<TABLE>
<CAPTION>
                                                                                   Tax       Net of
                                                                      Pre-Tax    Expense       Tax
                                                                       Amount    Benefit      Amount
                                                                       ------    -------      ------

                                                                             (In thousands)
           <S>                                                        <C>        <C>         <C>
           Three months ended September 30, 1998

           Net unrealized gain on securities available for sale         $73       $ --          $73
           ---------------------------------------------------------   ----       ----         ----
           Other comprehensive income                                   $73       $ --          $73
           =========================================================   ====       ====         ====

           Nine months ended September 30, 1998

           Net unrealized gain on securities available for sale         $82       $ --          $82
           ---------------------------------------------------------   ----       ----         ----
           Other comprehensive income                                   $82       $ --          $82
           =========================================================   ====       ====         ====
</TABLE>




                                       6
<PAGE>   8

       (3) EARNINGS PER SHARE

           The weighted average number of common shares outstanding during the
           nine months ended and quarter ended September 30, 1998 was 907,609.
           There were no dilutive items outstanding during the nine months and
           quarter ending September 30, 1998.

       (4) CHANGE IN TOTAL ASSETS AND DEPOSITS

           On September 30, 1998 the Bank received a large deposit of public
           funds of approximately $13,000,000. Of this amount, approximately
           $4.4 million was transferred out of the Bank on October 1, 1998.
           There were additional transfers out of the original $13 million. It
           is expected that only minimal balances will remain with this company
           on a continuing basis. The $13 million appears in the Consolidated
           Balance Sheets in "Deposits" and elsewhere in this document in
           "Interest-bearing demand accounts". Since the funds were received on
           the last day of the quarter, there was little affect on the
           year-to-date and quarterly average balances.

       (5) YEAR 2000 COMPUTER PROBLEM

           The Year 2000 issue is the result of computer programs being written
           using two digits rather than four to define the applicable year. Any
           of the Corporation's programs that have time sensitive software may
           recognize the date as the year 1900 rather than the year 2000. This
           could result in a major system failure or miscalculations. The
           Federal Financial Institutions Examination Council recognizes five
           phases that banks must complete to achieve Year 2000 readiness: 1)
           Awareness of the potential risks associated with Year 2000; 2)
           Assessment of all information and environmental systems needing
           enhancements; 3) Renovation of the systems that are not Year 2000
           ready; 4) Validation of the renovated systems to assure Year 2000
           readiness; and 5) Implementation of the renovated product into the
           ongoing operations. The Corporation has completed the Awareness,
           Assessment and Renovation phases and is currently in the process of
           validating its core processing systems for Year 2000 readiness. At
           this time it is not expected that expenses to address year 2000
           issues will materially impact future operating results.

           The following section contains forward-looking statements, which
           involve risks and uncertainties. The actual impact of the Year 2000
           issue on the Bank could materially differ from that which is
           anticipated in these forward-looking statements as a result of
           certain factors identified below.

           Company's State of Readiness

           Management is aware of the possibility of exposure by banks to a
           computer problem known as the "Year 2000 Problem" or the "Millennium
           Bug" (the inability of some computer programs to distinguish between
           the year 1900 and the year 2000). If :not corrected, some computer
           applications could fail or create erroneous results by or at the
           Year 2000. This could cause entire system failures, miscalculations,
           and disruptions of normal business operations including, among other
           things, a temporary inability to process transactions, send
           statements, or engage in similar day to day business




                                       7


<PAGE>   9

           activities. The extent of the potential impact of the Year 2000
           Problem in not yet known, and if not timely corrected, it could
           affect the global economy.

           Management has assessed the extent of vulnerability of the Bank's
           computer systems to the problem. The Company entered into a contract
           with Financial Data Technologies, Inc. (FiData) of Franklin,
           Tennessee to handle data processing functions. FiData uses
           Information Technology, Inc. (ITI) software and a Unisys mainframe
           computer. Management studied ITI and FiData's Year 2000 preparation
           when selecting a data processor. Unisys and ITI have been doing
           internal testing of their equipment and FiData is presently testing
           their computer system using the Bank's data. Management anticipates
           the first session of testing will be completed by the end of 1998
           and additional testing and follow-up testing is planned for early
           1999.

           Risk Assessment of Year 2000

           The Company believes that, with modifications to existing software
           and conversions to new software, the Year 2000 problem will not pose
           a significant operational problem for the Company. However, because
           most computer systems are, by their very nature, interdependent, it
           is possible that non-compliant third party computers could impact the
           Company's computer systems.

           Additionally, the Company has taken steps to communicate with the
           third parties, such as wire transfer systems, telephone systems,
           electric companies and other utility companies with which it deals to
           coordinate Year 2000 compliance but could be adversely affected if it
           or the unrelated third parties are unsuccessful. The Company is also
           assessing the impact, if any, the Year 2000 may have on its large
           loan (credit risk) and deposit customers.

           Cost of Year 2000

           As described above, our primary systems are Year 2000 compliant,
           therefore, little programming costs will be incurred. Most of the
           costs incurred in addressing this problem are related to planning and
           internal testing and validation, which are expected to be expensed as
           incurred. The financial impact to the Company of Year 2000 compliance
           has not been and is not anticipated to be material to the Company's
           financial position or results of operations for 1998 or 1999.
           However, there can be no guarantee that these estimates will be
           achieved and actual results could differ materially from those plans.
           Specific factors that might cause such material differences include,
           but are not limited to, the availability and cost of personnel
           trained in this area, the replacement of noncompliance of third party
           vendors, and similar uncertainties.

           Contingency Plans

           Management, in conjunction with its Year 2000 and Disaster Recovery
           consultants, is in the process of modifying its disaster recover
           plans to include the response to a Year 2000 problem in a most likely
           worst case scenario. The Company's preliminary contingency plans
           involve the use of manual labor to compensate for the loss temporary
           of certain automated computer systems or third party vendors.



                                       8
<PAGE>   10

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
AND PLAN OF OPERATIONS

GENERAL

The Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the information and
tables which follow. The Company was inactive and dormant from its formation on
October 21, 1996 until December 31, 1996. Prior to opening on October 6, 1997,
the Company was in organization without significant activity in the nine months
ended September 30, 1997 and the quarter ended September 30, 1997. There is no
meaningful comparative data from the corresponding periods in 1997.

FINANCIAL CONDITION

Earning Assets. Average earning assets for the nine months ended September 30,
1998 totaled $45,992,000, which represented 94.0% of average total assets.
Earning assets totaled $78,765,000 at September 30, 1998. Average earning assets
for the quarter ended September 30, 1998 totaled $59,055,000, which represented
96.7% of average total assets.

Loan Portfolio. The Company's average loans for the nine months ended September
30, 1998 were $19,306,000 and for the quarter ended September 30, 1998 were
$28,345,000. The balance in total loans at September 30, 1998 was $32,246,000 at
September 30, 1998.

Investment Portfolio. The Company's investment securities portfolio averaged
$22,307,000 for the nine months ended September 30, 1998 and $25,141,000 for the
quarter ended September 30, 1998. The portfolio totaled $23,983,000 at September
30, 1998.

The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: "Held to Maturity" and "Available
for Sale." The "Available for Sale" securities are carried at fair market value,
whereas the "Held to Maturity" securities are carried at book value. At December
31, 1997, unrealized losses in the "Available for Sale" portfolio amounted to
$9,000 and unrealized gains in the "Available for Sale" portfolio totaled
$73,000 at September 30, 1998. The average balance of securities "Available for
Sale" during the quarter ended September 30, 1998 was $20,564,000, for the nine
months ended was $19,074,000 and the balance at September 30, 1998 was
$18,089,000. The average balance of securities "Held to Maturity" during the
quarter ended September 30, 1998 was $4,576,000, for the nine months ended
$3,233,000 and the balance at September 30, 1998 was $5,894,000.

Deposits. The Company's average deposits were $39,700,000 during the nine months
ended September 30, 1998. This included average noninterest-bearing deposits of
$1,313,000, average certificates of deposit of $18,741,000, average saving
deposits of $143,000 and average interest bearing transaction accounts of
$19,503,000. The Company's average deposits for the quarter ended September 30,
1998 were $50,875,000. This included average non-interest bearing deposits of
$1,069,000, average certificates of deposit of $24,837,000, average savings
deposits of $200,000 and average interest bearing transaction accounts of
$24,869,000. Deposits at September 30, 1998 were $68,560,000.

Capital Resources. Shareholders' equity totaled $8,372,000 at of September 30,
1998. This included $9,068,000 of common stock and additional paid-in-capital
less a deficit of $769,000 and $73,000 accumulated other comprehensive income.




                                       9
<PAGE>   11



BALANCE SHEET MANAGEMENT

Liquidity Management. Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing liabilities.
Liquidity management involves having the ability to meet the day-to-day cash
flow requirements of its customers, whether they are depositors wishing to
withdraw funds or borrowers requiring funds to meet their credit needs.

The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.

The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment securities. Additional
sources of liquidity are loan repayments and possible prepayments from the
mortgage-backed securities from the investment portfolio.

The liability portion of the balance sheet provides liquidity through various
interest bearing and noninterest bearing deposit accounts. At September 30,
1998, the Company had $2,300,000 of federal funds purchase lines available at
three correspondent banks. None of these lines were drawn at September 30, 1998.

Because of the level of capital obtained in formation, no additional capital
funds or notes payable are anticipated to be deemed necessary during the next
twelve months.

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.

Net interest income for the nine months ended September 30, 1998 totaled
$831,000. This was the result of interest income of $2,390,000 and interest
expense of $1,559,000 for the same period. Interest income produced by the loan
portfolio totaled $1,200,000, interest income on investment securities totaled
$1,002,000 and interest income on federal funds totaled $188,000. Interest
expense included $805,000 of interest expense on certificates of deposit, and
interest expense of $728,000 on interest-bearing transaction accounts, savings
accounts and money market accounts and $26,000 of interest expense on securities
sold under agreement to repurchase.

The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets is computed by dividing fully taxable
equivalent net interest income by average earning assets. This ratio represents
the difference between the average yield on average earning assets and the
average rate paid for all funds used to support those earning assets.

The net interest margin for the nine months ended September 30, 1998 was 2.45%.
The net cost of funds, defined as interest expense divided by average-earning
assets, was 4.41% for the same period. The yield on earning assets was 6.95% for
the nine months ended September 30, 1998.

The interest rate spread measures the difference between the average yield on
earning assets and the average rate paid on interest bearing sources of funds.
The interest rate spread eliminates the impact of non-interest bearing funds and
gives a direct perspective on the effect of market interest rate movements.



                                       10
<PAGE>   12

During recent years, the net interest margins and interests rate spreads have
been under intense pressure to maintain historical levels, due in part to tax
laws that discouraged investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the nine months ended September 30, 1998 was 1.56%.

As the Company continues to grow interest income can be expected to increase
particularly in the area of interest and fees on loans. It is management's
desire to continue quality loan growth which should increase the yield on
interest-earning assets. As the Company grows, it can be expected that deposits
will increase and increase the interest expense. It is management's intent to
maintain or lower the cost of funds which should show an increase in net
interest income.

Allowance for Possible Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans which present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers are
responsible for the collection effort on a delinquent loan. Senior management is
informed of the status of delinquent and problem loans on a monthly basis.

Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses on
a quarterly basis. The Company's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears.

The allowance for possible loan losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provisions
required to maintain a level considered adequate to absorb anticipated loan
losses. In assessing the adequacy of the allowance, management reviews the size,
quality and risk of loans in the portfolio. Management also considers such
factors as loan loss experience, the amount of past due and non-performing
loans, specific known risk, the status and amount of non-performing assets,
underlying collateral values securing loans, current and anticipated economic
conditions and other factors which affect the allowance for potential credit
losses.

While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgment as to the adequacy of the allowance is necessarily
approximate and imprecise.

Management believes that the $403,000 at September 30, 1998 in the allowance for
possible loan losses is adequate to absorb known risks in the portfolio. No
assurance can be given, however, that adverse economic circumstances will not
result in increased losses in the loan portfolio, and require greater provisions
for possible loan losses in the future.

Non-performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual or renegotiated. The Company's policy is to place a
loan on non-accrual status when it is contractually past due 90 days or more as
to payment of principal or interest. At the time a loan is placed on non-accrual
status, interest previously accrued but not collected is reversed and charged
against current earnings. Recognition of any interest after a loan has been
placed on non-accrual is accounted for on a cash basis.

The Company had no non-performing assets or impaired loans as of September 30,
1998.

Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and profits. In addition, any gains or losses realized from the sale of
investment portfolio securities available for sale are included in non-interest
income.



                                       11
<PAGE>   13

Total non-interest income totaled $105,000 for the nine months ended September
30, 1998. This included $82,000 from service charges on deposit accounts, $8,000
of fee income and $15,000 of other non-interest income. There were no realized
gains or losses on securities during the nine months ended September 30, 1998.
Non-interest income should increase as the Company grows and adds deposit
accounts for which service charges may be made and additional fee generating
services are expanded.

Non-interest Expenses. Non-interest expense for the nine months ended September
30, 1998 totaled $1,001,000. Salaries and employee benefits for the period
totaled $487,000, occupancy expense totaled $54,000 while furniture and
equipment expense totaled $62,000. All other non-interest expenses totaled
$398,000 for the nine months ended September 30, 1998. Other non-interest
expenses include supplies and printing, data processing, telephone, postage and
legal and audit fees. Management expects an increase in certain areas of
non-interest expense as the Company grows; however, costs associated with
personnel (salaries and benefits), occupancy expense and furniture and equipment
expense should show only a slight increase as the Company grows through the
remainder of 1998.

Income Taxes. At September 30, 1998, the Company has net operating losses for
federal and state income taxes of approximately $310,000 which expire in tax
year 2012 for federal and state purposes and $107,000 which expire in tax year
2018 for federal purposes and 2013 for state purposes. The Company recorded no
tax benefit for the nine months ended September 30, 1998 as a valuation
allowance offset the tax benefit related to the deferred tax asset for these net
operating losses and other temporary differences, the primary of which is
provision for possible loan losses.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998

Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense paid on
deposits. The following discussion is on a fully taxable equivalent basis.

Net interest income for the three months ended September 30, 1998 totaled
$346,000. This was the result of interest income of $1,041,000 and interest
expense of $695,000 for the same period. Interest income produced by the loan
portfolio totaled $587,000, interest income on investment securities totaled
$374,000 and interest income on federal funds totaled $80,000. Interest expense
included $358,000 of interest expense on certificates of deposit, and interest
expense of $313,000 on interest-bearing transaction accounts, savings accounts
and money market accounts and $24,000 of interest expense on securities sold
under agreement to repurchase.

The net interest margin for the quarter ended September 30, 1998 was 2.42%. The
net cost of funds, defined as interest expense divided by average-earning
assets, was 4.71% for the quarter ended September 30, 1998. The yield on earning
assets was 6.99%. The interest rate spread for the quarter ended September 30,
1998 was 1.65%.

Non-interest Income Total non-interest income totaled $59,000 for the quarter
ended September 30, 1998. This included $46,000 from service charges on deposit
accounts, $4,000 of fee income and $9,000 of other non-interest income. There
were no realized gains or losses on securities during the quarter ended
September 30, 1998.

Non-interest Expenses. Non-interest expense for the quarter ended September 30,
1998 totaled $380,000. Salaries and employee benefits totaled $181,000,
occupancy expense totaled $22,000 and furniture and equipment expense totaled
$23,000 for the three months ended September 30, 1998. All other non-interest
expenses totaled $154,000 for the period.



                                       12
<PAGE>   14


Income Taxes. The Company recorded no tax benefit for the quarter ended
September 30, 1998 as a valuation allowance offset the tax benefit related to
the deferred tax asset for these net operating losses and other temporary
differences.

RETURN ON EQUITY AND ASSETS

Return on assets (net loss divided by average total assets) for the nine months
ended September 30, 1998 was (1.10%.) Return on equity (net loss divided by
average equity) for the nine months ended September 30, 1998 was (6.37%.) Equity
to assets (average equity divided by average total assets) for the nine months
ended September 30, 1998 was 17.18%.

Return on assets for the quarter ended September 30, 1998 was (0.53%). Return on
equity for the quarter ended September 30, 1998 was (4.03%). Equity to assets
for the quarter ended September 30, 1998 was 13.10%.

There were no dividends paid during 1998, so no dividend payout ratio is
presented.

As the Company attempts to increase net interest income, the return on assets
and return on equity should be expected to increase.

EFFECTS OF INFLATION AND CHANGING PRICES

Inflation generally increases the cost of funds and operating overhead, and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expense and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancings tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans in the
secondary market.





                                       13
<PAGE>   15


AVERAGE BALANCE SHEET AND NET INTEREST INCOME

 The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the nine months ended September 30, 1998 and
certain other information:
<TABLE>
<CAPTION>

                                                                                 Interest          Average     
                                                                  Average        Income/            Yields/
                                                                  Balance        Expense            Rates
                                                                  -------        -------            -----

ASSETS:                                                      (Fully taxable equivalent - dollars in thousands)
<S>                                                               <C>            <C>               <C>
Interest-earning assets:
Loans                                                             $19,306         $1,200            8.31%
U.S. Treasury and other U.S. government agencies                   22,307          1,002            6.00%
States and municipalities                                            --              --               N/A
Federal funds sold                                                  4,379            188            5.75%
Interest bearing deposits with other financial institutions          --              --               N/A
-------------------------------------------------------------     -------         ------          -------
Total interest-earning assets/interest income                      45,992          2,390            6.95%
-------------------------------------------------------------     -------         ------          -------
Cash and due from banks                                               852
Other assets                                                        2,097
Allowance for possible loan losses                                   (225)
-------------------------------------------------------------     ------- 
Total assets                                                      $48,716
=============================================================     =======
LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing liabilities:
Demand deposits and savings accounts                              $19,280            728            5.05%
Certificates of deposit                                            18,741            805            5.75%
Repurchase agreements                                                 647             26            5.36%     
-------------------------------------------------------------     -------         ------          -------
Total interest-bearing liabilities/interest expense                39,668          1,559            5.39%
-------------------------------------------------------------     -------         ------          -------
Non-interest-bearing demand deposits                                1,313
Other liabilities                                                     178
Shareholders' equity                                                8,557
-------------------------------------------------------------     -------
Total liabilities and shareholders' equity                        $48,716
=============================================================     =======
Net interest earnings                                                               $831
=============================================================                     ======
Net interest income on interest-earning assets                                                       2.42%
=============================================================                                     ========  

Taxable equivalent adjustment:                                                       N/A
                                                                                  ------
</TABLE>


Since there are no corresponding periods of meaningful data for which to compare
in 1997, no table reflecting the changes in interest income and expense as a
result of the changes of average volume and average rate is presented.




                                       14
<PAGE>   16


 The following table sets forth weighted yields earned by the Company on its
earning assets and the weighted average rates paid on its deposits and other
interest-bearing liabilities for the quarter ended September 30, 1998 and
certain other information:

<TABLE>
<CAPTION>

                                                                                 Interest         Average
                                                                 Average         Income/          Yields/
                                                                 Balance         Expense           Rates
                                                                 -------         -------           -----

ASSETS:                                                      (Fully taxable equivalent - dollars in thousands)
<S>                                                              <C>             <C>              <C>
Interest-earning assets:
Loans                                                            $ 28,345         $  587            8.22%
U.S. Treasury and other U.S. government agencies                   25,141            374            5.9%
States and municipalities                                            --              --               N/A
Federal funds sold                                                  5,569             80            5.70%
Interest bearing deposits with other financial institutions          --              --               N/A     
---------------------------------------------------------------  --------         ------          -------
Total interest-earning assets/interest  income                     59,055          1,041            6.99%
---------------------------------------------------------------  --------         ------          -------
Cash and due from banks                                               592
Other assets                                                        2,135
Allowance for possible loan losses                                   (339)
---------------------------------------------------------------  --------
Total assets                                                      $61,443
===============================================================  ========

LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing liabilities:
Demand deposits and savings accounts                              $24,969            313            4.98%
Certificates of deposit                                            24,837            358            5.72%
Repurchase agreements                                               1,865             24            5.11%
---------------------------------------------------------------  --------         ------          ------- 
Total interest-bearing liabilities/interest expense                51,671            695            5.34%
---------------------------------------------------------------  --------         ------          -------
Non-interest-bearing demand deposits                                1,069
Other liabilities                                                     250
Shareholders' equity                                                8,453
---------------------------------------------------------------  -------- 
Total liabilities and shareholders' equity                        $61,443
===============================================================  ======== 
Net interest earnings                                                               $346
===============================================================                   ====== 
Net interest income on interest-earning assets                                                      2.32%
===============================================================                                   =======

Taxable equivalent adjustment:                                                       N/A

</TABLE>

Since there are no corresponding periods of meaningful data for which to compare
in 1997, no table reflecting the changes in interest income and expense as a
result of the changes of average volume and average rate is presented.



                                       15
<PAGE>   17


DEPOSITS

The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at September 30, 1998
and December 31, 1997:

<TABLE>
<CAPTION>

                                                                 September 30, 1998     December 31, 1997
                                                                  (In thousands)         (In thousands)
<S>                                                              <C>                    <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations                          $  1,450               $   808
U. S. Government and states and political subdivisions                  --                     --
Certified and official checks                                             87                   156
--------------------------------------------------------------       -------               -------
Total non-interest-bearing deposits                                    1,537                   964
--------------------------------------------------------------       -------               -------
Interest-bearing deposits:
Interest-bearing demand accounts                                      41,423                10,545
Saving accounts                                                          225                    59
Certificates of deposit, less than $100,000                           19,636                 6,312
Certificates of deposit, more than $100,000                            5,739                 3,885
--------------------------------------------------------------       -------               -------
Total interest-bearing deposits                                       67,023                20,801
--------------------------------------------------------------       -------               -------
Total deposits                                                       $68,560               $21,765
==============================================================       =======               =======

</TABLE>

The growth in deposits during the first nine months of 1998 can be attributed to
the growing geographic market in which the Company is located along with the
opportunity afforded a new community bank. Management expects the growth to
continue throughout the remainder of 1998 and even into 1999, but at a slower
rate. Management does not anticipate any increase in the cost of funds unless
rates increase significantly.

The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the nine months ended
September 30, 1998 and year ended December 31, 1997:

 
<TABLE>
<CAPTION>
                                            Nine months ended               Year Ended
                                            September 30, 1998            December 31, 1997
                                          (Dollars in thousands)       (Dollars in thousands)
<S>                                       <C>            <C>           <C>             <C>
Non interest-bearing deposits             $  1,313         N/A         $   283           N/A
Interest-bearing demand deposits            19,503       4.96%           1,045         5.32%
Savings accounts                               143       2.59%               8         2.52%
Certificates of deposit                     18,741       5.75%           1,446         6.02%
                                            ------       -----          ------         -----
Total deposits                             $39,700       5.34%          $2,782         5.72%
                                            ======       =====          ======         =====
</TABLE>


At September 30, 1998, certificates of deposits greater than $100,000 aggregated
approximately $5,739,000. The following table indicates, as of September 30,
1998, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):

<TABLE>
<CAPTION>

                                                    3 Months     3 to 12   1 to 5      Over 5
                                                    or less      Months    Years       Years
                                                    -------      ------    -----       -----

<S>                                                 <C>          <C>       <C>         <C>
Certificates of deposit                              $2,473       $2,566   $  700       --    
================================================     ======       ======   ======      ======
</TABLE>



                                       16
<PAGE>   18



At December 31, 1997, certificates of deposits greater than $100,000 aggregated
approximately $3,885,000. The following table indicates, as of December 31,
1997, the dollar amount of $100,000 or more by the time remaining until maturity
(in thousands):

<TABLE>
<CAPTION>
                                            3 Months    3 to 12    1 to 5     Over 5
                                            or less     Months      Years     Years
                                            -------     ------      -----     -----
<S>                                         <C>         <C>        <C>        <C>
Certificates of deposit                     $3,135       $750        --         --    
=====================================       ======       ====      ======    =======
</TABLE>

ASSETS

The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest-earning assets by category at September 30, 1998 and December
31, 1997:

<TABLE>
<CAPTION>
                                                   September 30, 1998    December 31, 1997
                                                     (In thousands)       (In thousands)
<S>                                                <C>                   <C>
Interest-bearing deposits with banks                   $   --                $   --
Investment securities                                    23,983                14,732
Federal funds sold                                       22,536                 7,704
Loans:
Real estate                                              20,150                 3,600
Commercial and other                                     12,096                 1,801
----------------------------------------------          -------               -------
Total loans                                              32,246                 5,401
----------------------------------------------          -------               -------
Interest-earning assets                                 $78,765               $27,837
==============================================          =======               =======
</TABLE>

Asset growth can be expected to continue throughout 1998 and into 1999. It is
the intent of management to increase loans (i.e. the higher yielding asset
category). The balances in investment securities and federal funds will
fluctuate in response to new deposit growth and the lag period in utilizing
funds from new deposits as part of a quality loan portfolio throughout the
remainder of 1998 and into 1999. Management intends to maintain quality loans
while growing the portfolio.

INVESTMENT PORTFOLIO

The Company has classified all investment securities as either available for
sale or held to maturity depending upon whether the Company has the intent and
ability to hold the investment securities to maturity. The classification of
certain investment securities as available for sale is consistent with the
Company's investment philosophy of maintaining flexibility to manage the
portfolio. At September 30, 1998, approximately $18,016,000 of investment
securities were classified as available for sale and at December 31, 1997,
approximately $14,741,000 of investment securities were classified as available
for sale. Approximately $9,000 of unrealized loss was related to the available
for sale investment securities at December 31, 1997. There was $73,000 of
unrealized gains at September 30, 1998. There were $5,894,000 of securities at
September 30, 1998 classified as held to maturity. There were no securities at
December 31, 1997 classified as held to maturity.

At December 31, 1997 as well as September 30, 1998, obligations of the United
States Government or its agencies represented approximately 100% of the total
investment portfolio. The following table presents the carrying amounts of the
Company's investment portfolio at September 30, 1998 (in thousands):




                                       17
<PAGE>   19


<TABLE>
<CAPTION>
                                                     Amortized        Estimated
                                                       Cost           Fair Value
                                                     --------         ----------
<S>                                                  <C>              <C>
AVAILABLE FOR SALE:
U.S. Treasury                                        $   --            $   --
U.S. Government agencies                               18,016            18,089
States and political subdivisions                        --                --
Other securities                                         --                --       
-----------------------------------------------      --------          --------
Total available for sale                             $ 18,016          $ 18,089
===============================================      ========          ========

HELD TO MATURITY:
U.S. Treasury                                        $   --            $   --
U.S. Government agencies                                4,894             4,961
States and political subdivisions                        --                --
Other securities                                        1,000             1,000
-----------------------------------------------      --------          --------
Total held to maturity                               $  5,894          $  5,961
===============================================      ========          ========

Total investment portfolio                           $ 23,910          $ 24,050
===============================================      ========          ========

</TABLE>

At December 31, 1997, obligations of the United States Government or its
agencies represented approximately 100% of the total investment portfolio. The
following table presents the carrying amounts of the Company's investment
portfolio at December 31, 1997 (in thousands):

<TABLE>
<CAPTION>
                                                     Amortized        Estimated
                                                       Cost           Fair Value
                                                     ---------        ----------
<S>                                                  <C>              <C>
AVAILABLE FOR SALE:
U.S. Treasury                                        $    --           $   --
U.S. Government agencies                                14,741           14,732
States and political subdivisions                         --               --
Other securities                                          --               --       
-----------------------------------------------      ---------         --------
Total available for sale                             $  14,741         $ 14,732
===============================================      =========         ========

HELD TO MATURITY:
U.S. Treasury                                        $    --           $   --
U.S. Government agencies                                  --               --
States and political subdivisions                         --               --
Other securities                                          --               --       
-----------------------------------------------      ---------         --------
Total held to maturity                               $    --           $   --       
===============================================      =========         ========

Total investment portfolio                           $  14,741         $ 14,732
===============================================      =========         ========

</TABLE>

The growth in investment securities during the first nine months of 1998 was the
result of a growth in deposits of the Bank. As quality loan demand increases,
management expects the investment portfolio to grow at a much slower rate during
the remainder of 1998. The growth during 1998 has been in securities available
for sale since it has been management's intention to maintain liquidity to fund
loan demand. Any growth in the investment portfolio during the remainder of 1998
will probably occur in securities available for sale since it is important to
have liquidity to meet loan demand. Many of the securities in the portfolio have
call features so the portfolio may experience some turnover depending upon the
issuers' decision whether to call a particular security.




                                       18

<PAGE>   20



The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at September 30,
1998. The weighted average yields on these instruments are presented based on
final maturity.

<TABLE>
<CAPTION>

                                                Amortized             Estimated          Weighted
                                                  Cost                Fair Value        Average Yield
                                                ---------             ----------        -------------
                                                     (Dollars in thousands)
<S>                                             <C>                   <C>               <C>
AVAILABLE FOR SALE:
U.S. Treasuries                                    $ --                  $--                 N/A
U.S. Government agencies:
Due within 1 year                                   1,500                1,501              5.80%
Due after 1 year but within 5 years                16,516               16,588              6.00%
Due after 5 years but within 10 years                --                   --                 N/A
Due after 10 years                                   --                   --                 N/A
--------------------------------------------      -------              -------              -----
Total                                              18,016               18,089              5.99%
--------------------------------------------      -------              -------              -----
States and political   subdivisions                  --                   --                 N/A
Other                                                --                   --                 N/A
--------------------------------------------      -------              -------              -----
Total investments available for sale              $18,016              $18,089              5.99%
============================================      =======              =======              =====

HELD TO MATURITY:
U.S. Treasuries                                   $  --                $  --                 N/A
U.S. Government agencies:
Due within 1 year                                    --                   --                 N/A
Due after 1 year but within 5 years                 1,003                1,010              6.15%
Due after 5 years but within 10 years               3,891                3,951              6.10%
Due after 10 years                                   --                   --                 N/A
--------------------------------------------      -------              -------              -----
Total                                             $ 4,894              $ 4,961              6.11%
--------------------------------------------      -------              -------              -----
States and political subdivisions                    --                   --                 N/A
Other                                               1,000                1,000              5.57%
--------------------------------------------      -------              -------              -----
Total held to maturity                            $ 5,894              $ 5,961              6.02%
============================================      =======              =======              =====
Total investment portfolio                        $23,910              $24,050              6.00%
============================================      =======              =======              =====

</TABLE>

The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1997.
The weighted average yields on these instruments are presented based on final
maturity.

<TABLE>
<CAPTION>
                                             Amortized       Estimated       Weighted
                                               Cost          Fair Value     Average Yield
                                             ---------       ----------     -------------
                                              (Dollars in thousands)
<S>                                          <C>             <C>            <C>
AVAILABLE FOR SALE:
U.S. Treasuries                              $  --           $  --              N/A
U.S. Government agencies:
Due within 1 year                              2,741           2,739           5.79%
Due after 1 year but within 5 years           12,000          11,993           6.07%
Due after 5 years but within 10 years           --              --              N/A
Due after 10 years                              --              --              N/A
------------------------------------------   -------         -------           -----
Total                                         14,741          14,732           6.02%
------------------------------------------   -------         -------           -----
States and political subdivisions               --              --              N/A
Other                                           --              --              N/A
------------------------------------------   -------         -------           -----
Total investments available for sale         $14,741         $14,732           6.02%
==========================================   =======         =======           =====

HELD TO MATURITY:

</TABLE>




                                       19
<PAGE>   21

There were no securities classified as "held to maturity" at December 31, 1997.


INVESTMENT POLICY

The objective of the Company's investment policy is to invest funds not
otherwise needed to meet the loan demand of the Bank's market area to earn the
maximum return for the Bank, yet still maintain sufficient liquidity to meet
fluctuations in the Bank's loan demand and deposit structure. In doing so, the
Company balances the market and credit risk against the potential investment
return, makes investments compatible with the pledge requirements of the Bank's
deposits of public funds, maintains compliance with regulatory investment
requirements, and assists the various public entities with their financing
needs. The Investment Committee is comprised of the president and three other
directors. The president is authorized to execute security transactions for the
investment portfolio and to make decisions on purchases and sales of securities.
All the investment transactions occurring since the previous board of directors'
meeting are reviewed by the board at its next monthly meeting. Limitations on
the Committee's investment authority include: (a) investment in any one
municipal security may not exceed 20% of equity capital; (b) the entire
investment portfolio may not increase or decrease by more than 10% in any one
month; (c) investments in obligations of the State of Tennessee may not exceed
30% of equity capital; and (d) investment in mortgage-backed securities may not
exceed more than 40% of equity capital. The investment policy allows portfolio
holdings to include short-term securities purchased to provide the Bank's needed
liquidity and longer term securities purchased to generate stable income for the
Bank during periods of interest rate fluctuations.

LOAN PORTFOLIO

The following table sets forth the composition of the Company's loan portfolio
at September 30, 1998 (dollars in thousands).

<TABLE>
<CAPTION>
                                                                         Percent of
                                                        Balance          Total Loans
                                                        -------          -----------
<S>                                                    <C>               <C>
Real estate loans:
Construction and land development                      $   985               3.1%
Secured by residential  properties                       9,556              29.5%
Secured by commercial real estate                        9,609              29.7%
                                                       -------             ------
Total real estate loans                                 20,150              62.3%
Commercial and industrial loans                          6,334              19.6%
Other consumer loans                                     5,712              17.9%
All other loans                                             50               0.2%
----------------------------------------------         -------             ------
Total loans                                             32,246             100.0%
Less:
Allowance for possible loan losses                        (403)              N/A   
----------------------------------------------         -------             ------
Net loans                                              $31,843               N/A   
==============================================         =======             ======
</TABLE>




                                       20

<PAGE>   22



The following table sets forth the composition of the Company's loan portfolio
at December 31, 1997 (dollars in thousands).

<TABLE>
<CAPTION>
                                                                         Percent of
                                                        Balance          Total Loans
                                                        -------          -----------
<S>                                                    <C>               <C>
Real estate loans:
Construction and land development                      $   334               6.2%
Secured by residential  properties                       1,018              18.8%
Secured by commercial real estate                        2,248              41.6%
                                                       -------             ------
Total real estate loans                                  3,600              66.7%
Commercial and industrial loans                          1,134              21.0%
Other consumer loans                                       667              12.4%
All other loans                                           --                0.00%
----------------------------------------------         -------             ------
Total loans                                              5,401             100.0%
Less:
Allowance for possible loan losses                          68               N/A   
----------------------------------------------         -------             ------
Net loans                                              $ 5,333               N/A   
==============================================         =======             ======

</TABLE>

The increase in loans during the first nine months of 1998 was the result of
growth of the Bank's deposits and the vibrant growing market in which the Bank
is located. In addition, additional lending personnel were added which provided
the staffing necessary to meet growing loan demand. In addition, favorable
interest rates for borrowers in the market have increased the refinancing of
first mortgages. The rates have also helped increase housing starts in the
market. Finally, increased home sales have provided additional mortgage loan
demand. The growing market has also contributed to growth in commercial loans as
more new businesses are moving into the area or starting up and existing
businesses are expanding. Consumer loan demand has also increased as the Bank
has been able to better penetrate the market and offer loan consumer services to
its deposit customers. Management anticipates continued loan growth
(particularly in the area of single family residential mortgage loans) through
the remainder of 1998 and into 1999, but growth may slow somewhat. It is the
intent of management to maintain a quality loan portfolio. Management will
manage loan growth throughout 1998 and into 1999.

The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
September 30, 1998 (in thousands).

<TABLE>
<CAPTION>

                                                                    Maturity Range                                     
                                                 ---------------------------------------------------
                                                 One Year        One Through     Over
                                                 or Less         Five Years   Five Years    Total
                                                 -------         ----------   ----------    -----
<S>                                              <C>             <C>          <C>           <C>
LOAN MATURITY:
Real estate construction loans                   $   908           $   77       $  --        $  985
Real estate residential mortgage loans               539            8,707         310         9,556
Real estate commercial loans                       6,533            3,076          --         9,609
Commercial and industrial loans                    3,574            2,222         588         6,384
All other loans                                    2,024            3,588         100         5,712
-------------------------------------------      -------          -------       -----       -------
Total loans                                      $13,578          $17,670       $ 998       $32,246
===========================================      =======          =======       =====       =======

LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates                     $ 1,869          $ 4,425        $998       $ 7,292
Floating or adjustable interest  rates            11,709           13,245          --        24,954
-------------------------------------------      -------          -------        ----       -------
Total                                            $13,578          $17,670        $998       $32,246
===========================================      =======          =======        ====       =======

</TABLE>



                                       21
<PAGE>   23


The following table sets forth the contractual maturities of the loan portfolio
and the sensitivity to interest rate changes of the Company's loan portfolio at
December 31, 1997 (in thousands).

<TABLE>
<CAPTION>
                                                                       Maturity Range                                    
                                                 ----------------------------------------------------------
                                                 One Year         One Through         Over
                                                 or Less          Five Years       Five Years        Total
                                                 -------          ----------       ----------        -----
<S>                                              <C>              <C>              <C>               <C>
LOAN MATURITY:
Real estate construction loans                   $  334             $ --             $  --           $  334
Real estate mortgage loans                           91              3,147              28            3,266
Commercial and industrial loans                     680                454              --            1,134
All other loans                                     287                380              --              667
-----------------------------------------        ------             ------           -----           ------
Total loans                                      $1,392             $3,981           $  28           $5,401
=========================================        ======             ======           =====           ======

LOAN INTEREST RATE SENSITIVITY:
Selected loans with:
Predetermined interest rates                     $1,221             $1,890           $  --           $3,111
Floating or adjustable interest  rates              171              2,091              28            2,290
-----------------------------------------        ------             ------           -----           ------
Total                                            $1,392             $3,981           $  28           $5,401
=========================================        ======             ======           =====           ======

</TABLE>


LOAN POLICY

All lending activities of Bank are under the direct supervision and control of
the Bank's Board with secondary authority vested in the Executive Committee. The
Senior Loan Committee, which consists of the president, one other director and
two senior lending officers, enforces loan authorizations for each officer,
decides on loans exceeding such limits, services all requests for officer
credits to the extent allowable under current laws and regulations, administers
all problem credits, and determines the allocation of funds for each lending
division. The loan portfolio consists primarily of real estate, commercial,
small business, residential construction and consumer installment loans.
Maturity of term loans is normally limited to 15 years. Conventional real estate
loans may be made up to 80% of the appraised value or purchase cost of the real
estate for no more than a 30-year term. Installment loans are based on the
earning capacity and vocational stability of the borrower.

The Bank board at its regularly scheduled meetings reviews all new loans made
the preceding month and discusses and approves any loans that exceed a loan
officer's authority. Loans which are 30 days or more past due are reviewed
monthly.

The Loan Committee of the Bank periodically reviews the loan portfolio,
particularly any nonaccrual and renegotiated loans. Each loan officer is
responsible for monitoring and collecting his or her own loan portfolio. Loan
Committee review may result in a determination that a loan should be placed on a
nonaccrual status for income recognition, subject to Bank Board approval. In
addition, to the extent that management identifies potential losses in the loan
portfolio and reduces the book value of such loans through charge-offs, to their
estimated collectible value, the Company's policy is to classify as nonaccrual
any loan on which payment of principal or interest is 90 days or more past due,
where there is adequate collateral to cover principal and accrued interest and
the loan is in the process of collection. No concessions are granted and late
fees are collected. In addition, a loan will be classified as nonaccrual if, in
the opinion of the Loan Committee, based upon a review of the borrower's or
guarantor's financial condition, collateral value or other factors, payment is
questionable, even though payments are not 90 days or more past due.



                                       22
<PAGE>   24


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

The large number of consumer installment loans and the relatively small dollar
amount of each make an individual review impracticable. It is the Company's
policy to charge off any consumer installment loan which is past due 90 days or
more and is not adequately collateralized.

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

CREDIT RISK MANAGEMENT AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

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

Management's objective in establishing lending and investment standards is to
manage the risk of loss and to provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
loans with a three-year or less fixed maturity which may be amortized over a
maximum of 15 years.

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

The allowance for possible loan losses is increased by provisions charged to
operating expense. The allowance for possible loan losses is reduced by charging
off loans or portions of loans at the time they are deemed by management to be
uncollectible and increased when loans previously charged off are recovered. The
resulting allowance for possible loan losses is viewed by management as a
single, unallocated reserve available for all loans and, in management's
opinion, is adequate to provide for reasonably foreseeable potential loan
losses. The risk associated with loans varies with the creditworthiness of the
borrower, the type of loan (consumer, commercial or real estate) and its
maturity. Cash flows adequate to support a repayment schedule is an element
considered for all types of loans. Real estate loans are impacted by market
conditions regarding the value of the underlying property used as collateral.
Commercial loans are also impacted by the management of the business as well as
economic conditions. Management believes the allowance for possible loan losses
is adequate to absorb such anticipated charge-offs.



                                       23
<PAGE>   25

Rules and formulas relative to the adequacy of the allowance for possible loan
losses, although useful as guidelines to management, are not rigidly applied.
The allowance for possible loan losses was $68,000 as of December 31, 1997 or
1.25% of loans outstanding. The allowance for possible loan losses was $403,000
as of September 30, 1998, or 1.25% of loans outstanding. No loans were
charged-off (nor any recoveries made) during 1997 nor the first nine months of
1998. The provision for possible loan losses charged against earnings during the
first nine months of 1998 was $335,000 and the provision for possible loan
losses charged against earnings during the quarter ended September 30, 1998 was
$106,000.

There were no non-performing loans of the Company at December 31, 1997 or at
September 30, 1998. This includes non-accrual loans and restructured loans.
Accrual of interest is discontinued when there is reasonable doubt as to the
full, timely collections of interest or principal. When a loan becomes
contractually past due ninety (90) days with respect to interest or principal,
it is reviewed and a determination is made as to whether it should be placed on
non-accrual status. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current period interest
income. Income on such loans is then recognized only to the extent that cash is
received and where the future collection of principal is probable. Interest
accruals are resumed on such loans only when they are brought fully current with
respect to principal and interest and when, in the judgment of management, the
loans are estimated to be fully collectible as to principal and interest.
Restructured loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty. Interest is generally
accrued on such loans in accordance with the new terms. There were also no loans
past due ninety days or more, any other real estate owned or foreclosed, any
repossessed assets or impaired loans at December 31, 1997 or at September 30,
1998.

CAPITAL RESOURCES/LIQUIDITY

Liquidity. Of primary importance to depositors, creditors and regulators is the
ability to have readily available funds sufficient to repay fully maturing
liabilities. The Company's liquidity, represented by cash and cash due from
banks, is a result of its operating, investing and financing activities. In
order to insure funds are available at all times, the Company devotes resources
to projecting on a monthly basis the amount of funds which will be required and
maintains relationships with a diversified customer base so funds are
accessible. Liquidity requirements can also be met through short-term borrowings
or the disposition of short-term assets which are generally matched to
correspond to the maturity of liabilities.

The Company has a formal liquidity policy, and in the opinion of management, its
liquidity levels are considered adequate. Neither the Company nor the Bank is
subject to any specific regulation liquidity requirements imposed by regulatory
authorities. The Bank is subject to general FDIC guidelines which do not require
a minimum level of liquidity. Management believes its liquidity ratios meet or
exceed these guidelines. Management does not know of any trends or demands which
are reasonably likely to result in liquidity increasing or decreasing in any
material manner. The ratio for average loans to average deposits for the nine
months ended September 30, 1998 was 48.6% and 55.7%for the quarter ended
September 30, 1998.

CAPITAL ADEQUACY

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



                                       24
<PAGE>   26

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

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

The following table gives the various capital ratios and balances at September
30, 1998 and December 31, 1997 (dollars in thousands) for the Company:


<TABLE>
<CAPTION>

                                                   September 30, 1998    December 31, 1997
                                                    (In thousands)        (In thousands)
<S>                                                <C>                   <C>
CAPITAL:
Tier I capital:
Shareholders' equity                                   $ 8,299               $ 8,699
Less disallowed intangibles                                --                    --    
------------------------------------------------       -------               -------
Total Tier I capital                                     8,299               $ 8,699
------------------------------------------------       -------               -------

Tier II capital:
Qualifying debt                                            --                    --
Qualifying allowance for possible loan losses              403                    68
------------------------------------------------       -------               -------
Total Tier II capital                                      403                    68
------------------------------------------------       -------               -------
Total capital                                          $ 8,702               $ 8,767
================================================       =======               =======
Risk-adjusted assets                                   $43,307               $11,883
================================================       =======               =======
Quarterly average assets (since
     commencement of operations)                       $61,093               $20,770
================================================       =======               =======

RATIOS:
Tier I capital to risk-adjusted assets                   19.2%                 73.2%
Tier II capital to risk-adjusted assets                   0.9%                  0.6%
Total capital to risk-adjusted assets                    20.1%                 73.8%
Leverage-- Tier I capital to quarterly      
    Average assets less disallowed intangibles           13.6%                 41.9%


</TABLE>



                                       25
<PAGE>   27


The following table gives the various capital ratios and balances at September
30, 1998 and December 31, 1997 (dollars in thousands) for the Bank:

<TABLE>
<CAPTION>

                                                      September 30, 1998  December 31, 1997
                                                        (In thousands)      (In thousands)
<S>                                                   <C>                 <C>
CAPITAL:
Tier I capital:
Shareholders' equity                                        $8,169            $ 7,757 
                                                                                 --
Less disallowed intangibles                                    --                --    
----------------------------------------------------       -------            -------
Total Tier I capital                                         8,169            $ 7,757
----------------------------------------------------       -------            -------

Tier II capital:
Qualifying debt                                                --                --
Qualifying allowance for possible loan losses                  403                 68
----------------------------------------------------       -------            -------
Total Tier II capital                                          403                 68
----------------------------------------------------       -------            -------
Total capital                                              $ 8,572            $ 7,825
====================================================       =======            =======
Risk-adjusted assets                                       $43,407            $11,845
====================================================       =======            =======
Quarterly average assets (since
     commencement of operations)                           $62,181            $18,823
====================================================       =======            =======


RATIOS:
Tier I capital to risk-adjusted assets                       18.8%              65.5%
Tier II capital to risk-adjusted assets                       0.9%               0.6%
Total capital to risk-adjusted assets                        19.7%              66.1%
Leverage-- Tier I capital to quarterly
    Average assets less disallowed intangibles               13.1%              41.2%

</TABLE>

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

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


On December 31, 1997 and September 30, 1998, the Company exceeded the regulatory
minimums and qualified as a well-capitalized institution under the regulations.

SHORT-TERM BORROWINGS:

The average balance for short-term borrowings of the Company was less than 30%
of shareholders' equity at December 31, 1997 and September 30, 1998.



                                       26

<PAGE>   28

PROPERTY ACQUISITIONS:

No significant property acquisitions are planned for the next year. Management
is looking at the possibility and feasibility of expanding the building located
at 607 Memorial Boulevard in the next year. The earliest time for which
construction would probably begin is early 1999.

PERSONNEL:

The Company increased the number of employees from the December 31, 1997 level
of 14 to 23 at September 30, 1998. Management anticipates the number of
employees at the end of 1998 to be approximately 25. Employees will be added as
needed to service the anticipated loan and deposit growth and related support
services during the next twelve months.

FOREIGN TRANSACTIONS:

The Company and the Bank have not had any investment securities, loans or
deposits of foreign governments, corporations or other entities nor anticipate
any such transactions in the future.





                                       27

<PAGE>   29


PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         None

ITEM 3. DEFAULT ON SENIOR SECURITIES

         None

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

         None

ITEM 5. OTHER INFORMATION

         None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
      (27) Financial Data Schedule (for SEC use only)

(b) No reports on Form 8-K have been filed during the quarter for which this
    report is filed.




                                       28
<PAGE>   30


SIGNATURES



         In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.


                           Murfreesboro Bancorp, Inc.
-------------------------------------------------------------------------------
                                  (Registrant)


Date November 12, 1998   
     ---------------------

By  /s/ William L. Webb 
    ---------------------            
        (Signature) *
        William L. Webb,
        Principal Accounting Officer and Chief Financial Officer

*  Print the name and title of each signing officer under his or her signature.



                                       29