<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 six month period ended JUNE 30, 1999

[ ] 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 August 11, 1999.


<PAGE>   2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                           MURFREESBORO BANCORP, INC.

                        CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                  JUNE 30, 1999



                                 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 Statements of Cash Flows .........................................................      5

Notes to Consolidated Financial Statements ....................................................      6
</TABLE>




                                       1
<PAGE>   3



                           MURFREESBORO BANCORP, INC.
                           CONSOLIDATED BALANCE SHEETS
                    AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
                                   (UNAUDITED)

                       (Tabular amounts are in thousands)


<TABLE>
<CAPTION>
                                                                               June 30,     December 31,
                                                                                 1999          1998
<S>                                                                            <C>           <C>
         ASSETS

Cash and due from banks                                                        $  1,653      $  2,402
Federal funds sold                                                                1,411         7,070
-----------------------------------------------------------------------------------------------------
   Total cash and cash equivalents                                                3,064         9,472
-----------------------------------------------------------------------------------------------------
Securities available for sale                                                    15,127        20,198
Securities held to maturity                                                       8,870         6,384
-----------------------------------------------------------------------------------------------------
   Total investment securities                                                   23,997        26,582
-----------------------------------------------------------------------------------------------------

Loans, less allowance for possible loan losses
   of $648,000 and $473,000, respectively                                        51,168        37,318
Premises and equipment, net                                                       1,983         1,605
Accrued interest receivable                                                         635           540
Other assets                                                                      1,627         1,583
Deferred tax assets                                                                 330           323
-----------------------------------------------------------------------------------------------------
   Total assets                                                                $ 82,804      $ 77,423
=====================================================================================================

         LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Deposits                                                                       $ 68,334      $ 65,002
Securities sold under agreements to repurchase                                    5,458         3,590
Accrued interest payable                                                            202           205
Accrued expenses and other liabilities                                              231            92
-----------------------------------------------------------------------------------------------------
   Total liabilities                                                             74,225        68,889
-----------------------------------------------------------------------------------------------------

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                                                                            (420)         (546)
-----------------------------------------------------------------------------------------------------
   Realized shareholders' equity                                                  8,648         8,522
Accumulated other comprehensive income                                              (69)           12
-----------------------------------------------------------------------------------------------------
   Total shareholders' equity                                                     8,579         8,534
-----------------------------------------------------------------------------------------------------
   Total liabilities and shareholders' equity                                  $ 82,804      $ 77,423
=====================================================================================================
</TABLE>




See notes to consolidated financial statements.



                                       2
<PAGE>   4



                           MURFREESBORO BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                                   (UNAUDITED)

           (Tabular amounts are in thousands except per share amounts)

<TABLE>
<CAPTION>
                                                                              1999        1998
<S>                                                                           <C>        <C>
Interest income:
   Interest and fees on loans                                                 $1,856     $   613
   Interest on taxable investment securities                                     725         628
   Interest on federal funds sold                                                 58         108
------------------------------------------------------------------------------------------------
     Total interest income                                                     2,639       1,349
------------------------------------------------------------------------------------------------
Interest expense:
   Interest on negotiable order of withdrawal accounts                           267         315
   Interest on money market demand accounts                                      178          99
   Interest on savings deposits                                                    3           1
   Interest on certificates of deposit                                           890         447
------------------------------------------------------------------------------------------------
     Total interest expense on deposits                                        1,338         862
   Interest on securities sold under agreement to repurchase                      63           2
------------------------------------------------------------------------------------------------
     Total interest expense                                                    1,401         864
------------------------------------------------------------------------------------------------

Net interest income                                                            1,238         485
        Provision for possible loan losses                                       175         229
------------------------------------------------------------------------------------------------
     Net interest income after provision for possible loan losses              1,063         256
------------------------------------------------------------------------------------------------

Non-interest income:
   Service charges on deposits                                                    98          36
   Other fees and commissions                                                      6           3
   Increase in cash surrender value of officers' life insurance                   38          --
   Other non-interest income                                                      25           6
------------------------------------------------------------------------------------------------
     Total non-interest income                                                   167          45
------------------------------------------------------------------------------------------------
Non-interest expense:
   Salaries and employee benefits                                                546         306
   Occupancy expenses, net                                                        35          32
   Furniture and equipment expense                                                70          39
   Other non-interest expense                                                    398         243
------------------------------------------------------------------------------------------------
     Total non-interest expense                                                1,049         620
------------------------------------------------------------------------------------------------
      Income (loss) before income taxes and cumulative effect of a change
        in accounting principle                                                  181        (319)
Income tax expense                                                                55          --
------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change
        in accounting principle                                                  126        (319)
Cumulative effect of a change in accounting principle, removing
        start-up costs (no tax effect required)                                   --         (38)
------------------------------------------------------------------------------------------------
                Net income (loss)                                             $  126     $  (357)
================================================================================================
Earnings per share:
      Basic:
         Income (loss) before cumulative effect of a change
          in accounting principle                                             $ 0.14     $ (0.35)
         Cumulative effect of a change in accounting principle                    --     $ (0.04)
------------------------------------------------------------------------------------------------
                Net income (loss)                                             $ 0.14     $ (0.39)
================================================================================================
      Diluted:
         Income (loss) before cumulative effect of a change
          in accounting principle                                             $ 0.14     $ (0.35)
         Cumulative effect of a change in accounting principle                    --        (.04)
------------------------------------------------------------------------------------------------
                Net income (loss)                                             $ 0.14     $ (0.39)
================================================================================================
</TABLE>



See notes to consolidated financial statements.


                                       3
<PAGE>   5


                           MURFREESBORO BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  FOR THE QUARTER ENDED JUNE 30, 1999 AND 1998
                                   (UNAUDITED)

           (Tabular amounts are in thousands except per share amounts)
<TABLE>
<CAPTION>
                                                                          1999      1998
<S>                                                                     <C>        <C>
Interest income:
   Interest and fees on loans                                           $1,010     $  407
   Interest on taxable investment securities                               328        368
   Interest on federal funds sold                                           28         36
-----------------------------------------------------------------------------------------
     Total interest income                                               1,366        811
-----------------------------------------------------------------------------------------
Interest expense:
   Interest on negotiable order of withdrawal accounts                     108        190
   Interest on money market demand accounts                                 99         54
   Interest on savings deposits                                              2         --
   Interest on certificates of deposit                                     458        274
-----------------------------------------------------------------------------------------
     Total interest expense on deposits                                    667        518
   Interest on securities sold under agreement to repurchase                34          2
-----------------------------------------------------------------------------------------
     Total interest expense                                                701        520
-----------------------------------------------------------------------------------------

Net interest income                                                        665        291
        Provision for possible loan losses                                  79        115
-----------------------------------------------------------------------------------------
     Net interest income after provision for possible loan losses          586        176
-----------------------------------------------------------------------------------------

Non-interest income:

   Service charges on deposits                                              51         24
   Other fees and commissions                                                4          2
   Increase in cash surrender value of officers' life insurance             19         --
   Other non-interest income                                                15          4
-----------------------------------------------------------------------------------------
     Total non-interest income                                              89         30
-----------------------------------------------------------------------------------------
Non-interest expense:
   Salaries and employee benefits                                          289        167
   Occupancy expenses, net                                                  18         23
   Furniture and equipment expense                                          38         20
   Other non-interest expense                                              223        140
-----------------------------------------------------------------------------------------
     Total non-interest expense                                            568        350
-----------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect of a change
        in accounting principle                                            107       (144)
Income tax expense                                                          34        --
-----------------------------------------------------------------------------------------
      Income (loss) before cumulative effect of a change
        in accounting principle                                             73       (144)
Cumulative effect of a change in accounting principle, removing
        start-up costs (no tax effect required)                             --        --
-----------------------------------------------------------------------------------------
                Net income (loss)                                       $   73     $ (144)
=========================================================================================
Earnings per share:
      Basic:
         Income (loss) before cumulative effect of a change
          in accounting principle                                       $ 0.08     $(0.16)
         Cumulative effect of a change in accounting principle              --        --
-----------------------------------------------------------------------------------------
                Net income (loss)                                       $ 0.08     $(0.16)
=========================================================================================
      Diluted:
         Income (loss) before cumulative effect of a change
          in accounting principle                                       $ 0.14     $(0.35)
         Cumulative effect of a change in accounting principle              --       (.04)
-----------------------------------------------------------------------------------------
                Net income (loss)                                       $ 0.14     $(0.39)
=========================================================================================
</TABLE>




See notes to consolidated financial statements.

                                       4
<PAGE>   6

                           MURFREESBORO BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                                   (UNAUDITED)

                       (Tabular amounts are in thousands)

<TABLE>
<CAPTION>
                                                                                          1999          1998
<S>                                                                                     <C>           <C>
Operating activities:
   Net income (loss)                                                                    $    126      $   (357)
   Adjustments to reconcile net income (loss) to net cash provided
     by (used in) operating activities:
     Provision for loan losses                                                               175           229
     Provision for depreciation, amortization and accretion, net                              85            81
     Changes in assets and liabilities:
        Increase in accrued interest receivable                                              (95)         (306)
        Increase in cash surrender value of officers' life insurance                         (38)           --
        Increase in deferred tax asset                                                        (7)           --
        Increase in other assets                                                              (6)           --
        Increase (decrease) in accrued interest payable                                       (3)           87
        Increase (decrease) in accrued expenses and other liabilities                        175            (9)
--------------------------------------------------------------------------------------------------------------
     Net cash provided (used) by operating activities                                        412          (275)
--------------------------------------------------------------------------------------------------------------

Investing activities:
   Purchase of securities available for sale                                              (8,043)      (11,515)
   Purchase of securities held to maturity                                                (4,501)       (5,552)
   Maturities and calls of securities available for sale                                  12,000         5,000
   Maturities and calls of securities held to maturity                                     2,000         1,250
   Proceeds from sales of securities available for sale                                      990            --
   Increase in loans, net                                                                (14,025)      (18,339)
   Additions to premises and equipment                                                      (441)          (52)
--------------------------------------------------------------------------------------------------------------
   Net cash used by investing activities                                                 (12,020)      (29,208)
--------------------------------------------------------------------------------------------------------------

Financing activities:
   Net increase in deposits                                                                3,332        23,625
   Net increase in securities sold under agreement to repurchase                           1,868            --
--------------------------------------------------------------------------------------------------------------
   Net cash provided by financing activities                                               5,200        23,625
--------------------------------------------------------------------------------------------------------------

Net decrease in cash and cash equivalents                                                 (6,408)       (5,858)

Cash and cash equivalents at the beginning of the period                                   9,472         8,710
--------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at the end of the period                                      $  3,064      $  2,852
==============================================================================================================

Supplemental disclosure of cash flow information:

Cash paid during the six months for:

        Interest                                                                        $  1,404      $    777
==============================================================================================================

Non-cash transactions:
        Stock dividend on Federal Home Loan Bank common stock                           $      3      $     --
--------------------------------------------------------------------------------------------------------------
        Increase in unrealized gain (loss) on securities available for sale, net of
         $50,000 in tax effect                                                          $    (81)     $     (6)
==============================================================================================================
</TABLE>


See notes to consolidated financial statements.


                                       5
<PAGE>   7

                           MURFREESBORO BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

                                   (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 June 30, 1999 and December 31, 1998, the results of operations
            for the six months ended June 30, 1999 and 1998 and changes in cash
            flows for the six months ended June 30, 1999 and 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 Annual Report to Shareholders. The
            results of the interim periods are not necessarily indicative of the
            results to be expected for the complete fiscal year.

        (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 six months ended June 30, 1999 and 1998,
            respectively.

<TABLE>
<CAPTION>
                                                                                 Tax     Net of
                                                                    Pre-Tax    Expense     Tax
                                                                    Amount    (Benefit)  Amount
                                                                    ------    ---------  ------
                                                                          (In thousands)
            <S>                                                     <C>        <C>       <C>
            Six months ended June 30, 1999

            Net unrealized loss on securities available for sale     $(112)     $(43)     $(69)
                                                                     -----      ----      ----
            Other comprehensive income (loss)                        $(112)     $(43)     $(69)
                                                                     =====      ====      ====

            Six months ended June 30, 1998

            Net unrealized loss on securities available for sale     $  (6)     $ --      $ (6)
                                                                     -----      ----      ----
            Other comprehensive income                               $  (6)     $ --      $ (6)
                                                                     =====      ====      ====
</TABLE>

        (3) EARNINGS PER SHARE

            The weighted average number of common shares outstanding during the
            six months ended June 30, 1999 and 1998 was 907,609. The effect of
            dilutive common stock options was 17,800 shares for the six months
            ended June 30, 1999. There were no dilutive items outstanding during
            the six months ending June 30, 1998.



                                       6
<PAGE>   8

(4)      CHANGE IN ACCOUNTING PRINCIPLE

         During 1998, the Company adopted the provisions of Statement of
         Position 98-5 (SOP 98-5) Reporting on the Costs of Start-Up Activities.
         Under SOP 98-5, all start-up costs should be expensed as incurred which
         differed from the prior method of capitalization of such costs and
         amortizing using the straight-line-method over a sixty month term. In
         accordance with SOP 98-5, the Company expensed organizational costs of
         approximately $38,000 with no tax benefit recorded as a full allowance
         for deferred tax assets had been established as of the beginning of the
         six months. This change in accounting principle increased the loss per
         share by $0.04 for both basic and dilutive purposes.

(5)      YEAR 2000 COMPUTER ISSUE

         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 Company'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 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 performed testing in
         1998 and plans further testing in 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,



                                       7
<PAGE>   9

           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
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.

SUMMARY

Net loss for the six months ended June 30, 1998 was $357,000 and the net income
for the six months ended June 30, 1999 was $126,000.

FINANCIAL CONDITION

Earning Assets. Average earning assets for the six months ended June 30, 1998
totaled $32,461,000, which represents 92.1% of average total assets. Earning
assets totaled $51,223,000 at June 30, 1998. Average earning assets for the six
months ended June 30, 1999 totaled $72,609,000, which represented 93.4% of
average total assets. Earning assets totaled $77,224,000 at June 30, 1999 and
$71,443,000 at December 31, 1998.

Loan Portfolio. The Company's average loans for the six months ended June 30,
1998 were $14,786,000 and for the six months ended June 30, 1999 were
$44,745,000. The balance in total loans at June 30, 1998 was $23,740,000,
$37,670,000 at December 31, 1998 and $51,816,000 at June 30, 1999.

Investment Portfolio. The Company's investment securities portfolio averaged
$20,890,000 for the six months ended June 30, 1998 and $25,465,000 for the six
months ended June 30, 1999. The portfolio totaled $25,562,000 at June 30, 1998,
$26,582,000 at December 31, 1998 and $23,997,000 at June 30, 1999.

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 cost. At June 30, 1998,
there was no unrealized gains or losses in the "Available for Sale" portfolio
and there was an unrealized loss of $112,000 at June 30, 1999. The average
balance of securities "Available for Sale" during the six months ended June 30,
1998 was $18,329,000 and the balance at June 30, 1998 was $21,266,000. The
average balance of securities "Held to Maturity" during the six months ended
June 30, 1998 was $2,562,000 and the balance at June 30, 1998 was $4,296,000.
The average balance of securities "Available for Sale" during the six months
ended June 30, 1999 was $16,523,000 and the balance at June 30, 1999 was
$15,127,000. The average balance of securities "Available for Sale" during the
quarter ended June 30, 1999 was $13,854,000 and $20,058,000 for the quarter
ended June 30, 1998. The average balance of securities "Held to Maturity" during
the six months ended June 30, 1999 was $8,942,000 and the balance at June 30,
1999 was $8,870,000. The average balance of securities "Held to Maturity" during
the quarter ended June 30, 1999 was $9,035,000 and $4,104,000 for the quarter
ended June 30, 1998.

Deposits. The Company's average deposits were $34,062,000 for the six months
ended June 30, 1998. This included average non-interest-bearing deposits of
$1,435,000, average certificates of deposit of $15,692,000, average saving
deposits of $116,000 and average interest-bearing transaction accounts of
$16,819,000. The Company's average deposits for the six months ended June 30,
1999 were $66,095,000. This included average non-interest-bearing deposits of
$3,095,000, average certificates of deposit of $35,402,000, average savings
deposits of $309,000 and average interest-bearing transaction accounts of
$27,289,000. Deposits totaled $45,390,000 at June 30, 1998, $65,002,000 at
December 31, 1998 and $68,334,000 at June 30, 1999.



                                       9
<PAGE>   11

Capital Resources. Shareholders' equity totaled $8,579,000 at of June 30, 1999.
This included $9,068,000 of common stock and additional paid-in-capital less a
deficit of $420,000 and other comprehensive income in the form of an unrealized
loss on securities available for sale of $69,000.

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 non-interest bearing deposit accounts. At June 30, 1998 and
June 30, 1999, the Company had $2,300,000 of federal funds purchase lines
available at three correspondent banks as well as a secured federal funds
purchase line of $4,000,000. None of these lines were drawn at June 30, 1998.
There was $1,500,000 of secured federal funds purchased at June 30, 1999 secured
by U.S government agency securities.

Management anticipates raising $3,000,000 of additional capital in the form of
subordinated convertible debentures during the third quarter of 1999.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 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 six months ended June 30, 1998 totaled $485,000.
This was the result of interest income of $1,349,000 and interest expense of
$864,000. Interest income produced by the loan portfolio totaled $613,000,
interest income on investment securities totaled $628,000, and interest income
on federal funds totaled $108,000. Interest expense included $447,000 of
interest expense on certificates of deposit, interest expense of $315,000 on
interest-bearing transaction accounts, interest expense of $99,000 on money
market demand accounts, interest expense of $1,000 on savings accounts and
interest expense on securities sold under agreement to repurchase of $2,000.

Net interest income for the six months ended June 30, 1999 totaled $1,238,000.
This was the result of interest income of $2,639,000 and interest expense of
$1,401,000. Interest income produced by the loan portfolio totaled $1,856,000,
interest income on investment securities totaled $725,000 and interest income on
federal funds totaled $58,000. Interest expense included $890,000 of interest
expense on certificates of deposit, interest expense of $267,000 on
interest-bearing transaction accounts, interest expense of $178,000 on money
market demand accounts, interest expense on savings accounts of $3,000 and
interest expense on securities sold under agreement to repurchase of $63,000.



                                       10
<PAGE>   12


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 six months ended June 30, 1998 was 2.48%. The
net cost of funds, defined as interest expense divided by average-earning
assets, was 4.41% and the yield on earning assets was 6.89% for the six months
ended June 30, 1998. The net interest margin for the six months ended June 30,
1999 was 3.44%. The net cost of funds for the six months ended June 30, 1999 was
3.89% and the yield on earning assets was 7.33%.

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.
During recent years, the net interest margins and interest 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 six months ended June 30, 1998 was 1.56% and for the six months ended June
30, 1999 was 3.04%.

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 that 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, unless there is
sufficient collateral to justify continued accrual.

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 that 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 $473,000 at December 31, 1998 and $648,000 at June
30, 1999 in the allowance for possible loan losses are 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.



                                       11
<PAGE>   13


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 unless there is reason to believe the
collection of principal and interest is fairly certain. 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.

There were no impaired loans, loans on non-accrual status or foreclosed real
estate held for sale at December 31, 1998 or at June 30, 1999. Loans past due
ninety days or more and still accruing interest at December 31, 1998 totaled
$3,000 and $68,000 at June 30, 1999.

Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officer's life insurance. In
addition, any gains or losses realized from the sale of investment portfolio
securities available for sale are included in non-interest income. Total
non-interest income totaled $45,000 for the six months ended June 30, 1998. This
included $36,000 from service charges on deposit accounts, other fees of $3,000
and $6,000 of other non-interest income. There were no gains or losses on
securities during the six months ended June 30, 1998.

Non-interest income totaled $167,000 for the six months ended June 30, 1999.
This included $98,000 on service charge on deposit accounts, other fees of
$6,000 and $25,000 of other non-interest income including brokerage income and
$38,000 from the increase in the cash surrender value of the officer's life
insurance.

Non-interest Expenses. Non-interest expense for the six months ended June 30,
1998 totaled $620,000. Salaries and employee benefits for the six months ended
June 30, 1998 totaled $306,000. Occupancy expense for the six months ended June
30, 1998 totaled $32,000 while furniture and equipment expense totaled $39,000.
All other non-interest expenses totaled $243,000 for the six months ended June
30, 1998. Other non-interest expenses include supplies and printing, telephone,
postage and legal and audit fees.

Non-interest expense for the six months ended June 30, 1999 totaled $1,049,000.
Salaries and employee benefits for the six months ended June 30, 1999 totaled
$546,000. Occupancy expenses for the six months ended June 30, 1999 totaled
$35,000 while furniture and equipment expenses totaled $70,000. Other
non-interest expenses totaled $398,000.

Income Taxes. At December 31, 1998, the Company had net operating losses for
federal and state income taxes of approximately $560,000 of which $310,000
expire in tax year 2012 for federal and state purposes. Approximately $250,000
will expire in tax year 2013 for state purposes, and in tax year 2018 for
federal purposes.

For the six months ended June 30, 1999 the Company incurred income tax expenses
of $55,000 for an effective tax rate of 30.39%.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 1999 AND 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 quarter ended June 30, 1998 totaled $291,000. This
was the result of interest income of $811,000 and interest expense of $520,000.
Interest income produced by the loan portfolio totaled $407,000, interest income
on investment securities totaled $368,000, and interest income on federal funds
totaled $36,000. Interest expense included $274,000 of interest expense on
certificates of deposit,



                                       12
<PAGE>   14

interest expense of $190,000 on interest-bearing transaction accounts and
interest expense of $54,000 on money market demand accounts.

Net interest income for the quarter ended June 30, 1999 totaled $665,000. This
was the result of interest income of $1,366,000 and interest expense of
$701,000. Interest income produced by the loan portfolio totaled $1,010,000,
interest income on investment securities totaled $328,000 and interest income on
federal funds totaled $28,000. Interest expense included $458,000 of interest
expense on certificates of deposit, interest expense of $108,000 on
interest-bearing transaction accounts, interest expense of $99,000 on money
market demand accounts, interest expense on savings accounts of $2,000 and
interest expense on securities sold under agreement to repurchase of $24,000.

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 quarter ended June 30, 1998 was 2.52%. The net
cost of funds, defined as interest expense divided by average-earning assets,
was 5.44% and the yield on earning assets was 7.02% for the quarter ended June
30, 1998. The net interest margin for the quarter ended June 30, 1999 was 3.62%.
The net cost of funds for the quarter ended June 30, 1999 was 4.22% and the
yield on earning assets was 7.43%.

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.
During recent years, the net interest margins and interest 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 quarter ended June 30, 1998 was 1.64% and for the quarter ended June 30,
1999 was 3.23%.

Non-interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and increase in the cash surrender value of officer's life insurance. In
addition, any gains or losses realized from the sale of investment portfolio
securities available for sale are included in non-interest income. Total
non-interest income totaled $30,000 for the quarter ended June 30, 1998. This
included $24,000 from service charges on deposit accounts, other fees of $2,000
and $4,000 of other non-interest income. There were no gains or losses on
securities during the quarter ended June 30, 1998.

Non-interest income totaled $89,000 for the quarter ended June 30, 1999. This
included $51,000 on service charge on deposit accounts, other fees of $4,000,
$15,000 of other non-interest income including brokerage income and $19,000 from
the increase in the cash surrender value of the officer's life insurance.

Non-interest Expenses. Non-interest expense for the quarter ended June 30, 1998
totaled $350,000. Salaries and employee benefits for the quarter ended June 30,
1998 totaled $167,000. Occupancy expense for the quarter ended June 30, 1998
totaled $23,000 while furniture and equipment expense totaled $20,000. All other
non-interest expenses totaled $140,000 for the quarter ended June 30, 1998.
Other non-interest expenses include supplies and printing, telephone, postage
and legal and audit fees.

Non-interest expense for the quarter ended June 30, 1999 totaled $568,000.
Salaries and employee benefits for the quarter ended June 30, 1999 totaled
$289,000. Occupancy expenses for the quarter ended June 30, 1999 totaled $18,000
while furniture and equipment expenses totaled $38,000. Other non-interest
expenses totaled $223,000.

Income Taxes. At December 31, 1998, the Company had net operating losses for
federal and state income taxes of approximately $560,000 of which $310,000
expire in tax year 2012 for federal and state purposes.



                                       13
<PAGE>   15

Approximately $250,000 will expire in tax year 2013 for state purposes, and in
tax year 2018 for federal purposes.

For the quarter ended June 30, 1999 the Company incurred income tax expenses of
$34,000 for an effective tax rate of 31.78%.

RETURN ON EQUITY AND ASSETS

Return on assets (net income divided by average total assets) for the six months
ended June 30, 1998 was (1.68%.) Return on assets for the six months ended June
30, 1999 was 0.32%. Return on assets for the quarter ended June 30, 1998 was
(1.17%.) while return on assets for the quarter ended June 30, 1999 was 0.37%.

Return on equity (net income divided by average equity) for the six months ended
June 30, 1998 was (8.36%.) Return on equity for the six months ended June 30,
1998 was 3.02%. Return on equity for the quarter ended June 30, 1998 was (6.71%)
while return on equity for the quarter ended June 30, 1999 was 3.58%.

Equity to assets (average equity divided by average total assets) for the six
months ended June 30, 1999 was 10.84%. Equity to assets for the six months ended
June 30, 1998 was 20.09%. Equity to assets for the quarter ended June 30, 1998
was 17.39% while equity to assets for the quarter ended June 30, 1999 was
10.41%.

There were no dividends paid during the quarters or six months ended June 30,
1998 or 1999, so no dividend payout ratio is presented.

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.



                                       14
<PAGE>   16


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 six months ended June 30, 1999 indicated
and certain other information:

<TABLE>
<CAPTION>
                                                                             Interest    Average
                                                               Average        Income/     Yields/
                                                               Balance        Expense      Rates
                                                               -------        -------      -----
                                                                   (Fully taxable equivalent -
                                                                      dollars in thousands)
<S>                                                             <C>            <C>          <C>
ASSETS:

Interest-earning assets:

Loans                                                           $ 44,745       $1,856       8.37%
U.S. Treasury and other U.S. government agencies                  25,465          725       5.74%
States and municipalities                                             --           --        N/A
Federal funds sold                                                 2,399           58       4.87%
Interest bearing deposits with other financial institutions           --           --        N/A
                                                                --------       ------     ------
Total interest-earning assets/interest income                     72,609        2,639       7.33%
                                                                --------       ------     ------
Cash and due from banks                                            1,489
Other assets                                                       4,191
Allowance for possible loan losses                                  (549)
                                                                --------
Total assets                                                    $ 77,740
                                                                ========

LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing liabilities:
Demand deposits and savings accounts                            $ 27,598          448       3.27%
Certificates of deposit                                           35,402          890       5.07%
Repurchase agreements                                              2,865           63       4.43%
Note payable                                                          --           --        N/A
                                                                --------       ------     ------
Total interest-bearing liabilities/interest expense               65,865        1,401       4.29%
                                                                --------       ------     ------
Non-interest-bearing demand deposits                               3,095
Other liabilities                                                    357
Shareholders' equity                                               8,423
                                                                --------
Total liabilities and shareholders' equity                      $ 77,740
                                                                ========
Net interest earnings                                                          $1,238
                                                                               ======     ======
Net interest income on interest-earning assets                                              3.44%
                                                                               ======     ======

Taxable equivalent adjustment:                                                    N/A
</TABLE>



                                       15
<PAGE>   17


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 six months ended June 30, 1998 indicated
and certain other information:

<TABLE>
<CAPTION>
                                                                     Interest   Average
                                                        Average       Income/   Yields/
                                                        Balance       Expense    Rates
                                                        -------       -------    -----
                                                         (Fully taxable equivalent -
                                                            dollars in thousands)
<S>                                                     <C>            <C>        <C>
ASSETS:

Interest-earning assets:

Loans                                                   $ 14,786       $  613     8.36%
U.S. Treasury and other U.S. government agencies          20,890          628     6.06%
States and municipalities                                     --           --      N/A
Federal funds sold                                         3,785          108     5.75%
                                                        --------       ------     ----
Total interest-earning assets/interest income             39,461        1,349     6.89%
                                                        --------       ------     ----
Cash and due from banks                                    1,156
Other assets                                               2,403
Allowance for possible loan losses                          (168)
                                                        --------
Total assets                                            $ 42,852
                                                        ========
LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing liabilities:
Demand deposits and savings accounts                    $ 16,935          415     4.94%
Certificates of deposit                                   15,692          447     5.74%
Repurchase agreements                                         39            2     5.50%
                                                        --------       ------     ----
Total interest-bearing liabilities/interest expense       32,666          864     5.33%
                                                        --------       ------     ----
Non-interest-bearing demand deposits                       1,435
Other liabilities                                            142

Shareholders' equity                                       8,609
                                                        --------
Total liabilities and shareholders' equity              $ 42,852
                                                        ========
Net interest earnings                                                  $  485
                                                                       ======
Net interest income on interest-earning assets                                    2.48%
                                                                                  ====
Taxable equivalent adjustment:                                            N/A
</TABLE>



                                       16
<PAGE>   18


The following table presents changes in the Company's various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the six months ended June 30, 1998 to
the six months ended June 30, 1999 (in thousands).

<TABLE>
<CAPTION>
                                                              INCREASE     INCREASE
                                                             (DECREASE)   (DECREASE)
                                                  INCREASE     DUE TO       DUE TO
                                                 (DECREASE)     RATE        VOLUME
                                                 ----------     ----        ------
<S>                                              <C>          <C>          <C>
                        ASSETS

Interest earning assets:

Interest bearing deposits with other banks       $    --          --            --
Federal funds sold                                   (50)        (33)          (17)
Investment securities                                 97         (33)          130
Loans                                              1,243           1         1,242
----------------------------------------------------------------------------------
    Total interest earning assets                  1,290         (65)        1,355
----------------------------------------------------------------------------------

                      LIABILITIES

Interest bearing liabilities:

Demand deposits and savings accounts                  33        (175)          208
Certificates of deposits                             259         (76)          519
Repurchase agreements                                 61          (1)           62
----------------------------------------------------------------------------------
    Total interest bearing liabilities               537        (252)          789
----------------------------------------------------------------------------------

  Total                                          $   753        (187)          566
==================================================================================
</TABLE>



                                       17
<PAGE>   19


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 quarter ended June 30, 1999 indicated and
certain other information:

<TABLE>
<CAPTION>
                                                                                 Interest      Average
                                                                  Average         Income/      Yields/
                                                                  Balance         Expense       Rates
                                                                  -------         -------       -----
                                                           (Fully taxable equivalent - dollars in thousands)
<S>                                                               <C>             <C>          <C>
ASSETS:

Interest-earning assets:

Loans                                                             $ 48,471         $1,010       8.36%
U.S. Treasury and other U.S. government agencies                    22,889            328       5.75%
States and municipalities                                               --             --        N/A
Federal funds sold                                                   2,357             28       4.76%
Interest bearing deposits with other financial institutions             --             --        N/A
                                                                  --------         ------       ----
Total interest-earning assets/interest income                       73,717          1,366       7.43%
                                                                  --------         ------       ----
Cash and due from banks                                              1,441
Other assets                                                         4,066
Allowance for possible loan losses                                    (599)
                                                                  --------
Total assets                                                      $ 78,625
                                                                  ========

LIABILITIES AND SHAREHOLDERS' EQUITY:

Interest-bearing liabilities:
Demand deposits and savings accounts                              $ 26,788            209       3.13%
Certificates of deposit                                             36,876            458       4.98%
Repurchase agreements                                                2,987             34       4.57%
                                                                  --------         ------       ----
Total interest-bearing liabilities/interest expense                 66,651          1,701       4.22%
                                                                  --------         ------       ----
Non-interest-bearing demand deposits                                 3,368
Other liabilities                                                      425
Shareholders' equity                                                 8,181
                                                                  --------
Total liabilities and shareholders' equity                        $ 78,625
                                                                  ========
Net interest earnings                                                              $  665
                                                                                   ======
Net interest income on interest-earning assets                                                  3.62%
                                                                                                ====

Taxable equivalent adjustment:                                                        N/A
</TABLE>



                                       18
<PAGE>   20


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 June 30, 1998 indicated and
certain other information:

<TABLE>
<CAPTION>
                                                                                 Interest      Average
                                                                  Average         Income/      Yields/
                                                                  Balance         Expense       Rates
                                                                  -------         -------       -----
                                                           (Fully taxable equivalent - dollars in thousands)
<S>                                                               <C>             <C>          <C>
Assets:

Interest-earning assets:

Loans                                                     $ 19,697         $407       8.29%
U.S. Treasury and other U.S. government agencies            24,162          368       6.19%
States and municipalities                                       --           --        N/A
Federal funds sold                                           2,476           36       5.83%
                                                          --------         ----       ----
Total interest-earning assets/interest income               46,335          811       7.02%
                                                          --------         ----       ----
Cash and due from banks                                      1,378
Other assets                                                 2,022
Allowance for possible loan losses                            (226)
                                                          --------
Total assets                                              $ 49,509
                                                          ========         ====       ====


Liabilities and shareholders' equity:

Interest-bearing liabilities:

Demand deposits and savings accounts                      $ 19,347          244       5.06%
Certificates of deposit                                     19,303          274       5.69%
Repurchase agreements                                           77            2       6.50%
                                                          --------         ----       ----
Total interest-bearing liabilities/interest expense         38,727          520       5.39%
                                                          --------         ----       ----
Non-interest-bearing demand deposits                         1,716
Other liabilities                                              457

Shareholders' equity                                         8,609
                                                          --------
Total liabilities and shareholders' equity                $ 49,509
                                                          ========
Net interest earnings                                                      $271
                                                                           ====
Net interest income on interest-earning assets                                        2.52%
                                                                                      ====

Taxable equivalent adjustment:                                              N/A
</TABLE>



                                       19
<PAGE>   21


The following table presents changes in the Company's various categories of
interest income and interest expense based upon the change in the average rate
and the change in the average volume from the quarter ended June 30, 1998 to the
quarter ended June 30, 1999 (in thousands).

<TABLE>
<CAPTION>
                                                              INCREASE     INCREASE
                                                             (DECREASE)   (DECREASE)
                                                  INCREASE     DUE TO       DUE TO
                                                 (DECREASE)     RATE        VOLUME
                                                 ----------     ----        ------
<S>                                              <C>          <C>          <C>
                        ASSETS

Interest-earning assets:

Interest bearing deposits with other banks        $  --           --           --
Federal funds sold                                   (8)          (7)          (1)
Investment securities                               (40)         (27)         (13)
Loans                                               603           (1)         604
---------------------------------------------------------------------------------
    Total interest earning assets                   555          (35)         590
---------------------------------------------------------------------------------

                      LIABILITIES

Interest bearing liabilities:

  Demand deposits and savings accounts              (35)         (95)          60
 Certificates of deposits                           184          (50)         234
 Repurchase agreements                               32           (2)          34
---------------------------------------------------------------------------------
    Total interest bearing liabilities              181         (147)         328
---------------------------------------------------------------------------------

  Total                                           $ 374          112          262
=================================================================================
</TABLE>



                                       20
<PAGE>   22


DEPOSITS

The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at June 30, 1999 and
December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                             June 30,      December 31,
                                                               1999           1998
                                                              -------        -------
<S>                                                           <C>            <C>
Non-interest-bearing deposits:
Individuals, partnerships and corporations                    $ 3,142        $ 2,567
U. S. Government and states and political subdivisions             --             --
Certified and official checks                                     549            389
                                                              -------        -------
Total non-interest-bearing deposits                             3,691          2,956
                                                              -------        -------
Interest-bearing deposits:
Interest-bearing demand accounts                               25,658         29,557
Saving accounts                                                   362            221
Certificates of deposit, less than $100,000                    27,428         23,752
Certificates of deposit, $100,000 or greater                   11,195          8,516
                                                              -------        -------
Total interest-bearing deposits                                64,643         62,046
                                                              -------        -------
Total deposits                                                $68,334        $65,002
                                                              =======        =======
</TABLE>


The following table presents a breakdown by category of the average amount of
deposits and the average rate paid on deposits for the six months ended June 30,
1999 and the year ended December 31, 1998 (dollars in thousands):

<TABLE>
<CAPTION>
                                            Six months Ended             Year Ended
                                             June 30, 1999             December 31,1998
                                             -------------             ----------------

<S>                                     <C>                         <C>
Non-interest-bearing deposits           $ 3,095            N/A      $ 1,803            N/A
Interest-bearing demand deposits         27,289           3.28%      22,400           4.96%
Savings accounts                            309           2.08%         160           2.51%
Certificates of deposit                  35,402           5.07%      21,174           5.64%
                                        -------        -------      -------        -------
Total deposits                          $66,095           4.08%     $45,537           5.08%
                                        =======        =======      =======        =======
</TABLE>


At December 31, 1998, certificates of deposits greater than $100,000 aggregated
approximately $8,516,000. The following table indicates, as of December 31,
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                 $ 1,722        $ 5,794      $ 1,000             --
                                        =======        =======      =======        =======
</TABLE>

At June 30, 1999, certificates of deposits greater than $100,000 aggregated
approximately $11,195,000. The following table indicates, as of June 30, 1999,
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                 $ 4,219        $ 5,476        1,500             --
                                        =======        =======      =======        =======
</TABLE>



                                       21
<PAGE>   23


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 June 30, 1999 and December 31,
1998 (in thousands):

<TABLE>
<CAPTION>
                                             June 30, 1999    December 31, 1998
                                             -------------    -----------------

<S>                                          <C>              <C>
Interest-bearing deposits with banks            $    --            $    --
Investment securities                            23,997             26,582
Federal funds sold                                1,411              7,070
Loans:
Real estate                                      34,787             23,256
Commercial and other                             17,029             14,414
                                                -------            -------
Total loans                                      51,816             37,670
                                                -------            -------
Interest-earning assets                         $77,224            $71,322
                                                =======            =======
</TABLE>


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 June 30, 1999, approximately $15,127,000 of investment securities
was classified as available for sale and at December 31, 1998, approximately
$20,198,000 of investment securities was classified as available for sale.
Approximately $69,000 of unrealized loss (net of tax) and $12,000 of unrealized
gain (net of tax) was included in shareholders' equity related to the available
for sale investment securities as of June 30, 1999 and December 31, 1998,
respectively. There was $8,870,000 and $6,384,000 of securities at June 30, 1999
and December 31, 1998 classified as held to maturity, respectively.



                                       22
<PAGE>   24



At June 30, 1999 as well as December 31, 1998, obligations of the United States
Government or its agencies represented 100% of the total investment debt
portfolio. The Company acquired restricted stock in the Federal Home Loan Bank
of Cincinnati during 1998. The following table presents the carrying amounts of
the Company's investment portfolio at December 31, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                  Amortized           Estimated
                                                     Cost             Fair Value
                                                     ----             ----------
<S>                                               <C>                 <C>
AVAILABLE FOR SALE:
U.S. Treasury                                       $    --            $    --
U.S. Government agencies                             20,016             20,035
States and political subdivisions                        --                 --
Other securities                                         --                 --
                                                    -------            -------
Total available for sale debt securities             20,016             20,035
Federal Home Loan Bank stock                            163                163
                                                    -------            -------
Total available for sale                             20,179             20,198
                                                    =======            =======

HELD TO MATURITY:
U.S. Treasury                                            --                 --
U.S. Government agencies                              6,384              6,422
States and political subdivisions                        --                 --
Other securities                                         --                 --
                                                    -------            -------
Total held to maturity                                6,384              6,422
                                                    =======            =======
Total investment portfolio                          $26,563            $26,620
                                                    =======            =======
</TABLE>

At June 30, 1999, obligations of the United States Government or its agencies
represented 100% of the total investment debt portfolio. The following table
presents the carrying amounts of the Company's investment portfolio at June 30,
1999 (in thousands):

<TABLE>
<CAPTION>
                                                  Amortized           Estimated
                                                     Cost             Fair Value
                                                     ----             ----------
<S>                                               <C>                 <C>
AVAILABLE FOR SALE:
U.S. Treasury                                       $    --            $    --
U.S. Government agencies                             15,003             14,891
States and political subdivisions                        --                 --
Other securities                                         --                 --
                                                    -------            -------
Total available for sale - debt securities           15,003             14,891
                                                    -------            -------
Federal Home Loan Bank Stock                            236                236
                                                    -------            -------
Total available for sale                            $15,239            $15,127
                                                    =======            =======
HELD TO MATURITY:
U.S. Treasury                                            --                 --
U.S. Government agencies                              8,870              8,730
States and political subdivisions                        --                 --
Other securities                                         --                 --
                                                    -------            -------
Total held to maturity                                8,870              8,730
                                                    =======            =======
Total investment portfolio                          $24,109            $23,857
                                                    =======            =======
</TABLE>




                                       23
<PAGE>   25


The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at June 30, 1999. The
weighted average yields on these instruments are presented based on final
maturity (dollars in thousands).

<TABLE>
<CAPTION>
                                                 Amortized       Estimated        Weighted
                                                   Cost          Fair Value    Average Yield
                                                   ----          ----------    -------------
<S>                                                <C>           <C>           <C>
AVAILABLE FOR SALE:
U.S. Treasuries                                    $    --         $    --         N/A
U.S. Government agencies:
Due within 1 year                                       --              --         N/A
Due after 1 year but within 5 years                 12,993          12,903         5.59%
Due after 5 years but within 10 years                2,010           1,988         6.18%
Due after 10 years                                      --              --         N/A
                                                   -------         -------         ----
Total                                               15,003          14,891         5.52%
                                                   -------         -------         ----
States and political subdivisions                       --              --         N/A
Other                                                   --              --         N/A
                                                   -------         -------         ----
Total investments available for sale-debt           15,003          14,891         5.52%
                                                   =======         =======         ====
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                  1,502           1,502         5.93%
Due after 5 years but within 10 years                4,882           4,920         6.17%
Due after 10 years                                      --              --         N/A
                                                   -------         -------         ----
Total                                                8,870           8,730         5.98%
                                                   -------         -------         ----
States and political subdivisions                       --              --         N/A
Other                                                   --              --         N/A
                                                   -------         -------         ----
Total held to maturity                               8,870           8,730         5.98%
                                                   =======         =======         ====
Total investment portfolio-debt securities         $23,873         $23,621         5.73%
                                                   =======         =======         ====
</TABLE>



                                       24
<PAGE>   26



The following table presents the maturity distribution of the carrying value and
estimated fair value of the Company's investment portfolio at December 31, 1998.
The weighted average yields on these instruments are presented based on final
maturity (dollars in thousands).

<TABLE>
<CAPTION>
                                                 Amortized       Estimated        Weighted
                                                   Cost          Fair Value    Average Yield
                                                   ----          ----------    -------------
<S>                                                <C>           <C>           <C>
AVAILABLE FOR SALE:

U.S. Treasuries                                    $    --         $    --         N/A
U.S. Government agencies:
Due within 1 year                                    4,000           3,993         5.05%
Due after 1 year but within 5 years                 15,002          15,011         5.61%
Due after 5 years but within 10 years                1,014           1,031         6.18%
Due after 10 years                                      --              --         N/A
                                                   -------         -------         ----
Total                                               20,016          20,035         5.52%
                                                   -------         -------         ----
States and political subdivisions                       --              --         N/A
Other                                                   --              --         N/A
                                                   -------         -------         ----
Total investments available for sale-debt
   secur                                            20,016          20,035         5.52%
                                                   =======         =======         ====
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                  1,502           1,502         5.77%
Due after 5 years but within 10 years                4,882           4,920         6.07%
Due after 10 years                                      --              --         N/A
                                                   -------         -------         ----
Total                                                6,384           6,422         6.00%
                                                   -------         -------         ----
States and political subdivisions                       --              --         N/A
Other                                                   --              --         N/A
                                                   -------         -------         ----
Total held to maturity                               6,384           6,422         6.00%
                                                   =======         =======         ====
Total investment portfolio-debt securities         $26,400         $26,457         5.64%
                                                   =======         =======         ====
</TABLE>

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.



                                       25
<PAGE>   27


LOAN PORTFOLIO

The following table sets forth the composition of the Company's loan portfolio
at December 31, 1998 (dollars in thousands).

<TABLE>
<CAPTION>
                                                                                       Percent of
                                                                 Balance               Total Loans
                                                                 -------               -----------
<S>                                                          <C>                       <C>
Real estate loans:
Construction and land development                            $     1,286                    3.4%
Secured by residential properties                                 12,307                   32.7%
Secured by commercial real estate                                  9,663                   25.7%
------------------------------------------------------------------------------------------------
Total real estate loans                                           23,256                   61.8%
------------------------------------------------------------------------------------------------
Commercial and industrial loans                                    7,789                   20.7%
Other consumer loans                                               6,625                   17.5%
------------------------------------------------------------------------------------------------
Total loans                                                       37,670                  100.0%
Unamortized (discounts) premiums and
  net deferred loan costs                                            121                   N/A

Allowance for possible loan losses                                  (473)                  N/A
------------------------------------------------------------------------------------------------
Net loans                                                        $37,318                   N/A
================================================================================================
</TABLE>


The following table sets forth the composition of the Company's loan portfolio
at June 30, 1999 (dollars in thousands).

<TABLE>
<CAPTION>
                                                                                      Percent of
                                                                Balance               Total Loans
                                                                -------               -----------
<S>                                                          <C>                     <C>
Real estate loans:
Construction and land development                              $   1,696                    3.3%
Secured by residential properties                                 18,881                   36.4%
Secured by commercial real estate                                 14,210                   27.4%
------------------------------------------------------------------------------------------------
Total real estate loans                                           34,787                   67.1%
------------------------------------------------------------------------------------------------
Commercial and industrial loans                                    7,744                   14.9%
Other consumer loans                                               9,285                   18.0%
------------------------------------------------------------------------------------------------
Total loans                                                       51,816                  100.0%
Allowance for possible loan losses                                  (648)                  N/A
-------------------------------------------------------------------------------------------------
Net loans                                                        $51,168                   N/A
=================================================================================================
</TABLE>




                                       26
<PAGE>   28


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, 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                 $ 1,188         $    98         $   --         $ 1,286
Real estate mortgage loans                       8,106          13,155            709          21,970
Commercial and industrial loans                  3,134           3,924            731           7,789
All other loans                                  2,159           4,018            448           6,625
                                               -------         -------         ------         -------
Total loans                                    $14,587         $21,195         $1,888         $37,670
                                               =======         =======         ======         =======
LOAN INTEREST RATE SENSITIVITY:
Predetermined interest rates                   $ 5,598         $ 4,724         $1,434         $11,756
Floating or adjustable interest  rates           8,989          16,471            454          25,914
                                               -------         -------         ------         -------
Total                                          $14,587         $21,195         $1,888         $37,670
                                               =======         =======         ======         =======
</TABLE>


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
June 30, 1999 (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                $ 1,213         $   483         $   --         $ 1,696
Real estate mortgage loans                      7,976          24,670            342          33,091
Commercial and industrial loans                 1,565           5,463            716           7,744
All other loans                                 2,142           6,013          1,231           9,285
                                              -------         -------         ------         -------
Total loans                                   $12,896         $36,631         $2,289         $51,816
                                              =======         =======         ======         =======
Loan interest rate sensitivity:
Predetermined interest rates                  $ 3,431         $10,108         $2,289         $15,828
Floating or adjustable interest rates           9,465          26,523             --          35,988
                                              -------         -------         ------         -------
Total                                         $12,896         $36,631         $2,289         $51,816
                                              =======         =======         ======         =======
</TABLE>




                                       27
<PAGE>   29


LOAN POLICY

All lending activities of the 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 that are 30 days or more past due are reviewed
monthly.

The Loan Committee of the Bank periodically reviews the loan portfolio,
particularly 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,
unless 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.

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 that is past due 90 days or
more and are 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

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



                                       28
<PAGE>   30

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 flow 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.

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 $648,000 as of June 30, 1999 or 1.25%
of loans outstanding. The allowance for possible loan losses was $473,000 as of
December 31, 1998, or 1.25% of loans outstanding. No loans were charged-off (nor
any recoveries made) during 1999. The provision for possible loan losses charged
against earnings during 1999 was $175,000. Loans totaling $1,000 were
charged-off (with no recoveries made) during the year ended December 31, 1998.
The provision for possible loan losses charged against earnings during the year
ended December 31, 1998 was $406,000.

There were no non-performing loans of the Company on at June 30, 1999 or at
December 31, 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 was no other real
estate owned or foreclosed, any repossessed assets or impaired loans at June 30,
1999 or at December 31, 1998. There was $3,000 of loans past due ninety or more
days at December 31, 1998 and still accruing interest and $68,000 of loans past
due ninety or more days at June 30, 1999 and still accruing interest.

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



                                       29
<PAGE>   31

available at all times, the Company devotes resources to projecting on a monthly
basis the amount of funds that 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 are
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 that are reasonably likely to result in liquidity increasing or
decreasing in any material manner. The ratio for average loans to average
deposits for 1998 was 51.1% and for the six months ended June 30, 1999 was
67.7%.

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 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
excess tax assets, and Tier II capital which is primarily the qualifying 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 and excess tax assets.



                                       30
<PAGE>   32


The following table gives the various capital ratios and balances at June 30,
1999 and December 31, 1998 (dollars in thousands) for the Company:

<TABLE>
<CAPTION>
                                                 June 30,        December 31,
                                                   1999             1998
                                                  -------          -------
<S>                                               <C>            <C>
CAPITAL:
Tier I capital:
Shareholders' equity                              $ 8,648          $ 8,522
Less excess tax assets                                330              323
                                                  -------          -------
Total Tier I capital                                8,318            8,199
                                                  -------          -------
Tier II capital:
Qualifying debt-
Qualifying allowance for loan losses                  648              473
                                                  -------          -------
Total Tier II capital                                 648              473
                                                  -------          -------
Total capital                                     $ 8,966          $ 8,672
                                                  =======          =======
Risk-adjusted assets                              $63,510          $47,883
                                                  =======          =======
Quarterly average assets                          $78,625          $76,255
                                                  =======          =======
RATIOS:
Tier I capital to risk-adjusted assets               13.1%            17.1%
Tier II capital to risk-adjusted assets               1.0%             1.0%
Total capital to risk-adjusted assets                14.1%            18.1%
Leverage -- Tier I capital to quarterly
    average assets less excess tax assets            10.6%            10.8%
</TABLE>



                                       31
<PAGE>   33


The following table gives the various capital ratios and balances at June 30,
1999 and at December 31, 1998 (dollars in thousands) for the Bank:

<TABLE>
<CAPTION>
                                                 June 30,       December 31,
                                                   1999             1998
                                                  -------          -------
<S>                                               <C>              <C>
CAPITAL:
Tier I capital:
Shareholders' equity                              $ 8,504          $ 8,356
Less excess tax assets                                268              261
                                                  -------          -------
Total Tier I capital                                8,236            8,095
                                                  -------          -------
Tier II capital:
Qualifying debt                                        --               --
Qualifying allowance for loan losses                  648              473
                                                  -------          -------
Total Tier II capital                                 648              473
                                                  -------          -------
Total capital                                     $ 8,884          $ 8,568
                                                  =======          =======
Risk-adjusted assets                              $63,434          $47,862
                                                  =======          =======
Quarterly average assets                          $76,587          $76,255
                                                  =======          =======
RATIOS:
Tier I capital to risk-adjusted assets               13.0%            16.9%
Tier II capital to risk-adjusted assets               1.0%             1.0%
Total capital to risk-adjusted assets                14.0%            17.9%
Leverage -- Tier I capital to quarterly
    Average assets less excess tax assets            10.8%            10.6%
</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 June 30, 1999 and December 31, 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 June 30, 1999 and December 31, 1998.

PROPERTY ACQUISITIONS:

During 1999, the Company began renovating the existing office premises and Bank
building into one combined main office. The cost of this renovation and
construction and related furnishings is estimated at $2,000,000. In addition,
the Bank has entered into a contract to purchase land and a commercial building



                                       32
<PAGE>   34

to use as a branch. Cost of acquiring the property and improvements that need to
be made for the building to be utilized as a branch are anticipated to
approximate $650,000. No other significant property acquisitions are planned for
the next year.

PERSONNEL:

The Company increased the number of employees from twenty-eight at December 31,
1998 to thirty-two at June 30, 1999.

The Company anticipates increasing the number of employees during 1999 to
approximately thirty-eight employees to service the anticipated loan and deposit
growth and related support services as well as the branch during the next twelve
months. When the proposed new building is completed, additional employees will
be added during the year 2000 beginning with the second six months.

RESEARCH AND DEVELOPMENT:

The Company does not engage in product research and development and does not
anticipate any such activities 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.




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<PAGE>   35

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 six months for which this
report is filed



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<PAGE>   36


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 August 12, 1999
    -------------------------------


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.



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