CAVALRY BANCORP INC
424B3, 1998-01-30
SAVINGS INSTITUTION, FEDERALLY CHARTERED
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<PAGE>

                                                FILED PURSUANT TO RULE 424(b)(3)
                                                REGISTRATION NO. 333-40057

PROSPECTUS SUPPLEMENT

                             CAVALRY BANCORP, INC.

                                CAVALRY BANKING
                              401(K) SAVINGS PLAN

     This Prospectus Supplement relates to the offer and sale to participants
("Participants") in the Cavalry Banking 401(k) Savings Plan ("Plan" or "401(k)
Plan") of participation interests and shares of Cavalry Bancorp, Inc. common
stock, no par value per share ("Common Stock"), as set forth herein.

     In connection with the proposed conversion of Cavalry Banking ("Bank" or
"Employer") from a federally chartered mutual savings bank to a federally
chartered stock savings bank, a holding company, Cavalry Bancorp, Inc. ("Holding
Company"), has been formed.  The simultaneous conversion of the Bank to stock
form, the issuance of the Bank's common stock to the Holding Company and the
offer and sale of the Holding Company's Common Stock to the public are herein
referred to as the "Conversion."  Applicable provisions of the 401(k) Plan
permit the investment of the Plan assets in Common Stock of the Holding Company
at the direction of a Plan Participant.  This Prospectus Supplement relates to
the election of a Participant to direct the purchase of Common Stock in
connection with the Conversion.

     The Prospectus, dated January 21, 1998, of the Holding Company
("Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion, the Common Stock and the
financial condition, results of operations and business of the Bank and the
Holding Company.  This Prospectus Supplement, which provides detailed
information with respect to the Plan, should be read only in conjunction with
the Prospectus.  Terms not otherwise defined in this Prospectus Supplement are
defined in the Plan or the Prospectus.

     A Participant's eligibility to purchase Common Stock in the Conversion
through the Plan is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion and the maximum and minimum limitations
set forth in the Plan of Conversion.  See "THE CONVERSION" and "-- Limitations
on Purchases of Shares" in the Prospectus.

     For a discussion of certain factors that should be considered by each
Participant, see "RISK FACTORS" in the Prospectus.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OFFICE OF THRIFT SUPERVISION ("OTS"), THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER FEDERAL OR STATE
AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR
ANY OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT.  ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

          The date of this Prospectus Supplement is January 21, 1998.
<PAGE>
 
     No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement in connection with the offering made hereby, and, if given or made,
such information and representations must not be relied upon as having been
authorized by the Holding Company, the Bank or the Plan.  This Prospectus
Supplement does not constitute an offer to sell or solicitation of an offer to
buy any securities in any jurisdiction to any person to whom it is unlawful to
make such offer or solicitation in such jurisdiction.  Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall
under any circumstances create any implication that there has been no change in
the affairs of the Bank or the Plan since the date hereof, or that the
information herein contained or incorporated by reference is correct as of any
time subsequent to the date hereof.  This Prospectus Supplement should be read
only in conjunction with the Prospectus that is attached hereto and should be
retained for future reference.
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
 
<S>                                                            <C>
                                                               PAGE 
The Offering
     Securities Offered......................................   S-1
     Election to Purchase Common Stock in the Conversion.....   S-1
     Value of Participation Interests........................   S-1
     Method of Directing Transfer............................   S-1
     Time for Directing Transfer.............................   S-2
     Irrevocability of Transfer Direction....................   S-2
     Direction Regarding Common Stock After the Conversion...   S-2
     Purchase Price of Common Stock..........................   S-2
     Nature of a Participant's Interest in the Common Stock..   S-3
     Voting and Tender Rights of Common Stock................   S-3
 
Description of the Plan
     Introduction............................................   S-3
     Eligibility and Participation...........................   S-4
     Contributions Under the Plan............................   S-4
     Limitations on Contributions............................   S-5
     Investment of Contributions.............................   S-7
     The Employer Stock Fund.................................   S-7
     Benefits Under the Plan.................................   S-8
     Withdrawals and Distributions from the Plan.............   S-8
     Administration of the Plan..............................   S-9
     Reports to Plan Participants............................   S-9
     Plan Administrator......................................   S-9
     Amendment and Termination...............................  S-10
     Merger, Consolidation or Transfer.......................  S-10
     Federal Income Tax Consequences.........................  S-10
     Restrictions on Resale..................................  S-13
 
Legal Opinions...............................................  S-13
 
Investment Form..............................................  S-14
</TABLE>

                                       i
<PAGE>
 
                                 THE OFFERING

Securities Offered

     The securities offered hereby are participation interests in the Plan and
up to 369,780 shares, at the actual purchase price of $10.00 per share, of
Common Stock which may be acquired by the Plan for the accounts of employees
participating in the Plan.  The Holding Company is the issuer of the Common
Stock.  Only employees and former employees of the Bank and their beneficiaries
may participate in the Plan.  Information with regard to the Plan is contained
in this Prospectus Supplement and information with regard to the Conversion and
the financial condition, results of operation and business of the Bank and the
Holding Company is contained in the attached Prospectus.  The address of the
principal executive office of the Bank is 114 W. College Street, Murfreesboro,
Tennessee 37130. The Bank's telephone number is (615) 893-1234.

Election to Purchase Common Stock in the Conversion

     In connection with the Bank's Conversion, each Participant in the 401(k)
Plan may direct the trustee of the Plan (the "Trustee") to transfer up to 100%
of a Participant's January 31, 1998 account balance to a newly created Employer
Stock Fund and to use such funds to purchase Common Stock issued in connection
with the Conversion.  Amounts transferred may include salary deferral, matching,
profit sharing contributions as well as amounts transferred from the Bank's
prior retirement programs.  The Employer Stock Fund may consist of investments
in the Common Stock made on or after the effective date of the Conversion.
Funds not transferred to the Employer Stock Fund will continue to be invested by
the Trustee.  See "DESCRIPTION OF THE PLAN -- Investment of Contributions"
below.  A Participant's ability to transfer funds to the Employer Stock Fund in
the Conversion is subject to the Participant's general eligibility to purchase
shares of Common Stock in the Conversion.  For general information as to the
ability of the Participants to purchase shares in the Conversion, see "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" in the attached Prospectus.

Value of Participation Interests

     The assets of the Plan are valued on an ongoing basis and each Participant
is informed of the value of his or her beneficial interest in the Plan on at
least an annual basis.  This value represents the market value of past
contributions to the Plan by the Bank and by the Participants and earnings
thereon, less previous withdrawals, and transfers from other plans.

Method of Directing Transfer

     The last page of this Prospectus Supplement is an investment form to direct
a transfer to the Employer Stock Fund ("Investment Form").  If a Participant
wishes to transfer funds to the Employer Stock Fund to purchase Common Stock
issued in connection with the Conversion, the

                                      S-1
<PAGE>
 
Participant should indicate that decision in Part 2 of the Investment Form.  If
a Participant does not wish to make such an election, he or she does not need to
take any action.

Time for Directing Transfer

     The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund in order to purchase Common Stock issued in connection with the
Conversion is January 30, 1998.  The Investment Form should be returned to Libby
Green at the Bank no later than the close of business on such date.

Irrevocability of Transfer Direction

     A Participant's direction to transfer amounts credited to such
Participant's account in the Plan to the Employer Stock Fund in order to
purchase shares of Common Stock in connection with the Conversion shall be
irrevocable. Participants, however, will be able to direct the sale of Common
Stock, as explained below.

Direction Regarding Common Stock After the Conversion

     It is currently anticipated that Participants may be permitted to transfer
additional funds from their existing account balances to the Employer Stock Fund
following the Conversion.  In addition, it is anticipated that a Participant
will, on a periodic basis, be able to direct the purchase of Common Stock with
new Participant and employer contributions or direct the sale of Common Stock.
If Common Stock is sold, the proceeds will be credited to the Participant's
account and may be reinvested in the other investment options available under
the Plan.  Special restrictions may apply to purchases or sales directed by
those Participants who are executive officers, directors and principal
stockholders of the Holding Company who are subject to the provisions of Section
16(b) of the Securities and Exchange Act of 1934, as amended ("Exchange Act"),
or applicable OTS regulations.

Purchase Price of Common Stock

     The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to purchase
shares of Common Stock.  The price paid for such shares of Common Stock will be
the same price as is paid by all other persons who purchase shares of Common
Stock in the Conversion.  To the extent that a Participant's order is not
filled, in whole or in part, the balance of any transferred funds will be
applied to the purchase of Common Stock on the open market following the closing
of the Conversion.  Such purchases will be at prevailing market prices, which
may be higher or lower than the initial offering price of $10.00 per share.  In
addition, any commissions associated with such purchases will be included in the
cost of the stock.

                                      S-2
<PAGE>
 
Nature of a Participant's Interest in the Common Stock

     The Common Stock purchased for an account of a Participant will be held in
the name of the Trustee of the Plan in the Employer Stock Fund.  Any earnings,
losses or expenses with respect to the Common Stock, including dividends and
appreciation or depreciation in value, will be credited or debited to the
account and will not be credited to or borne by any other accounts.

Voting and Tender Rights of Common Stock

     The Trustee generally will exercise voting and tender rights attributable
to all Common Stock held by the Trust as directed by Participants with an
interest in the Employer Stock Fund.  With respect to each matter as to which
holders of Common Stock have the right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund.  The percentage of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
or negative on each matter shall be the same percentage of the total number of
voting instruction rights that are exercised in either the affirmative or
negative, respectively.

                            DESCRIPTION OF THE PLAN

Introduction

     The Bank adopted the Plan effective January 1, 1993 as an amendment and
restatement of the Bank's prior defined contribution retirement plan.  The Plan
is a cash or deferred arrangement established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended ("Code").

     The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code.  The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.  The Bank
has received a determination from the Internal Revenue Service ("IRS") that the
Plan is qualified under Section 401(a) of the Code and that it satisfies the
requirements for a qualified cash or deferred arrangement under Section 401(k)
of the Code.

     Employee Retirement Income Security Act.  The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").  As
such, the Plan is subject to all of the provisions of Title I (Protection of
Employee Benefit Rights) and Title II (Amendments to the Internal Revenue Code
Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA, which by their terms do not apply to an
individual account plan (other than a money purchase pension plan).  The Plan is
not subject to Title IV (Plan Termination Insurance) of ERISA.  Neither the
funding requirements contained in Title IV

                                      S-3
<PAGE>
 
of ERISA nor the plan termination insurance provisions contained in Title IV
will be extended to Participants or beneficiaries under the Plan.

     APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS OR HER
BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH
THE BANK.  A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59 1/2, UNLESS A PARTICIPANT
RETIRES AS PERMITTED UNDER THIS PLAN REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.

     Reference to Full Text of Plan.  The following statements are summaries of
the material provisions of the Plan.  They are not complete and are qualified in
their entirety by the full text of the Plan, which is filed as an exhibit to the
registration statement filed with the SEC.  Copies of the Plan are available to
all employees by filing a request with the Plan Administrator.  Each employee is
urged to read carefully the full text of the Plan.

Eligibility and Participation

     Any employee of the Bank is eligible to participate and will become a
Participant in the Plan following completion of one year of service with the
Bank and the attainment of age 21.  The Plan year is the calendar year ("Plan
Year").  Directors who are not employees of the Bank are not eligible to
participate in the Plan.

     During 1997, approximately 100 employees participated in the Plan.

Contributions Under the Plan

     Participant Contributions.  Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to a
salary reduction agreement in amounts ranging from 1% to 15% of Compensation and
have that amount contributed to the Plan on such Participant's behalf.  Such
amounts are credited to the Participant's deferral contribution account.  For
purposes of the Plan, "Compensation" means a Participant's total amount of
earnings reportable W-2 wages for federal income tax withholding purposes plus a
Participant's elective deferrals pursuant to a salary reduction agreement under
the Plan or any elective deferrals to a Section 125 plan.  Due to recent
statutory changes, the annual Compensation of each Participant taken into
account under the Plan is limited to $160,000 (as adjusted under applicable Code
provisions).  A Participant may elect to modify the amount contributed to the
Plan under the Participant's salary reduction agreement during the Plan Year.
Deferral contributions are transferred by the Bank to the Trustee of the Plan on
a periodic basis as required by applicable law.

                                      S-4
<PAGE>
 
     Employer Contributions.  For employees with one or more years of service,
the Bank currently matches employee deferral contributions dollar-for-dollar up
to 3% of Compensation.  Additional contributions may also be made on a
discretionary basis in proportion to each Participant's Compensation.

Limitations on Contributions

     Limitations on Annual Additions and Benefits.  Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Account during any Plan Year may not exceed the lesser of 25%
of the Participant's "Section 415 Compensation" for the Plan Year or $30,000 (as
adjusted under applicable Code provisions).  A Participant's "Section 415
Compensation" is a Participant's Compensation.  In addition, annual additions
are limited to the extent necessary to prevent the limitations for the combined
plans of the Bank from being exceeded.  To the extent that these limitations
would be exceeded by reason of excess annual additions to the Plan with respect
to a Participant, the excess must be reallocated to the remaining Participants
who are eligible for an allocation of Employer contributions for the Plan Year.

     Limitation on 401(k) Plan Contributions.  The annual amount of deferred
compensation of a Participant (when aggregated with any elective deferrals of
the Participant under any other employer plan, a simplified employee pension
plan or a tax-deferred annuity) may not exceed $10,000 (as adjusted under
applicable Code provisions).  Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross federal income
tax purposes in the year they are made.  In addition, any such excess deferral
will again be subject to federal income tax when distributed by the Plan to the
Participant, unless the excess deferral (together with any income allocable
thereto) is distributed to the Participant not later than the first April 15th
following the close of the taxable year in which the excess deferral is made.
Any income on the excess deferral that is distributed not later than such date
shall be treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.

     Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of deferred compensation
contributed to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred compensation
contributed by or on behalf of all other employees eligible to participate in
the Plan.  Specifically, the actual deferral percentage for a Plan Year (i.e.,
                                                                         ---- 
the average of the ratios, calculated separately for each eligible employee in
each group, by dividing the amount of salary reduction contributions credited to
the salary reduction contribution account of such eligible employee by such
employee's compensation for the Plan Year) of the Highly Compensated Employees
may not exceed the greater of (a) 125% of the actual deferred percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual deferred
percentage of all other eligible employees, or (ii) the actual deferral
percentage of all other eligible employees plus two percentage points.  In
addition, the actual contribution percentage for a Plan Year (i.e., the average
                                                              ----             
of the ratios calculated separately for each eligible employee in each

                                      S-5
<PAGE>
 
group, by dividing the amount of employer contributions credited to the Matching
contributions account of such eligible employee by each eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (a) 125% of the actual contribution percentage of all
other eligible employees, or (b) the lesser of (i) 200% of the actual
contributions percentage of all other eligible employees, or (ii) the actual
contribution percentage of all other eligible employees plus two percentage
points.

     In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner (i.e.,
                                                                          ---- 
owns directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
Employer) or, (2) during the preceding Plan Year, received Section 415
Compensation in excess of $80,000 (as adjusted under applicable Code provisions)
and, if elected by the Bank, was in the top paid group of employees for such
Plan Year.

     In order to prevent disqualification of the Plan, any amounts contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year.  However, the Bank will be subject to a 10%
excise tax on any excess contributions unless such excess contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2 1/2 months following the Plan Year
to which such excess contributions relate.  In addition, in order to avoid
disqualification of the Plan, any contributions by Highly Compensated Employees
that exceed the average contribution limitation in any Plan Year ("excess
aggregate contributions") together with any income allocable thereto, must be
distributed to such Highly Compensated Employees before the close of the
following Plan Year.  However, the 10% excise tax will be imposed on the Bank
with respect to any excess aggregate contributions, unless such amounts, plus
any income allocable thereto, are distributed within 2 1/2 months following the
close of the Plan Year in which they arose.

     Top-Heavy Plan Requirements.  If, for any Plan Year, the Plan is a Top-
Heavy Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual benefits under
any defined plan maintained by the Bank.

     In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year, if as of the last day of the preceding Plan Year, the aggregate balance of
the accounts of all Participants who are key Employees exceeds 60% of the
aggregate balance of the Accounts of the Participants.  "Key Employees"
generally include any employee, who at any time during the Plan Year or any of
the four preceding Plan Years, if (1) an officer of the Bank having annual
compensation in excess of $60,000 who is in an administrative or policy-making
capacity, (2) one of the ten employees having annual compensation in excess of
$30,000 and owing, directly or indirectly, the largest interest in the Employer,
(3) a 5% owner of the Employer (i.e., owns
                                ----      

                                      S-6
<PAGE>
 
directly or indirectly more than 5% of the stock of the Employer, or stock
possessing more than 5% of the total combined voting power of all stock of the
Employer), or (4) a 1% owner of the Employer having compensation in excess of
$150,000.

Investment of Contributions

     All amounts credited to Participant's Accounts under the Plan are held in
the Trust which is administered by the Trustee who is appointed by the Bank's
Board of Directors.  Currently, the investment of all Plan assets is directed by
the Trustee in its discretion in a manner consistent with the Plan's investment
policy.

     In connection with the Conversion, a Participant may elect to have prior
contributions and additions to the Participant's Account invested in the
Employer Stock Fund.  Any amounts credited to a Participant's Accounts for which
investment directions are not given will continue to be invested on a
discretionary basis by the Trustee.

     The net gain (or loss) in the Accounts from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) are determined on a periodic basis.  For purposes
of such allocation, all assets of the Trust are valued at their fair market
value.

The Employer Stock Fund

     The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion.

     Following the Conversion, when Common Stock is sold, the cost or net
proceeds will be charged or credited to the Accounts of Participants affected by
the purchase or sale.  A Participant's Account will also be adjusted to reflect
changes in the value of shares of Common Stock resulting from stock dividends,
stock splits and similar changes.

     To the extent dividends are not paid on Common Stock held in the Employer
Stock Fund, the return on any investment in the Employer Stock Fund will consist
only of the market value appreciation or depreciation of the Common Stock
subsequent to its purchase.  Declarations and payments of any dividends (regular
and special) by the Board of Directors will depend upon a number of factors,
including the amount of the net proceeds retained by the Holding Company,
capital requirements, regulatory limitations, the Bank's and the Holding
Company's financial condition and results of operations, tax considerations and
general economic conditions.

     As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock.  Accordingly, there is no record of the historical performance
of the Employer Stock Fund.

                                      S-7
<PAGE>
 
     Investments in the Employer Stock Fund may involve certain risk factors
associated with investments in Common Stock of the Holding Company.  For a
discussion of these risk factors, see "RISK FACTORS" in the Prospectus.

Benefits Under the Plan

     Vesting.  A Participant has, at all times, a fully vested, non-forfeitable
interest in all of his or her Participant and Employer contributions and the
earnings thereon under the Plan.

Withdrawals and Distributions from the Plan

     Distribution Upon Retirement, Death, Disability or Termination of
Employment. The normal form of distribution under the 401(k) Plan to a married
Participant who retires, incurs a disability, or otherwise terminates employment
is a joint-and-50% annuity payable over the life of the Participant and his
surviving spouse.  The normal form of distribution to an unmarried Participant
is an annuity for the life of the Participant.  Optional forms of distribution
include a lump-sum payment or installment periods over a specified period.
Distributions generally commence as soon as practicable following the
Participant's termination of employment.  At the request of the Participant, the
distribution may include an in-kind distribution of Common Stock of the Holding
Company credited to the Participant's Account.  Benefit payments ordinarily must
begin not later than 60 days following the end of the Plan Year in which occur
the later of the Participant's: (i) termination of employment; (ii) attainment
of age 65; or (iii) the tenth anniversary of commencement of participation in
the Plan; but in no event later than April 1 following the calendar year in
which the Participant attains age 70 1/2 (if the Participant is retired).
However, if the vested portion of the Participant's Account balances exceeds
$5,000, no distribution will be made from the Plan prior to the Participant's
attaining age 65 unless the Participant consents to an earlier distribution.
Special rules may apply to the distribution of Common Stock of the Holding
Company to those Participants who are executive officers, directors and
principal shareholders of the Holding Company who are subject to the provisions
of Section 16(b) of the Exchange Act.

     In-Service Withdrawals and Loans.  The Plan provides for distributions of
Participant deferral contributions prior to termination of employment in the
form of hardship withdrawals.  Such withdrawals are permitted where the funds
are applied to (i) uninsured medical expenses, (ii) the purchase of a principal
residence, (iii) the payment of tuition and other education expenses or (iv)
payments necessary to prevent eviction from a principal residence or foreclosure
on a mortgage.  In order to qualify for a hardship withdrawal, the Participant
must satisfy certain requirements relating to his or her financial resources and
the amount of the withdrawal may not exceed the Participant's immediate and
heavy financial need.

     The Plan does not provide for other in-service withdrawals or loans.

     Non-alienation of Benefits.  Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits


                                      S-8
<PAGE>
 
payable under the Plan shall not be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, charge,
garnishment, execution, or levy of any kind, either voluntary or involuntary,
and any attempt to anticipate, alienate, sell, transfer, assign, pledge,
encumber, charge or otherwise dispose of any rights to benefits payable under
the Plan shall be void.

Administration of the Plan

     Trustee.  The Trustee with respect to Plan assets is currently the trust
department of the Bank.

     Pursuant to the terms of the Plan, the Trustee receives and holds
contributions to the Plan in trust and has exclusive authority and discretion to
manage and control the assets of the Plan pursuant to the terms of the Plan and
to manage, invest and reinvest the Trust and income therefrom.  The Trustee has
the authority to invest and reinvest the Trust and may sell or otherwise dispose
of Trust investments at any time and may hold trust funds uninvested.  The
Trustee has authority to invest the assets of the Trust in "any type of
property, investment or security" as defined under ERISA.

     The Trustee has full power to vote any corporate securities in the Trust in
person or by proxy; provided, however, that the Participants will direct the
Trustee as to voting and tendering of all Common Stock held in the Employer
Stock Fund.

     The Trustee receives no compensation for its services.  The expenses of the
Trustees are paid out of the Trust except to the extent such expenses and
compensation are paid by the Bank.

     The Trustee must render at least annual reports to the Bank and to the
Participants in such form and containing such information that the Trustee deem
necessary.

Reports to Plan Participants

     The Plan Administrator (see below) furnishes to each Participant a
statement at least quarterly showing (i) the balance in the Participant's
Account as of the end of that period, (ii) the amount of contributions allocated
to such Participant's Account for that period, and (iii) the adjustments to such
Participant's Account to reflect earnings or losses (if any).

Plan Administrator

     The Bank currently serves as the Plan Administrator.  The Plan
Administrator is responsible for the administration of the Plan, interpretation
of the provisions of the Plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the Plan,
maintenance of plan records, books of account and all other data necessary for
the proper administration of the Plan, and preparation and filing of all returns
and reports relating to the Plan which are required to be filed with the U.S.
Department of Labor and


                                      S-9
<PAGE>
 
the IRS, and for all disclosures required to be made to Participants,
beneficiaries and others under Sections 104 and 105 of ERISA.

Amendment and Termination

     The Bank may terminate the Plan at any time.  If the Plan is terminated in
whole or in part, then regardless of other provisions in the Plan, each employee
who ceases to be a Participant shall have a fully vested interest in his or her
Account.  The Bank reserves the right to make, from time to time, any amendment
or amendments to the Plan which do not cause any part of the Trust to be used
for, or diverted to, any purpose other than the exclusive benefit of the
Participants or their beneficiaries.

Merger, Consolidation or Transfer

     In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust to another plan, the Plan requires that each
Participant (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).

Federal Income Tax Consequences

     The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.  The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.

PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.

     The Plan has received a determination from the IRS that it is qualified
under Sections 401(a) and 401(k) of the Code, and that the related Trust is
exempt from tax under Section 501(a) of the Code.  A plan that is "qualified"
under these sections of the Code is afforded special tax treatment which include
the following: (1) the sponsoring employer is allowed an immediate tax deduction
for the amount contributed to the plan for each year; (2) participants pay no
current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the plan are tax-exempt thereby permitting the tax-deferred
accumulation of income and gains on investments.  The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law.  The Bank expects to


                                     S-10
<PAGE>
 
timely adopt any amendments to the Plan that may be necessary to maintain the
qualified status of the Plan under the Code.  Following such an amendment, the
Plan will be submitted to the IRS for a determination that the Plan, as amended,
continues to qualify under Sections 401(a) and 501(a) of the Code and that it
continues to satisfy the requirements for a qualified cash or deferred
arrangement under Section 401(k) of the Code.

     Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:

     (a) Amounts contributed to a Participant's 401(k) account and the
investment earning thereon are not taxable until actually distributed or
withdrawn from the Plan.  Special tax treatment may apply to the taxable portion
of any distribution that includes Common Stock or qualified as a "Lump Sum
Distribution" (as described below).

     (b) Income earned on assets held by the Trust will not be taxable to the
Trust.

     Lump Sum Distribution.  A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a "Lump Sum Distribution" if it
is made: (i) within a single taxable year of the Participant or beneficiary;
(ii) on account of the Participant's death or separation from service, or after
the Participant attains age 59 1/2; and (iii) consists of the balance to the
credit of the Participant under the Plan and all other profit sharing plans, if
any, maintained by the Bank.  The portion of any Lump Sum Distribution that is
required to be included in the Participant's or beneficiary's taxable income for
federal income tax purposes ("total taxable amount") consists of the entire
amount of such Lump Sum Distribution less the amount of after-tax contributions,
if any, made by the Participant to any other profit sharing plans maintained by
the Bank which is included in such distribution.

     Averaging Rules.  The portion of the total taxable amount of a Lump Sum
Distribution ("ordinary income portion") will be taxable generally as ordinary
income for federal income tax purposes.  However, for distributions occurring
prior to January 1, 2000, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in the Plan or any other profit sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging").  The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule.  The special five-year averaging rule has been
repealed for distributions occurring after December 31, 1999.  Under a special
grandfather rule, individuals who turned 50 by 1986 may elect to have their Lump
Sum Distribution taxed under either the five-year averaging rule (if available)
or the prior law ten-year averaging rule.  Such individuals also may elect to
have that portion of the


                                     S-11
<PAGE>
 
Lump Sum Distribution attributable to the Participant's pre-1974 participation
in the Plan taxed at a flat 20% rate as gain from the sale of a capital asset.

     Common Stock Included in Lump Sum Distribution.  If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
- ----                                                                 
distribution over its cost to the Plan.  The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation.  Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock.  Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock.  The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations by the IRS.

     Distributions:  Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA.  Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an individual retirement account ("IRA") without regard to
whether the distribution is a Lump Sum Distribution or Partial Distribution.
Effective January 1, 1993, Participants have the right to elect to have the
Trustee transfer all or any portion of an "eligible rollover distribution"
directly to another plan qualified under Section 401(a) of the Code or to an
IRA.  If the Participant does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution.  An "eligible rollover distribution" means any
amount distributed from the Plan except:  (1) a distribution that is (a) one of
a series of substantially equal periodic payments made (not less frequently than
annually) over the Participant's life or the joint life of the Participant and
the Participant's designated beneficiary, or (b) for a specified period of ten
years or more; (2) any amount that is required to be distributed under the
minimum distribution rules; and (3) any other distributions excepted under
applicable federal law.  The tax law change described above did not modify the
special tax treatment of Lump Sum Distributions, that are not rolled over or
transferred, i.e., forward averaging, capital gains tax treatment and the
             ----                                                        
nonrecognition of net unrealized appreciation, discussed earlier.

     Additional Tax on Early Distributions.  A Participant who receives a
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate of a Participant) on
or after the death of


                                     S-12
<PAGE>
 
the Participant, (ii) attributable to the Participant's being disabled within
the meaning of Section 72(m)(7) of the Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Participant or the joint lives (or
joint life expectancies) of the Participant and his or her beneficiary, (iv)
made to the Participant after separation from service on account of early
retirement under the Plan after attainment of age 55, (v) made to pay medical
expenses to the extent deductible for federal income tax purposes, (vi) pursuant
to a qualified domestic relations order, or (vii) made to effect the
distribution of excess contributions or excess deferrals.

     THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT INTENDED
TO BE A COMPLETE OR DEFINITIVE  DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.

Restrictions on Resale

     Any person receiving shares of the Common Stock under the Plan who is an
"affiliate" of the Bank or the Holding Company as the term "affiliate" is used
in Rules 144 and 405 under the Securities Act of 1933, as amended ("Securities
Act") (e.g., directors, officers and substantial shareholders of the Bank) may
reoffer or resell such shares only pursuant to a registration statement filed
under the Securities Act (the Holding Company and the Bank having no obligation
to file such registration statement) or, assuming the availability thereof,
pursuant to Rule 144 or some other exemption from the registration requirements
of the Securities Act.  Any person who may be an "affiliate" of the Bank or the
Holding Company may wish to consult with counsel before transferring any Common
Stock owned by him or her.  In addition, Participants who are officers of the
Bank or the Holding Company are advised to consult with counsel as to the
applicability of the reporting and short-swing profit liability rules of Section
16 of the Exchange Act which may affect the purchase and sale of the Common
Stock where acquired or sold under the Plan or otherwise.

                                LEGAL OPINIONS

     The validity of the issuance of the Common Stock will be passed upon by
Breyer & Aguggia, Washington, D.C., which firm is acting as special counsel for
the Holding Company in connection with the Conversion.


                                     S-13
<PAGE>
 
                                INVESTMENT FORM
                             (Employer Stock Fund)

                                CAVALRY BANKING
                              401(K) SAVINGS PLAN


Name of Participant:
                    -------------------------------------------


Social Security Number:
                       ----------------------------------------


     1.   Instructions.  In connection with the proposed conversion of Cavalry
Banking ("Bank") to a federally chartered stock savings bank and the
simultaneous formation of a holding company ("Conversion"), participants in the
Cavalry Banking 401(k) Savings Plan ("Plan") may elect to direct the investment
of up to 100% of their January 31, 1998 account balance into the Employer Stock
Fund ("Employer Stock Fund").  Amounts transferred at the direction of
Participants into the Employer Stock Fund will be used to purchase shares of the
common stock of Cavalry Bancorp, Inc. ("Common Stock"), the proposed holding
company for the Bank.  A Participant's eligibility to purchase shares of Common
Stock is subject to the Participant's general eligibility to purchase shares of
Common Stock in the Conversion and the maximum and minimum limitations set forth
in the Plan Conversion.  See the Prospectus for additional information.

     You may use this form to direct a transfer of funds credited to your
account to the Employer Stock Fund, to purchase Common Stock in the Conversion.
To direct such a transfer to the Employer Stock Fund, you should complete this
form and return it to Libby Green at the Bank, no later than the close of
business on January 30, 1998.  The Bank will keep a copy of this form and return
a copy to you.  (If you need assistance in completing this form, please contact
Libby Green).

     2.   Transfer Direction.  I hereby direct the Plan Administrator to
transfer _________% (in 5% increments) of my January 31, 1998 account balance to
the Employer Stock Fund to be applied to the purchase of Common Stock in the
Conversion.  I understand that my transfer amount will be rounded down to the
nearest $10.00 increment.  I further understand that if my Conversion order is
not filled, in whole or in part, the excess funds will be applied to the
purchase of Common Stock in the open market following the close of the
Conversion.  I acknowledge that such purchases will be made at prevailing market
prices which may be higher or lower than the initial offering price and that any
commissions associated with such purchases be included in the cost of the stock.

     3.   Effectiveness of Direction.  I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan and the terms
and conditions of the Conversion.  I acknowledge that I have received a copy of
the Prospectus and the Prospectus Supplement.



- -------------------------------------      -------------------------------------
             Signature                                      Date

                             *    *    *    *    *

     4.   Acknowledgment of Receipt.  This Investment Form was received by the
Plan Administrator and will become effective on the date noted below.



- -------------------------------------      -------------------------------------
         Plan Administrator                                 Date


                                     S-14
<PAGE>
 
PROSPECTUS
 
                 [LOGO OF CAVALRY BANCORP, INC. APPEARS HERE]

                (PROPOSED HOLDING COMPANY FOR CAVALRY BANKING)
                    UP TO 6,555,000 SHARES OF COMMON STOCK
 
                        $10.00 PURCHASE PRICE PER SHARE
 
  Cavalry Bancorp, Inc. ("Holding Company"), a Tennessee corporation, is
offering between 4,845,000 and 6,555,000 shares of its common stock, no par
value per share ("Common Stock"), in connection with the conversion of Cavalry
Banking ("Bank") from a federally chartered mutual savings bank to a federally
chartered capital stock
                                                       (continued on next page)
 
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE STOCK
INFORMATION CENTER AT (615) 849-3335
 
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE
INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
 
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE SAVING
ASSOCIATION INSURANCE FUND ("SAIF") OR ANY OTHER GOVERNMENT AGENCY
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE OTS, THE FDIC OR ANY OTHER FEDERAL AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE OTS, THE FDIC OR ANY OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                         ESTIMATED UNDERWRITING
                            PURCHASE        COMMISSIONS AND       ESTIMATED NET
                            PRICE(1)   OTHER FEES AND EXPENSES(2)  PROCEEDS(3)
- -------------------------------------------------------------------------------
<S>                        <C>         <C>                        <C>
Minimum Price Per
 Share..................     $10.00              $0.21                $9.79
- -------------------------------------------------------------------------------
Midpoint Price Per
 Share..................     $10.00              $0.20                $9.80
- -------------------------------------------------------------------------------
Maximum Price Per
 Share..................     $10.00              $0.19                $9.81
- -------------------------------------------------------------------------------
Maximum Price Per Share,
 as adjusted(4).........     $10.00              $0.18                $9.82
- -------------------------------------------------------------------------------
Minimum Total(5)........   $48,450,000         $1,002,000          $47,448,000
- -------------------------------------------------------------------------------
Midpoint Total(6).......   $57,000,000         $1,120,000          $55,880,000
- -------------------------------------------------------------------------------
Maximum Total(7)........   $65,550,000         $1,238,000          $64,312,000
- -------------------------------------------------------------------------------
Maximum Total, as adjust-
 ed(4)(8)...............   $75,382,500         $1,373,000          $74,009,500
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by
    Ferguson & Company ("Ferguson") as of November 7, 1997, which states that
    the estimated aggregate pro forma market value of the Holding Company and
    the Bank, as converted, ranged from $48,450,000 to $65,550,000, with a
    midpoint of $57,000,000 ("Estimated Valuation Range"). See "THE
    CONVERSION--Stock Pricing and Number of Shares to be Issued."
(2) Includes estimated expenses to the Holding Company and the Bank arising
    from the Conversion, including fees to be paid to Trident Securities, Inc.
    ("Trident Securities") in connection with the Offerings, as defined
    hereafter. Trident Securities' fees amount to $414,000, $532,000, $650,000
    and $785,000 at the minimum, midpoint, maximum and 15% above the Estimated
    Valuation Range, respectively. Such fees may be deemed to be underwriting
    fees and Trident Securities may be deemed to be an underwriter. Expenses,
    other than fees to be paid to Trident Securities, are estimated to total
    approximately $588,000 at each of the minimum, midpoint, maximum and
    maximum, as adjusted, of the Estimated Valuation Range. Actual expenses
    may be more or less than estimated amounts. The Holding Company and the
    Bank have agreed to indemnify Trident Securities against certain
    liabilities, including liabilities that might arise under the Securities
    Act of 1933, as amended ("Securities Act"). See "USE OF PROCEEDS" and "THE
    CONVERSION--Plan of Distribution for the Subscription, Direct Community
    and Syndicated Community Offerings."
(3) Actual net proceeds can vary substantially from the estimated amounts
    depending upon actual expenses and the relative number of shares sold in
    the Offerings. See "USE OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to an increase in the number of shares that could be sold in
    the Offerings due to an increase in the pro forma market value of the
    Holding Company and the Bank, as converted, up to 15% above the maximum of
    the Estimated Valuation Range, without the resolicitation of subscribers
    or any right of cancellation. The ESOP shall have a first priority right
    to subscribe for such additional shares up to an aggregate of 8% of the
    Common Stock issued in the Conversion; however, the ESOP may purchase all
    or part of its shares in the open market after the consummation of the
    Conversion. The issuance of such additional shares will be conditioned on
    a determination by Ferguson that such issuance is compatible with its
    determination of the estimated pro forma market value of the Holding
    Company and the Bank, as converted. See "THE CONVERSION-- Stock Pricing
    and Number of Shares to be Issued."
(5) Assumes the issuance of 4,845,000 shares at $10.00 per share.
(6) Assumes the issuance of 5,700,000 shares at $10.00 per share.
(7) Assumes the issuance of 6,555,000 shares at $10.00 per share.
(8) Assumes the issuance of 7,538,250 shares at $10.00 per share.
 
                           TRIDENT SECURITIES, INC.
 
               The date of this Prospectus is January 21, 1998.
<PAGE>
 
savings bank and the simultaneous issuance of all of the Bank's outstanding
capital stock to the Holding Company pursuant to the Bank's plan of
conversion, as amended ("Plan of Conversion"). The conversion of the Bank to a
federally chartered capital stock savings bank and its acquisition by the
Holding Company are collectively referred to herein as the "Stock Conversion."
Following the completion of the Stock Conversion, the Bank may convert from a
federally chartered capital stock savings bank to a Tennessee-chartered
commercial bank as a subsidiary of the Holding Company ("Bank Conversion").
All references to the "Bank" shall include its operation as a federally
chartered mutual savings bank, a federally chartered capital stock savings
bank, or a Tennessee-chartered commercial bank, as indicated by the context.
The Stock Conversion and the Bank Conversion are collectively referred to
herein as the "Conversion." As of the date of this Prospectus, neither the
Holding Company nor the Bank has filed any of the applicable regulatory
applications necessary to undertake the Bank Conversion. Under the Plan of
Conversion, the decision whether or not to undertake the Bank Conversion is in
the sole discretion of the Bank's Board of Directors. The Board of Directors
does not expect to make this decision until after the consummation of the
Stock Conversion. No assurance can be given that the Bank Conversion will be
undertaken. The decision whether or not to undertake the Bank Conversion will
depend on the economic and regulatory climate at that time, among other
factors. See "PROSPECTUS SUMMARY--The Conversion--Bank Conversion."
 
  Pursuant to the Plan of Conversion, nontransferable rights to subscribe for
the Common Stock ("Subscription Rights") have been granted, in order of
priority, to (i) depositors with $50.00 or more on deposit at the Bank as of
June 30, 1996 ("Eligible Account Holders"), (ii) the Bank's employee stock
ownership plan ("ESOP"), a tax-qualified employee benefit plan, (iii)
depositors with $50.00 or more on deposit at the Bank as of December 31, 1997
("Supplemental Eligible Account Holders"), and (iv) depositors of the Bank as
of January 12, 1998 ("Voting Record Date") and borrowers of the Bank with
loans outstanding as of January 24, 1991, which continue to be outstanding as
of the Voting Record Date ("Other Members"), subject to the priorities and
purchase limitations set forth in the Plan of Conversion ("Subscription
Offering"). SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS SELLING OR
OTHERWISE TRANSFERRING THEIR RIGHTS TO SUBSCRIBE FOR COMMON STOCK IN THE
SUBSCRIPTION OFFERING OR SUBSCRIBING FOR COMMON STOCK ON BEHALF OF ANOTHER
PERSON WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER
SANCTIONS AND PENALTIES IMPOSED BY THE OFFICE OF THRIFT SUPERVISION ("OTS") OR
ANOTHER AGENCY OF THE U.S. GOVERNMENT. The Subscription Offering will expire
at 12:00 Noon, Central Time, on February 25, 1998 ("Expiration Date"), unless
extended by the Bank and the Holding Company for up to 15 days to March 12,
1998. Such extension may be granted without additional notice to subscribers.
See "THE CONVERSION--The Subscription, Direct Community and Syndicated
Community Offerings" and "--Limitations on Purchases of Shares."
 
  Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale to members of the general public through a direct
community offering ("Direct Community Offering") with preference being given
to natural persons and trusts of natural persons who are permanent residents
of Rutherford and Bedford Counties, Tennessee ("Local Community"), subject to
the right of the Holding Company to accept or reject orders in the Direct
Community Offering in whole or in part. The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering. The Direct Community
Offering may terminate on or after the Expiration Date, but not later than
April 10, 1998 (or April 24, 1998 if the Subscription Offering is fully
extended), unless further extended with the consent of the OTS. It is
anticipated that shares of Common Stock not subscribed for or purchased in the
Subscription Offering and the Direct Community Offering will be offered to
eligible members of the general public on a best efforts basis by a selling
group of broker-dealers managed by Trident Securities in a syndicated offering
("Syndicated Community Offering"). The Subscription Offering, Direct Community
Offering and Syndicated Community Offering are referred to collectively as the
"Offerings." If the Conversion is not consummated within 45 days after the
last day of the Subscription Offering (which date will be no later than April
24, 1998, assuming a fully extended Subscription Offering) and the OTS
consents to an extension of time to complete the Conversion, subscribers will
be given the right to increase, decrease or rescind their orders. Such
extensions may not go beyond March 2, 2000.
<PAGE>
 
  With the exception of the ESOP, which is expected to subscribe for 8% of the
shares of Common Stock issued in the Stock Conversion, the Plan of Conversion
provides that no person (including all persons on a joint account), either
alone or together with associates of or persons acting in concert with such
person, may purchase in the Stock Conversion shares of Common Stock with an
aggregate purchase price of more than $655,500. If market conditions are such
that an increase in the maximum purchase limitation is necessary to sell a
number of shares in excess of the minimum of the Estimated Valuation Range,
the maximum purchase limitation may be increased at the sole discretion of the
Bank and the Holding Company subject to any required regulatory approval. See
"THE CONVERSION--The Subscription, Direct Community and Syndicated Community
Offerings," "--Limitations on Purchases of Shares" and "--Procedure for
Purchasing Shares in the Subscription and Direct Community Offerings" for
other purchase and sale limitations. The minimum order is 25 shares.
 
  The Holding Company must receive a properly completed and signed stock order
form and certification ("Order Form") along with full payment (or appropriate
instructions authorizing a withdrawal of the full payment from a deposit
account at the Bank) of $10.00 per share for all shares subscribed for or
ordered. Funds so received will be placed in segregated accounts created for
this purpose at the Bank and will earn interest at the Bank's passbook rate
from the date payment is received until the Stock Conversion is consummated or
terminated; these funds will be otherwise unavailable to the depositor until
such time. Payments authorized by withdrawals from deposit accounts will
continue to earn interest at the contractual rate until the Stock Conversion
is consummated or terminated, although such funds will be unavailable for
withdrawal until the Stock Conversion is consummated or terminated. ONCE
TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT THE CONSENT OF THE
BANK AND THE HOLDING COMPANY. The Holding Company is not obligated to accept
orders submitted on photocopied or telecopied Order Forms.
 
  The Bank and the Holding Company have engaged Trident Securities as their
financial advisor and to assist the Holding Company in the sale of the Common
Stock in the Offerings. Trident Securities is a registered broker-dealer and a
member of the National Association of Securities Dealers, Inc. ("NASD").
Neither Trident Securities nor any other registered broker-dealer is obligated
to take or purchase any shares of Common Stock in the Offerings. The Holding
Company and the Bank reserve the right, in their absolute discretion, to
accept or reject, in whole or in part, any or all orders in the Direct
Community or Syndicated Community Offerings either at the time of receipt of
an order or as soon as practicable following the termination of the Offerings.
See "THE CONVERSION--Plan of Distribution for the Subscription, Direct
Community and Syndicated Community Offerings."
 
  Offering materials for the Subscription Offering initially will be
distributed to certain persons by mail, with copies also available by request
or at the Stock Information Center. The Bank has established the Stock
Information Center for purposes of coordinating the Offerings, including
tabulating orders and answering questions about the Offerings by telephone.
See "THE CONVERSION--Description of Sales Activities."
 
  Prior to the Offerings, the Holding Company has not issued any capital stock
and accordingly there has been no market for the shares offered hereby. There
can be no assurance that an active and liquid trading market for the Common
Stock will develop or, if developed, will be maintained. The Holding Company
has received conditional approval to list the Common Stock on the Nasdaq
National Market under the symbol "CAVB." See "RISK FACTORS--Absence of Prior
Market for the Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
 
                                CAVALRY BANKING
                            MURFREESBORO, TENNESSEE
 
 
 
 [MAP OF DEPICTING STATE OF TENNESSEE AND RUTHERFORD, BEDFORD AND WILLIAMSON]
 
 
 
  THE STOCK CONVERSION IS CONTINGENT UPON APPROVAL OF THE BANK'S PLAN OF
CONVERSION BY AT LEAST A MAJORITY OF THE BANK'S ELIGIBLE VOTING MEMBERS, THE
SALE OF AT LEAST 4,845,000 SHARES OF COMMON STOCK PURSUANT TO THE PLAN OF
CONVERSION, AND RECEIPT OF ALL APPLICABLE REGULATORY APPROVALS.
<PAGE>
 
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY.


                              PROSPECTUS SUMMARY

     The information set forth below should be read in conjunction with and is
qualified in its entirety by the more detailed information and Consolidated
Financial Statements (including the Notes thereto) presented elsewhere in this
Prospectus. The purchase of Common Stock is subject to certain risks. See "RISK
FACTORS."

Cavalry Bancorp, Inc.

     The Holding Company was organized on November 5, 1997 under Tennessee law
at the direction of the Bank to acquire all of the capital stock that the Bank
will issue upon its conversion from the mutual to stock form of ownership. The
Holding Company has only engaged in organizational activities to date. The
Holding Company has received conditional OTS approval to become a savings and
loan holding company through the acquisition of 100% of the capital stock of the
Bank. Immediately following the Stock Conversion, the only significant assets of
the Holding Company will be the outstanding capital stock of the Bank, 50% of
the net proceeds of the Offerings as permitted by the OTS to be retained by it
and a note receivable from the ESOP evidencing a loan to enable the ESOP to
purchase 8% of the Common Stock issued in the Stock Conversion. Funds retained
by the Holding Company will be used for general business activities. See "USE OF
PROCEEDS." Upon consummation of the Stock Conversion, the Holding Company will
be classified as a unitary savings and loan holding company subject to OTS
regulation. See "REGULATION -- Savings and Loan Holding Company Regulations." If
the Bank Conversion is undertaken, the Holding Company's principal business
would become the business of the Bank as a Tennessee-chartered commercial bank
and it would register with the Board of Governors of the Federal Reserve System
("Federal Reserve") as a bank holding company under the Bank Holding Company
Act, as amended ("BHCA"). See "-- The Conversion -- Bank Conversion" and
"REGULATION -- Bank Holding Company Regulation." Management believes that the
holding company structure and retention of proceeds could facilitate possible
geographic expansion and diversification through future acquisitions of other
financial institutions and also enable the Holding Company to diversify, should
it decide to do so, into a variety of commercial banking-related activities.
There are no present plans, arrangements, agreements, or understandings, written
or oral, regarding any such acquisitions or activities. The holding company
structure will also facilitate the repurchase of shares in the open market,
subject to the discretion of the Holding Company's Board of Directors,
regulatory restrictions and market conditions. The main office of the Holding
Company is located at 114 West College Street, Murfreesboro, Tennessee 37130 and
its telephone number is (615) 893-1234.

Cavalry Banking

     The Bank is a federally chartered mutual savings bank located in
Murfreesboro, Tennessee, which is approximately 30 miles southeast of Nashville,
Tennessee. Chartered in 1929 as a Tennessee-chartered mutual building and loan
association under the name "Murfreesboro Building and Loan Association," the
Bank converted to a federal charter and adopted the name "Murfreesboro Federal
Savings and Loan Association," in 1936. In 1984, the Bank adopted the name
"Cavalry Banking Federal Savings and Loan Association." In 1991, the Bank
adopted the name "Cavalry Banking, A Federal Savings Bank," and in 1996 the Bank
amended its mutual charter to adopt its current name. As a result of the
Conversion, the Bank will convert to a federal capital stock savings bank and
will become a wholly-owned subsidiary of the Holding Company. The Bank is
regulated by the OTS, its primary regulator, and by the FDIC, the insurer of its
deposits. The Bank's deposits have been federally-insured since 1936 and are
currently insured by the FDIC under the SAIF. The Bank has been a member of the
Federal Home Loan Bank ("FHLB") System since 1936. At September 30, 1997, the
Bank had total assets of $275.9 million, total deposits of $242.0 million and
total equity of $29.5 million on a consolidated basis.

     The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, 

                                      (i)
<PAGE>
 
and to businesses owned and operated by such individuals. The Bank considers
Rutherford, Bedford and Williamson Counties in Central Tennessee as its primary
market area.

     The Bank believes that its operations more closely resemble those of a
traditional commercial bank than a traditional thrift institution. Unlike a
traditional thrift institution that primarily originates long-term residential
mortgage loans funded primarily with long-term certificates of deposits, a
traditional commercial bank primarily originates commercial business, consumer
and other short-term non-real estate loans funded primarily by non-interest
bearing demand deposit accounts and other short-term liabilities. The Bank's 
one-to-four family mortgage loan portfolio, as a percent of the total loan
portfolio, has decreased from 50.6% at December 31, 1992 to 32.7% at September
30, 1997. In addition, the Bank's certificates of deposit, as a percentage of
deposit accounts, have decreased from 60.7% at December 31, 1994 to 54.6% at
September 30, 1997. In addition to the change in its asset and liability mix,
the Bank is one of the few thrift institutions in its primary market area that
offers trust services. See "BUSINESS OF THE BANK -- Lending Activities," "--
Deposit Activities and Other Sources of Funds --Deposit Accounts" and "-- Trust
Department."

     The Bank's lending activities are diverse. The Bank originates both
adjustable rate mortgage ("ARM") loans and fixed-rate mortgage loans. Generally,
ARM loans are retained in the Bank's portfolio and long-term fixed-rate mortgage
loans are originated for sale in the secondary market. In addition, the Bank
actively originates construction and acquisition and development loans. At
September 30, 1997, construction loans totalled $68.8 million, or 26.7% of total
loans receivable, and acquisition and development loans totalled $10.6 million,
or 4.1% of total loans receivable. The Bank also originates commercial real
estate, commercial business, and consumer and other non-real estate loans. At
September 30, 1997, commercial real estate loans totalled $37.1 million, or
14.4% of total loans receivable, commercial business loans totalled $22.1
million, or 8.6% of total loans receivable, and consumer and other non-real
estate loans totalled $33.3 million, or 12.9% of total loans receivable. See
"BUSINESS OF THE BANK -- Lending Activities." The Bank invests its excess
liquidity in short-term U.S. Government and agency securities. See "BUSINESS OF
THE BANK -- Investment Activities."

     The Bank conducts its operations from its main office and four branch
offices located in Murfreesboro, Tennessee, a branch office in Shelbyville,
Tennessee (Bedford County) and three offices in Smyrna, Tennessee (Rutherford
County). The Bank also operates a mortgage loan origination office in Franklin,
Tennessee (Williamson County). See "BUSINESS OF THE BANK -- Properties." The
main office is located at 114 West College Street, Murfreesboro, Tennessee 37130
and its telephone number is (615) 893-1234.

The Conversion

     Stock Conversion. Pursuant to the Stock Conversion, the Bank is converting
from a federally chartered mutual savings bank to a federally chartered capital
stock savings bank as a wholly owned subsidiary of the Holding Company. Upon
consummation of the Stock Conversion, the Bank will issue all of its outstanding
capital stock to the Holding Company in exchange for 50% of the net proceeds
raised by the Holding Company in the Offerings. Simultaneously, the Holding
Company will sell its Common Stock in the Offerings. The Conversion has been
conditionally approved by the OTS, subject to approval by the Bank's members at
a special meeting to be held on March 2, 1998. After consummation of the
Conversion, depositors and borrowers of the Bank will have no voting rights in
the Holding Company unless they become stockholders.

     The Plan of Conversion requires that the aggregate purchase price of the
Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Bank, as converted. Ferguson has advised the Bank that in its opinion, at
November 7, 1997, the aggregate estimated pro forma market value of the Holding
Company and the Bank, as converted, ranged from $48,450,000 to $65,550,000 or
from 4,845,000 shares to 6,555,000 shares, assuming a $10.00 per share Purchase
Price. The appraisal of the pro forma market value of the Holding Company and
the Bank, as converted, is based on a number of factors and should not be
considered a recommendation to buy shares of the Common Stock or any assurance
that after the 

                                     (ii)
<PAGE>
 
Conversion shares of Common Stock will be able to be resold at or above the
Purchase Price. The appraisal will be updated or confirmed prior to consummation
of the Conversion.

     The Board of Directors and management believe that the Conversion is in the
best interests of the Bank, its members and the communities it serves. The
capital raised in the Conversion is intended to support the Bank's current
lending and investment activities and may also support possible future expansion
and diversification of operations, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such expansion or
diversification. The Conversion is also expected to afford the Bank's members
and others the opportunity to become stockholders of the Holding Company and
participate more directly in, and contribute to, any future growth of the
Holding Company and the Bank. The Conversion will also enable the Holding
Company and the Bank to raise additional capital in the public equity or debt
markets should the need arise, although there are no current specific plans,
arrangements or understandings, written or oral, regarding any such financing
activities. As a mutual institution, the Bank is unable to raise equity capital
or issue debt instruments (other than by accepting deposits). See "THE
CONVERSION -- Purposes of Conversion."

     Bank Conversion. If the Bank Conversion is undertaken, the Bank would
operate as a Tennessee-chartered commercial bank and succeed to all of the
assets and liabilities of the Bank immediately prior to the Bank Conversion. The
Bank Conversion would have to be approved by the Commissioner of the Department
of Financial Institutions of the State of Tennessee ("Commissioner") and the
OTS. The Holding Company would also have to file an application with the Federal
Reserve to become the bank holding company for the Bank upon consummation of the
Bank Conversion. As of the date of this Prospectus, neither the Holding Company
nor the Bank has filed any of the required regulatory applications to undertake
the Bank Conversion.

     Under the Plan of Conversion, the decision whether or not to undertake the
Bank Conversion is in the sole discretion of the Bank's Board of Directors. The
Board of Directors does not expect to make this decision until after the
consummation of the Stock Conversion, and no assurances can be given that the
Bank Conversion will be undertaken. In deciding whether or not to undertake the
Bank Conversion, the Board of Directors will consider, among other things, the
economic and regulatory climate at the time, particularly the status of proposed
federal legislation providing for a common "unified charter" for banks and
thrifts. Although no assurances can be given whether or not such legislation
will be passed; if passed, it would likely eliminate the banking and thrift
industries as separate industries. See "RISK FACTORS -- Recent Legislation and
the Future of the Thrift Industry." As a Tennessee-chartered commercial bank,
the Bank would have broader investment and lending authorities than it now has
as a federally chartered savings bank, particularly in the areas of commercial
real estate and commercial business lending.

     Upon consummation of the Bank Conversion, the deposits of the Bank would
continue to be insured by the FDIC under the SAIF and the Bank would continue to
be regulated and supervised by the FDIC. The Commissioner, however, would
replace the OTS as the Bank's primary regulator. The Bank Conversion would not
result in any change in the Bank's management, directors, employees or office
locations.

The Subscription, Direct Community and Syndicated Community Offerings

     The Holding Company is offering up to 6,555,000 shares of Common Stock at
$10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Bank's ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other Members. In the event the number of
shares offered in the Stock Conversion is increased above the maximum of the
Estimated Valuation Range, the Bank's ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock. Once tendered, orders are
irrevocable without the consent of the Bank and the Holding Company. Any shares
of Common Stock not subscribed for in the Subscription Offering may be offered
in the Direct Community Offering to the general public with preference being
given to natural persons and trusts of natural persons who are permanent
residents of the Local Community (Rutherford and Bedford Counties of Tennessee).
The Bank has engaged Trident Securities to consult with and advise the Holding
Company and the Bank in the Offerings, and Trident Securities has agreed to use
its best efforts to assist the Holding Company with the solicitation of

                                     (iii)
<PAGE>
 
subscriptions and purchase orders for shares of Common Stock in the Offerings.
Trident Securities is not obligated to take or purchase any shares of Common
Stock in the Offerings. If all shares of Common Stock to be issued in the Stock
Conversion are not sold through the Subscription Offering and the Direct
Community Offering, then the Holding Company expects to offer the remaining
shares in a Syndicated Community Offering managed by Trident Securities, which
would occur as soon as practicable following the close of the Subscription and
Direct Community Offerings. All shares of Common Stock will be sold at the same
price per share in the Syndicated Community Offering as in the Subscription
Offering and the Direct Community Offering. See "USE OF PROCEEDS," "PRO FORMA
DATA" and "THE CONVERSION -- Stock Pricing and Number of Shares to be Issued."
The Subscription Offering will expire at 12:00 Noon, Central Time, on the
Expiration Date, unless extended by the Bank and the Holding Company for up to
15 days. The Direct Community Offering and Syndicated Community Offering, if
any, may terminate on the Expiration Date or on any date thereafter; however, in
no event later than April 24, 1998, unless further extended with the consent of
the OTS.

Benefits of the Conversion to Management

     General. Management of the Holding Company and the Bank will participate in
the ESOP, and in the Cavalry Bancorp, Inc. 1998 Management Recognition Plan and
Trust ("MRP') and the Cavalry Bancorp, Inc. Stock Option Plan ("Stock Option
Plan") assuming the MRP and Stock Option Plan are approved by the Holding
Company's stockholders subsequent to the Stock Conversion. Based on the issuance
of 6,555,000 shares of Common Stock at the maximum of the Estimated Valuation
Range in the Stock Conversion, an aggregate of 1,442,100 shares of Common Stock
would be available for issuance under the ESOP, MRP and Stock Option Plan with
an aggregate value of approximately $14.4 million based on the Purchase Price.

     In addition, the Holding Company and the Bank intend to enter into
employment and severance agreements with certain members of senior management,
as well as establish an employee severance plan for members of management and
other key employees that provide for cash severance payments in the event of a
change in control of the Holding Company or the Bank. Assuming a change of
control had occurred at September 30, 1997, the maximum aggregate payment under
such employment and severance arrangements and severance plan would have been
approximately $1.9 million.

     ESOP. In connection with the Stock Conversion, the Bank will adopt the
ESOP, a tax-qualified employee benefit plan for officers and employees of the
Holding Company and the Bank, which intends to purchase 8% of the shares of
Common Stock issued in the Offerings (524,400 shares of Common Stock, based on
the issuance of the maximum of the Estimated Valuation Range). In the event the
number of shares offered in the Stock Conversion is increased above the maximum
of the Estimated Valuation Range, the Bank's ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock. In the event that the ESOP's
subscription is not filled in its entirety, the ESOP may purchase additional
shares in the open market or may purchase authorized but unissued shares with
cash contributed to it by the Bank. See "MANAGEMENT OF THE BANK -- Benefits --
Employee Stock Ownership Plan." As a result of the adoption of the ESOP, the
Holding Company will recognize compensation expense in an amount equal to the
fair market value of the ESOP shares when such shares are committed to be
released to participants' accounts. See "RISK FACTORS -- New Expenses Associated
With ESOP and MRP" and "PRO FORMA DATA."

     MRP. The Holding Company expects to seek stockholder approval of the MRP.
The MRP will reserve a number of shares equal to 4% of the number of shares
issued in the Stock Conversion. Under current OTS regulations, the approval of a
majority vote of the Holding Company's outstanding shares of Common Stock is
required prior to the implementation of the MRP within one year of the
consummation of the Stock Conversion. If stockholder approval of the MRP is
obtained, it is expected that awards of up to 262,200 shares of Common Stock
(based on the issuance of the maximum of the Estimated Valuation Range) will be
made to key employees and directors of the Holding Company and the Bank at no
cost to the recipient. Although no specific award determinations have been made
at this time, the Holding Company and the Bank anticipate that if stockholder
approval is obtained it would provide awards to its directors, officers and
employees to the extent permitted by applicable regulations. Under current OTS
regulations, if 

                                     (iv)
<PAGE>
 
the MRP is implemented within one year of the consummation of the Stock
Conversion, (i) no officer or employee could receive an award covering in excess
of 25%, (ii) no nonemployee director may receive in excess of 5% and (iii)
nonemployee directors, as a group, could not receive in excess of 30% of the
number of shares reserved for issuance under the MRP. In addition, all awards
would be subject to vesting at a minimum rate of 20% per year. The size of
individual awards will be determined prior to submitting the MRP for stockholder
approval, and disclosure of anticipated awards will be included in the proxy
materials for such meeting. See "PRO FORMA DATA" and "MANAGEMENT OF THE BANK --
Benefits -- Management Recognition Plan."

     Stock Option Plan. The Holding Company expects to seek stockholder approval
of the Stock Option Plan. The Stock Option Plan will reserve a number of shares
equal to 10% of the number of shares issued in the Stock Conversion. Under
current OTS regulations, the approval of a majority vote of the Holding
Company's outstanding shares of Common Stock is required prior to the
implementation of the Stock Option Plan within one year of the consummation of
the Stock Conversion. If stockholder approval of the Stock Option Plan is
obtained, it is expected that options to acquire up to 655,500 shares of Common
Stock of the Holding Company will be awarded to key employees and directors of
the Holding Company and the Bank (based on the issuance of the maximum of the
Estimated Valuation Range). The exercise price of such options will be 100% of
the fair market value of the Common Stock on the date the option is granted.
Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
permitted by applicable regulations. Under current OTS regulations, if the Stock
Option Plan is implemented within one year of the consummation of the Stock
Conversion, (i) no officer or employees could receive an award of options
covering in excess of 25%, (ii) no nonemployee director could receive in excess
of 5% and (iii) nonemployee directors, as a group, could not receive in excess
of 30% of the number of shares reserved for issuance under the Stock Option
Plan. In addition, all awards would be subject to vesting at a minimum rate of
20% per year. The size of individual awards will be determined prior to
submitting the Stock Option Plan for stockholder approval, and disclosure of
anticipated awards will be included in the proxy materials for such meeting.
Options are valuable only to the extent that they are exercisable and the market
price for the underlying share of Common Stock is in excess of the exercise
price. An option effectively eliminates the market risk of holding the
underlying securities since no consideration is paid for the option until it is
exercised. Therefore, the recipient may, within the limits of the term of the
option, wait to exercise the option until the market price exceeds the exercise
price. See "MANAGEMENT OF THE BANK -- Benefits -- Stock Option Plan."

     Employment and Severance Agreements. The Holding Company and the Bank have
agreed to enter into employment agreements with two of the Bank's executive
officers, which provide certain benefits in the event of their termination
following a change in control of the Holding Company or the Bank. In the event
of a change in control of the Holding Company or the Bank, as defined in the
agreement, each executive officer will be entitled to a package of cash and/or
benefits with a maximum value equal to 2.99 times their average annual
compensation during the five-year period preceding the change in control.
Assuming a change of control occurred as of September 30, 1997 the aggregate
value of the severance benefits payable to these executive officers under the
employment agreements would have been approximately $1.1 million. See
"MANAGEMENT OF THE BANK -- Executive Compensation -- Employment Agreements."

     The Holding Company and the Bank also have agreed to enter into severance
agreements with seven of the Bank's senior officers, none of whom will be
covered by an employment agreement. The severance agreements provide certain
benefits in the event of their termination following a change in control of the
Holding Company or the Bank. In the event of a change in control of the Holding
Company or the Bank, as defined in the agreement, each senior officer will be
entitled to a package of cash and/or benefits with a maximum value equal to 2.99
times their average annual compensation during the five-year period preceding
the change in control. Assuming a change of control occurred as of September 30,
1997, the aggregate value of the severance benefits payable to these senior
officers under the severance agreements would have been approximately $650,000.
See "MANAGEMENT OF THE BANK -- Executive Compensation -- Severance Agreements."

                                      (v)
<PAGE>
 
     Key Employee Severance Compensation Plan. In connection with the Stock
Conversion, the Board of Directors of the Bank intends to adopt a key Employee
Severance Compensation Plan ("Severance Plan") to provide benefits to eligible
key employees in the event of a change in control of the Holding Company or the
Bank. Officers who enter into separate employment or severance agreements with
the Holding Company and the Bank will not be eligible to participate in the
Severance Plan. The Severance Plan provides that, in the event of a change in
control of the Holding Company or the Bank, eligible key employees who are
terminated or who terminate employment (but only upon the occurrence of events
specified in the Severance Plan) within 12 months of the effective date of a
change in control will be entitled to a payment based on years of service with
the Bank, subject to certain limits. Assuming that a change in control had
occurred at September 30, 1997 and the termination of all eligible employees,
the maximum aggregate payment due under the Severance Plan would be
approximately $116,000. See "MANAGEMENT OF THE BANK -- Executive Compensation --
Key Personnel Severance Compensation Plan."

     For information concerning the possible voting control of officers,
directors and employees following the Stock Conversion, see "RISK FACTORS -- 
Anti-takeover Considerations -- Voting Control by Insiders."

Prospectus Delivery and Procedure for Purchasing Common Stock

     To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date, in accordance with Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended ("Exchange Act"), no Prospectus will be mailed
later than five days or hand delivered any later than two days prior to the
Expiration Date. Execution of the Order Form will confirm receipt or delivery of
a Prospectus in accordance with Rule 15c2-8. Order Forms will be distributed
only with a Prospectus. Neither the Holding Company, the Bank nor Trident
Securities is obligated to deliver a Prospectus and an Order Form by any means
other than the U.S. Postal Service.

     To ensure that Eligible Account Holders, Supplemental Eligible Account
Holders, and Other Members are properly identified as to their stock purchase
priorities, such parties must list all deposit accounts, or in the case of Other
Members who are only borrowers, loans held at the Bank, on the Order Form giving
all names on each deposit account and/or loan and the account and/or loan
numbers at the applicable eligibility date.

     Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original Order Form. The Holding Company is not obligated to accept
orders submitted on photocopied or telecopied Order Forms. Orders cannot and
will not be accepted without the execution of the certification appearing on the
reverse side of the Order Form. See "THE CONVERSION -- Procedure for Purchasing
Shares in the Subscription and Direct Community Offerings."

Purchase Limitations

     With the exception of the ESOP, which is expected to subscribe for 8% of
the shares of Common Stock issued in the Stock Conversion, the Plan of
Conversion provides that no person (including all persons on a joint account),
either alone or together with associates of or persons acting in concert with
such person, may purchase in the Stock Conversion shares of Common Stock with an
aggregate purchase price of more than $655,500. This maximum purchase limitation
may be increased consistent with OTS regulations in the sole discretion of the
Holding Company and the Bank subject to any required regulatory approval. The
minimum purchase is 25 shares.

     The term "acting in concert" is defined in the Plan of Conversion to mean:
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise. The Holding Company and the Bank may presume that certain persons are
acting in concert based upon, among other things, joint account relationships
and the fact that such persons have filed joint Schedules 13D with the
Securities and Exchange Commission ("SEC") with respect to other companies. The
term "associate" of a person is defined in the Plan of Conversion to mean: (i)
any corporation or organization (other than the Bank or a majority-owned

                                     (vi)
<PAGE>
 
subsidiary of the Bank) of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank or any of its parents or subsidiaries. The Holding Company and the Bank may
presume that certain persons are acting in concert based upon, among other
things, joint account relationships and the fact that such persons have filed
joint Schedules 13D with the SEC with respect to other companies.

     Stock orders received either through the Direct Community Offering or the
Syndicated Community Offering, if held, may be accepted or rejected, in whole or
in part, at the discretion of the Holding Company and the Bank. See "THE
CONVERSION -- Limitations on Purchases of Shares." If an order is rejected in
part, the purchaser does not have the right to cancel the remainder of the
order. In the event of an oversubscription, shares will be allocated in
accordance with the Plan of Conversion. See "THE CONVERSION -- The Subscription,
Direct Community and Syndicated Community Offerings."

Stock Pricing and Number of Shares to be Issued in the Stock Conversion

     The Purchase Price in the Subscription Offering is a uniform price
established by the Board of Directors for all subscribers, including members of
the Holding Company's and the Bank's Boards of Directors, their management and
tax-qualified employee plans. The number of shares to be offered at the Purchase
Price is based upon an independent appraisal of the aggregate pro forma market
value of the Holding Company and the Bank, as converted. The aggregate pro forma
market value was estimated by Ferguson to range from $48,450,000 to $65,550,000
as of November 7, 1997, or from 4,845,000 to 6,555,000 shares based on the
Purchase Price. See "THE CONVERSION -- Stock Pricing and Number of Shares to be
Issued." The appraisal of the pro forma value of the Holding Company and the
Bank, as converted, will be updated or confirmed at the completion of the
Offerings. The maximum of the Estimated Valuation Range may be increased by up
to 15% and the number of shares of Common Stock to be issued in the Stock
Conversion may be increased to 7,538,250 shares due to material changes in the
financial condition or results of operations of the Bank or changes in market
conditions or general financial, economic or regulatory conditions. No
resolicitation of subscribers will be made and subscribers will not be permitted
to modify or cancel their subscriptions unless the gross proceeds from the sale
of the Common Stock are less than the minimum or more than 15% above the maximum
of the current Estimated Valuation Range. The appraisal is not intended to be
and should not be construed as a recommendation of any kind as to the
advisability of purchasing Common Stock in the Offerings nor can assurance be
given that purchasers of the Common Stock in the Offerings will be able to sell
such shares after consummation of the Conversion at a price that is equal to or
above the Purchase Price. Furthermore, the pro forma stockholders' equity is not
intended to represent the fair market value of the Common Stock and may be
greater than amounts that would be available for distribution to stockholders in
the event of liquidation.

Use of Proceeds

     The net proceeds from the sale of the Common Stock are estimated to range
from $47.4 million to $64.3 million, or to $74.0 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Stock Conversion. The Holding Company has received
conditional OTS approval to purchase all of the capital stock of the Bank to be
issued in the Stock Conversion in exchange for 50% of the net proceeds of the
Offerings. This will result in the Holding Company retaining approximately $23.7
million to $32.2 million of the net proceeds, or up to $37.0 million if the
Estimated Valuation Range is increased by 15%, from which the Holding Company
will fund a loan to the ESOP, and the Bank receiving an equal amount.

     Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Bank's capital and will support the expansion of the Bank's
existing business activities. The Bank will use the funds contributed to it for
general corporate purposes, including, initially, lending and investment in
short-term U.S. Government and agency obligations.

                                     (vii)
<PAGE>
 
     A portion of the net proceeds retained by the Holding Company will be used
for a loan by the Holding Company to the ESOP to enable it to purchase 8% of the
shares of Common Stock issued in the Stock Conversion. Such loan would fund the
entire purchase price of the ESOP shares ($5,244,000 at the maximum of the
Estimated Valuation Range) and would be repaid principally from the Bank's
contributions to the ESOP and from dividends payable on the Common Stock held by
the ESOP. The remaining proceeds retained by the Holding Company initially will
be invested primarily in short-term U.S. Government and agency obligations. Such
proceeds will be available for additional contributions to the Bank in the form
of debt or equity, to support future growth and diversification activities, as a
source of dividends to the stockholders of the Holding Company and for future
repurchases of Common Stock (including possible repurchases to fund the MRP or
to provide shares to be issued upon exercise of stock options) to the extent
permitted under Tennessee law and OTS regulations. The Holding Company will
consider exploring opportunities to use such funds to expand operations through
acquiring or establishing additional branch offices and the acquisition of other
financial institutions. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any such activities.

Market for Common Stock

     The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market System under the symbol "CAVB." Trident Securities has
agreed to act as a market maker for the Holding Company's Common Stock following
consummation of the Stock Conversion. No assurance can be given that an active
and liquid trading market for the Common Stock will develop. Further, no
assurance can be given that purchasers will be able to sell their shares at or
above the Purchase Price after the Stock Conversion. See "RISK FACTORS --Absence
of Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."

Dividend Policy

      The Holding Company's Board of Directors anticipates paying quarterly cash
dividends on the Common Stock at an annual rate of $0.20 per share, commencing
in the first full quarter following the consummation of the Conversion.
Declarations and payments of dividends by the Board of Directors will depend
upon a number of factors, including the amount of the net proceeds retained by
the Holding Company, capital requirements, regulatory limitations, the Bank's
and the Holding Company's financial condition and results of operations, tax
considerations and general economic conditions. In order to pay any cash
dividends, however, the Holding Company must have available cash either from the
net proceeds raised in the Offerings and retained by the Holding Company,
dividends received from the Bank or earnings on Holding Company assets. There
are certain limitations on the payment of dividends from the Bank to the Holding
Company. See "REGULATION." In addition, from time to time in an effort to manage
capital to a reasonable level, the Board of Directors may determine to pay
periodic special cash dividends in addition to, or in lieu of, regular cash
dividends. No assurances can be given that any dividends (regular or special)
will be declared or, if declared, what the amount of dividends will be or
whether such dividends, once declared, will continue. See "DIVIDEND POLICY."

Officers' and Directors' Common Stock Purchases and Beneficial Ownership

     Officers and directors of the Bank (30 persons) are expected to subscribe
for an aggregate of approximately 1,331,750 shares of Common Stock, or 27.5% and
20.3% of the shares based on the minimum and the maximum of the Estimated
Valuation Range, respectively. See "SHARES TO BE PURCHASED BY MANAGEMENT
PURSUANT TO SUBSCRIPTION RIGHTS." In addition, purchases by the ESOP,
allocations under the MRP, and the exercise of stock options issued under the
Stock Option Plan, will increase the number of shares beneficially owned by
directors, officers and employees. Assuming (i) implementation of the MRP and
the Stock Option Plan, (ii) the open market purchase of shares on behalf of the
MRP, (iii) the purchase by the ESOP of 8% of the Common Stock sold in the
Offerings, and (iv) the exercise of stock options equal to 10% of the number of
shares of Common Stock issued in the Conversion, directors, officers and
employees of the Holding Company and the Bank would have voting control, on a
fully diluted basis, of 45.0% and 38.5% of the Common Stock, based on the
issuance of the minimum and maximum 

                                    (viii)
<PAGE>
 
of the Estimated Valuation Range, respectively. See "RISK FACTORS -- Anti-
takeover Considerations -- Voting Control by Insiders." The MRP and Stock Option
Plan are subject to approval by the stockholders of the Holding Company at a
meeting to be held no earlier than six months following consummation of the
Stock Conversion.

Risk Factors

     See "RISK FACTORS" beginning on page 1 for a discussion of certain risks
related to the Offerings that should be considered by all prospective investors.







                                     (ix)
<PAGE>
 
                  SELECTED CONSOLIDATED FINANCIAL INFORMATION

     The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Bank and its
subsidiaries at the dates and for the periods indicated. Information at
September 30, 1997 and for the nine months ended September 30, 1997 and 1996 are
unaudited, but, in the opinion of management, reflect all adjustments (none of
which are other than normal recurring entries) necessary for a fair
presentation. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of the results of operations that may be
expected for the entire fiscal year. This information is qualified in its
entirety by reference to the detailed information contained in the Consolidated
Financial Statements and Notes thereto presented elsewhere in this Prospectus.

<TABLE>
<CAPTION>
                                                                                         At December 31,
                                            At September 30,        ----------------------------------------------------
                                                  1997              1996        1995        1994        1993        1992
                                            -----------------       ----        ----        ----        ----        ----
                                               (Unaudited)                          (Dollars in thousands)
FINANCIAL CONDITION DATA:                                                                                       
<S>                                         <C>                   <C>         <C>         <C>         <C>         <C>        
Total assets..............................          $275,925      $244,964    $223,882    $208,844    $206,078    $198,600
Loans receivable, net.....................           216,410       200,600     159,943     165,481     154,139     162,537
Loans held-for-sale.......................             4,149         5,253       3,689       1,452       4,804       7,378
Investment securities held-to-maturity....             3,700         7,705      35,550      19,898      13,535       7,522
Investment securities available-for sale..            10,107            --          --          --          --          --
Mortgage-backed securities held-                                                                                
  to-maturity.............................             1,333         1,419       1,541       1,665       2,108       2,446
Cash, federal funds sold and overnight                                                                          
  interest-bearing deposits...............            26,691        19,519      13,935      11,978      22,660       9,954
Deposit accounts..........................           241,950       214,533     196,734     180,283     185,174     180,294
Borrowings................................                --            --          --       5,000          --          --
Total equity, substantially restricted....            29,501        27,250      24,436      21,236      18,778      16,155

<CAPTION>  
                                               Nine Months Ended
                                                September 30,                      Year Ended December 31,
                                              ------------------      -----------------------------------------------
                                              1997       1996         1996       1995       1994       1993      1992
                                              ----       ----         ----       ----       ----       ----      ----
                                                (Unaudited)                       (Dollars in thousands)                          
OPERATING DATA:                                                                                               
<S>                                         <C>        <C>          <C>        <C>        <C>        <C>        <C>  
Interest income...........................  $ 16,160   $ 14,380     $ 19,584   $ 17,222   $ 15,394   $ 14,963   $ 15,849
Interest expense..........................     6,815      6,117        8,268      7,696      6,299      6,317      8,116
                                            --------   --------     --------   --------   --------   --------   --------
                                                                                                              
Net interest income.......................     9,345      8,263       11,316      9,526      9,095      8,646      7,733
Provision for loan losses.................       700         90          120         80        113        690        366
                                            --------   --------     --------   --------   --------   --------   --------
                                                                                                              
Net interest income                                                                                           
 after provision for loan losses..........     8,645      8,173       11,196      9,446      8,982      7,956      7,367
                                                                                                              
Gains from sale of loans..................       674        733          890        882        530      1,552        945
Gains from sale of securities.............        --         --           --         --         --         --         46
Other income..............................     1,840      1,580        2,268      2,082      1,485      1,618      1,418
Other expenses............................     7,354      7,517        9,786      7,498      7,001      7,000      6,263
                                            --------   --------     --------   --------   --------   --------   --------
                                                                                                              
Earnings before income taxes                                                                                  
  and extraordinary item..................     3,805      2,969        4,568      4,912      3,996      4,126      3,513
Provision for income taxes................     1,547      1,129        1,754      1,711      1,538      1,913      1,272
                                            --------   --------     --------   --------   --------   --------   --------
                                                                                                              
Earnings before extraordinary item........     2,258      1,840        2,814      3,201      2,458      2,213      2,241
Cumulative effect of change in                                                                                
 accounting principle.....................        --         --           --         --         --        409         --
                                            --------   --------     --------   --------   --------   --------   --------
                                                                                                              
Net earnings..............................  $  2,258   $  1,840     $  2,814   $  3,201   $  2,458   $  2,622   $  2,241
                                            ========   ========     ========   ========   ========   ========   ========
</TABLE>

                                      (x)
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                             At December 31,              
                                                    At September 30,           ------------------------------------------
                                                         1997                  1996       1995     1994     1993     1992      
                                                    ----------------           ----       ----     ----     ----     ----  
                                                       (Unaudited)                                      
<S>                                                 <C>                       <C>        <C>      <C>      <C>      <C>
OTHER DATA:                                                                                                                         

                                                                                                                                    

Number of:                                                                                                                          

 Real estate loans outstanding...................         4,816                4,693      4,559    4,690    5,912    5,469          

 Deposit accounts................................        22,772               20,687     18,891   17,812   17,610   16,960          

 Full-service offices............................             9                    7          7        6        6        6          

</TABLE>
 
<TABLE> 
<CAPTION> 
                                                              At or For
                                                          Nine Months Ended                     At or For the
                                                            September 30,                  Year Ended December 31
                                                         ------------------      -------------------------------------------
                                                         1997          1996      1996        1995     1994     1993     1992      
                                                         ----          ----      ----        ----     ----     ----     ----  
                                                             (Unaudited)                                      
<S>                                                      <C>          <C>         <C>        <C>        <C>      <C>      <C> 
KEY FINANCIAL RATIOS(1):                                                                                                            

Performance Ratios:                                                                                                                 

 Return on average assets(2).....................          1.18%       1.06%       1.20%      1.50%    1.17%    1.30%    1.15% 
 Return on average equity(3).....................         10.63        9.63       10.94      14.21    11.53    15.01    14.91  
 Interest rate spread(4).........................          4.61        4.42        4.48       4.14     4.11     4.17     3.85  
 Net interest margin(5)..........................          5.24        5.10        5.15       4.78     4.59     4.38     4.07  
 Average interest-earning assets                                                                                                  
  as a percentage of average                                                                                                      
  interest-bearing liabilities...................        116.77      117.75      117.96     116.64   115.31   106.52   105.29  
 Noninterest expense as a                                                                                                         
  percent of average total assets................          3.84        4.34        4.17       3.52     3.34     3.46     3.23  
 Efficiency ratio(6).............................         62.01       71.08       67.61      60.03    63.02    59.24    61.75  
                                                                                                                                    
Asset Quality Ratios:                                                                                                               
                                                                                                                                    
 Nonaccrual and 90 days or more                                                                                                     
  past due loans as a percent                                                                                                       
  of total loans, net.....................                 0.03        0.02        0.02       0.07     0.22     0.49     0.84  
 Nonperforming assets as a                                                                                                          
  percent of total assets.................                 0.02        0.01        0.02       0.05     0.22     0.72     1.23  
 Allowance for losses as a percent                                                                                                  
  of total loans receivable...............                 1.09        1.04        0.87       1.00     0.93     0.92     0.81  
 Allowance for losses as a percent                                                                                                  
  of nonperforming loans..................             4,747.46    6,953.33    4,162.75   1,866.36   476.14   217.18   106.37  
 Net (charge-offs) recoveries to average                                                                                            
  outstanding loans.......................                (0.01)         --          --       0.09    (0.01)   (0.31)   (0.13) 

Capital Ratios:                                                                                                                     

 Total equity-to-assets ratio.............                10.69       10.83       11.12      10.91    10.17     9.11     8.13
 Average equity to average assets(7)......                11.09       11.03       10.97      10.58    10.17     8.63     7.74

</TABLE> 

- ------------------
(1)  Annualized, where appropriate, for the nine months ended September 30, 1997
     and 1996.
(2)  Net earnings divided by average total assets.
(3)  Net earnings divided by average equity.
(4)  Difference between weighted average yield on interest-earning assets and
     weighted average rate on interest-bearing liabilities.
(5)  Net interest income as a percentage of average interest-earning assets.
(6)  Other expenses divided by the sum of net interest income and other income.
(7)  Average total equity divided by average total assets.

                                     (xi)
<PAGE>
 
                                 RISK FACTORS

     Before investing in shares of the Common Stock offered hereby, prospective
investors should carefully consider the matters presented below, in addition to
matters discussed elsewhere in this Prospectus.

Certain Lending Risks

     Construction and Land Lending Risks.   The Bank is an active originator of
construction loans and acquisition and development ("land A&D") loans.  At
September 30, 1997, the Bank had $79.4 million of such loans, representing 30.8%
of its total loan portfolio.  Of the $79.4 million of such loans, $7.3 million
were commercial A&D loans, $10.6 million were residential A&D loans, and $61.5
million were residential construction loans, of which $28.8 million were
speculative construction loans, meaning that at the time the loan was originated
there was no commitment for permanent financing for the finished property.  Land
A&D loans are loans to real estate developers for the acquisition and
infrastructure development (i.e., installing roads, sewers and other utilities,
                            ----                                               
etc.) of raw or unimproved land so that individual improved lots are available
on which to construct a single family home.

     At September 30, 1997, the Bank's portfolio of construction and land A&D
loans was concentrated among approximately 25 builders and at that time the Bank
had 14 borrowers whose aggregate speculative construction and land A&D loans
outstanding in such projects exceeded $500,000.

     Construction and land A&D lending involves greater credit risk than one- 
to- four family mortgage lending. Construction and land A&D loans generally have
higher loan balances than one- to- four family mortgage loans. In addition, the
potential for cost overruns because of the inherent difficulties in estimating
construction costs and, therefore, collateral values and the difficulties and
costs associated with monitoring construction progress, among other things, are
major contributing factors to this greater credit risk. Speculative construction
loans have the added risk that there is not an identified buyer for the
completed home when the loan is originated, with the risk that the builder will
have to service the construction loan debt and finance other carrying costs of
the completed property for an extended time period until a buyer is identified.
Furthermore, the demand for construction loans and the ability of construction
loan borrowers to service their debt depends highly on the state of the general
economy, including market interest rate levels, and the state of the economy of
the Bank's primary market area. A material downturn in economic conditions would
be expected to have a material adverse effect on the credit quality of the
construction and land A&D loan portfolio, and may require management to reassess
the adequacy of the Bank's allowance for loan losses and to establish additional
provisions for loan losses, which would have a material adverse effect on net
income. See "BUSINESS OF THE BANK -- Lending Activities -- Construction Lending"
and "-- Allowance for Loan Losses."

     Commercial Real Estate Lending. At September 30, 1997, the Bank's
commercial real estate loan portfolio amounted to $37.1 million, or 14.4% of
total net loans receivable. Commercial real estate lending generally involves
greater credit risk than one- to- four family mortgage lending. Because payments
on loans secured by commercial properties often depend upon the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy, among
other things. See "BUSINESS OF THE BANK -- Lending Activities -- Commercial Real
Estate Lending."

     Commercial Business Lending.  At September 30, 1997, the Bank's commercial
business loan portfolio amounted to $22.1 million, or 8.6% of total net loans
receivable.  Subject to market conditions and other factors, the Bank intends to
expand its commercial business lending activities within its primary market
area.  Commercial business lending generally involves greater credit risk than
one- to- four family mortgage lending.  Although commercial business loans are
often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation value of these assets in the event of a
borrower default is often an insufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use.  See "BUSINESS OF THE BANK -- Lending Activities -- Commercial
Business Lending."

                                       1
<PAGE>
 
     Consumer Lending Risks.  At September 30, 1997, the Bank's consumer loan
portfolio amounted to $33.2 million, or 15.4% of loans receivable, net.
Consumer lending is also generally viewed to involve greater credit risk than
one- to- four family mortgage lending.  Collateral such as automobiles, boats
and other personal property depreciate rapidly and are often an inadequate
repayment source if a borrower defaults.  In addition,  consumer loan repayments
depend on the borrower's continuing financial stability and are more likely to
be adversely affected by job loss, divorce, illness, personal bankruptcy and
other financial hardship.  See "BUSINESS OF THE BANK --Lending Activities --
Consumer Lending."

     Geographic Concentration of Credit Risk.  The Bank has no significant
concentration of credit risk other than that a substantial portion of its loan
portfolio is secured by real estate, either as primary or secondary collateral,
located in its primary market area.  The economy of the Bank's primary market
area is generally stable and diverse, however, no assurances can be given that
such favorable economic conditions will continue.  Accordingly, this geographic
concentration of credit risk could have a material adverse effect on the Bank's
financial condition and results of operations to the extent there is a material
deterioration in that area's economy and real estate values.  See "BUSINESS OF
THE BANK -- Market Area" and "BUSINESS OF THE BANK -- Lending Activities."

Interest Rate Risk

     General.  Like all financial institutions, the Bank's financial condition
and operations are influenced significantly by general economic conditions, the
related monetary and fiscal policies of the federal government and government
regulations. Deposit flows and the cost of funds are influenced by interest
rates of competing investments and general market interest rates. Lending
activities are affected by the demand for mortgage financing and for consumer
and other types of loans, which in turn is affected by the interest rates at
which such financing may be offered and by other factors affecting the supply of
housing and the availability of funds. The Bank's profitability, like that of
most financial institutions, depends largely on its net interest income, which
is the difference between the interest income received from its interest-earning
assets and the interest expense incurred in connection with its interest-bearing
liabilities. To better control the impact of changes in interest rates, the Bank
has sought to improve the match between asset and liability maturities or
repricing periods and rates by emphasizing the origination of ARM loans and
shorter term construction, commercial real estate, and consumer loans.

     Potential Adverse Impact on Results of Operations.  The Bank's results of
operations would be adversely affected by a material prolonged increase in
market interest rates.  At September 30, 1997, assuming, for example, an
instantaneous 200 basis point increase in market interest rates, the Bank's net
portfolio value ("NPV") (the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts) would decrease by approximately
$1.7 million.  See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Asset and Liability Management."

     Potential Adverse Impact on Financial Condition.  Changes in the level of
interest rates also affect the volume of loans originated or purchased by the
Bank and, thus, the amount of loan and commitment fees, as well as the market
value of the Bank's investment securities and other interest-earning assets.
Changes in interest rates also can affect the average life of loans.  Decreases
in interest rates may result in increased prepayments of loans, as borrowers
refinance to reduce borrowing costs.  Under these circumstances, the Bank is
subject to reinvestment risk to the extent that it is not able to reinvest such
prepayments at rates which are comparable to the rates on the maturing loans or
securities.  Moreover, volatility in interest rates also can result in
disintermediation, or the flow of funds away from savings institutions into
direct investments, such as U.S. Government and corporate securities and other
investment vehicles which, because of the absence of federal insurance premiums
and reserve requirements, generally pay higher rates of return than savings
institutions.

     At September 30, 1997, out of total gross loans of $257.3 million in the
Bank's portfolio, $74.8 million were ARM loans, the majority of which reprice
every year.  Furthermore, the Bank's ARM loans contain periodic and lifetime
interest rate adjustment limits which, in a rising interest rate environment,
may prevent such loans from repricing to market interest rates.  While
management anticipates that ARM loans will better offset the adverse

                                       2
<PAGE>
 
effects of an increase in interest rates as compared to fixed-rate mortgages,
the increased mortgage payments required of ARM borrowers in a rising interest
rate environment could potentially cause an increase in delinquencies and
defaults.  The Bank has not historically had an increase in such delinquencies
and defaults on ARM loans, but no assurance can be given that such delinquencies
or defaults would not occur in the future.  The marketability of the underlying
property also may be adversely affected in a high interest rate environment.
Moreover, the Bank's ability to originate or purchase ARM loans may be affected
by changes in the level of interest rates and by market acceptance of the terms
of such loans.  In a relatively low interest rate environment, as currently
exists, borrowers generally tend to favor fixed-rate loans over ARM loans to
hedge against future increases in interest rates.

New Expenses Associated With ESOP and MRP

     The Bank will recognize additional material employee compensation and
benefit expenses assuming the ESOP and the MRP are implemented. The actual
aggregate amount of these new expenses cannot be currently predicted because
applicable accounting practices require that they be based on the fair market
value of the shares of Common Stock when the expenses are recognized, which
would occur when shares are committed to be released in the case of the ESOP and
over the vesting period of awards made to recipients in the case of the MRP.
These expenses have been reflected in the pro forma financial information under
"PRO FORMA DATA" assuming the Purchase Price ($10.00 per share) as fair market
value. Actual expenses, however, will be based on the fair market value of the
Common Stock at the time of recognition, which may be higher or lower than the
Purchase Price. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Impact of Accounting Pronouncements and Regulatory
Policies --Accounting for Employee Stock Ownership Plans," "-- Accounting for
Stock-Based Compensation," "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock
Ownership Plan" and "-- Benefits -- Management Recognition Plan."

Possible Dilutive Effect of Benefit Programs

     The MRP intends to acquire an amount of Common Stock of the Holding Company
equal to 4% of the shares issued in the Stock Conversion.  Such shares of Common
Stock of the Holding Company may be acquired by the Holding Company in the open
market or from authorized but unissued shares of Common Stock of the Holding
Company.  In the event that the MRP acquires authorized but unissued shares of
Common Stock from the Holding Company, the voting interests of existing
stockholders will be diluted and net income per share and stockholders' equity
per share will be decreased.  See "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -
- - Benefits -- Management Recognition Plan."  The MRP is subject to approval by
the Holding Company's stockholders.

     The Stock Option Plan will provide for options for up to a number of shares
of Common Stock of the Holding Company equal to 10% of the shares issued in the
Stock Conversion. Such shares may be authorized but unissued shares of Common
Stock of the Holding Company and, upon exercise of the options, will result in
the dilution of the voting interests of existing stockholders and may decrease
net income per share and stockholders' equity per share. See "MANAGEMENT OF THE
BANK -- Benefits -- Stock Option Plan." The Stock Option Plan is subject to
approval ny the Holding Company's stockholders.

     If the ESOP is not able to purchase 8% of the shares of Common Stock issued
in the Offerings, the ESOP may purchase newly issued shares from the Holding
Company. In such event, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "MANAGEMENT OF THE BANK -- Benefits -- Employee Stock Ownership
Plan."

Anti-takeover Considerations

     Provisions in the Holding Company's Governing Instruments and Tennessee
Law. Certain provisions included in the Holding Company's Charter and in the
Tennessee Business Corporation Act, as amended ("TBCA"), might discourage
potential proxy contests and other potential takeover attempts, particularly
those that have not been

                                       3
<PAGE>
 
negotiated with the Board of Directors.  As a result, these provisions might
preclude takeover attempts that certain stockholders may deem to be in their
best interest and might tend to perpetuate existing management.  These
provisions include, among other things, a provision limiting voting rights of
beneficial owners of more than 10% of the Common Stock, supermajority voting
requirements for certain business combinations, staggered terms for directors,
non-cumulative voting for directors, the removal of directors without cause only
upon the vote of holders of 80% of the outstanding voting shares, limitations on
the calling of special meetings, and specific notice requirements for
stockholder nominations and proposals.  Certain provisions of the Holding
Company's Charter cannot be amended by stockholders unless an 80% stockholder
vote is obtained.  The existence of these anti-takeover provisions could result
in the Holding Company being less attractive to a potential acquiror and in
stockholders receiving less for their shares than otherwise might be available
in the event of a takeover attempt.  Furthermore, federal regulations prohibit
for three years after consummation of the Conversion the ownership of more than
10% of the Bank or the Holding Company without prior OTS approval.  Federal law
also requires OTS approval prior to the acquisition of "control" (as defined in
OTS regulations) of an insured institution.  See "RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY."

     Voting Control by Insiders.  Directors and officers of the Bank and the
Holding Company (and their associates) expect to purchase 1,331,750 shares of
Common Stock, or 27.5% and 20.3% of the shares issued in the Offerings at the
minimum and the maximum of the Estimated Valuation Range, respectively.
Directors and officers are also expected to control indirectly the voting of
approximately 8% of the shares of Common Stock issued in the Stock Conversion
through the ESOP (assuming shares have been allocated under the ESOP).  Under
the terms of the ESOP, the unallocated shares will be voted by the ESOP trustees
in the same proportion as the votes cast by participants with respect to the
allocated shares.  Three, current, non-employee directors of the Holding Company
and the Bank will serve as the ESOP trustees.

     At a meeting of stockholders to be held no earlier than six months
following the consummation of the Stock Conversion, the Holding Company expects
to seek approval of the Holding Company's MRP, which is a non-tax-qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Bank. The Holding Company expects to acquire common
stock of the Holding Company on behalf of the MRP in an amount equal to 4% of
the Common Stock issued in the Stock Conversion, or 193,800 and 262,200 shares
at the minimum and the maximum of the Estimated Valuation Range, respectively.
These shares will be acquired either through open market purchases through a
trust established in conjunction with the MRP or from authorized but unissued
shares of Common Stock. A committee of the Board of Directors of the Holding
Company will administer the MRP, the members of which would also serve as
trustees of the MRP trust, if formed. Under the terms of the MRP, the MRP
committee or the MRP trustees, will have the power to vote unallocated and
unvested shares. In addition, the Holding Company intends to reserve for future
issuance pursuant to the Stock Option Plan a number of authorized shares of
Common Stock equal to 10% of the Common Stock issued in the Stock Conversion
(484,500 and 655,500 shares at the minimum and the maximum of the Estimated
Valuation Range, respectively). The Holding Company also intends to seek
approval of the Stock Option Plan at a meeting of stockholders to be held no
earlier than six months following the consummation of the Stock Conversion.

     Assuming (i) the implementation of the MRP and the Stock Option Plan, (ii)
the open market purchase of shares on behalf of the MRP, (iii) the purchase by
the ESOP of 8% of the Common Stock sold in the Offerings, and (iv) the exercise
of stock options equal to 10% of the number of shares of Common Stock issued in
the Stock Conversion, directors, officers and employees of the Holding Company
and the Bank would have voting control, on a fully diluted basis, of 45.0% and
38.5% of the Common Stock, based on the issuance of the minimum and maximum of
the Estimated Valuation Range, respectively. Management's potential voting
control alone, as well as together with additional stockholder support, might
preclude or make more difficult takeover attempts that certain stockholders deem
to be in their best interest and might tend to perpetuate existing management.

     Provisions of Employment and Severance Agreements and Severance Plan. The
proposed employment and severance agreements with certain senior officers of the
Holding Company and the Bank provide for cash severance payments and/or the
continuation of health, life and disability benefits in the event of their
termination

                                       4
<PAGE>
 
of employment following a change in control of the Holding Company or the Bank.
Assuming a change of control occurred as of September 30, 1997, the aggregate
value of the severance benefits available to these executive officers under the
agreements would have been approximately $1.8 million.  In addition, assuming
that a change in control had occurred at September 30, 1997 and the termination
of all eligible key employees, the maximum aggregate payment due under the
Severance Plan would be approximately $116,000.  These agreements and plan may
have the effect of increasing the costs of acquiring the Holding Company,
thereby discouraging future attempts to take over the Holding Company or the
Bank.

     See "MANAGEMENT OF THE BANK -- Benefits," "RESTRICTIONS ON ACQUISITION OF
THE HOLDING COMPANY" and "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY."

Return on Equity After Conversion

     Return on equity (net income for a given period divided by average equity
during that period) is a ratio used by many investors to compare the performance
of a particular financial institution to its peers.  The Bank's return on equity
for the nine months ended September 30, 1997 and the year ended December 31,
1996 was, and the Holding Company's post-Conversion return on equity will be,
less than the average return on equity for publicly traded thrift institutions
and their holding companies.  See "SELECTED CONSOLIDATED FINANCIAL INFORMATION"
for numerical information regarding the Bank's historical return on equity and
"CAPITALIZATION" for a discussion of the Holding Company's estimated pro forma
consolidated capitalization as a result of the Conversion.  In order for the
Holding Company to achieve a return on equity comparable to the historical
levels of the Bank, the Holding Company either would have to increase net income
or reduce stockholders' equity, or both, commensurate with the increase in
equity resulting from the Conversion.  Reductions in equity could be achieved
by, among other things, the payment of regular or special cash dividends
(although no assurances can be given as to their payment or, if paid, their
amount and frequency), the repurchase of shares of Common Stock subject to
applicable regulatory restrictions, or the acquisition of branch offices, other
financial institutions or related businesses (neither the Holding Company nor
the Bank has any present plans, arrangements, or understandings, written or
oral, regarding any repurchase or acquisitions).  See "DIVIDEND POLICY" and "USE
OF PROCEEDS."  Achievement of increased net income levels will depend on several
important factors outside management's control, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others.  In addition, the expenses associated with the
ESOP and the MRP (see "-- New Expenses Associated with ESOP and MRP"), along
with other post-Conversion expenses, as well as operating expenses associated
with the new branch offices, are expected to contribute initially to reduced
earnings levels.  Subject to market conditions, initially the Bank intends to
deploy the net proceeds of the Offerings to support its core lending activities
to increase earnings per share and book value per share, without assuming undue
risk, with the goal of achieving a return on equity comparable to the average
for publicly traded thrift institutions and their holding companies.  This goal
will likely take a number of years to achieve and no assurances can be given
that this goal can be attained.  Consequently, for the foreseeable future,
investors should not expect a return on equity which will meet or exceed the
average return on equity for publicly traded thrift institutions, many of which
are not newly converted institutions and have had time to deploy their
conversion capital.

Competition

     The Bank has faced, and will continue to face, intense competition both in
making loans and attracting deposits. The Bank's primary market area of
Rutherford, Bedford and Williamson Counties has a high density of financial
institutions, many of which are branches of large Southeastern bank holding
companies which have greater financial resources than the Bank and all of which
compete with the Bank in varying degrees.  Competition for loans principally
comes from commercial banks, thrift institutions, credit unions, mortgage
banking companies and insurance companies.  Historically, commercial banks,
thrift institutions and credit unions have been the Bank's most direct
competition for deposits.  The Bank also competes with short-term money market
funds and with other financial institutions, such as brokerage firms and
insurance companies, for deposits.  In competing for loans, the Bank may be
forced to offer lower loan interest rates periodically.  Conversely, in
competing for deposits, the Bank

                                       5
<PAGE>
 
may be forced to offer higher deposit interest rates periodically.  Either case
or both cases could adversely affect net interest income.  See "BUSINESS OF THE
BANK -- Competition."

Absence of Prior Market for the Common Stock

     The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock. Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market under the symbol "CAVB," there can be no assurance that an active and
liquid trading market for the Common Stock will develop, or once developed, will
continue. Furthermore, there can be no assurance that purchasers will be able to
sell their shares at or above the Purchase Price. See "MARKET FOR COMMON STOCK."

Possible Increase in Estimated Price Range and Number of Shares Issued

     The Estimated Valuation Range may be increased up to 15% to reflect
material changes in the financial condition or results of operations of the Bank
or changes in market conditions or general financial, economic or regulatory
conditions following the commencement of the Offerings. If the Estimated
Valuation Range is increased, it is expected that the Holding Company would
increase the Estimated Price Range so that up to 7,538,250 shares of Common
Stock at the Purchase Price would be issued for an aggregate price of up to
$75,382,500. This increase in the number of shares would decrease a subscriber's
pro forma net earnings per share and stockholders' equity per share, increase
the Holding Company's pro forma consolidated stockholders' equity and net
earnings, and increase the Purchase Price as a percentage of pro forma
stockholders' equity per share and net earnings per share. See "PRO FORMA DATA."

Potential Delay in Consummating the Stock Conversion

     Once tendered, subscription orders cannot be revoked during the Offerings
without the consent of the Holding Company and the Bank, unless the Stock
Conversion is terminated or there is a resolicitation offering.  If the Stock
Conversion is not completed by April 24, 1998 as a result of changes that lead
to a material revision in the Estimated Valuation Range and the OTS consents to
an extension of time to complete the Stock Conversion, there would be a
resolicitation offering.  OTS regulations permit the OTS to grant one or more
time extensions, none of which shall exceed 90 days.  In the resolicitation
offering, all subscribers would be mailed a supplement to this Prospectus and
given the opportunity to confirm, modify or cancel their subscriptions.  Failure
to confirm affirmatively or modify would be deemed a cancellation and all
subscription funds, together with accrued interest, would be returned to the
subscriber, or if the subscriber authorized payment by withdrawal of funds on
deposit at the Bank, that authorization would terminate.  If a subscriber
affirmatively confirms his subscription order during the resolicitation
offering, the Holding Company and the Bank would continue to hold all
subscription orders and all subscription funds until the expiration of the
resolicitation offering.  All subscriptions held by the Holding Company and the
Bank when the resolicitation offering expires would be irrevocable without the
consent of the Holding Company and the Bank until the completion or termination
of the Stock Conversion.

Recent Legislation and the Future of the Thrift Industry

     The Bank is, and the Holding Company upon consummation of the Conversion
will be, subject to extensive government regulation designed primarily to
protect the federal deposit insurance fund and depositors. Such regulation often
has a material impact on the Bank's financial condition and results of
operations. For example, recent legislation required the Bank to pay a one-time
assessment of $1.2 million, pre-tax, to the FDIC to recapitalize the SAIF. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Comparison of Operating Results for the Nine Months Ended
September 30, 1997 and 1996."

                                       6
<PAGE>
 
     The U.S. Congress is considering several versions of proposed legislation
designed to modernize the financial institutions industry.  Currently, these
various legislative measures are in the committee stage and there is no
definitive timetable for considering any of them on the floor of either the
House or Senate.  Principal among the various measures is the House measure
(H.R. 10), which, among other things, includes in its current form provisions
calling for the elimination of the thrift charter and the elimination of the
absence of restrictions on non-banking activities applicable to unitary thrift
holding companies.  If the thrift charter is eliminated, alternatives under
consideration are requiring thrifts to convert to a bank charter or adopt a
common financial institutions charter.  The Bank cannot predict whether such
legislation will be passed or, if passed, what the attributes of any common
charter would be.  However, it is possible that the common charter may not offer
all the advantages that the Bank now enjoys (e.g., unrestricted nationwide
                                             ----                         
branching) or that the Holding Company, as a unitary savings and loan holding
company, will enjoy upon consummation of the Conversion (e.g., the absence of
                                                         ----                
restrictions on non-banking activities).  See "REGULATION."

     In deciding whether or not to undertake the Bank Conversion after the
consummation of the Stock Conversion, the Bank will consider the economic and
regulatory climate at that time, among other factors.  The status of
Congressional legislation regarding the common "unified charter" is expected to
be a significant factor in its decision making.

Possible Adverse Income Tax Consequences of the Distribution of Subscription
Rights

     If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Bank are deemed
to have an ascertainable value, receipt of such rights may be a taxable event
(either as capital gain or ordinary income), to those Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members who receive and/or
exercise the Subscription Rights in an amount equal to such value. Additionally,
the Bank could be required to recognize a gain for tax purposes on such
distribution. Whether Subscription Rights are considered to have ascertainable
value is an inherently factual determination. The Bank has been advised by
Ferguson that such rights have no value; however, Ferguson's conclusion is not
binding on the Internal Revenue Service ("IRS"). See "THE CONVERSION -- Effects
of Conversion to Stock Form on Depositors and Borrowers of the Bank -- Tax
Effects."

                             CAVALRY BANCORP, INC.

     The Holding Company was incorporated on November 5, 1997 under Tennessee
law at the direction of the Bank to acquire all of the capital stock that the
Bank will issue upon its conversion from the mutual to stock form of ownership.
The Holding Company has received conditional OTS approval to become a savings
and loan holding company through the acquisition of 100% of the capital stock of
the Bank. Prior to the Conversion, the Holding Company will not engage in any
material operations. After the Conversion, the Holding Company will be
classified as a unitary savings and loan holding company subject to regulation
by the OTS, and its principal business will be the ownership of the Bank.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of the Bank, 50% of the net proceeds of the
Offerings as permitted by the OTS to be retained by it and a note receivable
from the ESOP evidencing a loan to enable the ESOP to purchase 8% of the Common
Stock issued in the Conversion. See "BUSINESS OF THE HOLDING COMPANY."

     The holding company structure will permit the Holding Company to expand the
financial services currently offered through the Bank.  Management believes that
the holding company structure and retention of a portion of the proceeds of the
Offerings will, should it decide to do so, facilitate the expansion and
diversification of its operations.  The holding company structure will also
enable the Holding Company to repurchase its stock without adverse tax
consequences, subject to applicable regulatory restrictions, including waiting
periods.  There are no present plans, arrangements,  agreements, or
understandings, written or oral, regarding any such activities or repurchases.
See "REGULATION -- Savings and Loan Holding Company Regulations."

                                       7
<PAGE>
 
                                CAVALRY BANKING

     The Bank is a federally chartered mutual savings bank located in
Murfreesboro, Tennessee, which is approximately 30 miles southeast of Nashville,
Tennessee. Chartered in 1929 as a Tennessee-chartered mutual building and loan
association under the name "Murfreesboro Building and Loan Association," the
Bank converted to a federal charter and adopted the name "Murfreesboro Federal
Savings and Loan Association," in 1936. In 1984, the Bank adopted the name
"Cavalry Banking Federal Savings and Loan Association." In 1991, the Bank
adopted the name "Cavalry Banking, A Federal Savings Bank," and in 1996 the Bank
amended its mutual charter to adopt its current name. As a result of the
Conversion, the Bank will convert to a federal capital stock savings bank and
will become a wholly-owned subsidiary of the Holding Company. The Bank is
regulated by the OTS, its primary regulator, and by the FDIC, the insurer of its
deposits. The Bank's deposits have been federally-insured since 1936 and are
currently insured by the FDIC under the SAIF. The Bank has been a member of the
FHLB System since 1936. At September 30, 1997, the Bank had total assets of
$275.9 million, total deposits of $242.0 million and total equity of $29.5
million on a consolidated basis.

     The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals. The Bank
considers Rutherford, Bedford and Williamson Counties in Central Tennessee as
its primary market area.

     The Bank believes that its operations more closely resemble those of a
traditional commercial bank than a traditional thrift institution.  Unlike a
traditional thrift institution that primarily originates long-term residential
mortgage loans funded primarily with long-term certificates of deposits, a
traditional commercial bank primarily originates commercial business, consumer
and other short-term non-real estate loans funded primarily by non-interest
bearing demand deposit accounts and other short-term liabilities.  The Bank's
one- to- four family mortgage loan portfolio, as a percent of the total loan
portfolio, has decreased from 50.6% at December 31, 1992 to 32.7% at September
30, 1997.  In addition, the Bank's certificates of deposit, as a percentage of
deposit accounts, have decreased from 60.7% at December 31, 1994 to 54.6% at
September 30, 1997.  In addition to its shifting asset and liability mix, the
Bank is one of the few thrift institutions in its primary market area that
offers trust services.  See "BUSINESS OF THE BANK -- Lending Activities," "--
Deposit Activities and Other Sources of Funds -- Deposit Accounts" and "-- Trust
Department."

     The Bank's lending activities are diverse. The Bank originates both ARM
loans and fixed-rate mortgage loans. Generally, ARM loans are retained in the
Bank's portfolio and long-term fixed-rate mortgage loans are originated for sale
in the secondary market. In addition, the Bank actively originates construction
and acquisition and development loans. At September 30, 1997, construction loans
totalled $68.8 million, or 26.7% of total loans receivable, and acquisition and
development loans totalled $10.6 million, or 4.1% of total loans receivable. The
Bank also originates commercial real estate, commercial business, and consumer
and other non-real estate loans. At September 30, 1997, commercial real estate
loans totalled $37.1 million, or 14.4% of total loans receivable, commercial
business loans totalled $22.1 million, or 8.6% of total loans receivable, and
consumer and other non-real estate loans totalled $33.3 million, or 12.9% of
total loans receivable. See "BUSINESS OF THE BANK -- Lending Activities." The
Bank invests its excess liquidity in short-term U.S. Government and agency
securities. See "BUSINESS OF THE BANK -- Investment Activities."

     If the Bank Conversion is undertaken, the Bank, as a Tennessee-chartered
commercial bank, would succeed to all of the assets and liabilities of the Bank
(which, pursuant to the Stock Conversion will have succeeded to all of the
assets and liabilities of the Bank), and would initially continue to conduct
business in substantially the same manner as the Bank prior to the Bank
Conversion.  Over time, however, management anticipates an increase in the
percentage of commercial loans in the Bank's loan portfolio.  It is anticipated
that the Bank will continue to diversify its loan and deposit mix and add other
services in connection with the Bank Conversion.

                                       8
<PAGE>
 
     The deposits of the Bank would continue to be insured by the FDIC under the
SAIF upon consummation of the Bank Conversion.  Accordingly, FDIC regulation and
supervision would continue.  However, the Commissioner would replace the OTS as
the Bank's primary regulator upon consummation of the Bank Conversion.

     The Bank conducts its operations from its main office and four branch
offices located in Murfreesboro, Tennessee, a branch office in Shelbyville,
Tennessee (Bedford County) and three offices in Smyrna, Tennessee (Rutherford
County). The Bank also operates a mortgage loan origination office in Franklin,
Tennessee (Williamson County). See "BUSINESS OF THE BANK -- Properties."

                                USE OF PROCEEDS

     The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $47.4 million to $64.3 million, or up to $74.0 million
if the Estimated Valuation Range is increased by 15%.  See "PRO FORMA DATA" for
the assumptions used to arrive at such amounts.  The Holding Company has
received conditional OTS approval to purchase all of the capital stock of the
Bank to be issued in the Stock Conversion in exchange for 50% of the net
proceeds of the Offerings.  This will result in the Holding Company retaining
approximately $23.7 million to $32.2 million of net proceeds, or up to $37.0
million if the Estimated Valuation Range is increased by 15%, from which it will
fund a loan to the ESOP, and the Bank receiving an equal amount.

     Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Bank's capital and will support the expansion of the Bank's
existing business activities.  The Bank will use the funds contributed to it for
general corporate purposes, including, initially, lending and investment in
short-term U.S. Government and agency obligations.

     In connection with the Conversion and the establishment of the ESOP, the
Holding Company intends to loan the ESOP the amount necessary to purchase 8% of
the shares of Common Stock sold in the Stock Conversion.  The Holding Company's
loan to fund the ESOP may range from $3,876,000 to $5,244,000 based on the sale
of 387,600 shares to the ESOP (at the minimum of the Estimated Valuation Range)
and 524,400 shares (at the maximum of the Estimated Valuation Range),
respectively, at $10.00 per share.  If 15% above the maximum of the Estimated
Valuation Range, or 7,538,250 shares, are sold in the Stock Conversion, the
Holding Company's loan to the ESOP would be approximately $6,030,600 (based on
the sale of 603,060 shares to the ESOP).  It is anticipated that the ESOP loan
will have a 12-year term with interest payable at the prime rate as published in
The Wall Street Journal on the closing date of the Stock Conversion.  The loan
will be repaid principally from the Bank's contributions to the ESOP and from
any dividends paid on shares of Common Stock held by the ESOP.

     The remaining net proceeds retained by the Holding Company initially will
be invested primarily in short-term U.S. Government and agency obligations. Such
proceeds will be available for additional contributions to the Bank in the form
of debt or equity, to support future diversification or acquisition activities,
as a source of dividends to the stockholders of the Holding Company and for
future repurchases of Common Stock to the extent permitted under Tennessee law
and federal regulations. The Holding Company will consider exploring
opportunities to use such funds to expand operations through acquiring or
establishing additional branch offices or acquiring other financial
institutions. Currently, there are no specific plans, arrangements, agreements
or understandings, written or oral, regarding any diversification activities.

     Following consummation of the Stock Conversion, the Board of Directors will
have the authority to adopt plans for repurchases of Common Stock, subject to
statutory and regulatory requirements.  Since the Holding Company has not yet
issued stock, there currently is insufficient information upon which an
intention to repurchase stock could be based.  The facts and circumstances upon
which the Board of Directors may determine to repurchase stock in the future
would include but are not limited to:  (i) market and economic factors such as
the price at which the stock is trading in the market, the volume of trading,
the attractiveness of other investment alternatives in terms of the rate of
return and risk involved in the investment, the ability to increase the book
value and/or earnings per

                                       9
<PAGE>
 
share of the remaining outstanding shares, and the ability to improve the
Holding Company's return on equity; (ii) the avoidance of dilution to
stockholders by not having to issue additional shares to cover the exercise of
stock options or to fund employee stock benefit plans; and (iii) any other
circumstances in which repurchases would be in the best interests of the Holding
Company and its stockholders.  Any stock repurchases will be subject to a
determination by the Board of Directors that both the Holding Company and the
Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that capital will be adequate, taking into
account, among other things, the level of nonperforming and classified assets,
the Holding Company's and the Bank's current and projected results of operations
and asset/liability structure, the economic environment and tax and other
regulatory considerations.  For a discussion of the regulatory limitations
applicable to stock repurchases and current OTS policy with respect thereto, see
"THE CONVERSION -- Restrictions on Repurchase of Stock."

                                DIVIDEND POLICY

General

     The Holding Company's Board of Directors anticipates paying quarterly cash
dividends on the Common Stock at an annual rate of $0.20 per share, commencing
in the first full quarter following the consummation of the Stock Conversion.
Declarations or payments of dividends will be subject to determination by the
Holding Company's Board of Directors, which will take into account the amount of
the net proceeds retained by the Holding Company, the Holding Company's
financial condition, results of operations, tax considerations, capital
requirements, industry standards, economic conditions and other factors,
including the regulatory restrictions that affect the payment of dividends by
the Bank to the Holding Company discussed below.  In addition, from time to time
in an effort to manage capital to a reasonable level, the Board of Directors may
determine to pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends.  No assurances can be given that any dividends, either
regular or special, will be declared or, if declared, what the amount of
dividends will be or whether such dividends, once declared, will continue.  In
order to pay any cash dividends (regular and special), however, the Holding
Company must have available cash either from the net proceeds raised in the
Offerings and retained by the Holding Company, dividends received from the Bank
or earnings on Holding Company assets.

Current Restrictions

     The Holding Company has committed to the OTS not to make any tax-free
distributions to stockholders in the form of a return of capital, or take any
action in contemplation of any such distributions, within the first year
following the consummation of the Stock Conversion.

     Dividends from the Holding Company may depend, in part, upon receipt of
dividends from the Bank because the Holding Company initially will have no
source of income other than dividends from the Bank and earnings from the
investment of the net proceeds from the Offerings retained by the Holding
Company.  OTS regulations require the Bank to give the OTS 30 days' advance
notice of any proposed declaration of dividends to the Holding Company, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends to the Holding Company.  The OTS imposes certain limitations on the
payment of dividends from the Bank to the Holding Company which utilize a three-
tiered approach that permits various levels of distributions based primarily
upon a savings association's capital level.  The Bank currently meets the
criteria to be designated a Tier 1 association, as hereinafter defined, and
consequently could at its option (after prior notice to and no objection made by
the OTS) distribute up to 100% of its net income during the calendar year plus
50% of its surplus capital ratio at the beginning of the calendar year less any
distributions previously paid during the year. In addition, the Bank may not 
declare or pay a cash dividend on its capital stock if the effect thereof would 
be to reduce the regulatory capital of the Bank below the amount required for 
the liquidation account to be established pursuant to the Bank's Plan of 
Conversion. See "REGULATION -- Federal Regulation of Savings Associations -- 
Limitations on Capital Distributions," "THE CONVERSION -- Effects of Conversion 
to Stock Form on Depositors and Borrowers of the Bank -- Liquidation Account" 
and Note 14 of Notes to the Consolidated Financial Statements included elsewhere
herein.

                                       10
<PAGE>
 
     Subsequent to the Bank Conversion, dividends from the Holding Company would
continue to depend primarily upon the receipt of dividends from the Bank and the
payment of such dividends would be subject to the restrictions under Tennessee
law, which generally limit dividend declarations to not more than once each
calendar quarter from undivided profits, less any required reserves against
deposits.  See "REGULATION."

     Dividend payments by the Holding Company will be governed by Tennessee law,
which prohibits dividend payments that would either render the Holding Company
unable to pay its debts as they came due in the normal course of business or
cause the Holding Company's total liabilities to exceed its total assets.  If
the Bank Conversion is undertaken, the Holding Company would also be subject to
Federal Reserve policy governing dividend payments by bank holding companies.
See "REGULATION -- Bank Holding Company Regulation -- Dividends."

Tax Considerations

     In addition to the foregoing, retained earnings of the Bank appropriated to
bad debt reserves and deducted for federal income tax purposes cannot be used by
the Bank to pay cash dividends to the Holding Company without the payment of
federal income taxes by the Bank at the then current income tax rate on the
amount deemed distributed, which would include the amount of any federal income
taxes attributable to the distribution.  See "TAXATION -- Federal Taxation" and
Note 11 of Notes to the Consolidated Financial Statements included elsewhere
herein.  The Holding Company does not contemplate any distribution by the Bank
that would result in a recapture of the Bank's bad debt reserve or create the
above-mentioned federal tax liabilities.

                            MARKET FOR COMMON STOCK

     The Holding Company has never issued capital stock and, consequently, there
is no existing market for the Common Stock.  Although the Holding Company has
received conditional approval to list the Common Stock on the Nasdaq National
Market System under the symbol "CAVB," there can be no assurance that the
Holding Company will meet Nasdaq National Market System listing requirements,
which include a minimum market capitalization, at least three market makers and
a minimum number of record holders.  Trident Securities has agreed to make a
market for the Common Stock following consummation of the Stock Conversion and
will assist the Holding Company in seeking to encourage at least two additional
market makers to establish and maintain a market in the Common Stock.  Making a
market involves maintaining bid and ask quotations and being able, as principal,
to effect transactions in reasonable quantities at those quoted prices, subject
to various securities laws and other regulatory requirements.  The Holding
Company anticipates that prior to the completion of the Stock Conversion it will
be able to obtain the commitment from at least two additional broker-dealers to
act as market maker for the Common Stock.  Additionally, the development of a
liquid public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Holding Company, the Bank or
any market maker.  There can be no assurance that an active and liquid trading
market for the Common Stock will develop or that, if developed, it will
continue.  The number of active buyers and sellers of the Common Stock at any
particular time may be limited.  Under such circumstances, investors in the
Common Stock could have difficulty disposing of their shares on short notice and
should not view the Common Stock as a short-term investment.  Furthermore, there
can be no assurance that purchasers will be able to sell their shares at or
above the Purchase Price or that quotations will be available on the Nasdaq
National Market System as contemplated.

                                       11
<PAGE>
 
                                 CAPITALIZATION

     The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Holding
Company after giving effect to the assumptions set forth under "PRO FORMA DATA,"
based on the sale of the number of shares of Common Stock at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation Range.
The shares that would be issued at the maximum, as adjusted, of the Estimated
Valuation Range would be subject to receipt of OTS approval of an updated
appraisal confirming such valuation.  A change in the number of shares to be
issued in the Stock Conversion may materially affect pro forma consolidated
capitalization.

<TABLE>
<CAPTION>
                                                                                    Holding Company              
                                                                         Pro Forma Consolidated Capitalization    
                                                                                 Based Upon the Sale of         
                                                              ------------------------------------------------------------
                                                              4,845,000        5,700,000         6,555,000      7,538,250
                                           Capitalization     Shares at        Shares at         Shares at      Shares at
                                               as of          $10.00           $10.00            $10.00         $10.00
                                         September 30, 1997   Per Share(1)     Per Share(1)      Per Share(1)   Per Share(2)
                                         ------------------   ------------     ------------      ------------   ----------
                                                                               (In thousands)
<S>                                      <C>                  <C>              <C>               <C>            <C>
Deposits(3)............................       $241,950        $  241,950       $  241,950        $  241,950     $  241,950
FHLB advances..........................             --                --               --                --             --
                                              --------        ----------       ----------        ----------     ----------
Total deposits and                                                                           
 borrowed funds........................       $241,950        $  241,950       $  241,950        $  241,950     $  241,950
                                              ========        ==========       ==========        ==========     ==========
                                                                                             
Stockholders' equity:                                                                        
                                                                                             
   Preferred stock:                                                                          
     250,000 shares, no                                                                      
     par value per share,                                                                    
     authorized; none issued                                                                 
     or outstanding....................       $     --        $       --       $       --        $       --     $       --
                                                                                             
   Common Stock:                                                                             
     49,750,000 shares, no par                                                               
     value per share, authorized;                                                            
     specified number of shares                                                              
     assumed to be issued and                                                                
     outstanding(4)....................             --            47,448           55,880            64,312         74,010
                                                                                             
   Additional paid-in capital..........             --                --               --                --             --
                                                                                             
   Retained earnings(5)................         29,508            29,508           29,508            29,508         29,508
   Less:                                                                                     
     Common Stock acquired                                                                   
      by ESOP(6).......................             --            (3,876)          (4,560)           (5,244)        (6,031)
     Common Stock to be acquired                                                             
       by MRP(7).......................             --            (1,938)          (2,280)           (2,622)        (3,015)
   Net unrealized losses on available                                                        
     for sale securities...............             (7)               (7)              (7)               (7)            (7)
                                              --------        ----------       ----------        ----------     ----------
Total stockholders' equity.............       $ 29,501        $   71,135       $   78,541        $   85,947     $   94,465
                                              ========        ==========       ==========        ==========     ==========
</TABLE>

                         (footnotes on following page)

                                       12
<PAGE>
 
- ---------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
    reflect material changes in the financial condition or results of operations
    of the Bank or changes in market conditions or general financial, economic
    and regulatory conditions, or the issuance of additional shares under the
    Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
    in the event the aggregate number of shares of Common Stock issued in the
    Stock Conversion is 15% above the maximum of the Estimated Valuation Range.
    See "PRO FORMA DATA" and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
    reflected.  Such withdrawals will reduce pro forma deposits by the amounts
    thereof.
(4) The Bank's authorized capital will consist solely of 1,000 shares of common
    stock, par value $1.00 per share, 1,000 shares of which will be issued to
    the Holding Company, and 9,000 shares of preferred stock, no par value per
    share, none of which will be issued in connection with the Stock Conversion.
(5) Retained earnings are substantially restricted by applicable regulatory
    capital requirements.  Additionally, the Bank will be prohibited from paying
    any dividend that would reduce its regulatory capital below the amount in
    the liquidation account, which will be established for the benefit of the
    Bank's Eligible Account Holders and Supplemental Eligible Account Holders at
    the time of the Stock Conversion and adjusted downward thereafter as such
    account holders reduce their balances or cease to be depositors.  See "THE
    CONVERSION -- Effects of Conversion to Stock Form on Depositors and
    Borrowers of the Bank -- Liquidation Account."
(6) Assumes that 8% of the Common Stock sold in the Stock Conversion will be
    acquired by the ESOP in the Stock Conversion with funds borrowed from the
    Holding Company.  Under generally accepted accounting principles ("GAAP"),
    the amount of Common Stock to be purchased by the ESOP represents unearned
    compensation and is, accordingly, reflected as a reduction of capital.  As
    shares are released to ESOP participants' accounts, a corresponding
    reduction in the charge against capital will occur.  Since the funds are
    borrowed from the Holding Company, the borrowing will be eliminated in
    consolidation and no liability will be reflected in the consolidated
    financial statements of the Holding Company.  See "MANAGEMENT OF THE BANK --
    Benefits -- Employee Stock Ownership Plan."
(7) Assumes the purchase in the open market at the Purchase Price, pursuant to
    the proposed MRP, of a number of shares equal to 4% of the shares of Common
    Stock issued in the Stock Conversion at the minimum, midpoint, maximum and
    15% above the maximum of the Estimated Valuation Range.  The issuance of an
    additional 4% of the shares of Common Stock for the MRP from authorized but
    unissued shares of Holding Company Common Stock would dilute the ownership
    interest of stockholders by 3.85%.  The shares are reflected as a reduction
    of stockholders' equity.  See "RISK FACTORS -- Possible Dilutive Effect of
    Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -- Benefits
    -- Management Recognition Plan."  The MRP is subject to stockholder
    approval, which is expected to be sought at a meeting to be held no earlier
    than six months following consummation of the Stock Conversion.

                                       13
<PAGE>
 
             HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

     The following tables set forth as of September 30, 1997, in order of
presentation, (i) the Bank's historical and pro forma capital compliance under
OTS regulatory capital requirements, (ii) the Bank's historical and pro forma
capital compliance under FDIC regulatory capital requirements that would apply
upon consummation of the Bank Conversion, and (iii) the Holding Company's pro
forma capital compliance under Federal Reserve regulatory capital requirements
that would apply upon consummation of the Bank Conversion. For purposes of the
following tables, (i) the amount of capital infused into the Bank is 50% of the
proceeds of the Offerings and (ii) the amount expected to be borrowed by the
ESOP and the cost of the shares of Common Stock expected to be acquired by the
MRP are deducted from pro forma regulatory capital. For additional information
regarding the financial condition of the Bank and the assumptions underlying the
pro forma capital calculations set forth below, see "USE OF PROCEEDS,"
CAPITALIZATION" and "PRO FORMA DATA" and the Consolidated Financial Statements
and related Notes appearing elsewhere herein.

                        OTS Regulatory Capital Compliance
<TABLE>
<CAPTION>

                                                                              PRO FORMA AT SEPTEMBER 30, 1997
                                                                   ------------------------------------------------------
                                                                      Minimum of Estimated      Midpoint of Estimated
                                                                        Valuation Range            Valuation Range
                                                                   -------------------------- ---------------------------
                                                                        4,845,000 Shares          5,700,000 Shares
                                       September 30, 1997             at $10.00 Per Share        at $10.00 Per Share
                                     ----------------------        -------------------------- ---------------------------
                                                Percent of                       Percent of                  Percent of
                                                 Adjusted                         Adjusted                    Adjusted
                                                  Total                            Total                       Total
                                     Amount      Assets (1)          Amount       Assets (1)    Amount        Assets (1)
                                     ------     -----------          ------      -----------    ------       -----------
                                                                      (Dollars in thousands)
<S>                                  <C>        <C>                 <C>          <C>           <C>           <C>
GAAP capital(2)..................    $29,501       10.7%            $47,411         15.9%      $50,601          16.8%
                                     =======       ====             =======         ====       =======          ====
                                                       
Tangible capital(2)..............    $29,508       10.8%            $47,418         16.1%      $50,608          17.0%
Tangible capital requirement.....      4,089        1.5               4,416          1.5         4,474           1.5
                                     -------       ----             -------         ----       -------          ----
Excess...........................    $25,419        9.3%            $43,002         14.6%      $46,134          15.5%
                                     =======       ====             =======         ====       =======          ====
                                                       
Core capital(2)..................    $29,508       10.8%            $47,418         16.1%      $50,608          17.0%
Core capital requirement(3)......      8,178        3.0               8,832          3.0         8,948           3.0
                                     -------       ----             -------         ----       -------          ----
Excess...........................    $21,330        7.8%            $38,586         13.1%      $41,660          14.0%
                                     =======       ====             =======         ====       =======          ====
                                                       
Risk-based capital...............    $32,309       13.1%            $50,219         20.0%      $53,409          21.2%
Risk-based                                             
 capital requirement.............     19,746        8.0              20,095          8.0        20,157           8.0
                                     -------       ----             -------         ----       -------          ----
Excess...........................    $12,563        5.1%            $30,124         12.0%      $33,252          13.2%
                                     =======       ====             =======         ====       =======          ====
<CAPTION>
                                                 PRO FORMA AT SEPTEMBER 30, 1997
                                      -------------------------------------------------------
                                                                          15% above
                                        Maximum of Estimated         Maximum of Estimated
                                          Valuation  Range              Valuation Range
                                      -------------------------    --------------------------
                                         6,555,000 Shares              7,538,250 Shares
                                        at $10.00 Per Share           at $10.00 Per Share
                                      -------------------------    --------------------------
                                                    Percent of                   Percent of    
                                                     Adjusted                    Adjusted      
                                                      Total                       Total        
                                       Amount        Assets (1)    Amount        Assets (1)    
                                       ------       -----------    ------       -----------    
                                                      (Dollars in thousands)                   
<S>                                   <C>           <C>           <C>           <C>            
GAAP capital(2)..................     $53,791          17.6%      $57,460          18.5%       
                                      =======          ====       =======          ====        
                                                                                               
Tangible capital(2)..............     $53,798          17.8%      $57,467          18.7%       
Tangible capital requirement.....       4,532           1.5         4,599           1.5        
                                      -------          ----       -------          ----        
Excess...........................     $49,266          16.3%      $52,868          17.2%       
                                      =======          ====       =======          ====        
                                                                                               
Core capital(2)..................     $53,798          17.8%      $57,467          18.7%       
Core capital requirement(3)......       9,064           3.0         9,198           3.0        
                                      -------          ----       -------          ----        
Excess...........................     $44,734          14.8%      $48,269          15.7%       
                                      =======          ====       =======          ====        
                                                                                               
Risk-based capital...............     $56,599          22.4%      $60,268          23.8%       
Risk-based                                                                                     
 capital requirement.............      20,219           8.0        20,290           8.0        
                                      -------          ----       -------          ----        
Excess...........................     $36,380          14.4%      $39,978          15.8%       
                                      =======          ====       =======          ====         
</TABLE>

                                      14
<PAGE>
 

                      FDIC Regulatory Capital Compliance

<TABLE> 
<CAPTION> 





                                                                   PRO FORMA AT SEPTEMBER 30, 1997
                                           ---------------------------------------------------------------------
                                                                  Minimum of Estimated     Midpoint of Estimated
                                                                    Valuation Range           Valuation Range
                                                                  --------------------     ---------------------
                                              Historical            4,845,000 Shares         5,700,000 Shares
                                        At September 30, 1997     at $10.00 Per Share       at $10.00 Per Share
                                     --------------------------   --------------------     ---------------------
                                                 Percent of                 Percent of               Percent of
                                                  Adjusted                   Adjusted                 Adjusted
                                                   Total                      Total                     Total
                                     Amount       Assets           Amount     Assets        Amount     Assets
                                     ------       ------           ------     ------        ------     ------
                                                                    (Dollars in thousands)
<S>                                  <C>         <C>              <C>       <C>            <C>       <C>  
GAAP capital.....................    $29,501       10.7%          $47,411     15.9%        $50,601      16.8%
                                     =======       ====           =======     ====         =======      ====

Tier 1 capital...................    $29,508       10.8%          $47,418     16.1%        $50,608      17.0%
Minimum Tier 1 (leverage)
 requirement.....................     10,904        4.0            11,776      4.0          11,931       4.0
                                     -------       ----           -------     ----         -------      ----

  Excess.........................    $18,604        6.8%          $35,642     12.1%        $38,677      13.0%
                                     =======        ===           =======     ====         =======      ====
</TABLE> 

<TABLE> 
<CAPTION> 

                                                  PRO FORMA AT SEPTEMBER 30, 1997
                                    ----------------------------------------------------
                                                                         15% above
                                          Maximum of Estimated      Maximum of Estimated
                                             Valuation Range           Valuation Range
                                          --------------------      --------------------
                                            6,555,000 Shares          7,538,250 Shares
                                          at $10.00 Per Share       at $10.00 Per Share
                                          --------------------      --------------------
                                                     Percent of               Percent of
                                                      Adjusted                 Adjusted
                                                       Total                     Total
                                          Amount       Assets      Amount       Assets
                                          ------       ------      ------       ------
<S>                                       <C>        <C>           <C>        <C> 
GAAP capital.....................         $53,791       17.6%      $57,460       18.5%
                                          =======       ====       =======       ====

Tier 1 capital...................         $53,798       17.8%      $57,467       18.7%
Minimum Tier 1 (leverage)
 requirement.....................          12,086        4.0        12,264        4.0
                                          -------       ----       -------       ----

  Excess.........................         $41,712       13.8%      $45,203       14.7%
                                          =======       ====       =======       ====
</TABLE> 




                 Federal Reserve Regulatory Capital Compliance

<TABLE> 
<CAPTION> 
                                               Historical
                                         At September 30, 1997                    PRO FORMA AT SEPTEMBER 30, 1997
                                       -------------------------- ----------------------------------------------------------
                                                 Percent of                 Percent of               Percent of
                                                Risk-weighted             Risk-weighted            Risk-weighted
                                     Amount        Assets      Amount         Assets    Amount        Assets      Amount
                                     ------        ------      ------         ------    ------        ------      ------
                                                                        (Dollars in thousands)
<S>                                  <C>          <C>         <C>          <C>         <C>         <C>           <C>   
Tier 1 capital...................    $29,508       12.0%      $71,142       27.8%      $78,548        30.5%      $85,954
Tier 1 (risk weighted) requirement     9,873        4.0        10,237        4.0        10,302         4.0        10,367
                                     -------       ----       -------       ----       -------        ----       -------
Excess...........................    $19,635        8.0%      $60,905       23.8%      $68,246        26.5%      $75,587
                                     =======        ===       =======       ====       =======        ====       =======

Total capital....................    $32,309       13.1%      $73,943       28.9%      $81,349        31.6%      $88,755
Total (risk weighted) requirement     19,746        8.0        20,475        8.0        20,604         8.0        20,733
                                     -------       ----       -------       ----       -------         ---       -------
Excess...........................    $12,563        5.1%      $53,468       20.9%      $60,745        23.6%      $68,022
                                     =======        ===       =======       ====       =======        ====       =======
</TABLE> 




<TABLE> 
<CAPTION> 

                                           PRO FORMA AT SEPTEMBER 30, 1997
                                       ----------------------------------------
                                         Percent of               Percent of
                                        Risk-weighted            Risk-weighted
                                           Assets      Amount       Assets
                                           ------      ------       ------
                                               (Dollars in thousands)
<S>                                    <C>           <C>          <C> 
Tier 1 capital...................          33.2%      $94,472       36.2%
Tier 1 (risk weighted) requirement          4.0        10,441        4.0
                                           ----       -------       ----
Excess...........................          29.2%      $84,031       32.2%
                                           ====       =======       ====

Total capital....................          34.2%      $97,273       37.3%
Total (risk weighted) requirement           8.0        20,882        8.0
                                           ----       -------       ----
Excess...........................          26.2%      $76,391       29.3%
                                           ====       =======       ====
</TABLE> 
- ---------------------

(1)  Based upon adjusted total assets of $272.6 million for purposes of the
     tangible capital and core capital requirements, and risk-weighted assets of
     $246.8 million for purposes of the risk-based capital requirement.
(2)  The current OTS core capital requirement for savings associations is 3% of
     total adjusted assets. The OTS has proposed core capital requirements which
     would require a core capital ratio of 3% of total adjusted assets for
     thrifts that receive the highest supervisory rating for safety and
     soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3)  Percentage represents total core and supplementary capital divided by total
     risk-weighted assets. Assumes net proceeds are invested in assets that
     carry a 20% risk-weighting.

                                       15
<PAGE>
 
                                 PRO FORMA DATA

     Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Bank, as converted, based upon an independent valuation.  The Estimated
Valuation Range as of November 7, 1997 is from a minimum of $48,450,000 to a
maximum of $65,550,000 with a midpoint of $57,000,000 or, at a price per share
of $10.00, a minimum number of shares of 4,845,000, a maximum number of shares
of 6,555,000 and a midpoint number of shares of 5,700,000.  The actual net
proceeds from the sale of the Common Stock cannot be determined until the Stock
Conversion is completed.  However, net proceeds set forth on the following table
are based upon the following assumptions: (i) Trident Securities will receive
fees of $414,000, $532,000, $650,000 and $785,000 at the minimum, midpoint,
maximum and 15% above the Estimated Valuation Range, respectively (see "THE
CONVERSION -- Plan of Distribution for the Subscription, Direct Community and
Syndicated Community Offerings"); (ii) all of the Common Stock will be sold in
the Subscription and Direct Community Offerings; and (iii) Conversion expenses,
excluding the fees paid to Trident Securities, will total approximately $588,000
at each of the minimum, midpoint, maximum and 15% above the Estimated Valuation
Range.  Actual expenses may vary from this estimate, and the fees paid will
depend upon the percentages and total number of shares sold in the Subscription,
Direct Community and Syndicated Community Offerings and other factors.

     The pro forma consolidated net income of the Bank for the nine months ended
September 30, 1997 and the year ended December 31, 1996 have been calculated as
if the Conversion had been consummated at the beginning of the respective
periods and the estimated net proceeds received by the Holding Company and the
Bank had been invested at 5.45% and 5.50% at the beginning of the respective
periods, which represent the yield on the one year Treasury Bill as of September
30, 1997 and December 31, 1996, respectively.  Although OTS regulations require
the use of the arithmetic average of the average yield on all interest-earning
assets and the average rate paid on all deposits in computing investment returns
on net proceeds, the yield on the one year U.S. Treasury Bill is used because
management believes it more appropriately reflects a market rate of return.  As
discussed under "USE OF PROCEEDS," the Holding Company expects to retain 50% of
the net proceeds of the Offerings from which it will fund the ESOP loan.  A pro
forma after-tax return of 3.38% and 3.41% are used for both the Holding Company
and the Bank for the periods, after giving effect to an incremental combined
federal and state income tax rate of 38% for both periods.  Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the number of shares of Common Stock indicated in the footnotes
to the table.  Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the respective periods or at September 30,
1997 or December 31, 1996, but without any adjustment of per share historical or
pro forma stockholders' equity to reflect the earnings on the estimated net
proceeds.

     The following tables summarize the historical net income and retained
earnings of the Bank and the pro forma consolidated net income and stockholders'
equity of the Holding Company for the periods and at the dates indicated, based
on the minimum, midpoint and maximum of the Estimated Valuation Range and based
on a 15% increase in the maximum of the Estimated Valuation Range.  No effect
has been given to: (i) the shares to be reserved for issuance under the Holding
Company's Stock Option Plan, which is expected to be voted upon by stockholders
at a meeting to be held no earlier than six months following consummation of the
Stock Conversion; (ii) withdrawals from deposit accounts for the purpose of
purchasing Common Stock in the Stock Conversion; (iii) the issuance of shares
from authorized but unissued shares to the MRP, which is expected to be voted
upon by stockholders at a meeting to be held no earlier than six months
following consummation of the Stock Conversion; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders.  See "MANAGEMENT OF THE BANK -- Benefits -- Stock
Option Plan" and "THE CONVERSION -- Stock Pricing and Number of Shares Issued."
Shares of Common Stock may be purchased with funds on deposit at the Bank, which
will reduce deposits by the amounts of such purchases.  Accordingly, the net
amount of funds available for investment will be reduced by the amount of
deposit withdrawals used to fund stock purchases.

     The following pro forma information may not be representative of the
financial effects of the Conversion at the date on which the Conversion actually
occurs and should not be taken as indicative of future results of operations.
Stockholders' equity represents the difference between the stated amounts of
consolidated assets and liabilities of the Holding Company computed in
accordance with GAAP.  Stockholders' equity has not been increased or decreased
to reflect the difference between the carrying value of loans and other assets
and market value.  Stockholders' equity is not intended to represent fair market
value nor does it represent amounts that would be available for distribution to
stockholders in the event of liquidation.

                                       16
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                         At or For the Nine Months Ended September 30, 1997          
                                                     ----------------------------------------------------------      
                                                     Minimum of      Midpoint of      Maximum of      15% Above      
                                                     Estimated       Estimated        Estimated       Maximum of     
                                                     Valuation       Valuation        Valuation       Estimated      
                                                     Range           Range            Range           Valuation Range
                                                     ----------      -----------      ----------      ---------------
                                                     4,845,000       5,700,000        6,555,000       7,538,250(1)   
                                                     Shares          Shares           Shares          Shares         
                                                     at $10.00       at $10.00        at $10.00       at $10.00      
                                                     Per Share       Per Share        Per Share       Per Share      
                                                     ---------       ---------        ---------       ---------      
                                                              (In Thousands, Except Per Share Amounts)               
<S>                                                  <C>             <C>               <C>            <C>            
Gross proceeds...................................    $48,450         $57,000           $65,550        $75,383        
Less: estimated expenses.........................     (1,002)         (1,120)           (1,238)        (1,373)       
                                                     --------        --------          --------       --------       
Estimated net proceeds...........................     47,448          55,880            64,312         74,010        
Less: Common Stock acquired by ESOP .............     (3,876)         (4,560)           (5,244)        (6,031)       
Less: Common Stock to be acquired by MRP ........     (1,938)         (2,280)           (2,622)        (3,015)       
                                                     --------        --------          --------       --------       
     Net investable proceeds.....................    $41,634         $49,040           $56,446        $64,964        
                                                     =======         =======           =======        =======        
                                                                                                                     
Consolidated net earnings:                                                                                           
 Historical......................................    $ 2,258         $ 2,258           $ 2,258        $ 2,258        
 Pro forma income on net proceeds(2).............      1,055           1,243             1,430          1,646        
 Pro forma ESOP adjustments(3)...................       (150)           (177)             (203)          (234)       
 Pro forma MRP adjustments(4)....................       (180)           (212)             (244)          (280)       
                                                     --------        --------          --------       --------       
   Pro forma net earnings........................    $ 2,983         $ 3,112           $ 3,241        $ 3,390        
                                                     =======         =======           =======        =======        
                                                                                                                     
Consolidated net earnings per share (5)(6):                                                                          
 Historical......................................    $  0.50         $  0.43           $  0.37        $  0.32        
 Pro forma income on net proceeds................       0.23            0.23              0.23           0.24        
 Pro forma ESOP adjustments(3)...................      (0.03)          (0.03)            (0.03)         (0.03)       
 Pro forma MRP adjustments(4)....................      (0.04)          (0.04)            (0.04)         (0.04)       
                                                     --------        --------          --------       --------       
   Pro forma net earnings per share..............    $  0.66         $  0.59           $  0.53        $  0.49        
                                                     =======         =======           =======        =======        
                                                                                                                     
Consolidated stockholders' equity (book value):                                                                      
 Historical......................................    $29,501         $29,501           $29,501        $29,501        
 Estimated net proceeds..........................     47,448          55,880            64,312         74,010        
 Less: Common Stock acquired by ESOP.............     (3,876)         (4,560)           (5,244)        (6,031)       
 Less: Common Stock to be acquired by MRP(4).....     (1,938)         (2,280)           (2,622)        (3,015)       
                                                     --------        --------          --------       --------       
   Pro forma stockholders' equity(7).............    $71,135         $78,541           $85,947        $94,465        
                                                     =======         =======           =======        =======        
                                                                                                                     
Consolidated stockholders' equity per share(6)(8):                                                                   
 Historical(6)...................................    $  6.09         $  5.18           $  4.50        $  3.91        
 Estimated net proceeds..........................       9.79            9.80              9.81           9.82        
 Less: Common Stock acquired by ESOP.............      (0.80)          (0.80)            (0.80)         (0.80)       
 Less: Common Stock to be acquired by MRP(4).....      (0.40)          (0.40)            (0.40)         (0.40)       
                                                     --------        --------          --------       --------       
   Pro forma stockholders' equity per share(9)...    $ 14.68         $ 13.78           $ 13.11        $ 12.53        
                                                     =======         =======           =======        =======        
                                                                                                                     
Purchase Price as a percentage of pro forma                                                                          
 stockholders' equity per share..................       68.1%           72.6%             76.3%          79.8%       
                                                        ====            ====              ====           ====        
                                                                                                                     
Purchase Price as a multiple of pro forma                                                                            
 net earnings per share..........................       11.4x           12.7x             14.1x          15.4x       
                                                        ====            ====              ====           ====         
</TABLE> 
                      (footnotes on second following page)

                                      17

<PAGE>
 
<TABLE> 
<CAPTION> 

 
                                                          At or For the Year Ended December 31, 1996
                                                  ----------------------------------------------------------
                                                  Minimum of      Midpoint of      Maximum of      15% Above
                                                  Estimated       Estimated        Estimated       Maximum of
                                                  Valuation       Valuation        Valuation       Estimated
                                                  Range           Range            Range           Valuation Range
                                                  ---------       ---------        ---------       ---------------
                                                  4,845,000       5,700,000        6,555,000       7,538,250(1)
                                                  Shares          Shares           Shares          Shares
                                                  at $10.00       at $10.00        at $10.00       at $10.00
                                                  Per Share       Per Share        Per Share       Per Share
                                                  ---------       ---------        ---------       ----------
                                                            (In Thousands, Except Per Share Amounts)

<S>                                               <C>             <C>              <C>            <C>   
Gross proceeds................................... $48,450         $57,000           $65,550        $75,383
Less: estimated expenses.........................  (1,002)         (1,120)           (1,238)        (1,373)
                                                  --------        --------          --------       --------
Estimated net proceeds...........................  47,448          55,880            64,312         74,010
Less: Common Stock acquired by ESOP .............  (3,876)         (4,560)           (5,244)        (6,031)
Less: Common Stock to be acquired by MRP.........  (1,938)         (2,280)           (2,622)        (3,015)
                                                  --------        --------          --------       --------
     Net investable proceeds..................... $41,634         $49,040           $56,446        $64,964
                                                  =======         =======           =======        =======

Consolidated net earnings:
 Historical...................................... $ 2,814         $ 2,814           $ 2,814        $ 2,814
 Pro forma income on net proceeds(2).............   1,420           1,672             1,925          2,215
 Pro forma ESOP adjustments(3)...................    (200)           (236)             (271)          (312)
 Pro forma MRP adjustments(4)....................    (240)           (283)             (325)          (374)
                                                  --------        --------          --------       --------
   Pro forma net earnings........................ $ 3,794         $ 3,967           $ 4,143        $ 4,343
                                                  =======         =======           =======        =======

Consolidated net earnings per share (5)(6):
 Historical...................................... $  0.62         $  0.53           $  0.46        $  0.40
 Pro forma income on net proceeds................    0.32            0.32              0.32           0.32
 Pro forma ESOP adjustments(3)...................   (0.05)          (0.05)            (0.05)         (0.05)
 Pro forma MRP adjustments(4)....................   (0.05)          (0.05)            (0.05)         (0.05)
                                                  --------        --------          --------       --------
   Pro forma net earnings per share.............. $  0.84         $  0.75           $  0.68        $  0.62
                                                  =======         =======           =======        =======

Consolidated stockholders' equity (book value):
 Historical...................................... $27,250         $27,250           $27,250        $27,250
 Estimated net proceeds..........................  47,448          55,880            64,312         74,010
 Less: Common Stock acquired by ESOP.............  (3,876)         (4,560)           (5,244)        (6,031)
 Less: Common Stock to be acquired by MRP(4).....  (1,938)         (2,280)           (2,622)        (3,015)
                                                  --------        --------          --------       --------
   Pro forma stockholders' equity(7)............. $68,884         $76,290           $83,696        $92,214
                                                  =======         =======           =======        =======

Consolidated stockholders' equity per share(6)(8):
 Historical(6)................................... $  5.62         $  4.78           $  4.16        $  3.61
 Estimated net proceeds..........................    9.79            9.80              9.81           9.82
 Less: Common Stock acquired by ESOP.............   (0.80)          (0.80)            (0.80)         (0.80)
 Less: Common Stock to be acquired by MRP(4).....   (0.40)          (0.40)            (0.40)         (0.40)
                                                  --------        --------          --------       --------
   Pro forma stockholders' equity per share(9)... $ 14.21         $ 13.38           $ 12.77        $ 12.23
                                                  =======         =======           =======        =======

Purchase Price as a percentage of pro forma
 stockholders' equity per share..................    70.3%           74.7%             78.3%          81.7%
                                                     ====            ====              ====           ====

Purchase Price as a multiple of pro forma
 net earnings per share..........................    11.9x           13.3x             14.7x          16.1x
                                                     ====            ====              ====           ====
</TABLE> 
                         (footnotes on following page)


                                      18
<PAGE>
 
- -------------------
(1) Gives effect to the sale of an additional 983,250 shares in the Stock
    Conversion, which may be issued to cover an increase in the pro forma market
    value of the Holding Company and the Bank, as converted, without the
    resolicitation of subscribers or any right of cancellation.  The issuance of
    such additional shares will be conditioned on a determination by Ferguson
    that such issuance is compatible with its determination of the estimated pro
    forma market value of the Holding Company and the Bank, as converted.  See
    "THE CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
    purpose of purchasing Common Stock in the Stock Conversion.  Since funds on
    deposit at the Bank may be withdrawn to purchase shares of Common Stock
    (which will reduce deposits by the amount of such purchases), the net amount
    of funds available to the Bank for investment following receipt of the net
    proceeds of the Offerings will be reduced by the amount of such withdrawals.
(3) It is assumed that 8% of the shares of Common Stock offered in the Stock
    Conversion will be purchased by the ESOP.  The funds used to acquire such
    shares will be borrowed by the ESOP (at an interest rate equal to the prime
    rate as published in The Wall Street Journal on the closing date of the
    Stock Conversion, which rate is currently 8.5%) from the net proceeds from
    the Offerings retained by the Holding Company.  The amount of this borrowing
    has been reflected as a reduction from gross proceeds to determine estimated
    net investable proceeds.  The Bank intends to make contributions to the ESOP
    in amounts at least equal to the principal and interest requirement of the
    debt.  As the debt is paid down, stockholders' equity will be increased.
    The Bank's payment of the ESOP debt is based upon equal installments of
    principal over a 12-year period, assuming a combined federal and state
    income tax rate of 38%.  Interest income earned by the Holding Company on
    the ESOP debt offsets the interest paid by the Bank on the ESOP loan.  No
    reinvestment is assumed on proceeds contributed to fund the ESOP.  The ESOP
    expense reflects adoption of Statement of Position ("SOP") 93-6, which will
    require recognition of expense based upon shares committed to be released
    and the exclusion of unallocated shares from earnings per share
    computations.  The valuation of shares committed to be released would be
    based upon the average market value of the shares during the year, which,
    for purposes of this calculation, was assumed to be equal to the $10.00 per
    share Purchase Price.  See "MANAGEMENT OF THE BANK -- Benefits -- Employee
    Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
    required stockholder approval has been received, that the shares were
    acquired by the MRP at the beginning of the period presented in open market
    purchases at the Purchase Price, that 20% of the amount contributed was an
    amortized expense during such period, and that the combined federal and
    state income tax rate is 38%.  The issuance of authorized but unissued
    shares of the Common Stock instead of open market purchases would dilute the
    voting interests of existing stockholders by approximately 3.85% and pro
    forma net income per share would be $0.65, $0.58, $0.52 and $0.48 at the
    minimum, midpoint, maximum and 15% above the maximum of the Estimated
    Valuation Range for the nine months ended September 30, 1997, respectively,
    and $0.82, $0.73, $0.67 and $0.61 at the minimum, midpoint, maximum and 15%
    above the maximum of the Estimated Valuation Range for the year ended
    December 31, 1996, respectively, and pro forma stockholders' equity per
    share would be $14.50, $13.63, $12.99 and $12.43 at the minimum, midpoint,
    maximum and 15% above the maximum of the Estimated Valuation Range at
    September 30, 1997, respectively, and $14.06, $13.25, $12.66 and $12.15 at
    the minimum, midpoint, maximum and 15% above the maximum of the Estimated
    Valuation Range at December 31, 1996, respectively.  Shares issued under the
    MRP vest 20% per year and, for purposes of this table, compensation expense
    is recognized on a straight-line basis over each vesting period.  In the
    event the fair market value per share is greater than $10.00 per share on
    the date shares are awarded under the MRP, total MRP expense would increase.
    The total estimated MRP expense was multiplied by 20% (the total percent of
    shares for which expense is recognized in the first year) resulting in
    after-tax MRP expense of $180,234, $212,040, $243,846 and $280,423 at the
    minimum, midpoint, maximum and 15% above the maximum of the Estimated
    Valuation Range for the nine months ended September 30, 1997, respectively,
    and $240,312, $282,720, $325,128 and $373,897 at the minimum, midpoint,
    maximum and 15% above the maximum of the Estimated Valuation Range for the
    year ended December 31, 1996, respectively.  No effect has been given to the
    shares reserved for issuance under the proposed Stock Option Plan.  If
    stockholders approve the Stock Option Plan following the

                                       19
<PAGE>
 
    Stock Conversion, the Holding Company will have reserved for issuance under
    the Stock Option Plan authorized but unissued shares of Common Stock
    representing an amount of shares equal to 10% of the shares sold in the
    Stock Conversion.  If all of the options were to be exercised utilizing
    these authorized but unissued shares rather than treasury shares which could
    be acquired, the voting and ownership interests of existing stockholders
    would be diluted by approximately 9.1%.  Assuming stockholder approval of
    the Stock Option Plan and that all options were exercised at the beginning
    of the nine months ended September 30, 1997 and the year ended December 31,
    1996, respectively, at an exercise price of $10.00 per share, pro forma net
    earnings per share would be $0.62, $0.56, $0.51 and $0.46, respectively, for
    the nine months ended September 30, 1997, and $0.80, $0.71, $0.65 and $0.59,
    respectively, for the year ended December 31, 1996, and pro forma
    stockholders' equity per share would be $14.26, $13.44, $12.83 and $12.30,
    respectively, for the nine months ended September 30, 1997, and $13.83,
    $13.08, $12.52 and $12.03, respectively, for the year ended December 31,
    1996 at the minimum, midpoint, maximum and 15% above the maximum of the
    Estimated Valuation Range.  See "MANAGEMENT OF THE BANK -- Benefits -- Stock
    Option Plan" and "-- Benefits -- Management Recognition Plan" and "RISK
    FACTORS -- Possible Dilutive Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 4,489,700, 5,282,000,
    6,074,300 and 6,985,445 at the minimum, midpoint, maximum and 15% above the
    maximum of the Estimated Valuation Range for the nine months ended September
    30, 1997, and the year ended December 31, 1996, respectively, which includes
    the shares of Common Stock sold in the Stock Conversion less the number of
    shares assumed to be held by the ESOP not committed to be released within
    the first year following the Stock Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
    Stock expected to be issued in the Stock Conversion had been outstanding at
    the beginning of the period or on the date shown, but without any adjustment
    of historical net income or historical retained earnings to reflect the
    investment of the estimated net proceeds of the sale of shares in the Stock
    Conversion, the additional ESOP expense or the proposed MRP expense, as
    described above.
(7) "Book value" represents the difference between the stated amounts of the
    Bank's assets and liabilities.  The amounts shown do not reflect the
    liquidation account which will be established for the benefit of Eligible
    Account Holders and Supplemental Eligible Account Holders in the Stock
    Conversion, or the federal income tax consequences of the restoration to
    income of the Bank's special bad debt reserves for income tax purposes which
    would be required in the unlikely event of liquidation.  See "THE CONVERSION
    -- Effects of Conversion to Stock Form on Depositors and Borrowers of the
    Bank" and "TAXATION."  The amounts shown for book value do not represent
    fair market values or amounts distributable to stockholders in the unlikely
    event of liquidation.
(8) Per share amounts are based upon shares outstanding of 4,845,000, 5,700,000,
    6,555,000 and 7,538,250 at the minimum, midpoint, maximum and 15% above the
    maximum of the Estimated Valuation Range, respectively.
(9) Does not represent possible future price appreciation or depreciation of the
    Common Stock.

                                       20
<PAGE>
 
      SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS

         The following table sets forth certain information as to the
approximate purchases of Common Stock by each director and executive officer of
the Bank, including their associates, as defined by applicable regulations. No
individual has entered into a binding agreement with respect to such intended
purchases, and, therefore, actual purchases could be more or less than indicated
below. Directors and officers of the Bank and their associates may not purchase
in excess of 30% of the shares sold in the Stock Conversion. For purposes of the
following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers and employees will
pay the same price for the shares for which they subscribe as the price that
will be paid by all other subscribers.

<TABLE> 
<CAPTION> 
                                                                                   Percent of          Percent of
                                                Anticipated       Anticipated       Shares at           Shares at
                                                 Number of          Dollar         Minimum of          Maximum of
     Name and                                     Shares            Amount          Estimated           Estimated
     Position                                  Purchased (1)       Purchased     Valuation Range     Valuation Range
     --------                                 --------------       ---------     ---------------     ---------------
<S>                                           <C>                 <C>            <C>                 <C> 
William H. Huddleston, III
 Chairman of the Board                            65,550           $655,500           1.4%                 1.0%

Ed C. Loughry, Jr.
 President, Chief Executive Officer
 and Director                                     65,550            655,500           1.4                  1.0

Ronald F. Knight
 Executive Vice President, Chief
 Operating Officer and Director                   65,550            655,500           1.4                  1.0

Gary Brown
 Vice Chairman of the Board                       65,550            655,500           1.4                  1.0

Frank E. Crosslin, Jr.
 Director                                         65,550            655,500           1.4                  1.0

Tim J. Durham
 Director                                         65,550            655,500           1.4                  1.0

Ed Elam
 Director                                         65,550            655,500           1.4                  1.0

James C. Cope
 Director                                         65,550            655,500           1.4                  1.0

Terry G. Haynes
 Director                                         65,550            655,500           1.4                  1.0

Hillard C. "Bud" Gardner
 Senior Vice President and Chief
 Financial Officer                                65,550            655,500           1.4                  1.0

</TABLE> 

                       (table continued on following page)

                                      21

<PAGE>
 

<TABLE> 
<CAPTION> 
                                                                                   Percent of          Percent of
                                                Anticipated       Anticipated       Shares at           Shares at
                                                 Number of          Dollar         Minimum of          Maximum of
     Name and                                     Shares            Amount          Estimated           Estimated
     Position                                  Purchased (1)       Purchased     Valuation Range     Valuation Range
     --------                                 --------------       ---------     ---------------     ---------------
<S>                                           <C>                 <C>            <C>                 <C> 
William S. Jones
 Senior Vice President and Trust
 Officer/Investor Relations                       65,550        $   655,500            1.4%               1.0%

David W. Hopper
 Senior Vice President and Trust Officer          65,550            655,500            1.4                1.0

R. Dale Floyd
 Senior Vice President                            65,550            655,500            1.4                1.0

Ira B. Lewis, Jr.
 Vice President/CRA Compliance Officer
 and Secretary                                    65,550            655,500            1.4                1.0

M. Glenn Layne
 Vice President                                   65,550            655,500            1.4                1.0

Joy B. Jobe
 Vice President                                   65,550            655,500            1.4                1.0

Other officers (14 persons)                      282,950          2,829,500            5.8                4.3
                                              ----------        -----------          -----              -----

     Total                                     1,331,750        $13,317,500           27.5%              20.3%
                                              ==========        ===========          =====              =====
</TABLE> 
- --------------------
(1)  Excludes any shares awarded pursuant to the ESOP and MRP and options to
     acquire shares pursuant to the Stock Option Plan. For a description of the
     number of shares to be purchased by the ESOP and intended awards under the
     MRP and Stock Option Plan, see "MANAGEMENT OF THE BANK -- Benefits --
     Employee Stock Ownership Plan," "-- Benefits -- Stock Option Plan" and "--
     Benefits -- Management Recognition Plan."

                                      22
<PAGE>
 
                        CAVALRY BANKING AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS

     The following Consolidated Statements of Earnings of Cavalry Banking and
Subsidiaries for the fiscal years ended December 31, 1996, 1995 and 1994 have
been audited by Rayburn, Betts & Bates, P.C., Nashville, Tennessee, independent
auditors, whose report thereon appears elsewhere in this Prospectus.  The
Consolidated Statements of Earnings for the nine months ended September 30, 1997
and 1996 were not audited by Rayburn, Betts & Bates, P.C., but, in the opinion
of management, reflect all adjustments (none of which are other than normal
recurring entries) necessary for a fair presentation.  The results of operations
for the nine months ended September 30, 1997 are not necessarily indicative of
the results of operations that may be expected for the entire fiscal year.
These statements should be read in conjunction with the Consolidated Financial
Statements and related Notes included elsewhere herein.

<TABLE>
<CAPTION>
                                       Nine Months
                                   Ended September 30,   Years Ended December 31,
                                   -------------------  --------------------------
                                     1997       1996      1996     1995     1994
                                   ---------  --------  --------  -------  -------
                                       (Unaudited)
                                                   (In thousands)
<S>                                <C>        <C>       <C>       <C>      <C>
Interest and dividend income:
 First mortgage loans............    $ 9,312   $ 8,446   $11,516  $ 9,996  $ 9,378
 Other loans.....................      5,750     4,410     6,165    4,904    4,503
 Investment securities...........        399     1,114     1,338    1,601    1,088
 Deposits with other financial
  institutions...................        629       332       464      612      339
 Mortgage-backed securities......         70        78       101      109       86
                                     -------   -------   -------  -------  -------
    Total interest income........     16,160    14,380    19,584   17,222   15,394
                                     -------   -------   -------  -------  -------
 
Interest expense - deposits......      6,815     6,117     8,232    7,640    6,180
Interest expense - Advances from
 Federal Home Loan Bank..........         --        --        36       56      119
                                     -------   -------   -------  -------  -------
    Total interest expense.......      6,815     6,117     8,268    7,696    6,299
                                     -------   -------   -------  -------  -------
 
    Net interest income..........      9,345     8,263    11,316    9,526    9,095
 
Provision for loan losses 
 (note 5)........................        700        90       120       80      113
                                     -------   -------   -------  -------  -------
 
    Net interest income after
     provision for loan losses...      8,645     8,173    11,196    9,446    8,982
                                     -------   -------   -------  -------  -------
 
Noninterest income:
 Servicing income................        398       411       548      658      375
 Gain on sale of real estate
  acquired in settlement of 
  loans, net.....................         --         7        11       23       18
 Gain on sale of loans, net......        674       733       890      882      530
 Gain on sale of office
  properties and equipment.......         --        --        40       --       --
 Deposit servicing fees and
  charges........................        854       702       973      796      643
 Trust service fees..............        435       349       483      375      302
 Other operating income..........        153       111       213      230      147
                                     -------   -------   -------  -------  -------
     Total noninterest income....      2,514     2,313     3,158    2,964    2,015
                                     -------   -------   -------  -------  -------
 
Noninterest expenses:
 Compensation payroll taxes and
  fringe benefits (note 12)......      4,081     3,454     4,661    3,889    3,774
 Occupancy expense...............        404       355       493      459      417
 Supplies, communications and
  other office expenses..........        468       413       567      615      460
 Federal insurance premiums
  (note 18)......................         76     1,537     1,654      418      423
 Advertising expense.............        145       142       201      166      122
 Equipment and service bureau
  expense........................      1,452     1,082     1,466    1,241    1,073
 State and other taxes...........        261       149       200      180      170
 Other operating expenses........        467       385       544      530      562
                                     -------   -------   -------  -------  -------
     Total noninterest expenses..      7,354     7,517     9,786    7,498    7,001
                                     -------   -------   -------  -------  -------
 
Earnings before income tax
 expense.........................      3,805     2,969     4,568    4,912    3,996
 
Income tax expense (note 11).....      1,547     1,129     1,754    1,711    1,538
                                     -------   -------   -------  -------  -------
 
     Net earnings................    $ 2,258   $ 1,840   $ 2,814  $ 3,201  $ 2,458
                                     =======   =======   =======  =======  =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       23
<PAGE>
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

General

          Management's discussion and analysis of financial condition and
results of operations is intended to assist in understanding the financial
condition and results of operations of the Bank.  The information contained in
this section should be read in conjunction with the Consolidated Financial
Statements and accompanying Notes thereto and the other sections contained in
this Prospectus.

Operating Strategy

          The Bank is a community-oriented financial institution whose primary
business is attracting deposits from the general public and using those funds to
originate a variety of loans to individuals residing within its primary market
area, and to businesses owned and operated by such individuals.  The Bank
believes that its operations more closely resemble those of a traditional
commercial bank than a traditional thrift institution.  The Bank originates, in
order of magnitude, one- to- four family mortgage loans, construction loans,
commercial real estate loans, consumer loans, commercial business loans, and
land A&D loans.  In addition, the Bank invests in U.S. Government and federal
agency obligations.  The Bank intends to continue to fund its assets primarily
with retail deposits, although FHLB-Cincinnati advances may be used as a
supplemental source of funds.  The Bank also offers trust services.  See
"CAVALRY BANKING."

          The Bank's profitability depends primarily on its net interest income,
which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits.  Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities.  When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income.  The Bank profitability is also
affected by the level of other income and expenses.  Other income, net, includes
income associated with the origination and sale of mortgage loans, loan
servicing fees, other deposit related fees and trust fees.  Other expenses
include compensation and benefits, occupancy and equipment expenses, deposit
insurance premiums, data servicing expenses and other operating costs.  The
Bank's results of operations are also significantly affected by general economic
and competitive conditions, particularly changes in market interest rates,
government legislation and regulation and monetary and fiscal policies.

          The Bank's business strategy is to operate as a well-capitalized,
profitable and independent financial institution dedicated to a community-
oriented approach that emphasizes management involvement with customers and the
community at large, local decision-making and quality customer service.
Management believes that it can best serve an important segment of the
marketplace and enhance the long-term value of the Holding Company by operating
independently and continuing with and expanding its community-oriented approach,
especially in light of recent consolidations of thrift institutions with large
regional commercial banks in the Bank's market area.

          The Bank believes that it has successfully implemented its business
strategy by: (i) maintaining a strong capital base (see "HISTORICAL AND PRO
FORMA REGULATORY CAPITAL COMPLIANCE"); (ii) seeking to reduce its exposure to
fluctuations in market interest rates (see "-- Asset and Liability Management");
(iii) promoting local loan originations (see "BUSINESS OF THE BANK -- Lending
Activities -- General"); (iv) supplementing its traditional menu of mortgage
loan products with a variety of consumer and commercial loan products (see
"BUSINESS OF THE BANK -- Lending Activities -- Commercial Real Estate Lending,"
"-- Commercial Business Lending," and "-- Consumer Lending"); (v) providing
check imaging services and offering commercial deposit accounts to complement
its commercial real estate and commercial business lending activities (see
"BUSINESS OF THE BANK -- Deposit Activities and Other Sources of Funds"); (vi)
expanding its branch office network (see "BUSINESS OF THE BANK -- Properties");
(vii) seeking to increase its portfolio of loans serviced for others (see
"BUSINESS OF THE BANK -- Lending Activities -- Loan Fees"); and (viii) seeking
to

                                       24
<PAGE>
 
increase its trust assets under management (see "BUSINESS OF THE BANK -- Trust
Powers").  The Bank believes that the capital raised in the Offerings will
enhance its ability to continue implementing its business strategy.

Comparison of Financial Condition at September 30, 1997, December 31, 1996 and
December 31, 1995

          Total assets were $275.9 million, $245.0 million and $223.9 million at
September 30, 1997, December 31, 1996 and December 31, 1995, respectively.  This
increase resulted primarily from growth in the loan portfolio, which was funded
primarily by deposit growth.

          Loans receivable, net, amounted to $216.4 million, $200.6 million and
$159.9 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.  A substantial portion of the Bank's loan portfolio is secured by
real estate, either as primary or secondary collateral, located in its primary
market area.  There are certain risks associated with this credit concentration.
See "RISK FACTORS -- Certain Lending Risks -- Geographic Concentration of Credit
Risk."  In addition, the period between December 31, 1995 and September 30, 1997
saw a continuing trend in the growth of the construction commercial and consumer
loan portfolios as the Bank emphasized the origination of loans with shorter
maturities for asset and liability management purposes.  See "-- Asset and
Liability Management."  Construction, commercial real estate, commercial
business and consumer loans are inherently riskier than one- to- four family
mortgage loans.  See "RISK FACTORS -- Certain Lending Risks" and "BUSINESS OF
THE BANK -- Lending Activities."

          Loans held-for-sale were $4.1 million, $5.3 million and $3.7 million
at September 30, 1997, December 31, 1996 and December 31, 1995, respectively.
The variances resulted primarily from timing differences in the funding of
loans.

          Cash and cash equivalents amounted to $26.7 million, $19.5 million and
$13.9 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.  The increase between December 31, 1995 and September 30, 1997
reflects proceeds from the maturity of investment securities, and, to a lesser
extent, deposit growth.  See "-- Liquidity and Capital Resources."

          Investment securities held-to-maturity were $3.7 million, $7.7 million
and $35.6 million at September 30, 1997, December 31, 1996 and December 31,
1995, respectively.  The decrease between December 31, 1995 and September 30,
1997 resulted from maturities, with the proceeds used to fund loan growth.

          Investment securities available-for-sale were $10.1 million at
September 30, 1997.  There were no investment securities available-for-sale at
December 31, 1996 and December 31, 1995.  The increase between December 31, 1996
and September 30, 1997 reflected the investment of excess liquidity.  Such
securities may be sold for lending or other operating purposes.

          Office properties and equipment, net, were $7.9 million, $6.2 million
and $5.3 million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.  The increase between December 31, 1996 and 1995 resulted
primarily from the acquisition of land for the construction of the Cason Lane
and Southeast Broad branch offices,  expansion of the Memorial Boulevard office,
and the purchase of the building and property for the Hazelwood branch.  During
1996, the Bank also upgraded its computer hardware and software.  The increase
from December 31, 1996 to September 30, 1997 resulted from the continuation of
the computer hardware and software upgrade project, the construction and opening
of the Cason Lane office, the purchase of two parcels of land for possible
branch locations and starting construction on the Southeast Broad office.
Construction in progress was $165,000 at December 31, 1995 and was related to
the expansion of the Memorial office.  The construction was completed in March
1996 at a total cost of $194,000.  Construction in progress was $8,000 at
December 31, 1996 and was related to the construction of the Carson lane branch
office.  The construction was completed in July 1997 at a total cost of
$378,000.  Construction in progress was $144,000 at September 30, 1997 and was
related to the construction of a new branch office on Southeast Broad Street.
This new branch office was opened in December 1997 at a total cost of $422,000.
See "RECENT DEVELOPMENTS" and "BUSINESS OF THE BANK -- Properties."

                                       25
<PAGE>
 
          Deposit accounts totaled $242.0 million, $214.5 million and $196.7
million at September 30, 1997, December 31, 1996 and December 31, 1995,
respectively.  The increases between September 30, 1997, December 31, 1996 and
December 31, 1995 were the result of aggressive marketing and promotion of
transaction accounts.  See "BUSINESS OF THE BANK -- Deposit Activities and Other
Sources of Funds."

          Total equity was $29.5 million, $27.3 million and $24.4 million at
September 30, 1997, December  31, 1996 and December 31, 1995, respectively.
These increases were primarily the result of retained earnings.

Comparison of Operating Results for the Nine Months Ended September 30, 1997 and
1996

          Net Earnings.  Net earnings were $2.3 million for the nine months
ended September 30, 1997 compared to $1.8 million for the nine months ended
September 30, 1996, a 22.7% increase, attributed primarily to an increase in
interest income, offset by increases in interest expense and an increase in the
provision for loan losses.

          Net Interest Income.  Net interest income increased 12.0% from $8.3
million for the nine months ended September 30, 1996 to $9.3 million for the
nine months ended September 30, 1997.  Total interest income increased 12.4%
from $14.4 million for the nine months ended September 30, 1996 to $16.2 million
for the nine months ended September 30, 1997 primarily as a result of an
increase in the average balance of interest-earning assets from $216.2 million
to $237.6 million resulting primarily from normal asset growth, combined with an
increase in average yield from 8.87% at September 30, 1996 to 9.07% at September
30, 1997 resulting primarily from an increase in market interest rates.
Interest income on other loans (consumer loans, commercial real estate loans and
commercial business loans) increased from $4.4 million for the nine months ended
September 30, 1996 to $5.8 million for the nine months ended September 30, 1997
as a result of the increased volume of such loans.  Interest income from
investment securities decreased from $1.1 million for the nine months ended
September 30, 1996 to $399,000 for the nine months ended September 30, 1997 as a
result of a decrease in the average balance of investment securities from $24.8
million for the nine months ended September 30, 1996 to $6.9 million for the
nine months ended September 30, 1997.  Interest expense increased 11.4% from
$6.1 million for the nine months ended September 30, 1996 to $6.8 million for
the nine months ended September 30, 1997 as a result of an increase in the
average balance of deposits from $183.6 million to $203.4 million primarily as a
result of normal growth.  The average cost of these funds was 4.45% for the
period ending September 30, 1996 compared with 4.46% for the period ended
September 30, 1997. Interest rate spread increased from 4.42% to 4.61% as a
result of the increase in yield on interest-earning assets between the nine
months ended September 30, 1996 and the nine months ended September 30, 1997
resulting primarily from increases in loans outstanding and decreases in
investments outstanding.

          Provision for Loan Losses.  Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions.  In determining the
adequacy of the allowance for loan losses, management  periodically reviews the
loan portfolio and considers such factors as delinquency status, past
performance problems, historical loss experience, adverse situations that may
affect the ability of the borrowers to repay, known and inherent risks in the
portfolio, assessment of economic conditions, regulatory policies, and the
estimated value of any underlying collateral.  Although the Bank's credit
management systems have resulted in low loss experience, there can be no
assurances that such experience will continue.  The allowance for loan losses is
based principally on delinquency status and historical experience.  The Bank
gives greater weight to the level of internally identified problem assets than
to the level of nonperforming assets (nonaccrual loans, accruing loans
contractually past due 90 days or more, and real estate acquired in settlement
of loans) because internally identified problem assets include not only
nonperforming assets but also performing assets that otherwise exhibit, in
management's judgment, potential credit weaknesses.  See "BUSINESS OF THE 
BANK -- Lending Activities -- Nonperforming Assets and Delinquencies" and 
"-- Lending Activities -- Allowance for Loan Losses."  The required level of 
the allowance for loan losses is then calculated based upon the outstanding
balances in each loan category and the risk weight assigned to each loan
category.

                                       26
<PAGE>
 
          The provision for loan losses was $700,000 for the nine months ended
September 30, 1997 compared to $90,000 for the same period in 1996.  The Bank
believes that its operations now more closely resemble those of a traditional
commercial bank than a traditional thrift institution.  The Bank's one- to- four
family mortgage loan  portfolio as a percent of the total loan portfolio, has
decreased from 50.6% at December 31, 1992 to 32.7% at September 30, 1997.
Commercial mortgage loans as a percent of the total loan portfolio has increased
from 3.8% at December 31, 1992 to 14.4% at September 30, 1997.  Construction
loans as a percent of the total loan portfolio has increased from 14.6% at
December 31, 1992 to 26.7% at September 30, 1997.  Management deemed the
increase in the provision for loan losses necessary in light of the increase in
the relative level of estimated losses inherent in the increased levels of
higher risk loans (construction, commercial real estate, land, commercial
business and consumer loans).  See "RISK FACTORS -- Certain Lending Risks" and
"BUSINESS OF THE BANK -- Lending Activities -- Allowance for Loan Losses."
Management deemed the allowance for loan losses adequate at September 30, 1997.

          Noninterest Income.  Noninterest income increased from $2.3 million
for the nine months ended September 30, 1996 to $2.5 million for the nine months
ended September 30, 1997, primarily as a result of the increase in service
charges and trust fees offset by a decrease in other income.  Service charges
and fees increased from $702,000 for the nine months ended September 30, 1996 to
$854,000 for the same period in 1997 primarily as a result of increased income
deposit account fees, particularly on the increased number of transaction
accounts.  Trust fees increased from $349,000 for 1996 to $435,000 for 1997 as a
result of an increase in trust assets under management.  These increases were
partially offset by a decline in net gain on sale of loans from $733,000 for
1996 to $674,000 for 1997 primarily because of a decrease in the volume of loan
sales.

          Noninterest Expenses.  Noninterest expenses were $7.4 million for the
nine months ended September 30, 1997 compared to $7.5 million for the same
period in 1996.  This decrease resulted primarily from the FDIC special
assessment on all SAIF-insured institutions to recapitalize the SAIF.  The
Bank's assessment amounted to $1.2 million and was accrued during the quarter
ended September 30, 1996.  Prior to the SAIF recapitalization, the Bank's total
annual deposit insurance premiums amounted to 0.23% of assessable deposits.
Effective January 1, 1997, the rate decreased to 0.065% of assessable deposits.
See "REGULATION -- Federal Regulation of Savings Associations -- Federal Deposit
Insurance Corporation" and Note 17 of Notes to the Consolidated Financial
Statements.  Compensation, payroll taxes and fringe benefits expenses increased
from $3.5 million for 1996 to $4.1 million for 1997 as a result of an increase
in personnel to staff the new branch offices and service the increased number of
loan and deposit accounts.  Occupancy expense increased from $355,000 in 1996 to
$404,000 in 1997 as a result of new branch openings and increased maintenance
costs on the main office.  Equipment and service bureau expenses increased from
$1.1 million in 1996 to $1.5 million in 1997 as a result of increased
maintenance agreements for the new computer software and hardware and an
increase in related depreciation expense.  Other operating expenses will
increase in subsequent periods following the consummation of the Conversion as a
result of increased costs associated with operating as a public company and
increased compensation expense as a result of the adoption of the ESOP and, if
approved by the Holding Company's stockholders, the MRP.  See "RISK FACTORS --
Return on Equity After Conversion," "-- New Expenses Associated With ESOP and
MRP" and "BUSINESS OF THE BANK -- Properties."

          Income Tax Expense.  Income tax expense was $1.5 million for the nine
months ended September 30, 1997 compared to $1.1 million for the nine months
ended September 30, 1996 as a result of higher income before taxes. The
effective income tax rate increased from 38.0% for the nine months ended
September 30, 1996 to 40.7% for the nine months ended September 30, 1997
primarily as a result of a reduction in a state income tax benefit relating to
the calculation of the reserve for bad debts that existed for federal income tax
purposes prior to 1987.

Comparison of Operating Results for the Years Ended December 31, 1996 and 1995

          Net Earnings.  Net earnings were $2.8 million for the year ended
December 31, 1996 compared to $3.2 million a year earlier, a 12.1% decline,
primarily as a result of increases in noninterest expenses, primarily associated
with the one-time FDIC special SAIF assessment, and an increase in the provision
for loan losses.

                                       27
<PAGE>
 
          Net Interest Income.  Net interest income was $11.3 million for the
year ended December 31, 1996 compared to $9.5 million for the year ended
December 31, 1995, a 18.8% increase.  A 13.7% increase in total interest income,
from $17.2 million in 1995 to $19.6 million in 1996, was offset by a 7.4%
increase in interest expense, from $7.7 million in 1995 to $8.3 million in 1996.
The increase in total interest income resulted primarily from an increase in the
average balance of interest-earning assets from $199.3 million in 1995 to $220.0
million in 1996 and an increase in the average yield on interest-earning assets
from 8.64% in 1995 to 8.92% in 1996 as a result of a combination of higher
market interest rates and an increase in the average balance of higher yielding
consumer and other loans.  Interest income on other loans (consumer loans,
commercial real estate loans and commercial business loans) increased from $4.9
million for the year ended December 31, 1995 to $6.2 million of the year ended
December 31, 1996 as a result of the increased volume of such loans.  Interest
income from investment securities decreased from $1.6 million for the year ended
December 31, 1995 to $1.3 million for the year ended December 31, 1996 as a
result of a decrease in the average balance of investment securities from $29.1
million for the year ended December 31, 1995 to $21.9 million for the year ended
December 31, 1996.  The increase in interest expense was primarily the result of
an increase in average deposits from $169.8 million at December 31, 1995 to
$185.5 million at December 31, 1996 primarily as a result of marketing and
promotions.  The increase was offset by a decrease in the average cost of
deposits from 4.50% for 1995 to 4.44% for 1996 as a result of declining market
interest rates.  Interest rate spread increased from 4.14% in 1995 to 4.48% in
1996.

          Provision for Loan Losses.  The provision for loan losses was $120,000
for the year ended December 31, 1996 compared to $80,000 for the year ended
December 31, 1995.  Management deemed the increase in the provision for loan
losses necessary in light of the increase in the relative level of estimated
losses inherent in the higher levels of higher risk loans (construction,
commercial real estate, land, commercial business and consumer loans).  See
"BUSINESS OF THE BANK -- Lending Activities -- Construction Lending" and "--
Lending Activities --Nonperforming Assets and Delinquencies."

          Noninterest Income.  Noninterest income was $3.2 million for the year
ended December 31, 1996 compared to $3.0 million for the year ended December 31,
1995.  Loan fees and servicing income declined from $658,000 in 1995 to $548,000
in 1996 as a result of a decrease in the servicing portfolio from $134.4 million
at December 31, 1995 to $121.1 million at December 31, 1996.  This decrease was
offset by an increase in deposit fees from $796,000 in 1995 to $973,000 in 1996,
which was a result of an increase in transaction accounts.  Trust fees also
increased from $375,000 in 1995 to $483,000 in 1996 as a result of increased
assets under management.

          Noninterest Expenses.  Noninterest expenses were $9.8 million for the
year ended December 31, 1996 compared to $7.5 million for the year ended
December 31, 1995, an increase of 30.5%, primarily as a result of the FDIC
special assessment on all SAIF-insured institutions.  This assessment amounted
to $1.2 million in 1996.  As the Bank continued to grow and expand during this
period, compensation and related employee expenses increased from $3.9 million
for the year ended December 31, 1995 to $4.7 million for the same period in
1996, which represents a 19.9% increase.  Equipment and service bureau expenses
increased from $1.2 million in 1995 to $1.5 million in 1996, an 18.1% increase,
as a result of business expansion.

          Income Tax Expense.  Income tax expense was $1.8 million for the year
ended December 31, 1996 compared to $1.7 million for the year ended December 31,
1995.  The effective income tax rate increased from 34.8% in 1995 to 38.4% in
1996 as a result of previously unrecognized federal income tax benefits.

Comparison of Operating Results for the Years Ended December 31, 1995 and 1994

          Net Earnings.  Net earnings were $2.5 million for the year ended
December 31, 1994 compared to $3.2 million for the year ended December 31, 1995,
a 30.2% increase, primarily as a result of an increase in net interest income
and an increase in other operating income, offset by an increase in other
expense.

          Net Interest Income.  Net interest income increased from $9.1 million
for the year ended December 31, 1994 to $9.5 million for the year ended December
31, 1995.  Interest rate spread increased to 4.14% in 1995 from

                                       28
<PAGE>
 
4.11% in 1994 primarily as a result of increases in market interest rates.
Average interest-earning assets increased from $198.0 million to $199.3 million
during 1995, with a corresponding increase in yield from 7.78% to 8.64% as a
result of an increase in market interest rates.  These increases were partially
offset by an increase in cost of funds and borrowings from 3.68% for 1994
compared to 4.5% for 1995 primarily as a result of increases in market interest
rates.  Total average interest-bearing liabilities were $171.7 million for 1994
compared with $170.8 million for 1995.

          Provision for Loan Losses.  The provision for loan losses was $80,000
for the year ended December 31, 1995 compared to $113,000 for the year ended
December 31, 1994.  The reduced provision for loan losses was warranted in 1995
as a result of net recoveries of $141,000 during the year.  See "BUSINESS OF THE
BANK -- Lending Activities -- Allowance for Loan Losses."

          Noninterest Income.  Noninterest income was $3.0 million for the year
ended December 31, 1995 compared to $2.0 million for the year ended December 31,
1994.  Servicing income increased from $375,000 in 1994 to $658,000 in 1995 as a
result of the completion of the write-off of the remainder of an excess
servicing asset in 1994.  There was also an increase in net gain on disposition
of loans available for sale from $530,000 in 1994 to $882,000 in 1995, resulting
from increased loan sale activity.  Transaction account and deposit servicing
fees and charges increased from $643,000 in 1994 to $796,000 in 1995 as a result
of increased transaction account activity resulting primarily from an increased
number of accounts.  Trust fees increased from $302,000 in 1994 to $375,000 in
1995 as a result of the growth in assets under management.

          Noninterest Expenses.  Noninterest expenses were $7.5 million in 1995
compared to $7.0 million in 1994, an increase of 7.1%, primarily as a result of
general increases in all expense categories, which reflected the increased
activity of the Bank during the year.

          Income Tax Expense.  Income tax expense was $1.7 million for the year
ended December 31, 1995 compared to $1.5 million for the year ended December 31,
1994 as a result of higher income before taxes.  The effective income tax rate
decreased from 38.5% in 1994 to 34.8% in 1995.

Average Balances, Interest and Average Yields/Cost

          The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs.  Such yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented.  Average balances are derived from
daily balances for the nine months ended September 30, 1997 and 1996 and for the
years ended December 31, 1996 and 1995.  Average balances for the year ended
December 31, 1994 were derived from month-end balances.  Management does not
believe that the use of month-end balances instead of daily balances has caused
any material inconsistencies in the information presented.

                                       29
<PAGE>
 
<TABLE>
<CAPTION>
                                             Nine Months Ended September 30,             
                             --------------------------------------------------------------  
                                         1997                             1996          
                             ------------------------------  ------------------------------  
                                       Interest                        Interest              
                             Average      and      Yield/    Average      and      Yield/    
                             Balance   Dividends   Cost(3)   Balance   Dividends   Cost(3)   
                             --------  ---------  ---------  --------  ---------  ---------  
                                                   (Dollars in thousands)
<S>                          <C>       <C>        <C>        <C>       <C>        <C>        
Interest-earning assets:                                                                     
 Loans receivable, net (1)   $212,161    $15,062    9.47%    $180,579    $12,856    9.49%    
 Mortgage-backed securities     1,387         70    6.73        1,509         78    6.89     
 Investment securities.....     6,857        316    6.14       24,754      1,038    5.59     
 FHLB stock................     1,544         83    7.17        1,442         76    7.03     
 Federal funds sold 
  and overnight                                                                                  
  interest-bearing deposits    15,658        629    5.36        7,948        332    5.57     
                             --------    -------  ------     --------    -------  ------     
   Total interest-earning                                                                    
    assets.................   237,607     16,160    9.07      216,232     14,380    8.87     
                                                                                             
Non-interest-earning assets    17,823                          14,766                        
                             --------                        --------                        
   Total assets............  $255,430                        $230,998                        
                             ========                        ========                        
                                                                                             
Interest-bearing                                                                             
 liabilities:                                                                                
 Deposits:                                                                                   
  Passbook accounts........    15,354        227    1.97       16,821        272    2.16     
  Money market accounts....    33,243      1,040    4.17       25,286        795    4.20     
  NOW accounts.............    27,892        356    1.70       25,849        386    1.99     
  Certificates of deposit..   126,987      5,192    5.45      115,675      4,664    5.39     
                             --------    -------  ------     --------    -------  ------     
    Total deposits.........   203,476      6,815    4.46      183,631      6,117    4.45     
                             --------    -------  ------     --------    -------  ------     
                                                                                             
Advances from FHLB.........        --         --      --           --         --      --     
                             --------    -------  ------     --------    -------  ------     
                                                                                             
   Total interest-bearing                                                                    
    liabilities............   203,476      6,815    4.46      183,631      6,117    4.45     
                                                                                             
Non-interest-bearing                                                                         
 liabilities(2)............    23,625                          21,890                        
                             --------                        --------                        
   Total liabilities.......   227,101                         205,521                        
                                                                                             
Retained earnings..........    28,329                          25,477                        
                             --------                        --------                        
   Total liabilities and                                                                     
    retained earnings......  $255,430                        $230,998                        
                             ========                        ========                        
                                                                                             
Net interest income........              $ 9,345                         $ 8,263             
                                         =======                         =======             
                                                                                             
Interest rate spread.......                         4.61%                           4.42%    
                                                  ======                          ======     
                                                                                             
Net interest margin........                         5.24%                           5.10%    
                                                  ======                          ======     
                                                                                             
Ratio of average                                                                             
 interest-earning                                                                            
 assets to average                                                                           
  interest-                                                                                  
 bearing liabilities.......                       116.77%                         117.75%    
                                                  ======                          ======     




<CAPTION>
                                                               Year Ended December 31,
                               ----------------------------------------------------------------------------------------  
                                          1996                          1995                          1994
                               ----------------------------  ----------------------------  ---------------------------- 
                                         Interest                      Interest                      Interest
                               Average      and     Yield/   Average      and     Yield/   Average      and     Yield/
                               Balance   Dividends   Cost    Balance   Dividends   Cost    Balance   Dividends   Cost
                               --------  ---------  -------  --------  ---------  -------  --------  ---------  -------
                                                                 (Dollars in thousands)
<S>                            <C>       <C>        <C>      <C>       <C>        <C>      <C>       <C>        <C>
Interest-earning assets:     
 Loans receivable, net (1)     $186,393    $17,681    9.49%  $158,043    $14,900    9.43%  $163,370    $13,881    8.50%
 Mortgage-backed securities       1,497        101    6.75      1,626        109    6.70      1,882         86    4.57
 Investment securities.....      21,933      1,236    5.64     29,090      1,550    5.33     22,873      1,014    4.43
 FHLB stock................       1,454        102    7.02      1,357         93    6.85      1,299         74    5.70
 Federal funds sold and      
  overnight                  
  interest-bearing deposits       8,293        464    5.60      9,160        570    6.22      8,540        339    3.97
                               --------    -------  ------   --------    -------  ------   --------    -------  ------
   Total interest-earning    
    assets.................     219,570     19,584    8.92    199,276     17,222    8.64    197,964     15,394    7.78
                             
Non-interest-earning assets      15,028                        13,648                        11,577
                               --------                      --------                      --------
   Total assets............    $234,598                      $212,924                      $209,541
                               ========                      ========                      ========
                             
Interest-bearing             
 liabilities:                
 Deposits:                   
  Passbook accounts........      16,581        350    2.11     17,943        399    2.22     21,202        445    2.10
  Money market accounts....      25,851      1,090    4.22     16,352        681    4.16     12,258        396    3.23
  NOW accounts.............      26,257        505    1.92     22,052        464    2.10     21,535        431    2.00
  Certificates of deposit..     116,828      6,287    5.38    113,498      6,096    5.37    114,438      4,908    4.29
                               --------    -------  ------   --------    -------  ------   --------    -------  ------
    Total deposits.........     185,517      8,232    4.44    169,845      7,640    4.50    169,433      6,180    3.65
                               --------    -------  ------   --------    -------  ------   --------    -------  ------
                             
Advances from FHLB.........         628         36    5.73      1,000         56    5.60      2,245        119    5.30
                               --------    -------  ------   --------    -------  ------   --------    -------  ------
                             
   Total interest-bearing    
    liabilities............     186,145      8,268    4.44    170,845      7,696    4.50    171,678      6,299    3.67
                             
Non-interest-bearing         
 liabilities(2)............      22,726                        19,556                        16,553
                               --------                      --------                      --------
   Total liabilities.......     208,871                       190,401                       188,231
                             
Retained earnings..........      25,727                        22,523                        21,310
                               --------                      --------                      --------
   Total liabilities and     
    retained earnings......    $234,598                      $212,924                      $209,541
                               ========                      ========                      ========
                             
Net interest income........                $11,316                       $ 9,526                       $ 9,095
                                           =======                       =======                       =======
                             
Interest rate spread.......                           4.48%                         4.14%                         4.11%
                                                    ======                        ======                        ======
                             
Net interest margin........                           5.15%                         4.78%                         4.59%
                                                    ======                        ======                        ======
                             
Ratio of average             
 interest-earning            
 assets to average           
  interest-                  
 bearing liabilities.......                         117.96%                       116.64%                       115.31%
                                                    ======                        ======                        ======
- -------------------------
</TABLE>

(1)  Excludes interest on loans 90 days or more past due.  Includes loans
     originated for sale.
(2)  Includes non-interest bearing demand deposits of $19.4 million and $17.3
     million for the nine months ended September 30, 1997 and 1996,
     respectively, and $18.0 million, $15.1 million and $13.6 million for the
     years ended December 31, 1996, 1995 and 1994, respectively.
(3)  Annualized.

                                       30
<PAGE>
 
Yields Earned and Rates Paid

     The following table sets forth for the periods and at the dates indicated
the weighted average yields earned on the Bank's assets and the weighted average
interest rates paid on the Bank's liabilities, together with the interest rate
spread and net interest margin on interest-earning assets.

<TABLE>
<CAPTION>
                                                                 Nine Months
                                                                    Ended
                                                 At              September 30,       Year Ended December 31,
                                             September 30,    -----------------    ---------------------------
                                                1997           1997       1996       1996      1995      1994
                                                ----           ----       ----       ----      ----      ----
<S>                                         <C>                <C>        <C>        <C>        <C>       <C>
Weighted average yield on:                                  
  Loans receivable.........................     8.87%          9.47%     9.49%      9.49%     9.43%     8.50%
  Mortgage-backed                                           
   securities..............................     7.19           6.73      6.89       6.75      6.70      4.57
  Investment securities....................     5.64           6.14      5.59       5.64      5.33      4.43
  FHLB stock...............................     7.25           7.17      7.03       7.02      6.85      5.70
  Federal funds sold and overnight                          
     interest-bearing deposits.............     6.00           5.36      5.57       5.60      6.22      3.97
  All interest-earning assets..............     8.49           9.07      8.87       8.92      8.64      7.78
                                                            
Weighted average rate paid on:                              
  Passbook savings accounts................     2.00           1.97      2.16       2.11      2.22      2.10
  NOW accounts.............................     1.50           1.70      1.99       1.92      2.10      2.00
  Money market accounts....................     4.18           4.17      4.20       4.22      4.16      3.23
  Certificate accounts.....................     5.58           5.45      5.39       5.38      5.37      4.29
  FHLB advances............................       --             --        --       5.73      5.60      5.30
  All interest-bearing liabilities.........     4.49           4.46      4.45       4.44      4.50      3.67
                                                            
Interest rate spread (spread between                        
  weighted average rate on all interest-                    
  earning assets and all interest-                          
  bearing liabilities).....................     4.00           4.61      4.42       4.48      4.14      4.11
                                                            
Net interest margin (net interest income                    
  (expense) as a percentage of average                      
  interest-earning assets).................      N/A           5.24      5.10       5.15      4.78      4.59
</TABLE>

                                       31
<PAGE>
 
Rate/Volume Analysis
 
     The following table sets forth the effects of changing rates and volumes on
net interest income of the Bank.  Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); and (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume).  The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
 
                               Nine Months Ended September 30,    Year Ended December 31,     Year Ended December 31,               
                                1997 Compared to Nine Months       1996 Compared to Year       1995 Compared to Year                
                                  Ended September 30, 1996        Ended December 31, 1995     Ended December 31, 1994               
                                    Increase (Decrease)             Increase (Decrease)         Increase (Decrease)                 
                                          Due to                          Due to                       Due to                       
                                  -------------------------      ------------------------      ----------------------
                                  Rate      Volume    Total      Rate     Volume    Total      Rate    Volume   Total
                                  ----      ------    -----      ----     ------    -----      ----    ------   -----      
                                                                    (In thousands)
<S>                              <C>        <C>        <C>      <C>       <C>       <C>      <C>      <C>      <C>      
Interest-earning assets:
 Loans receivable (1).........   $ 165      $2,041     $2,206   $(1,200)  $ 3,981   $2,781   $  738   $  281   $1,019
 Mortgage-backed securities...      --          (8)        (8)       --        (8)      (8)      29       (6)      23
 Investment securities........    (517)       (205)      (722)    1,212    (1,484)    (272)    (553)   1,048      495
 FHLB stock...................      --           7          7         2         7        9       12        6       18
 Federal funds sold and
  overnight interest-
  bearing deposits............     (92)        389        297      (366)      218     (148)     116      157      273
                                 -----      ------     ------   -------   -------   ------   ------   ------   ------
 
Total net change in 
 income on interest-
  earning assets..............    (444)      2,224      1,780      (352)    2,714    2,362      342    1,486    1,828
 
Interest-bearing liabilities:
 Passbook accounts............     (24)        (21)       (45)      (15)      (32)     (47)     102      (57)      45
 NOW accounts.................     (82)         52        (30)      113       (72)      41       21       37       58
 Money market accounts........    (314)        559        245        74       335      409      (44)     212      168
 Certificate accounts.........    (138)        666        528      (229)      418      189      954      235    1,189
 FHLB advances................      --          --         --       (20)       --      (20)     202     (265)     (63)
                                 -----      ------     ------   -------   -------   ------   ------   ------   ------
 
Total net change in expense
 on interest-bearing
  liabilities.................    (558)      1,256        698       (77)      649      572    1,235      162    1,397
                                 -----      ------     ------   -------   -------   ------   ------   ------   ------
 
Net change in net interest
 income.......................   $ 114      $  968     $1,082   $  (275)  $ 2,065   $1,790   $ (893)  $1,324   $  431
                                 =====      ======     ======   =======   =======   ======   ======   ======   ======
- ---------------
</TABLE>

(1)  Excludes interest on loans 90 days or more past due.  Includes loans held-
     for-sale.

                                       32
<PAGE>
 
Asset and Liability Management

  Quantitative Aspects of Market Risk.  The Bank does not maintain a trading
account for any class of financial instrument nor does it engage in hedging
activities or purchase high-risk derivative instruments.  Furthermore, the Bank
is not subject to foreign currency exchange rate risk or commodity price risk.
For information regarding the sensitivity to interest rate risk of the Bank's
interest-earning assets and interest-bearing liabilities, see the tables under
"BUSINESS OF THE BANK -- Lending Activities -- Maturity of Loan Portfolio," 
"-- Investment Activities" and "-- Deposit Activities and Other Sources of 
Funds -- Time Deposits by Maturities."

  Qualitative Aspects of Market Risk.  The Bank's principal financial objective
is to achieve long-term profitability while reducing its exposure to fluctuating
market interest rates.  The Bank has sought to reduce the exposure of its
earnings to changes in market interest rates by attempting to manage the
mismatch between asset and liability maturities and interest rates.  The
principal element in achieving this objective is to increase the interest-rate
sensitivity of the Bank's interest-earning assets by retaining for its portfolio
loans with interest rates subject to periodic adjustment to market conditions
and the selling of fixed-rate one- to- four family mortgage loans.  In addition,
the Bank maintains an investment portfolio of U.S. Government and agency
securities with contractual maturities of between zero and two years.  The Bank
relies on retail deposits as its primary source of funds.  Management believes
retail deposits, compared to brokered deposits, reduce the effects of interest
rate fluctuations because they generally represent a more stable source of
funds. As part of its interest rate risk management strategy, the Bank promotes
transaction accounts and certificates of deposit with terms up to four years.

  In order to encourage institutions to reduce their interest rate risk, the OTS
adopted a rule incorporating an interest rate risk component into the risk-based
capital rules.  Using data compiled by the OTS, the Bank receives a report which
measures interest rate risk by modeling the change in NPV over a variety of
interest rate scenarios.  This procedure for measuring interest rate risk was
developed by the OTS to replace the "gap" analysis (the difference between
interest-earning assets and interest-bearing liabilities that mature or reprice
within a specific time period).  NPV is the present value of expected cash flows
from assets, liabilities and off-balance sheet contracts.  The calculation is
intended to illustrate the change in NPV that will occur in the event of an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps that management might take to counter the effect of that
interest rate movement.  Under proposed OTS regulations, an institution with a
greater than "normal" level of interest rate risk will be subject to a deduction
from total capital for purposes of calculating its risk-based capital.  An
institution with a "normal" level of interest rate risk is defined as one whose
"measured interest rate risk" is less than 2.0%.  Institutions with assets of
less than $300 million and a risk-based capital ratio of more than 12.0%, like
the Bank, are exempt.  However, the Bank will likely not be exempt after the
consummation of the Conversion because its asset size will increase as a result
of the proceeds of the Offerings.  Based on the Bank's regulatory capital levels
at September 30, 1997, and assuming the Conversion was consummated at that date,
the Bank believes that, if the proposed regulation was implemented at that date,
the regulation would not have had a material adverse effect on the Bank's
regulatory capital compliance.

                                       33
<PAGE>
 
  The following table is provided by the OTS and sets forth the change in the
Bank's NPV at September 30, 1997, based on OTS assumptions, that would occur in
the event of an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
<TABLE>
<CAPTION>
 
                     Basis Point     Estimated Change in   Board Approved
                   Change in Rates   Net Portfolio Value        Limit
                   ----------------  --------------------  ---------------
                                    (Dollars in thousands)
 
                                     Amount      Percent      Percent     
                                     ------      -------      -------     
                        <S>         <C>          <C>          <C>         
                        400         $(5,011)       (13)%        (50)%     
                        300          (3,243)        (8)         (30)      
                        200          (1,702)        (4)         (20)      
                        100            (555)        (1)         (10)      
                         --              --         --           --
                       (100)            (77)        --          (10)      
                       (200)           (454)        (1)         (20)      
                       (300)           (487)        (1)         (30)      
                       (400)            456          1          (50)       
</TABLE>

    The above table illustrates, for example, that an instantaneous 200 basis
point increase in market interest rates at September 30, 1997 would reduce the
Bank's NPV by approximately $1.7 million, or 4%.

    Certain assumptions utilized by the OTS in assessing the interest rate risk
of savings associations within its region were utilized in preparing the
preceding table.  These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under
differing interest rate scenarios, among others.

    As with any method of measuring interest rate risk, certain shortcomings are
inherent in the method of analysis presented in the foregoing table.  For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates.  Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates could deviate
significantly from those assumed in calculating the table.

                                       34
<PAGE>
 
     The following table presents the Bank's interest sensitivity gap analysis
at September 30, 1997.


<TABLE>
<CAPTION>
                                                                           After      After
                                                  Within                   One to     Three     Over
                                                   Six     Six Months      Three      to Five   Ten
                                                  Months   to One Year     Years      Years     Years      Total
                                                 --------  ------------  ---------  ---------  --------  ---------
                                                                      (Dollars in thousands)
<S>                                              <C>       <C>           <C>        <C>        <C>       <C>
Interest-earning assets:
Loans receivable, net..........................  $46,632      $ 38,484   $ 31,846   $ 26,981   $76,616   $220,559
 Mortgage-backed securities....................       15            15         67         77     1,159      1,333
 Other loans...................................      160           160        641        641        --      1,602
 Investment securities.........................    3,698         5,038      5,072         --        --     13,808
 Federal funds sold and overnight
  interest-bearing deposits....................   17,000            --         --         --        --     17,000
                                                 -------      --------   --------   --------   -------   --------
   Total interest-earning assets...............   67,505        43,697     37,626     27,699    77,775    254,302
 
Interest-bearing liabilities:
 Deposits:
  NOW accounts.................................    2,999         2,999     11,996     11,987        --     29,981
  Passbook savings accounts....................    1,520         1,520      6,081      6,081        --     15,202
  Money market deposit accounts................    3,990         3,990     15,961     15,961        --     39,902
  Certificates of deposit......................   66,916        45,334     17,412      2,446        --    132,108
                                                 -------      --------   --------   --------   -------   --------
   Total interest-earning liabilities..........   75,425        53,843     51,450     36,475        --    217,193
                                                 -------      --------   --------   --------   -------   --------
 
Excess (deficiency) of interest sensitivity
 assets over interest sensitivity liabilities..   (7,920)      (10,146)   (13,824)    (8,776)   77,775     37,109
Cumulative excess (deficiency) of
 interest sensitivity assets...................   (7,920)      (18,066)   (31,890)   (40,666)   37,109     37,109
Cumulative ratio of interest-earning assets
 to interest-bearing liabilities...............    89.50%        86.02%     82.35%     81.28%   117.08%    117.09%
Interest sensitivity gap to total assets.......    (3.11)%       (3.99)%    (5.44)%    (3.45)%   30.58%     14.59%
Ratio of interest-earning assets to
  interest-bearing liabilities.................    89.50%        81.16%     73.13%     75.94%      N/A     117.09%
Ratio of cumulative gap to total assets........    (3.11)%       (7.10)%   (12.54)%   (15.99)%   14.59%     14.59%
</TABLE>

                                       35
<PAGE>
 
Liquidity and Capital Resources

  The Bank's primary sources of funds are customer deposits, proceeds from
principal and interest payments on and the sale of loans, maturing securities
and FHLB advances.  While maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.

  The Bank must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities.  The Bank generally maintains sufficient cash and
short-term investments to meet short-term liquidity needs.  At September 30,
1997, cash and cash equivalents totalled $26.7 million, or 9.7% of total assets.
At September 30, 1997, the Bank also maintained an available line of credit of
$12.1 million with the FHLB-Cincinnati that may be used as an additional source
of liquidity.

  At September 30, 1997, the Bank's commitments to extend funds consisted of
unused lines of credit of $22.7 million, outstanding letters of credit of $8.1
million issued primarily to municipalities as performance bonds, and commitments
to originate or purchase loans of $3.8 million.  The commitments to originate or
purchase loans at September 30, 1997 consisted of commitments to originate or
purchase variable rate loans of $800,000, and commitments to originate or
purchase fixed rate loans of $3.0 million at interest rates ranging from 5.75%
to 9.50%.

  OTS regulations require savings institutions to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least 5.0%
of the average daily balance of its net withdrawable deposits and short-term
borrowings.  In addition, short-term liquid assets currently must constitute
1.0% of the sum of net withdrawable deposit accounts plus short-term borrowings.
The Bank's actual short- and long-term liquidity ratios at September 30, 1997
were 13.9% and 17.3%, respectively.

  The Bank's primary lending activity is the origination of real estate mortgage
loans.  During the nine months ended September 30, 1997 and the years ended
December 31, 1996, 1995 and 1994, the Bank originated $121.0 million, $172.0
million, $147.3 million and $133.4 million of such loans, respectively.  At
September 30, 1997, the Bank had loan commitments totalling $3.8 million and
undisbursed loans in process totalling $33.2 million.  The Bank anticipates that
it will have sufficient funds available to meet current loan commitments.
Certificates of deposit that are scheduled to mature in less than one year from
September 30, 1997 totalled $112.3 million.  Historically, the Bank has been
able to retain a significant amount of its deposits as they mature.

  OTS regulations require the Bank to maintain specific amounts of regulatory
capital.  As of September 30, 1997, the Bank complied with all regulatory
capital requirements as of that date with tangible, core and risk-based capital
ratios of 10.8%, 10.8% and 13.1%, respectively.  For a detailed discussion of
regulatory capital requirements, see "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements."  See also "HISTORICAL AND PRO
FORMA REGULATORY CAPITAL COMPLIANCE."

Impact of Accounting Pronouncements and Regulatory Policies

  Accounting by Creditors for Impairment of a Loan.  See Note 1 of Notes to the
Consolidated Financial Statements for a discussion of Statement of Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment
of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures."  The Bank adopted SFAS No. 114 and SFAS No.
118 effective January 1, 1995, and their adoption did not have a material effect
on the Bank's financial condition or results of operations.

  Accounting for Employee Stock Ownership Plans.  In November 1993 the American
Institute of Certified Public Accountants issued SOP 93-6, which requires an
employer to record compensation expense in an amount equal to the fair value of
shares committed to be released to employees from an employee stock ownership
plan and to exclude unallocated shares from earnings per share computations.
The effect of SOP 93-6 on net income and book

                                       36
<PAGE>
 
value per share in future periods cannot be predicted due to the uncertainty of
the fair value of the shares at the time they will be committed to be released.
See "PRO FORMA DATA."

  Disclosure of Certain Significant Risks and Uncertainties.  In December 1994
the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure of
Certain Significant Risks and Uncertainties."  This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities.
The disclosure requirements in SOP 94-6 focus primarily on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements in the near-term functioning of the reporting entity.  The
risks and uncertainties discussed in SOP 94-6 stem from the nature of the
entity's operations, from the necessary use of estimates in the preparation of
the entity's financial statements and from significant concentrations in certain
aspects of the entity's operations.  SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and did not
have a material impact on the financial condition or results of operations of
the Bank.

  Accounting for Mortgage Servicing Rights.  See Note 1 of Notes to the
Consolidated Financial Statements for a discussion of SFAS No. 122, "Accounting
for Mortgage Servicing Rights."  The Bank implemented SFAS No. 122,
prospectively, effective January 1, 1996 and its implementation did not have a
material impact on the Bank's financial condition or results of operations.
Effective January 1, 1997, SFAS No. 122 was superseded by SFAS No. 125 discussed
below.

  Accounting for Stock-Based Compensation.  SFAS No. 123, "Accounting for Stock-
Based Compensation," establishes financial accounting and reporting standards
for stock-based employee compensation plans.  This statement encourages all
entities to adopt a new method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated fair value of the award
at the date it is granted.  Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans.  Companies that elect to remain with the existing
accounting method are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
this statement had been adopted.  The accounting requirements of this statement
are effective for transactions entered into in fiscal years that begin after
December 15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15, 1994.
Management of the Bank has not completed an analysis of the potential effects of
SFAS No. 123 on its financial condition or results of operations, but expects to
use the intrinsic value method upon consummation of the Conversion.

  Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities.  See Note 1 of Notes to the Consolidated Financial Statements
for a discussion of SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," and of SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125."  SFAS No. 127 defers the effective date of the application of certain
portions of SFAS No. 125 until January 1, 1998.  The adoption of the provisions
of SFAS No. 125 and SFAS No. 127 did not have a material impact on the Bank's
financial condition or results of operations.

  Earnings Per Share.  SFAS No. 128, "Earnings Per Share," issued in February
1997, establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly-held common stock or potential
common stock.  It replaces the presentation of primary EPS with a presentation
of basic EPS and requires the dual presentation of basic and diluted EPS on the
face of the income statement.  This statement is effective for financial
statements issued for periods ending after December 15, 1997 including interim
periods; earlier applications not permitted.  This statement requires
restatement of all prior period EPS data presented.

  Disclosure of Information About Capital Structure.  SFAS No. 129, "Disclosure
of Information About Capital Structure," establishes standards for disclosing
information about an entity's capital structure and applies to all entities.
SFAS No. 129 continues the previous requirements to disclose certain information
about an entity's capital structure found in Accounting Principles Board ("APB")
Opinions No. 10, "Omnibus Opinion - 1966," and No. 15, "Earnings Per Share," and
SFAS No. 47, "Disclosure of Long-Term Obligations," for entities that were

                                       37
<PAGE>
 
subject to those standards.  SFAS No. 129 is effective for financial statements
for periods ending after December 15, 1997.  SFAS No. 129 contains no change in
disclosure requirements for entities that were previously subject to the
requirements of APB Opinions Nos. 10 and 15 and SFAS No. 47.  The adoption of
the provisions of SFAS No. 129 is not expected to have a material impact on the
Bank.

  Comprehensive Income.  SFAS No. 130, "Reporting Comprehensive Income," issued
in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements.  It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
presented with the same prominence as other financial statements.  SFAS No. 130
requires that companies (i) classify items of other comprehensive income by
their nature in a financial statement and (ii) display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the statement of financial condition.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.

  Disclosure About Segments.  SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," issued in June 1997, establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports.  It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers.  SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise."  SFAS No. 131 becomes effective for the
Bank's fiscal year ending December 31, 1998, and requires that comparative
information from earlier years be restated to conform to its requirements.  The
adoption of the provisions of SFAS No. 131 is not expected to have a material
impact on the Bank.

Year 2000 Considerations

  Many existing computer programs use only two digits to identify a year in the
date datum field.  These programs were designed and developed without
considering the impact of the upcoming change in the century.  If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000.  The Year 2000 issue affects virtually all companies and
organizations.

  The Bank uses the services of an outside service bureau for its significant
data processing applications.  Based on discussions with its service bureau, the
Bank does not expect that the cost of addressing any Year 2000 issue will be a
material event or uncertainty that would cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition, or that the costs or consequences of incomplete or
untimely resolution of any Year 2000 issue represent a known material event or
uncertainty that is reasonably likely to affect the its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition.

Effect of Inflation and Changing Prices

  The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the change in the relative purchasing power of money over
time due to inflation.  The primary impact of inflation is reflected in the
increased cost of the Bank's operations.  Unlike most industrial companies,
virtually all the assets and liabilities of a financial institution are monetary
in nature.  As a result, interest rates generally have a more significant impact
on a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.

                                       38
<PAGE>
 
                              RECENT DEVELOPMENTS

  The following tables set forth certain information concerning the consolidated
financial position and results of operations of the Bank at the dates and for
the periods indicated.  Information at November 30, 1997, September 30, 1997 and
for the two-months and eleven-months ended November 30, 1997 and 1996 are
unaudited, but, in the opinion of management, contain all adjustments (none of
which were other than normal recurring entries) necessary for a fair
presentation of the results of such periods.  The selected operations data for
the two-months and eleven-months ended November 30, 1997 are not necessarily
indicative of the results of operation for the entire fiscal year.  This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto presented elsewhere in this Prospectus.

<TABLE>
<CAPTION>
 
                                                            At               At              At
                                                        November 30,     September 30,   December 31,
                                                           1997             1997            1996
                                                       ------------    -------------    ------------
                                                                       (In Thousands)
<S>                                                    <C>             <C>              <C> 
SELECTED FINANCIAL CONDITION DATA:
 
Total assets...........................................   $281,668        $275,925       $244,964
Loans receivable, net..................................    214,825         216,410        200,600
Loans held-for-sale....................................      6,017           4,149          5,253
Investment securities held-to-maturity.................      2,700           3,700          7,705
Investment securities available-for-sale...............     10,082          10,107             --
Mortgage-backed securities held-to-maturity............      1,318           1,333          1,419
Cash, federal funds sold and                                          
 overnight interest-bearing deposits....................    32,743          26,691         19,519
Deposit accounts........................................   245,970         241,950        214,533
Borrowings..............................................        --              --             --
Total equity, substantially restricted..................    30,133          29,501         27,250
</TABLE> 


<TABLE> 
<CAPTION> 
                                      Two Months               Eleven Months
                                  Ended November 30,         Ended November 30,
                                 -------------------       -----------------------
                                   1997       1996           1997           1996
                                 --------   --------       --------       --------
                                                 (In Thousands)
SELECTED OPERATING DATA:
<S>                              <C>        <C>            <C>            <C>     
Interest income...............     $3,819     $3,440        $19,979        $17,820
Interest expense..............      1,637      1,414          8,452          7,532
                                   ------     ------        -------        -------
 
Net interest income...........      2,182      2,026         11,527         10,288
Provision for loan losses.....         --         20            700            110
                                   ------     ------        -------        -------
 
Net interest income after
 provision for loan losses....      2,182      2,006         10,827         10,178
 
Gains from sale of loans......        274        103            949            835
Other income..................        451        426          2,291          2,007
Other expenses................      1,888      1,481          9,242          8,998
                                   ------     ------        -------        -------
 
Earnings before income taxes..      1,019      1,054          4,825          4,022
Provision for income taxes....        385        417          1,932          1,546
                                   ------     ------        -------        -------
 
Net earnings..................     $  634     $  637        $ 2,893        $ 2,476
                                   ======     ======        =======        =======
</TABLE>

                                       39
<PAGE>
 
<TABLE>
<CAPTION>
                                         At or For the         At or For the
                                           Two Months          Eleven Months
                                       Ended November 30,    Ended November 30,
                                      --------------------  --------------------
                                        1997       1996       1997       1996
                                        ----       ----       ----       ----
<S>                                  <C>        <C>        <C>        <C>
 
SELECTED FINANCIAL RATIOS(1):
 
Performance Ratios:
 
Return on average assets(2)........      1.36%      1.56%      1.21%      1.16%
Return on average equity(3)........     12.66      14.50      10.99      10.54
Interest rate spread(4)............      4.40       4.61       4.55       4.45
Net interest margin(5).............      5.07       5.31       5.21       5.14
Average interest-earning assets to
 average interest-bearing 
 liabilities.......................     118.0      118.9      117.1      118.0
Noninterest expense as a percent
 of average total assets...........      4.06       3.63       3.88       4.20
Efficiency ratio(6)................     64.95      57.96      62.59      68.53
 
Asset Quality Ratios:
 
Nonaccrual and 90 days or more
 past due loans as a percent of 
 total loans, net..................      0.06       0.09       0.06       0.09
Nonperforming assets as a
 percent of total assets...........      0.05       0.07       0.05       0.07
Allowance for losses as a percent
 of gross loans receivable.........      1.10       0.85       1.10       0.85
Allowance for losses as a percent
 of nonperforming loans............  2,088.06   1,175.56   2,088.06   1,175.56
Net charge offs to average
 outstanding loans.................        --       0.01         --         --
 
Capital Ratios:
 
Total equity-to-assets ratio.......     10.70      10.70      10.70      10.70
Average equity to average assets(7)     10.76      10.77      11.05      10.98
- ---------------------
</TABLE>

- --------------
(1)  Annualized where appropriate.
(2)  Net earnings divided by average total assets.
(3)  Net earnings divided by average total equity.
(4)  Difference between weighted average yield on interest-earning assets and
     weighted average rate on interest-bearing liabilities.
(5)  Net interest income as a percentage of average interest-earning assets.
(6)  Other expenses divided by the sum of net interest income and other income.
(7)  Average total equity divided by average total assets.

                                       40
<PAGE>
 
Regulatory Capital

  The table below sets forth the Bank's capital position relative to its OTS
capital requirements at the date indicated.  The definitions of the terms used
in the table are those provided in the capital regulations issued by the OTS.
See "REGULATION -- Federal Regulation of Savings Associations -- Capital
Requirements."

<TABLE>
<CAPTION>
                                             At November 30, 1997
                                        --------------------------------
                                                    Percent of Adjusted
                                        Amount      Total Assets(1)
                                        ------      -------------------
                                     (In thousands)
<S>                                  <C>            <C>
 
Tangible capital................        $30,142          10.79%
Tangible capital requirement....          4,190           1.50
                                        -------          -----
Excess..........................        $25,952           9.29%
                                        =======          =====
 
Core capital....................        $30,142          10.79%
Core capital requirement(2).....          8,380           3.00
                                        -------          -----
Excess..........................        $21,762           7.79%
                                        =======          =====
 
Risk-based capital(3)...........        $32,940          13.37%
Risk-based capital requirement..         19,712           8.00
                                        -------          -----
Excess..........................        $13,228           5.37%
                                        =======          =====
</TABLE> 
- -----------------------
(1)  Based on total adjusted assets of $279.3 million for purposes of the
     tangible and core capital requirements, and risk-weighted assets of $246.4
     million for purposes of the risk-based capital requirement.
(2)  The current OTS core capital requirement for savings associations is 3% of
     total adjusted assets.  The OTS has proposed core capital requirements that
     would require a core capital ratio of 3% of total adjusted assets for
     thrifts that receive the highest supervisory rating for safety and
     soundness and a core capital ratio of 4% to 5% for all other thrifts.
(3)  Percentage represents total core and supplementary capital divided by total
     risk-weighted assets.

Non-Performing Assets and Delinquencies

     At November 30, 1997, the Bank had $134,000 of loans accounted for on a
non-accrual basis ($114,000 in one- to- four family mortgage loans and $20,000
in consumer loans) compared to $59,000 at September 30, 1997. At November 30,
1997 and September 30, 1997, the Bank had no accruing loans which were
contractually past due 90 days or more, no restructured loans and no real estate
owned.

     The allowance for loan losses was $2.8 million at November 30, 1997. 
Charge-offs for the two- and eleven-months ended November 30, 1997 were $3,000
and $40,000, respectively, compared to $4,000 and $212,000 for the comparative
periods in 1996. Recoveries for the two- and eleven-months ended November 30,
1997 were $1,000 and $15,000, respectively, compared to $9,000 and $218,000 for
the comparative periods in 1996.

                                       41
<PAGE>
 
     The following table sets forth the breakdown of the allowance for loan
 losses by category at November 30, 1997.

<TABLE>
<CAPTION>
                                                                      Percent of
                                                                     Loans in Each
                                                                      Category to
                                                         Amount       Total Loans
                                                         ------      --------------
                                                      (In thousands)
<S>                                                      <C>         <C>
Mortgage loans:
 One- to four-family...................................  $  426           33.5%
 Multi-family..........................................      20            0.5
 Commercial............................................     565           14.8
 Construction..........................................     496           24.9
 Land..................................................     165            4.3
Consumer Loans:
 Home equity lines of credit...........................      40            1.0
 Automobile............................................      75            2.0
 Credit cards..........................................       4            0.1
 Loans secured by deposit accounts.....................      --             --
 Unsecured.............................................      22            0.6
 Other secured.........................................     368            9.6
Commercial business loans..............................     331            8.7
Unallocated............................................     286            N/A
                                                         ------          -----
  Total allowance for loan losses......................  $2,798          100.0%
                                                         ======          =====
</TABLE>

Comparison of Financial Condition at November 30, 1997 and September 30, 1997

     Total assets increased 2.1% from $275.9 million at September 30, 1997 to
$281.7 million at November 30, 1997.  This increase resulted primarily from an
increase in cash, and overnight deposits with the FHLB, which was funded
primarily by increased deposits.

     Loans receivable, net, decreased from $216.4 million at September 30, 1997
to $214.8 million at November 30, 1997.  This decrease resulted primarily from a
decrease in construction loans offset partially by increases in other secured
consumer loans and commercial real estate loans.

     Loans held-for-sale increased from $4.1 million at September 30, 1997 to
$6.0 million at November 30, 1997.  The variances resulted primarily from timing
differences in the funding of loans.

     Cash and overnight deposits increased from $26.7 million at September 30,
1997 to $32.7 million at November 30, 1997, a 22.5% increase.  This increase was
a result of deposit growth and a decline in loans receivable, net.

     Investments securities held to maturity decreased from $3.7 million at
September 30, 1997 to $2.7 million at November 30, 1997.  This decrease reflects
investment maturities.

     Deposits increased 1.7% from $242.0 million at September 30, 1997 to $246.0
million at November 30, 1997 as a result of normal growth.

     Total equity increased from $29.5 million at September 30, 1997 to $30.1
million at November 30, 1997 primarily as a result of retained earnings.

                                       42
<PAGE>
 
Comparison of Operating Results for the Two Months Ended November 30, 1997 and
1996

     Net Earnings.  Net earnings for the two months ended November 30, 1997 were
$634,000 compared to $637,000 for the two months ended November 30, 1996.

     Net Interest Income.  Net interest income increased from $2.0 million for
the two months ended November 30, 1996 to $2.2 million for the two months ended
November 30, 1997.  Interest income increased from $3.4 million in 1996 to $3.8
million in 1997 as a result of an increase in average earning assets from $228.7
million in 1996 to $258.1 million in 1997, offset by a decline in average yield
from 9.02% in 1996 to 8.88% in 1997.  The decline in average yield can be
attributed to an increase in federal funds and investments as a percentage of
earning assets.  Interest expense increased from $1.4 million for the two months
ended November 30, 1996 to $1.6 million for the two months ended November 30,
1997 as a result of an increase in average interest-bearing liabilities from
$192.4 million for the two months ended November 30, 1996 to $218.7 million for
the two months ended November 30, 1997, partially offset by an increase in
average cost of funds from 4.41% to 4.48% as a result of an increase on the
average rate paid on certificates of deposit attributable to competition.  The
interest rate spread decreased from 4.61% for the two months ended November 30,
1996 to 4.40% for the two months ended November 30, 1997.

     Provision for Loan Losses.  Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions.

     The provision for loan losses was $20,000 for the two months ended November
30, 1996 compared with no provision for the same period in 1997.  This decrease
was a result of management's assessment of the level of the allowance for loan
losses being adequate at November 30, 1997.

     Noninterest Income.  Noninterest income was $725,000 for the two months
ended November 30, 1997 compared to $529,000 for the two months ended November
30, 1996.  Servicing income decreased from $93,000 for the two months ended
November 30, 1996 to $84,000 for the same period in 1997 as a result of a
decline in the balance of loans serviced for others.  Net gain on loans sold
increased from $103,000 for the two months ended November 30, 1996 to $274,000
for the two months ended November 30, 1997 as a result of increased sales
activity.  Transaction account and deposit servicing fees and charges increased
from $172,000 for the two months ended November 30, 1996 to $197,000 for the
same period in 1997 primarily as a result of an increased number of accounts.
Trust fees increased from $83,000 for the two months ended November 30, 1996 to
$132,000 for the same period in 1997 as a result of increased assets under
management.

     Noninterest Expenses.  Noninterest expenses were $1.5 million for the two
months ended November 30, 1996 compared to $1.9 million for the two months ended
November 30, 1997.  This increase is primarily attributable to an increase in
personnel expenses from $798,000 to $1.1 million, attributable to additional
expenses associated with the termination of the defined benefit plan (effective
December 31, 1997), to opening a new branch office and increased loan and
deposit activity resulting in increased staffing, higher commission and
incentive expenses, increased compensation, overtime and related benefits.  This
increased activity also contributed to general increases in most other
noninterest expense categories in 1997 compared to 1996.

     Income Tax Expense.  Income tax expense was $417,000 for the two months
ended November 30, 1996 compared to $385,000 for the period ending November 30,
1997 as a result of higher income before taxes.  The effective tax rate for the
two months ended November 30, 1997 was 37.8% compared with 39.5% for the two
months ended November 30, 1996.

                                       43
<PAGE>
 
Comparison of Operating Results for the Eleven Months Ended November 30, 1997
and 1996.

     Net Earnings.  Net earnings were $2.9 million for the eleven months ended
November 30, 1997 compared to $2.5 million for the eleven months ended November
30, 1996, a 16.0% increase.  This increase resulted from increases in net
interest income offset by an increase in provision for loan losses.  Other non-
interest income also increased but was offset by an increase in non-interest
expenses.

     Net Interest Income.  Net interest income was $11.5 million for the eleven
months ended November 30, 1997 compared to $10.3 million for the eleven months
ended November 30, 1996, a 11.7% increase.  Interest income increased from $17.8
million for the eleven months ended November 30, 1996 to $20.0 million for the
eleven months ended November 30, 1997 as a result of a 10.5% increase in average
earning assets from $218.4 million to $241.4 million.  The average yield also
increased from 8.90% for the eleven months ended November 30, 1996 to 9.03% for
the comparable period in 1997 as a result of an increase in the average balance
of the loan portfolio.  Interest expense increased from $7.5 million for the
eleven months ended November 30, 1996 to $8.4 million for the eleven months
ended November 30, 1997 as a result of a 11.3% increase in average interest-
bearing liabilities from $185.2 million to $206.2 million.  The average cost of
interest-bearing liabilities increased from 4.44% for the eleven months ended
November 30, 1996 to 4.48% for the eleven months ended November 30, 1997 as a
result of an increase in the average rate paid on certificates of deposit
attributable to competition.  Interest rate spread increased from 4.45% for the
eleven months ended November 30, 1996 to 4.55% for the comparable period in
1997.

     Provision for Loan Losses.  The provision for loan losses was $700,000 for
the eleven months ended November 30, 1997 compared to $110,000 for the same
period in 1996.  The Bank believes that its operations now more closely resemble
those of a traditional commercial bank than a traditional thrift institution.
The Bank's one-to- four family mortgage loan portfolio as a percent of the total
loan portfolio, has decreased from 50.6% at December 31, 1992 to 32.7% at
September 30, 1997.  Commercial mortgage loans as a percent of the total loan
portfolio has increased from 3.8% at December 31, 1992 to 14.4% at September 30,
1997.  Construction loans as a percent of the total loan portfolio has increased
from 14.6% at December 31, 1992 to 26.7% at September 30, 1997.  Management
deemed the increase in the provision for loan losses necessary in light of the
increase in the relative level of estimated losses inherent in the increased
levels of higher risk loans (construction, commercial real estate, land,
commercial business and consumer loans).  See "RISK FACTORS -- Certain Lending
Risks" and "BUSINESS OF THE BANK  --  Lending Activities -- Allowance for Loan
Losses."  Management deemed the allowance for loan losses adequate at November
30, 1997.

     Noninterest Income.  Noninterest income increased from $2.8 million for the
eleven months ended November 30, 1996 to $3.2 million for the eleven months
ended November 30, 1997.  This increase was primarily a result of the increase
in service charges, trust fees and, to a lesser extent, an increase in net gain
on sale of loans available for sale.  Service charges and fees increased from
$875,000 for the eleven months ended November 30, 1996 to $1.1 million for the
eleven months ended November 30, 1997 primarily as a result of increased income
deposit account fees, particularly on the increased number of transaction
accounts.  Trust fees increased from $432,000 for the eleven months ended
November 30, 1996 to $567,000 for the same period in 1997 as a result of an
increase in trust assets under management.  Net gain on sale of loans increased
from $835,000 for the eleven months ended November 30, 1996 to $949,000 for the
eleven months ended November 30, 1997 as a result of market interest rate
conditions.

     Noninterest Expenses.  Noninterest expenses were $9.0 million for the
eleven months ended November 30, 1996 compared with $9.2 million for the eleven
months ended November 30, 1997.  Personnel expense increased from $4.3 million
for the eleven months ended November 30, 1996 to $5.2 million for the eleven
months ended November 30, 1997 as a result of increases in personnel to staff
the new branch office, service increased numbers of loan and deposit accounts
and additional expense associated with the termination of the defined benefit
plan to be effective December 31, 1997.  Occupancy expense increased from
$450,000 for the eleven months ended November 30, 1996 to $498,000 for the
comparable period in 1997 as a result of new branch openings and increased
maintenance costs on the main office.  Equipment and service bureau expenses
increased from $1.3 million for the

                                       44
<PAGE>
 
eleven months ended November 30, 1996 to $1.8 million for the eleven months
ended November 30, 1997 as a result of increased maintenance agreements for the
new computer software and hardware and an increase in related depreciation
expense.  These increases were partially offset by the reduction in SAIF
premiums and assessments.  The Bank recorded $1.6 million in premiums and
assessments for the eleven months ended November 30, 1996 compared to $100,000
for the eleven months ended November 30, 1997.  In 1996, the FDIC imposed a
special assessment on all SAIF-insured institutions to recapitalize the SAIF.
The Bank's assessment amounted to $1.2 million and was accrued during the
quarter ended September 30, 1996.  Prior to the SAIF recapitalization, the
Bank's total annual deposit insurance premiums amounted to 0.23% of assessable
deposits.  Effective January 1, 1997, the rate decreased to 0.065% of assessable
deposits.  See "REGULATION -- Federal Regulation of Savings Associations --
Federal Deposit Insurance Corporation" and Notes to the Consolidated Financial
Statements.  Other operating expenses will increase in subsequent periods
following the consummation of the Conversion as a result of increased costs
associated with operating as a public company and increased compensation expense
as a result of the adoption of the ESOP and if approved by the Holding Company's
stockholders, the MRP.  See "RISK FACTORS -- Return on Equity After Conversion,"
"-- New Expenses Associated With ESOP and MRP" and "BUSINESS OF THE BANK --
Properties."

     Income Tax Expense.  Income tax expense was $1.9 million for the eleven
months ended November 30, 1997 compared to $1.5 million for the eleven months
ended November 30, 1996 as a result of higher income before taxes.  The
effective tax rate for the eleven months ended November 30, 1997 was 40.0%
compared with 38.4% for the eleven months ended November 30, 1996.

                        BUSINESS OF THE HOLDING COMPANY

General

     The Holding Company was organized as a Tennessee business corporation at
the direction of the Bank on November 5, 1997 for the purpose of becoming a
holding company for the Bank upon completion of the Conversion.  As a result of
the Conversion, the Bank will be a wholly-owned subsidiary of the Holding
Company and all of the issued and outstanding capital stock of the Bank will be
owned by the Holding Company.

Business

     Prior to the Stock Conversion, the Holding Company has not and will not
engage in any significant activities other than of an organizational nature.
Upon completion of the Stock Conversion, the Holding Company's sole business
activity will be the ownership of the outstanding capital stock of the Bank.  In
the future, the Holding Company may acquire or organize other operating
subsidiaries, although there are no current plans, arrangements, agreements or
understandings, written or oral, to do so.

     Initially, the Holding Company will neither own nor lease any property but
will instead use the premises, equipment and furniture of the Bank with the
payment of appropriate rental fees, as required by applicable law and
regulations.

     Since the Holding Company will only hold the outstanding capital stock of
the Bank upon consummation of the Stock Conversion, the competitive conditions
applicable to the Holding Company will be the same as those confronting the
Bank.  See "BUSINESS OF THE BANK -- Competition."

                                       45
<PAGE>
 
                             BUSINESS OF THE BANK

General

     The Bank operates, and intends to continue to operate, as a community
oriented financial institution and is devoted to serving the personal and
business needs of individuals residing in its primary market area. The Bank's
business consists primarily of attracting retail deposits from the general
public and using those funds to originate loans secured by real estate. The Bank
believes that its operations more closely resemble those of a traditional
commercial bank than a traditional thrift institution. In addition to
originating one- to- four family mortgage loans, the Bank originates commercial
business loans, consumer loans and other short-term non-real estate loans funded
increasingly by transaction accounts rather than long-term certificates. See 
"--Lending Activities" and "-- Deposit Activities and Other Sources of Funds." 
In addition, the Bank offers trust services. See "-- Trust Powers."

Market Area

     The Bank considers Rutherford, Bedford and Williamson Counties in Central
Tennessee to be its primary market area.  A large number of the Bank's
depositors reside, and a substantial portion of its loan portfolio is secured by
properties located, in Rutherford and Bedford Counties.  See "RISK FACTORS --
Geographic Concentration of Credit Risk."

     Rutherford and Bedford Counties had a 1990 population of approximately
118,570 and 30,411, respectively, according to the Rutherford and Bedford Areas
Chambers of Commerce.  The economy of Rutherford and Bedford Counties are
diverse and generally stable.  According to the U.S. Bureau of Labor Statistics,
the Rutherford and Bedford Counties unemployment rates were 3.4% and 5.1%,
respectively, for December 1996.  According to the Rutherford and Bedford Area
Chambers of Commerce, major employers include Nissan Motor Manufacturing Corp.
USA, Rutherford County Government, Whirlpool Corp., Bridgestone/Firestone Inc.,
Middle Tennessee State University, Alvin C. York Veterans Administration Medical
Center and Ingram Book Co., among others.

     The Bank faces intense competition from many financial institutions for
deposits and loan originations.  See "-- Competition" and "RISK FACTORS --
Competition."

Lending Activities

     General.  At September 30, 1997, the Bank's total loans receivable
portfolio amounted to $220.6 million, or 79.9% of total assets at that date.
The Bank has traditionally concentrated its lending activities on conventional
first mortgage loans secured by one- to- four family properties, with such loans
amounting to $84.0 million, or 32.7% of the total loans receivable portfolio at
September 30, 1997.  In addition, the Bank originates construction loans,
commercial real estate loans, land loans, consumer loans and commercial business
loans.  A substantial portion of the Bank's loan portfolio is secured by real
estate, either as primary or secondary collateral, located in its primary market
area.  See "RISK FACTORS -- Certain Lending Risks -- Geographic Concentration of
Credit Risk."

                                       46
<PAGE>
 
     Loan Portfolio Analysis.  The following table sets forth the composition of
the Bank's loan portfolio by type of loan as of the dates indicated.

<TABLE>
<CAPTION>
                                     At          
                             September 30, 1997  
                             ------------------  
                              Amount   Percent   
                             --------  --------  
                            (Dollars in thousands)

<S>                          <C>       <C>       
Mortgage Loans:                                  
 One-to-four family(1).....  $ 84,036     32.7%  
 Multi-family..............     1,385      0.5   
 Commercial................    37,104     14.4   
 Construction..............    68,794     26.7   
 Acquisition and                                 
  development..............    10,634      4.2   
                             --------    -----   
  Total mortgage loans.....   201,953     78.5   
                             --------            
Consumer Loans:                                  
 Home equity lines of                            
  credit...................     2,829      1.1   
 Automobile................     4,808      1.9   
 Unsecured.................     1,855      0.7   
 Other secured.............    23,742      9.2   
                             --------    -----   
   Total consumer loans....    33,234     12.9   
                                                 
Commercial business loans..    22,136      8.6   
                             --------    -----   
                                                 
   Total loans.............   257,323    100.0%  
                                         =====   
                                                 
Less:                                            
 Undisbursed portion of                          
  loans in process.........    33,201   
 Net deferred loan fees....       762   
 Allowance for loan losses.     2,801   
                             --------            
                                                 
  Total loans receivable,                        
   net.....................  $220,559   
                             ========            
 
<CAPTION>

                                                                        At December 31,
                             --------------------------------------------------------------------------------------------------
                                    1996                1995                1994                1993                1992
                             ------------------  ------------------  ------------------  ------------------  ------------------
                              Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent
                             --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
                                                                   (Dollars in thousands)
<S>                          <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Mortgage Loans:              
 One- to- four family(1)...  $ 81,279     33.1%  $ 72,302     36.4%  $ 82,793     43.5%  $ 76,687     42.2%  $ 94,549     50.6%
 Multi-family..............     2,847      1.2      1,705      0.9      2,285      1.2      8,546      4.7      8,188      4.4
 Commercial................    30,099     12.3     22,140     11.1     16,808      8.8     17,617      9.7      7,159      3.8
 Construction..............    61,032     24.9     47,416     23.9     40,261     21.1     35,969     19.8     27,389     14.6
 Acquisition and             
  development..............    18,799      7.7     13,816      6.8      9,962      5.3      7,500      4.0      8,582      4.6
                             --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
  Total mortgage loans.....   194,056     79.2    157,379     79.1    152,109     79.9    146,319     80.4    145,867     78.0
                             --------            --------            --------            --------            --------
Consumer Loans:              
 Home equity lines of        
  credit...................     1,964      0.8        941      0.5        228      0.1          3       --         24       --
 Automobile................     3,716      1.5      2,735      1.4      2,144      1.1      2,131      1.2        872      0.5
 Unsecured.................     1,779      0.7      1,996      1.0      2,129      1.1      2,051      1.1        127      0.1
 Other secured.............    23,037      9.4     20,982     10.6     22,409     11.8     22,574     12.4     21,516     11.4
                             --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
   Total consumer loans....    30,496     12.4     26,654     13.5     26,910     14.1     26,759     14.7     22,539     12.0
                             
Commercial business loans..    20,698      8.4     14,771      7.4     11,451      6.0      8,834      4.9     18,675     10.0
                             --------    -----   --------    -----   --------    -----   --------    -----   --------    -----
                             
   Total loans.............   245,250    100.0%   198,804    100.0%   190,470    100.0%   181,912    100.0%   187,081    100.0%
                                         =====               =====               =====               =====               =====
                             
Less:                        
 Undisbursed portion of      
  loans in process.........    36,573              32,615              21,228              20,699              14,744
 Net deferred loan fees....       701                 560                 533                 589                 902
 Allowance for loan losses.     2,123               1,997               1,776               1,681               1,520
                             --------            --------            --------            --------            --------
                             
  Total loans receivable,    
   net.....................  $205,853            $163,632            $166,933            $158,943            $169,915
                             ========            ========            ========            ========            ========
</TABLE>

      -------------------
      (1)  Includes loans held-for-sale.

                                       47
<PAGE>
 
  One-to-Four Family Real Estate Lending.  Historically, the Bank has
concentrated its lending activities on the origination of loans secured by first
mortgage loans on existing one-to-four family residences located in its
primary market area.  At September 30, 1997, $84.0 million, or 32.7% of the
Bank's total loan portfolio, consisted of such loans.  The Bank originated $54.6
million, $73.1 million, $63.2 million and $57.1 million of one-to-four family
residential mortgage loans during the nine months ended September 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, respectively.

  Generally, the Bank's fixed-rate one-to-four family mortgage loans have
maturities ranging from 15 to 30 years and are fully amortizing with monthly
payments sufficient to repay the total amount of the loan with interest by the
end of the loan term.  Generally, they are originated under terms, conditions
and documentation which permit them to be sold to U.S. Government sponsored
agencies such as Federal Home Loan Mortgage Corporation ("FHLMC").  The Bank's
fixed-rate loans customarily include "due on sale" clauses, which give the Bank
the right to declare a loan immediately due and payable in the event the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not paid.

  The Bank also originates ARM loans at rates and terms competitive with market
conditions.  At September 30, 1997, $72.6 million, or 28.1% of the Bank's gross
loan portfolio, were subject to periodic interest rate adjustments.  The Bank
originates for its portfolio ARM loans which provide for an interest rate which
adjusts every year or which is fixed for one, three or five years and then
adjusts every year after the initial period.  Most of the Bank's one-year,
three-year and five-year ARMs adjust every year after the initial fixed rate
period based on the one year Treasury constant maturity index.  The Bank's ARMs
are typically based on a 30-year amortization schedule.  The Bank qualifies the
borrowers on its nonconforming ARM loans (i.e., loans not originated in
                                          ----                         
conformity with standards that would permit the loans to be sold in the
secondary market) based on the initial rate.  The Bank qualifies the borrowers
on its conforming ARM loans based on the maximum note interest rate during the
second year of the loan.  A one-year ARM loan that is originated according to
FHLMC secondary market standards may be converted to a fixed-rate loan within
five years of the origination date.  ARM loans that are not saleable to the
FHLMC are not permitted to be converted to fixed rate loans.  The Bank does not
offer deep discount or "teaser" rates.  The Bank's current ARM loans do not
provide for negative amortization.  The Bank's ARM loans generally provide for
annual and lifetime interest rate adjustment limits of 2% and 5% to 6%,
respectively.

  Borrower demand for ARM loans versus fixed-rate mortgage loans is a function
of the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees
charged for each type of loan.  The relative amount of fixed-rate mortgage loans
and ARM loans that can be originated at any time is largely determined by the
demand for each in a competitive environment.

  The retention of ARM loans in the Bank's loan portfolio helps reduce the
Bank's exposure to changes in interest rates.  There are, however,
unquantifiable credit risks resulting from the potential of increased costs due
to changed rates to be paid by the customer.  It is possible that during periods
of rising interest rates the risk of default on ARM loans may increase as a
result of repricing and the increased payments required by the borrower.  See
"RISK FACTORS -- Interest Rate Risk."  In addition, although ARM loans allow the
Bank to increase the sensitivity of its asset base to changes in the interest
rates, the extent of this interest sensitivity is limited by the annual and
lifetime interest rate adjustment limits.  Because of these considerations, the
Bank has no assurance that yields on ARM loans will be sufficient to offset
increases in the Bank's cost of funds.  The Bank believes these risks, which
have not had a material adverse effect on the Bank to date, generally are less
than the risks associated with holding fixed-rate loans in portfolio during a
rising interest rate environment.

  The Bank also originates one-to-four family mortgage loans under Federal
Housing Administration ("FHA") and Veterans Administration ("VA") programs and
the Tennessee Housing and Development Agency ("THDA"), an affordable housing
program.  FHA and VA loans are generally sold to private investors, servicing
released (i.e., the right to collect principal and interest payments and forward
          ----                                                                  
it to the purchaser of the loan, maintain escrow accounts for payment of taxes
and insurance and perform other loan administration functions is sold with the
loan).  THDA loans are sold with servicing rights retained.  See "-- Loan
Originations, Sales and Purchases."

                                       48
<PAGE>
 
     The Bank generally requires title insurance insuring the status of its lien
or an acceptable attorney's opinion on all loans where real estate is the
primary source of security.  The Bank also requires that fire and casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the outstanding loan balance.

  The Bank's one-to-four family residential mortgage loans typically do not
exceed 80% of the appraised value of the security property.  Pursuant to
underwriting guidelines adopted by the Bank's Board of Directors, the Bank can
lend up to 95% of the appraised value of the property securing a one-to-four
family residential loan; however, the Bank generally obtains private mortgage
insurance on the portion of the principal amount that exceeds 80% to 95% of the
appraised value of the security property.

  Construction Lending.  The Bank actively originates three types of residential
construction loans: (i) speculative construction loans, (ii) pre-sold
construction loans and (iii) construction/permanent loans. The construction
loan portfolio increased from $27.4 million, or 14.6% of total loans receivable
at December 31, 1992 to $68.8 million, or 26.7% of total loans receivable, at
September 30, 1997.  See "RISK FACTORS -- Certain Lending Risks."  To a
substantially lesser extent, the Bank also originates construction loans for the
development of multi-family and commercial properties.

     At September 30, 1997, the composition of the Bank's construction loan
portfolio was as follows:

<TABLE>
<CAPTION>
 
                                 Outstanding      Percent of
                                  Balance(1)        Total
                                  ----------        -----
                                        (In thousands)
<S>                              <C>              <C>
Residential:
 Speculative construction....      $28,805           41.9%
 Pre-sold construction.......       21,471           31.2
 Construction/permanent......       11,227           16.3
Commercial and multi-family..        7,291           10.6
                                   -------          -----
 Total.......................      $68,794          100.0%
                                   =======          =====
</TABLE>

- --------------------
(1)  Includes loans in process.

     Speculative construction loans are made to home builders and are termed
"speculative" because the home builder does not have, at the time of loan
origination, a signed contract with a home buyer who has a commitment for
permanent financing with either the Bank or another lender for the finished
home.  The home buyer may be identified either during or after the construction
period, with the risk that the builder will have to debt service the speculative
construction loan and finance real estate taxes and other carrying costs of the
completed home for a significant time after the completion of construction until
the home buyer is identified.  The Bank lends to approximately 110 local
builders, many of whom may have only one or two speculative loans outstanding
from the Bank.  The Bank considers approximately 25 builders as core borrowers
with several speculative loans outstanding at any one time.  Rather than
originating lines of credit to home builders to construct several homes at once,
the Bank originates and underwrites a separate loan for each home.  Speculative
construction loans are originated for a term of 12 months, with interest rates
ranging from 0.5% to 2.0% above the prime lending rate, and with a loan-to-value
ratio of no more than 80% of the appraised estimated value of the completed
property.  At September 30, 1997, the Bank had 14 borrowers each with aggregate
outstanding speculative loan balances of more than $500,000, all of which were
performing according to their respective terms and the largest of which amounted
to $1.4 million.

     Unlike speculative construction loans, pre-sold construction loans are made
to home builders who, at the time of construction, have a signed contract with a
home buyer who has a commitment for permanent financing for the finished home
with the Bank or another lender.  Pre-sold construction loans are generally
originated for a term of 12 months, with adjustable interest rates ranging from
0.5% to 1.0% above the prime lending rate, and with loan-to-value ratios of 80%
of the appraised estimated value of the completed property or cost, whichever is
less.  At

                                       49
<PAGE>
 
September 30, 1997, the largest outstanding pre-sold construction loan had an
outstanding balance of $404,000 and was performing according to its terms.

     Construction/permanent loans are originated to the home owner rather than
the home builder. The construction phase of a construction/permanent loan
generally lasts 12 months and the interest rate charged is generally 8.5% to
9.5%, fixed, and with loan-to-value ratios of 80% (or up to 95% with private
mortgage insurance) of the appraised estimated value of the completed property
or cost, whichever is less. At the completion of construction, the Bank may
either originate a fixed-rate mortgage loan or an ARM loan. See "-- Lending
Activities--One-to-Four Family Real Estate Lending." At September 30, 1997,
the largest outstanding construction/permanent loan had an outstanding balance
of $350,000 and was performing according to its terms.

     To a lesser extent, the Bank also provides construction financing for non-
residential properties (i.e., multi-family and commercial properties).  At
                        ----                                              
September 30, 1997, such construction loans amounted to $7.3 million, $4.4
million of which was repaid subsequent to September 30, 1997.

     Construction loans up to $500,000 may be approved by any two members of the
Bank's seven member Loan Committee.  All construction loans over $500,000 must
be approved by the Board of Directors.  See "-- Lending Activities -- Loan
Solicitation and Processing."  Prior to preliminary approval of any construction
loan application, an appraiser approved by the Board of Directors inspects the
site and the Bank reviews the existing or proposed improvements, identifies the
market for the proposed project, analyzes the pro forma data and assumptions on
the project.  In the case of a speculative or pre-sold construction loan, the
Bank reviews the experience and expertise of the builder.  After preliminary
approval has been given, the application is processed, which includes obtaining
credit reports, financial statements and tax returns on the borrowers and
guarantors, an independent appraisal of the project, and any other expert
reports necessary to evaluate the proposed project.  In the event of cost
overruns, the Bank requires that the borrower use its own funds to maintain the
original loan-to-value ratio.

     The construction loan documents require that construction loan proceeds be
disbursed in increments as construction progresses.  Disbursements are based on
periodic on-site inspections by an appraiser and/or Bank personnel approved by
the Board of Directors.  The Bank regularly monitors the construction loan
portfolio and the economic conditions and housing inventory.  Property
inspections are performed by the Bank's property inspector.  The Bank believes
that the internal monitoring system helps reduce many of the risks inherent in
its construction lending.

     Construction lending affords the Bank the opportunity to achieve higher
interest rates and fees with shorter terms to maturity than does its single-
family permanent mortgage lending.  Construction lending, however, is generally
considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project.  The nature of these loans is such that they are generally more
difficult to evaluate and monitor.  If the estimate of construction cost proves
to be inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project.  If the estimate of
value upon completion proves to be inaccurate, the Bank may be confronted with a
project whose value is insufficient to assure full repayment.  Projects may also
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors.  Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the payoff
for the loan depends on the builder's ability to sell the property prior to the
time that the construction loan is due.  The Bank has sought to address these
risks by adhering to strict underwriting policies, disbursement procedures, and
monitoring practices.  In addition, because the Bank's construction lending is
in its primary market area, changes in the local economy and real estate market
could adversely affect the Bank's construction loan portfolio.

     Acquisition and Development Lending.  The Bank originates acquisition and
development loans for the purpose of developing the land (i.e., installing
                                                          ----            
roads, sewers, water and other utilities) for sale for residential housing
construction.  At September 30, 1997, the Bank had land A&D loans with aggregate
approved commitments of $10.6

                                       50
<PAGE>
 
million, of which an aggregate of $9.9 million was outstanding. At September 30,
1997, the largest land A&D loan had an outstanding balance of $495,000 and was
performing according to its terms. All of the land A&D loans are secured by
properties located in the Bank's primary market area. See "RISK FACTORS --
Certain Lending Risks -- Geographic Concentration of Credit Risk."

     Land A&D loans are usually repaid through the sale of the developed land.
However, the Bank believes that its land A&D loans are made to individuals with,
or to corporations the principals of which possess, sufficient personal
financial resources out of which the loans could be repaid, if necessary.

     Land A&D loans are secured by a lien on the property, made for a two year
term, and with an interest rate that adjusts with the prime rate.  The Bank
requires monthly interest payments during the term of the land A&D loan.  After
the expiration of the two year term, the loan is reevaluated, adjusted and/or
extended as a fixed or adjustable rate loan.  In addition, the Bank obtains
personal guarantees from the principals of its corporate borrowers.  At
September 30, 1997, the Bank did not have any nonaccruing land A&D loans.

     Loans secured by undeveloped land or improved lots involve greater risks
than one-to-four family residential mortgage loans because such loans are more
difficult to monitor and foreclose as the Bank may be confronted with a property
the value of which is insufficient to assure full repayment.  Furthermore, if
the borrower defaults the Bank may have to expend its own funds to complete
development and also incur costs associated with marketing and holding the
building lots pending sale.  Land A&D loans are generally considered to involve
a higher degree of risk than single-family permanent mortgage loans because of
the concentration of principal among relatively few borrowers and development
projects, the increased difficulty at the time the loan is originated of
estimating the development building costs, the increased difficulty and costs of
monitoring the loan, the higher degree of sensitivity to increases in market
rates of interest, and the increased difficulty of working out problem loans.  A
concentration of loans secured by properties in any single area presents the
risk that any adverse change in regional economic or employment conditions may
result in increased delinquencies and loan losses.  The Bank attempts to
minimize this risk by limiting the maximum loan-to-value ratio on acquisition
and development loans to 75%, although the Board of Directors has the authority
to approve acquisition and development loans with loan-to-value ratios of up to
80%.

     Commercial Real Estate Lending.  The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties.  At September
30, 1997, $37.1 million, or 14.4% of the Bank's total loan portfolio, consisted
of loans secured by existing commercial real estate properties.  The majority of
the Bank's commercial real estate properties are secured by small businesses,
retail properties and churches located in the Bank's primary market area.

     The Bank requires an evaluation of all properties securing commercial real
estate loans which are $250,000 and less.  Evaluations are performed by the
Bank's commercial loan officers or in-house appraiser, an outside fee appraiser,
or an employee of the Bank designated by the Board of Directors.  Appraisals are
required for all properties securing commercial real estate loans in excess of
$250,000.  Appraisals are performed by an independent appraiser designated by
the Bank and are reviewed by management.  The Bank considers the quality and
location of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property.

     The average size of a commercial real estate loan in the Bank's portfolio
is approximately $100,000 to $200,000.  Commercial real estate loans are
generally structured with fixed rates of interest and terms of three to five
years based on amortization schedules of 15 to 20 years.  At September 30, 1997,
the largest commercial real estate loan had an outstanding balance of $4.4
million.  This loan was repaid subsequent to September 30, 1997.

     Loan-to-value ratios on the Bank's commercial real estate loans are
generally limited to 80%.  As part of the criteria for underwriting commercial
real estate loans, the Bank generally imposes a debt coverage ratio (the ratio
of net cash from operations before payment of debt service to debt service) of
not less than 1.2 times.  It is also the

                                       51
<PAGE>
 
Bank's policy to obtain personal guarantees from the principals of its corporate
borrowers on its commercial real estate loans.

     Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one-to-four
family residential lending.  However, loans secured by such properties usually
are greater in amount, more difficult to evaluate and monitor and, therefore,
involve a greater degree of risk than one-to-four family residential mortgage
loans.  Because payments on loans secured by multi-family and commercial
properties are often dependent on the successful operation and management of the
properties, repayment of such loans may be affected by adverse conditions in the
real estate market or the economy.  The Bank seeks to minimize these risks by
limiting the maximum loan-to-value ratio to 80% and strictly scrutinizing the
financial condition of the borrower, the quality of the collateral and the
management of the property securing the loan.  The Bank also obtains loan
guarantees from financially capable parties based on a review of personal
financial statements.

     Commercial Business Lending.  The Bank's commercial business lending
activities focuses primarily on small to medium size businesses owned by
individuals well known to the Bank and who reside in the Bank's primary market
area.  At September 30, 1997, commercial business loans amounted to $22.1
million, or 8.6% of total loans.

     Commercial business loans may be unsecured loans, but generally are secured
by various types of business collateral other than real estate (i.e., inventory,
                                                                ----            
equipment, etc.). In many instances, however, such loans are often also secured
by junior liens on real estate.  Commercial business loans are generally made in
amounts between $50,000 to $75,000 and may be either lines of credit or term
loans.  Lines of credit are generally renewable and made for a one-year term.
Lines of credit are generally variable rate loans indexed to the prime rate.
Term loans are generally originated with three to five year maturities, with a
maximum of seven years, on a fully amortizing basis.  As with commercial real
estate loans, the Bank generally requires annual financial statements from its
commercial business borrowers and, if the borrower is a corporation, personal
guarantees from the principals.

     At September 30, 1997, the largest commercial business loan to an
unaffiliated borrower was a $2.0 million line of credit secured by marketable
investment securities, with no outstanding balance at that date.  At September
30, 1997, the largest commercial business loan with an outstanding balance had a
balance of $324,000 and was secured by inventory and equipment.  Such loan was
performing according to its terms at September 30, 1997.

     Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending with
loan amounts based on predetermined loan to collateral values and liquidation of
the underlying real estate collateral is viewed as the primary source of
repayment in the event of borrower default.  Although commercial business loans
are often collateralized by equipment, inventory, accounts receivable or other
business assets, the liquidation of collateral in the event of a borrower
default is often not a sufficient source of repayment because accounts
receivable may be uncollectible and inventories and equipment may be obsolete or
of limited use, among other things.  Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.

     As part of its commercial business lending activities, the Bank issues
standby letters of credit or performance bonds as an accommodation to its
borrowers.  See "-- Loan Commitments and Letters of Credit."

     Consumer Lending.  The Bank originates a variety of consumer loans that
generally have shorter terms to maturity and higher interest rates than
residential mortgage loans.  At September 30, 1997, the Bank's consumer loans
totaled $33.2 million, or 15.4%, of the Bank's loans receivable, net.  The
Bank's consumer loans consist primarily of home equity lines of credit,
automobile loans, and a variety of other secured loans, a substantial portion of
which are secured by junior mortgages on real estate.  To a substantially lesser
extent, the Bank also originates unsecured consumer loans.

                                       52
<PAGE>
 
     The Bank anticipates that it will continue to be an active originator of
consumer loans.  Factors that may affect the ability of the Bank to increase its
originations in this area include the demand for such loans, interest rates and
the state of the local and national economy.  Consumer loans accounted for 12.3%
of the Bank's total loan originations in the nine months ended September 30,
1997, and 9.5% and 8.9% in fiscal 1996 and 1995, respectively.

     The Bank offers open-ended home equity lines of credit secured by a second
mortgage on the borrower's primary residence.  These lines of credit have an
interest rate that is one to two percentage points above the prime lending rate,
as published in The Wall Street Journal, which adjusts monthly.  The majority of
the approved lines of credit at September 30, 1997 were less than $50,000.  At
September 30, 1997, approved lines of credit totaled $5.2 million, of which $2.8
million was outstanding.

     At September 30, 1997, the Bank's automobile loan portfolio amounted to
$4.8 million, or 1.9%, of total loans at such date, a substantial portion of
which were secured by used automobiles.  The maximum term for the Bank's
automobile loans is 60 months.  The Bank generally lends up to 80% to 90% of the
purchase price of the automobile.  The Bank requires all borrowers to maintain
automobile insurance, including collision, fire and theft, with a maximum
allowable deductible and with the Bank listed as loss payee.  The Bank does not
engage in indirect automobile lending.

     The Bank's consumer loan portfolio also includes other consumer loans
secured by a variety of collateral, such as recreational vehicles, boats,
motorcycles, deposit accounts and, in many instances, junior mortgages on real
estate.  Such other secured consumer loans were $23.7 million, or 9.2% of total
loans, at September 30, 1997.

     At September 30, 1997, unsecured consumer loans amounted to $1.9 million,
or 0.7% of total loans.  Unsecured loans are made for a term up to 24 months
with fixed rates of interest and are offered primarily to existing customers of
the Bank.  Included in the unsecured consumer loan portfolio are credit card
loans with an aggregate outstanding balance of $199,000 at September 30, 1997.
Approved credit card lines totaled $942,000 at September 30, 1997.  The Bank is
a VISA and MASTERCARD card issuer.  The Bank does not actively solicit credit
card business beyond its customer base and market area and has not engaged in
mailing of pre-approved credit cards.  The rate currently charged by the Bank on
its credit card loans is the prime rate, as published in The Wall Street
Journal, plus 6.9%, and the Bank is permitted to change the interest rate
quarterly.

     Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans that are unsecured or secured by rapidly
depreciating assets such as automobiles and other vehicles.  In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation.  The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment.  In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
that can be recovered on such loans.  At September 30, 1997, the Bank had
$59,000 of consumer loans accounted for on a nonaccrual basis.

     Maturity of Loan Portfolio. The following table sets forth certain
information at September 30, 1997 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments.  Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.  Loan balances do not include
undisbursed loan proceeds and do not reflect the deduction for unearned
discounts, unearned income and allowance for loan losses.
 

                                       53
<PAGE>
 
<TABLE>
<CAPTION> 

                                                   After    After
                                        One Year  3 Years  5 Years
                               Within   Through   Through  Through    After
                              One Year  3 Years   5 Years  10 Years  10 Years   Total
                              --------  --------  -------  --------  --------  --------
                                                   (In thousands)
<S>                           <C>       <C>       <C>      <C>       <C>       <C>
Mortgage loans:
 Residential................   $ 6,801   $10,488  $11,972   $14,802   $56,831  $100,894
 Construction...............    44,144     3,672       --        --        --    47,816
 Commercial.................    14,212     6,272    9,117     4,046       289    33,936
 Consumer and other loans...     9,462     6,956    4,608       203       165    21,394
 Commercial business loans..    10,858     5,177    2,004       387     1,656    20,082
                               -------   -------  -------   -------   -------  --------
   Total....................   $85,477   $32,565  $27,701   $19,438   $58,941  $224,122
                               =======   =======  =======   =======   =======  ========

</TABLE>

     The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have fixed interest rates and have floating or
adjustable interest rates.

<TABLE>
<CAPTION>
                               Fixed         Floating or
                               Rates       Adjustable Rates
                              -------      ----------------
                                    (In thousands)
<S>                           <C>          <C>
Mortgage loans:
 Residential................  $21,508           $72,586
 Construction...............       --             3,672
 Commercial.................   18,886               838
 Consumer and other loans...    8,358             3,574
 Commercial business loans..    9,171                52
                              -------           -------
   Total....................  $57,923           $80,722
                              =======           =======
</TABLE>

     Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets.  The average life of a loan is substantially less
than its contractual terms because of prepayments.  In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid.  The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.  Furthermore, management
believes that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.

    Loan Solicitation and Processing.  The Bank's lending activities are subject
to the written, non-discriminatory, underwriting standards and loan origination
procedures established by the Bank's Board of Directors and management.  Loan
originations come from a number of sources.  The customary sources of loan
originations are realtors, walk-in customers, referrals and existing customers.
A business development program has been implemented where loan officers and
sales personnel make sales calls on building contractors and realtors.  The Bank
also advertises its loan products.

    In marketing its products and services, the Bank emphasizes its community
ties, customized personal service and an efficient underwriting and approval
process.  The Bank uses professional fee appraisers for most residential real
estate loans and construction loans and all commercial real estate and land
loans.  The Bank requires hazard, title and, to the extent applicable, flood
insurance on all security property.

    Loan approval authority varies based on loan type.  Construction loans and
acquisition and development loans up to $500,000 may be approved by any two
members of the Bank's seven member Loan Committee, while loans over $500,000
must be approved by the Board of Directors.  One- to- four family residential
mortgage loans up to $500,000 originated to be held in portfolio may be approved
by any two members of the Loan Committee,

                                       54
<PAGE>
 
while loans over $500,000 must be approved by the Board of Directors.   One- to-
four family residential mortgage loans that are originated for sale to investors
and that are underwritten to the investor's specifications may be approved by
any member of the Loan Committee up to FHLMC loan limits.  Consumer and
commercial business loans may be approved by loan officers individually or in
combination with other loan officers within dollar limits specified by the Loan
Committee.  These dollar limits range from $2,500 to $25,000 for unsecured loans
and from $25,000 to $500,000 for secured loans.  The maximum approval authority
for an individual loan officer is $125,000 for unsecured loans and $250,000 for
secured loans.  All unsecured consumer and commercial business loans over
$250,000, and all secured consumer and commercial business loans over $500,000,
must be approved by the Board of Directors.  Each approved loan, regardless of
type, is reviewed by the Bank's quality control personnel to insure that proper
approval was received.

    Loan Originations, Sales and Purchases.  While the Bank originates both
adjustable-rate and fixed-rate loans, its ability to generate each type of loan
depends upon relative customer demand for loans in its primary market area.

    The Bank sells all loans originated under FHA and VA programs, including
related servicing rights, except for those originated for the THDA.  The Bank
periodically sells conventional one-to-four family loans (i.e., non-FHA/VA
                                                          ----            
loans) with servicing retained and without recourse.  These sales generally
involve fixed-rate loans which help to reduce the Bank's exposure to interest
rate risk, and the proceeds of sale are used to fund continuing operations.
However, the Bank occasionally may sell ARM loans to satisfy liquidity needs.

    Sellers of loans are exposed to various degrees of "pipeline risk," which is
the risk that the value of the loan will decline during the period between the
time the loan is originated and the time of sale because of changes in market
interest rates.  The Bank is exposed to a relatively low degree of pipeline risk
because it generally does not fix the loan interest rate until shortly before or
on the closing date and loans are generally closed against a mandatory purchase
commitment by the FHLMC or other purchaser.

    When conventional loans are sold, the Bank retains the responsibility for
servicing the loans, including collection and remitting mortgage loans payments,
accounting for principal and interest and holding and disbursing escrow or
impound funds for real estate taxes and insurance premiums.  The Bank receives a
servicing fee for performing these services for others.  The Bank's servicing
portfolio amounted to $116.7 million at September 30, 1997.  The Bank is
generally paid a fee equal to 0.25% of the outstanding principal balance for
servicing sold loans.  Loan servicing income totalled $305,000, $447,000,
$561,000 and $285,000 for the nine months ended September 30, 1997 and the years
ended December 31, 1996, 1995 and 1994, respectively.  The Bank earns late
charges collected from delinquent customers whose loans are serviced by the
Bank.  The Bank is allowed to invest escrow impounds (funds collected from
mortgage customers for the payment of property taxes and insurance premiums on
mortgaged real estate) until they are disbursed on behalf of mortgage customers,
but is not required to pay interest on these funds.  At September 30, 1997,
borrowers' escrow funds amounted to $1.1 million.

    Historically, the Bank has not been an active purchaser of loans or
participation interests in loans.

                                       55
<PAGE>
 
    The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
 
                                              Nine Months Ended
                                                September 30,         Year Ended December 31,
                                            --------------------  -------------------------------
                                              1997       1996       1996       1995       1994
                                            ---------  ---------  ---------  ---------  ---------
                                                               (In thousands)
<S>                                         <C>        <C>        <C>        <C>        <C>
Loans originated:
 Mortgage loans:
  One- to- four family....................  $ 54,597   $ 57,501   $ 73,075   $ 63,175   $ 57,145
  Multi-family............................        --         --         --         --        730
  Commercial..............................     4,200      7,100      9,700      7,200      4,700
  Construction............................    59,137     63,335     78,901     66,798     63,196
  Land....................................     3,091      6,649     10,341     10,114      7,633
 Consumer.................................    21,326     16,641     22,625     15,842     15,653
 Commercial business loans................    30,599     30,601     41,222     14,875     16,142
                                            --------   --------   --------   --------   --------
  Total loans originated..................   172,950    181,827    235,864    178,004    165,199
 
Loans purchased:
  One- to- four family....................        --      3,947      3,947         --         --
                                            --------   --------   --------   --------   --------
    Total loans originated and purchased..   172,950    185,774    239,811    178,004    165,199
 
Loans sold:
 Whole loans sold.........................   (48,684)   (52,278)   (71,235)   (67,136)   (48,939)
                                            --------   --------   --------   --------   --------
 Total loans sold.........................   (48,684)   (52,278)   (71,235)   (67,136)   (48,939)
 
Mortgage loan principal repayments........   (64,499)   (52,670)   (81,711)   (72,743)   (46,981)
 
Other loan principal repayments...........   (48,524)   (47,242)   (50,101)   (38,363)   (56,255)
 
Increase (decrease) in other items, net...     3,463      1,838      5,457     (3,060)    (5,037)
                                            --------   --------   --------   --------   --------
Net increase (decrease) in
 loans receivable, net....................  $ 14,706   $ 35,422   $ 42,221   $ (3,298)  $  7,987
                                            ========   ========   ========   ========   ========
</TABLE>

     Loan Commitments and Letters of Credit.  The Bank issues commitments for
mortgage loans conditioned upon the occurrence of certain events.  Such
commitments are made in writing on specified terms and conditions and are
honored for up to 45 days from approval, depending on the type of transaction.
At September 30, 1997, the Bank had loan commitments (excluding undisbursed
portions of interim construction loans of $33.2 million) of $3.8 million and
unused lines of credit of $22.7 million.  See Note 15 of Notes to the
Consolidated Financial Statements.

     As an accommodation to its commercial business borrowers, the Bank issues
standby letters of credit or performance bonds in favor of entities, usually
municipalities, for whom the Bank's borrowers are performing work or other
services.  At September 30, 1997, the Bank had an outstanding standby letter of
credit of $8.1 million that was issued primarily to municipalities as
performance bonds.  See Note 15 of Notes to the Consolidated Financial
Statements.

     Loan Fees.  In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, loan modification, late
payments and for miscellaneous service related to its loan.  Income from these
activities varies from period to period depending upon the volume and type of
loans made and competitive conditions.

                                       56
<PAGE>
 
     The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed.  In accordance with applicable accounting procedures,
loan origination fees and discount points in excess of loan origination costs
are deferred and recognized over the contractual remaining lives of the related
loans on a level yield basis.  Discounts and premiums on loans purchased are
accreted and amortized in the same manner.  The Bank recognized $820,000, $1.2
million, $918,000 and $1.2 million of deferred loan fees during the nine months
ended September 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively, in connection with loan refinancings, payoffs, sales and ongoing
amortization of outstanding loans.

     The Bank also earns fee income on loans serviced for others.  Loan
servicing fees for the nine months ended September 30, 1997 and the year ended
December 31, 1996 amounted to $305,000 and $447,000, respectively.  At September
30, 1997, the Bank serviced loans for others totalling $116.7 million.  See Note
1 of Notes to the  Consolidated Financial Statements.

     Nonperforming Assets and Delinquencies.  When a borrowers fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment.  Contacts are generally made
ten days after a payment is due.  In most cases, deficiencies are cured
promptly.  If a delinquency continues, additional contact is made either through
a notice or other means and the Bank will attempt to work out a payment
schedule.  While the Bank generally prefers to work with borrowers to resolve
such problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.

     Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely in accordance with the
terms of the loan agreement, or when principal or interest is past due 90 days
or more.  Interest accrued but not collected at the date the loan is placed on
nonaccrual status is reversed against income in the current period.  Loans may
be reinstated to accrual status when payments are under 90 days past due and, in
the opinion of management, collection of the remaining past due balances can be
reasonably expected.

     The Bank's Board of Directors is informed monthly of the status of all
loans delinquent more than 60 days, all loans in foreclosure and all foreclosed
and repossessed property owned by the Bank.

                                       57
<PAGE>
 
     The following table sets forth information with respect to the Bank's non-
performing assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                                       At December 31,
                                                         At September 30,  --------------------------------------
                                                              1997          1996    1995    1994    1993     1992
                                                        -----------------  ------  ------  ------  -------  -----
                                                                          (Dollars in thousands)
<S>                                                     <C>                <C>     <C>     <C>     <C>      <C>
Loans accounted for on a nonaccrual basis:
 Mortgage loans:
  One- to- four family................................       $  --         $   9   $  37   $ 204   $  657   $  968
  Commercial..........................................          --            --      --      61        4      187
 Consumer loans.......................................          59            42      70     108      113      274
                                                             -----         -----   -----   -----   ------   ------
      Total...........................................          59            51     107     373      774    1,429
                                                                         
Accruing loans which are contractually                                   
 past due 90 days or more.............................          --            --      --      --       --       --
                                                                         
Total of nonaccrual and 90 days past due loans........          59            51     107     373      774    1,429
                                                             -----         -----   -----   -----   ------   ------
                                                                         
Real estate owned.....................................          --            --      --      95      711    1,015
                                                             -----         -----   -----   -----   ------   ------
                                                                         
     Total nonperforming assets.......................       $  59         $  51   $ 107   $ 468   $1,485   $2,444
                                                             =====         =====   =====   =====   ======   ======
                                                                         
Restructured loans....................................       $  --         $  --   $  --   $  95   $  711   $1,015
                                                             =====         =====   =====   =====   ======   ======
                                                                         
Nonaccrual and 90 days or more past due loans                            
 as a percentage of loans receivable, net.............        0.03%         0.02%   0.07%   0.22%    0.49%    0.84%
                                                                         
Nonaccrual and 90 days or more past due                                  
 loans as a percentage of total assets................        0.02%         0.02%   0.05%   0.18%    0.38%    0.72%
                                                                         
Nonperforming assets as a percentage of total assets..        0.02%         0.02%   0.05%   0.22%    0.72%    1.23%
</TABLE>

     Interest income that would have been recorded for the nine months ended
September 30, 1997 and the year ended December 31, 1996 had nonaccruing loans
been current in accordance with their original terms amounted to $8,700 and
$10,300, respectively.  No interest was included in interest income on such
loans for such periods.

     Real Estate Owned.  See Note 1 of Notes to the Consolidated Financial
Statements for a discussion of the accounting treatment of real estate owned.
At September 30, 1997, the Bank had no real estate acquired in settlement of
loans.

     Restructured Loans.  Under GAAP, the Bank is required to account for
certain loan modifications or restructuring as a "troubled debt restructuring."
In general, the modification or restructuring of a debt constitutes a troubled
debt restructuring if the Bank for economic or legal reasons related to the
borrower's financial difficulties grants a concession to the borrowers that the
Bank would not otherwise consider.  Debt restructurings or loan modifications
for a borrower do not necessarily always constitute troubled debt
restructurings, however, and troubled debt restructurings do not necessarily
result in nonaccrual loans.  The Bank had no restructured loans.

     Asset Classification.  The OTS has adopted various regulations regarding
problem assets of savings institutions.  The regulations require that each
insured institution review and classify its assets on a regular basis.  In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified.  There are three classifications for problem assets:
substandard, doubtful and loss.  Substandard assets have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.

                                       58
<PAGE>
 
Doubtful assets have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss.  An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted.  If an asset or portion thereof is classified as
loss, the insured institution establishes specific allowances for loan losses
for the full amount of the portion of the asset classified as loss.  All or a
portion of general loan loss allowances established to cover possible losses
related to assets classified substandard or doubtful can be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
Assets that do not currently expose the insured institution to sufficient risk
to warrant classification in one of the aforementioned categories but possess
weaknesses are designated "special mention" and monitored by the Bank.

     The aggregate amounts of the Bank's classified and special mention assets,
and of the Bank's general and specific loss allowances at the dates indicated,
were as follows:
<TABLE>
<CAPTION>
 
                                               At December 31,
                             At September 30,  ---------------
                                  1997           1996    1995
                            ----------------   -------  ------
                                       (In thousands)
<S>                         <C>               <C>      <C>
Loss......................       $   --        $   --  $   --
Doubtful..................           --            --      --
Substandard assets........          863           735     748
Special mention...........        1,398           245     252
                                            
General loss allowances...        2,801         2,123   1,997
Specific loss allowances..           --            --      --
</TABLE>

     At September 30, 1997, substandard assets consisted of seven one- to- four
family mortgage loans totalling $482,000 and 33 consumer loans totalling
$381,000, and special mention assets consisted of four commercial real estate
loans, one of which was a $1.1 million loan secured by a golf course property
that was repaid subsequent to September 30, 1997.

     Allowance for Loan Losses.  The Bank has established a systematic
methodology for the determination of provisions for loan losses.  The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
that are tied to individual loans.

     In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan.  The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.

     The general valuation allowance is maintained to cover losses inherent in
the loan portfolio.  Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions.  Specific valuation allowances are established to absorb
losses on loans for which full collectibility cannot be reasonably assured.  The
amount of the allowance is based on the estimated value of the collateral
securing the loan and other analyses pertinent to each situation.  Generally, a
provision for losses is charged against income quarterly to maintain the
allowances.

     At September 30, 1997, the Bank had an allowance for loan losses of $2.8
million.  Management believes that the amount maintained in the allowances at
September 30, 1997 will be adequate to absorb losses inherent in the portfolio.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly

                                       59
<PAGE>
 
and adversely affected if circumstances differ substantially from the
assumptions used in making the determinations.  Furthermore, while the Bank
believes it has established its existing allowance for loan losses in accordance
with GAAP, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to increase significantly its
allowance for loan losses.  In addition, because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above.  Any material increase
in the allowance for loan losses may adversely affect the Bank's financial
condition and results of operations.

     The following table sets forth an analysis of the Bank's gross allowance
for possible loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                     Nine Months
                                       Ended
                                     September 30,             Year Ended December 31,
                                    ----------------  ----------------------------------------
                                     1997     1996     1996    1995    1994     1993     1992
                                    -------  -------  ------  ------  ------   ------   ------ 
                                                      (Dollars in thousands)
<S>                                 <C>      <C>      <C>     <C>     <C>      <C>      <C>
Allowance at beginning of period..  $2,123   $1,997   $1,997  $1,776  $1,681   $1,520   $1,353
Provision for loan losses.........     700       90      120      80     113      690      366
Recoveries:
 Mortgage loans:
  One- to- four family............      --        2       14       8       8        6       --
  Multi-family....................      --       --       --      68      26       --       --
  Commercial......................      --       --        1     101       7       --       --
  Construction....................      --       --       --       3      --       --       --
 Consumer loans:
  Unsecured.......................      14      194      191      --      --       --       --
  Other...........................      --       15       12      12      17       12        9
 Commercial business loans........      --       --       --      --       1       --
                                    ------   ------   ------  ------  ------   ------
   Total recoveries...............      14      211      218     192      59       18        9
 
Charge-offs:
 Mortgage loans:
  One- to- four family............      --       --       10      --      54       --       --
  Construction....................      --       --       --       6      --       --       --
 Consumer loans:
  Home equity lines of credit.....      10       --       --      --      --       --       --
  Automobile......................      25       --       --       4      --       --       --
  Credit card.....................       1       --       --      --      --       --       --
  Unsecured.......................      --      196      196      --      --       --       --
  Other...........................      --       16        6      34      23      547      208
 Commercial business loans........      --       --       --       7      --       --       --
                                    ------   ------   ------  ------  ------   ------   ------
   Total charge-offs..............      36      212      212      51      77      547      208
                                    ------   ------   ------  ------  ------   ------   ------
   Net recoveries (charge-offs)...     (22)      (1)       6     141     (18)    (529)    (199)
                                    ------   ------   ------  ------  ------   ------   ------
    Allowance at end of period....  $2,801   $2,086   $2,123  $1,997  $1,776   $1,681   $1,520
                                    ======   ======   ======  ======  ======   ======   ======
</TABLE>
                      (table continued on following page)

                                       60
<PAGE>
 
<TABLE>
<CAPTION>
                                         Nine Months
                                            Ended
                                        September 30,                   Year Ended December 31,
                                     --------------------  -----------------------------------------------
                                       1997       1996       1996       1995      1994     1993     1992
                                     ---------  ---------  ---------  ---------  -------  -------  -------
                                                            (Dollars in thousands)
<S>                                  <C>        <C>        <C>        <C>        <C>      <C>      <C>
Allowance for loan losses
 as a percentage of total
 loans outstanding at the
 end of the period.................      1.09%      1.04%      0.87%      1.00%    0.93%    0.92%    0.81%
 
Net (charge-offs) recoveries
 as a percentage of average loans
 outstanding during the period.....    (0.01)%        --%        --%      0.09%  (0.01)%  (0.31)%  (0.13)%
 
Allowance for loan losses as
 a percentage of nonperforming
 loans at end of period............  4,747.46%  6,953.33%  4,162.75%  1,866.36%  476.14%  217.18%  106.37%
</TABLE>

     For additional discussion regarding the provisions for loan losses in
recent periods, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Results of Operations -- Comparison of Operating
Results for the Nine months Ended September 30, 1997 and 1996 -- Provision for
Loan Losses," "-- Results of Operations -- Comparison of Operating Results for
the Years Ended December 31, 1996 and 1995 -- Provision for Loan Losses," and
"-- Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 1995 and 1994 -- Provision for Loan Losses."

                                       61
<PAGE>
 
     The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.

<TABLE>
<CAPTION>
                                    At
                               September 30,    
                                   1997         
                             -----------------  
                                     Percent   
                                     of Loans   
                                     in      
                                     Category   
                                     to Total   
                             Amount  Loans    
                             ------  -----
                                                
<S>                          <C>     <C>        
Mortgage loans:                                 
 One- to- four family......  $  420      32.7%  
 Multi-family..............      21       0.5   
 Commercial................     557      14.4   
 Construction..............     534      26.7   
 Land......................     160       4.2   
                                                
Consumer loans:                                 
 Home equity lines of                           
  credit...................      42       1.1   
 Automobile................      61       1.9   
 Credit cards..............       3       0.1   
 Loans secured by deposit                       
  accounts.................      --        --   
 Unsecured.................      25       0.6   
 Other secured.............     356       9.2   
Commercial business loans..     332       8.6   
Unallocated................     290       N/A   
                             ------     -----   
   Total allowance                              
    for loan losses........  $2,801     100.0%  
                             ======     =====   

<CAPTION>
                                                                    At December 31,
                             -----------------------------------------------------------------------------------------------
                                   1996               1995               1994                 1993                1992           
                             ---------------     ---------------     ---------------     ---------------     ----------------    
                                     Percent             Percent             Percent             Percent              Percent    
                                     of Loans            of Loans            of Loans            of Loans             of Loans   
                                     in Category         in Category         in Category         in Category          in Category
                                     to Total            to Total            to Total            to Total             to Total   
                             Amount  Loans       Amount  Loans       Amount  Loans       Amount  Loans       Amount   Loans      
                             ------  -----       ------  -----       ------  -----       ------  -----       ------   -----       
                                                                (Dollars in thousands)                                          
<S>                          <C>     <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>      <C>        
Mortgage loans:                                                                                                                 
 One- to- four family......  $  122     33.1%    $  108    36.4%     $  124     43.5%    $  115    42.2%     $  142    50.6%    
 Multi-family..............       4      1.2          3     0.9           3      1.2         13     4.7          12     4.4     
 Commercial................     301     12.3        221    11.1         168      8.8        176     9.7          72     3.8     
 Construction..............     245     24.9        148    23.9         190     21.1        153    19.8         126    14.6     
 Land......................     188      7.7        138     6.8         100      5.3         75     4.0          86     4.6     
                                                                                                                                
Consumer loans:                                                                                                                 
 Home equity lines of                                                                                                           
  credit...................      25      0.8          9     0.5           2      0.1         --      --          --      --     
 Automobile................      46      1.5         27     1.4          21      1.1         21     1.2           9     0.5     
 Credit cards..............      --       --         --      --          --       --         --      --          --      --     
 Loans secured by deposit                                                                                                       
  accounts.................      --       --          1      --           1      0.2          6     0.3           7     0.4     
 Unsecured.................      22      0.7         20     1.0          20      1.1         21     1.1           1     0.1     
 Other secured.............     288      9.4        209    10.6         209     11.6        220    12.1         208    11.0     
Commercial business loans..     259      8.4        148     7.4         148      6.0         88     4.9         187    10.0     
Unallocated................     623      N/A        965     N/A         790      N/A        793     N/A         670     N/A     
                             ------    -----     ------   -----      ------    -----     ------   -----      ------   -----     
   Total allowance                                                                                                              
    for loan losses........  $2,123    100.0%    $1,997   100.0%     $1,776    100.0%    $1,681   100.0%     $1,520   100.0%    
                             ======    =====     ======   =====      ======    =====     ======   =====      ======   =====   
</TABLE>

                                       62
<PAGE>
 
Investment Activities

     The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, securities of various
federal agencies and of state and municipal governments, deposits at the FHLB-
Cincinnati, certificates of deposit of federally insured institutions, certain
bankers' acceptances and federal funds.  Subject to various restrictions, the
Bank may also invest a portion of its assets in commercial paper and corporate
debt securities.  Savings institutions like the Bank are also required to
maintain an investment in FHLB stock.  The Bank is required under federal
regulations to maintain a minimum amount of liquid assets.  See "REGULATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."

     The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand.  The Bank's investment securities purchases
generally have been limited to U.S. Government and agency securities with
contractual maturities of between one and five years.  The Bank does not expect
a material change in these activities upon consummation of the Conversion.

     The Bank's investment policies generally limit investments to U.S.
Government and agency securities, municipal bonds, certificates of deposits,
marketable corporate debt obligations, mortgage-backed securities.  The Bank's
investment policy does not permit hedging activities or the purchase of high
risk mortgage derivative products or non-investment grade corporate bonds.
Investments are made based on certain considerations, which include the interest
rate, yield, settlement date and maturity of the investment, the Bank's
liquidity position, and anticipated cash needs and sources (which in turn
include outstanding commitments, upcoming maturities, estimated deposits and
anticipated loan amortization and repayments).   The effect that the proposed
investment would have on the Bank's credit and interest rate risk and risk-based
capital is also considered.

                                       63
<PAGE>
 
     The following table sets forth the amortized cost and fair value of the
Bank's debt and mortgage-based and related securities, by accounting
classification and by type of security, at the dates indicated.

<TABLE>
<CAPTION>

                                                                                   At December 31,
                                 At September 30,      ----------------------------------------------------------------------------
                                       1997                       1996                      1995                     1994
                             ------------------------  ------------------------  ------------------------  ------------------------
                              Amortized    Percent of   Amortized    Percent of   Amortized    Percent of   Amortized    Percent of
                               Cost(1)       Total       Cost(1)       Total       Cost(1)       Total       Cost(1)       Total
                             ------------  ----------  ------------  ----------  ------------  ----------  ------------  ----------
                                                                         (In thousands)
<S>                          <C>           <C>         <C>           <C>         <C>           <C>         <C>           <C>
Held to Maturity:
 
Debt Securities:
 U.S. Treasury obligations.    $ 3,000         17.90%    $ 7,005         65.82%    $12,062         31.33%    $ 8,109         35.47%
 U.S. Government agency
  obligations..............        700          4.18         700          6.58      23,488         60.99      11,789         51.55
Mortgage-backed securities.      1,333          7.96       1,419         13.33       1,541          4.00       1,665          7.28
FHLB stock.................      1,602          9.56       1,519         14.27       1,418          3.68       1,304          5.70
                               -------        ------     -------        ------     -------        ------     -------        ------
Total held to maturity
 securities................      6,635         39.60      10,643        100.00      38,509        100.00      22,867        100.00
                               -------        ------     -------        ------     -------        ------     -------        ------
 
Available for Sale:
 
Debt Securities:
 U.S. Treasury obligations.      3,052         18.22          --            --          --            --          --            --
 U.S. Government agency
  obligations..............      7,066         42.18          --            --          --            --          --            --
                               -------        ------     -------        ------     -------        ------     -------        ------
  Total available for sale
   securities..............     10,118         60.40          --            --          --            --          --            --
                               -------        ------     -------        ------     -------        ------     -------        ------
 
Total portfolio............    $16,753        100.00%    $10,643        100.00%    $38,509        100.00%    $22,867        100.00%
                               =======        ======     =======        ======     =======        ======     =======        ======

</TABLE>

- ------------------ 
(1)  The market value of the investment portfolio amounted to $16.8 million,
     $10.6 million, $38.6 million and $22.0 million at September 30, 1997 and
     December 31, 1996, 1995 and 1994, respectively.  At September 30, 1997, the
     market value of the principal components of the Bank's investment
     securities portfolio was as follows: U.S. Government securities, $13.9
     million; mortgage-backed securities, $1.3 million; and FHLB, $1.6 million.

                                       64
<PAGE>
 
     The following table sets forth the maturities and weighted average yields
of the debt and mortgage-backed securities in the Bank's investment securities
portfolio at September 30, 1997.

<TABLE>
<CAPTION>

                                           Less Than         One to          Over Five to         Over Ten
                                            One Year       Five Years         Ten Years            Years
                                         --------------  --------------  --------------------  --------------
                                         Amount  Yield   Amount  Yield      Amount     Yield   Amount  Yield
                                         ------  ------  ------  ------  ------------  ------  ------  ------
                                                                (Dollars in thousands)
<S>                                      <C>     <C>     <C>     <C>     <C>           <C>     <C>     <C>
Held to Maturity:
 
Debt Securities:
 U.S. Government agency obligations....  $3,000   5.83%  $  700   5.53%    $    --       --%   $   --     --%
Mortgage-backed securities.............      --     --       --                 --       --     1,333   7.19
FHLB stock.............................   1,602   7.25       --                 --                 --     --
                                         ------          ------          ---------   ------        --
Total held to maturity securities......   4,602   6.33      700   5.53          --       --     1,333   7.19
 
Available for Sale:
 
Debt Securities:
 U.S. Government agency obligations....   5,040   5.50    5,078   5.67          --       --        --     --
Mortgage-backed securities.............      --     --       --     --          --       --        --     --
Other..................................      --     --       --     --          --       --        --     --
                                         ------          ------          ---------             ------
  Total available for sale securities..   5,040   5.50    5,078   5.67          --       --        --     --
                                         ------          ------          ---------             ------
 
Total portfolio........................  $9,642   5.89%  $5,778   5.65%    $    --       --%   $1,333   7.19%
                                         ======          ======          =========             ======

</TABLE>

                                       65
<PAGE>
 
Deposit Activities and Other Sources of Funds

     General.  Deposits are the major external source of funds for the Bank's
lending and other investment activities.  In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities.  Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions.  Borrowings
from the FHLB-Cincinnati may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources.  Presently, the Bank
has no other borrowing arrangements.

     Deposit Accounts.  Most of the Bank's depositors reside in Tennessee.  The
Bank's deposit products include a broad selection of deposit instruments,
including NOW accounts, demand deposit accounts, money market accounts, regular
passbook savings, statement savings accounts and term certificate accounts.
Deposit account terms vary with the principal difference being the minimum
balance deposit, early withdrawal penalties and the interest rate.  The Bank
reviews its deposit mix and pricing weekly.  The Bank does not utilize brokered
deposits, nor has it aggressively sought jumbo certificates of deposit.

     The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products.  The Bank does not seek to pay the
highest deposit rates but a competitive rate.  The Bank determines the rates
paid based on a number of conditions, including rates paid by competitors, rates
on U.S. Treasury securities, rates offered on various FHLB-Cincinnati lending
programs, and the deposit growth rate the Bank is seeking to achieve.

     In the unlikely event the Bank is liquidated after the Conversion,
depositors will be entitled to full payment of their deposit accounts before any
payment is made to the Holding Company as the sole stockholder of the Bank.

                                       66
<PAGE>
 
  The following table sets forth information concerning the Bank's time deposits
and other interest-bearing deposits at September 30, 1997.

<TABLE>
<CAPTION>

Weighted
Average                                                                                    Percentage
Interest                                                         Minimum                    of Total
  Rate            Term             Category                      Amount       Balance       Deposits
  ----            ----             --------                      ------       -------       --------
                                                                           (In thousands)
<C>             <S>                <C>                          <C>           <C>          <C>
1.50%           --                 NOW Accounts                 $  1,000      $29,981        13.80%
2.00            --                 Savings Accounts                  100       15,202         7.00
4.34            --                 Money Market Accounts           5,000       39,902        18.37

<CAPTION> 

                                   Certificates of Deposit
                                   -----------------------
<C>             <S>                <C>                             <C>        <C>           <C> 
3.55            32 to 89 Days      Fixed-term, Fixed Rate          1,000           37         0.02
4.69            90 to 181 Days     Fixed-term, Fixed Rate          1,000        1,120         0.52
5.22            182 to 364 Days    Fixed-term, Fixed Rate          1,000       27,103        12.48
5.66            12 Months          Fixed-term, Fixed Rate          1,000        1,818         0.84
6.00            12 Months          Fixed-term, Adjustable Rate     1,000        2,025         0.93
8.00            15 Months          Fixed-term, Fixed Rate          1,000           12         0.01
4.95            18 Months          Floating Rate IRA                 250          390         0.18
5.52            12 to 18 Month     Fixed-term, Fixed Rate          1,000       35,983        16.57
5.23            18 to 23 Month     Fixed-term, Fixed Rate          1,000          757         0.35
5.65            18 to 59 Month     Fixed-term, Fixed Rate          1,000          155         0.07
5.04            18 Months          Fixed Rate IRA                    250        8,068         3.71
7.50            21 Months          Fixed-term, Fixed Rate          1,000            4           --
5.45            24 Months          Fixed-term, Fixed Rate          1,000        1,775         0.82
5.50            2 Years            Fixed-term, Adjustable Rate     1,000           10           --
5.60            24 to 35 Month     Fixed-term, Fixed Rate          1,000       12,475         5.74
5.51            36 to 47 Month     Fixed-term, Fixed Rate          1,000        1,813         0.83
5.85            60+ Months         Fixed-term, Fixed Rate          1,000       12,540         5.77
7.75            4 Years            Fixed-term, Fixed Rate          1,000           10           --
5.82            3 to 60 Months     Fixed-term, Fixed Rate        100,000       26,013        11.99
                                                                             --------       ------
                                                                             $217,193       100.00%
                                                                             ========       ======

</TABLE>

     The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1997.  Jumbo
certificates of deposit have principal balances of $100,000 or more and the
rates paid on such accounts are generally negotiable.

<TABLE>
<CAPTION>

Maturity Period                                 Amount
- ---------------                             --------------
                                            (In thousands)
<S>                                         <C>
Three months or less......................     $ 4,390
Over three through six months.............       6,770
Over six through twelve months............      11,395
Over twelve months........................       3,458
                                               -------
    Total.................................     $26,013
                                               =======
</TABLE>

                                       67
<PAGE>
 
Deposit Flow

     The following table sets forth the balances of savings deposits in the
various types of savings accounts offered by the Bank at the dates indicated.

<TABLE>
<CAPTION>

                                    At September 30,    
                                          1997          
                             ------------------------------
                                       Percent               
                                          of      Increase   
                              Amount    Total    (Decrease)  
                             --------  --------  ----------  
<S>                          <C>       <C>       <C>         
                                                             
Non-interest-bearing.......  $ 24,757    10.23%    $ 4,913   
NOW checking...............    29,981    12.39       2,245   
Passbook savings accounts..    15,202     6.28        (604)  
Money market deposit.......    39,902    16.49      11,403   
Fixed-rate certificates                                      
 which mature in the year 
 ending:                                  
  Within 1 year............   112,254    46.40      20,150   
  After 1 year, but within                                   
   2 years.................    14,155     5.85      (8,331)  
  After 2 years, but                                         
   within 5 years..........     5,699     2.36      (2,355)  
  Thereafter...............        --       --          (4)  
                             --------   ------     -------   
                                                             
     Total.................  $241,950   100.00%    $27,417   
                             ========   ======     =======   

<CAPTION>

                                                                     At December 31,
                             ----------------------------------------------------------------------------------------------
                                         1996                             1995                            1994
                             ------------------------------  ------------------------------  ------------------------------
                                       Percent                         Percent                         Percent
                                          of      Increase                of      Increase                of      Increase
                              Amount    Total    (Decrease)   Amount    Total    (Decrease)   Amount    Total    (Decrease)
                             --------  --------  ----------  --------  --------  ----------  --------  --------  ----------
                                                             (Dollars in thousands)
<S>                          <C>       <C>       <C>         <C>       <C>       <C>         <C>       <C>       <C>
                             
Non-interest-bearing.......  $ 19,844     9.25%    $   (31)  $ 19,875    10.10%    $ 5,141   $ 14,734     8.17%    $   384
NOW checking...............    27,736    12.93       3,410     24,326    12.36       1,838     22,488    12.47       3,078
Passbook savings accounts..    15,806     7.37      (1,422)    17,228     8.76      (2,552)    19,780    10.97      (1,497)
Money market deposit.......    28,499    13.28       8,054     20,445    10.39       6,553     13,892     7.71       2,655
Fixed-rate certificates      
 which mature in the year 
 ending:  
  Within 1 year............    92,104    42.93       4,453     87,651    44.55      11,434     76,217    42.28      (7,006)
  After 1 year, but within   
   2 years.................    22,486    10.48       8,654     13,832     7.03      (3,365)    17,197     9.54      (7,692)
  After 2 years, but         
   within 5 years..........     8,054     3.75      (5,290)    13,344     6.78      (2,540)    15,884     8.81       5,097
  Thereafter...............         4     0.01         (29)        33     0.03         (58)        91     0.05          91
                             --------   ------     -------   --------   ------     -------   --------   ------     -------
                             
     Total.................  $214,533   100.00%    $17,799   $196,734   100.00%    $16,451   $180,283   100.00%    $(4,890)
                             ========   ======     =======   ========   ======     =======   ========   ======     =======

</TABLE>

                                       68
<PAGE>
 
     Time Deposits by Rates.  The following table sets forth the amount of time
deposits in the Bank categorized by rates at the dates indicated.

<TABLE>
<CAPTION>
 
                          At               At December 31,
                     September 30,  ----------------------------
                         1997         1996     1995      1994
                    -------------   -------  --------  --------
                              (Dollars in thousands)
<S>               <C>            <C>       <C>       <C>
0.00 - 1.99%....       $    269    $    673  $    377  $    276
2.00 - 3.99%....             --          93       277    23,092
4.00 - 4.99%....          3,812      28,995    10,925    42,874
5.00 - 5.99%....         79,328      59,373    74,193    26,621
6.00 - 6.99%....         48,344      32,937    26,738    13,637
7.00% and over..            355         578     2,349     2,890
                       --------    --------  --------  --------
Total...........       $132,108    $122,649  $114,859  $109,390
                       ========    ========  ========  ========

</TABLE>

     Time Deposits by Maturities.  The following table sets forth the amount of
time deposits in the Bank categorized by maturities at September 30, 1997.

<TABLE>
<CAPTION>
 
                                                       Amount Due
                               -------------------------------------------------------------
                                                        After     After
                                             One to     Two to    Three
                               Less Than       Two      Three     to Four    After
                               One Year       Years     Years     Years     4 Years    Total
                               --------       -----     -----     -----     --------   -----
                                                 (Dollars in thousands)
<S>                            <C>          <C>       <C>       <C>       <C>        <C>
0.00 - 1.99%............       $    269     $     --  $     --  $     --  $     --   $    269
2.00 - 3.99%............             --           --        --        --        --         --
4.00 - 4.99%............          3,576          236        --        --        --      3,812
5.00 - 5.99%............         64,143       10,603     2,137       996     1,449     79,328
6.00 - 6.99%............         44,126        3,294       924        --        --     48,344
7.00% and over..........            140           22       193        --        --        355
                               --------     --------  --------  --------  --------   --------
Total...................       $112,254     $ 14,155  $  3,254  $    996  $  1,449   $132,108
                               ========     ========  ========  ========  ========   ========

</TABLE> 
 
     Deposit Activity. The following table set forth the savings activity of the
Bank for the periods indicated.

<TABLE> 
<CAPTION> 

                                                    Nine Months
                                                       Ended
                                                   September 30,       Year Ended December 31,
                                                  ---------------      -----------------------
                                                  1997       1996      1996      1995     1994
                                                  ----       ----      ----      ----     ----  
                                                                  (In thousands)
<S>                                            <C>        <C>       <C>       <C>       <C> 
Beginning balance.......................       $214,533   $196,734  $196,734  $180,283  $185,174
Net deposits (withdrawals)              
  before interest credited..............         25,338     10,511    15,025    14,018    (6,895)
Interest credited.......................          2,079      2,046     2,774     2,433     2,004
Net increase (decrease)                 
 in deposits............................         27,417     12,557    17,799    16,451    (4,891)
                                               --------   --------  --------  --------  --------
Ending balance..........................       $241,950   $209,291  $214,533  $196,734  $180,283
                                               ========   ========  ========  ========  ========
</TABLE>

     Borrowings.  Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes.
The Bank has the ability to use advances from the FHLB-Cincinnati

                                       69
<PAGE>
 
to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB-Cincinnati functions as a central reserve bank providing
credit for savings associations and certain other member financial institutions.
As a member of the FHLB-Cincinnati, the Bank is required to own capital stock in
the FHLB-Cincinnati and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities that are obligations of, or guaranteed by, the U.S. Government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. At
September 30, 1997, the Bank had no advances outstanding from the FHLB-
Cincinnati.

     The following table sets forth certain information regarding short-term
borrowings by the Bank at the end of and during the periods indicated:

<TABLE>
<CAPTION>
 
                                                          At or For the
                                                           Nine Months
                                                              Ended                At or For the
                                                          September 30,        Year Ended December 31,
                                                          -------------      --------------------------
                                                          1997      1996     1996      1995        1994
                                                          ----      ----     ----      ----        ----
                                                                      (Dollars in thousands)
<S>                                                       <C>       <C>      <C>       <C>        <C>  
Maximum amount of FHLB advance
 outstanding at any month end.....................         $--      $--      $5,000      5,000    $5,000
                                                                   
Approximate average FHLB advance                                   
 outstanding......................................          --       --       5,000      5,000     5,000
                                                                   
Approximate weighted average rate paid                             
 on FHLB advances.................................          --%      --%      5.67%      5.55%     5.34%
</TABLE>

Competition

     The Bank faces intense competition in its primary market area for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Its most direct competition for savings deposits has
historically come from commercial banks, credit unions, other thrifts operating
in its market area, and other financial institutions such as brokerage firms and
insurance companies. As of September 30, 1997, there were 12 commercial banks
and no other thrifts operating in Rutherford and Bedford Counties, Tennessee.
Particularly in times of high interest rates, the Bank has faced additional
significant competition for investors' funds from short-term money market
securities and other corporate and government securities. The Bank's competition
for loans comes from commercial banks, thrift institutions, credit unions and
mortgage bankers. Such competition for deposits and the origination of loans may
limit the Bank's growth in the future. See "RISK FACTORS -- Competition."

Subsidiary Activities

     Federal savings associations generally may invest up to 3% of their assets
in service corporations, provided that at least one-half of any amount in excess
of 1% is used primarily for community, inner-city and community development
projects.

     The Bank had three service corporation subsidiaries in dissolution as of
September 30, 1997. The subsidiaries were either inactive or engaged in an
insignificant level of activities that the Bank is legally permitted to engage
in directly.

                                       70
<PAGE>
 
Trust Department

     The OTS granted trust powers to the Bank on December 13, 1991. The Bank is
one of the few banks in the Bank's primary market area providing a broad range
of trust services. These services include acting as trustee under a living
trust, a Standby Trust or Testamentary Trust; acting as personal representative;
agency services, including custody accounts, agent for the trustee, and agent
for the personal representative; and trustee and agent services for accounts
subject to the provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). In addition to providing fiduciary and investment
advisory services, the Bank provides employee benefit services, such as Self-
Directed Individual Retirement Accounts ("IRAs"). At September 30, 1997, trust
assets under management totalled approximately $185.9 million.

Properties

     The following table sets forth certain information regarding the Bank's
offices at September 30, 1997, all of which are owned except as noted.

<TABLE>
<CAPTION>
 
                                                             Approximate
Location                                    Year Opened    Square Footage    Deposits
- --------                                    -----------    --------------    --------
                                                                             (In thousands)
<S>                                         <C>            <C>               <C>
Main Office:                            
                                        
114 W. College Street                          1974            32,385         $174,043
Murfreesboro, Tennessee 37130                                                 
                                                                              
Branch Offices:                                                               
                                                                              
804 S. Tennessee Boulevard (1)                 1983               578            2,477
Murfreesboro, Tennessee 37130                                                 
                                                                              
1745 Memorial Boulevard                        1984             1,500            8,868
Murfreesboro, Tennessee 37129                                                 
                                                                              
1645 N.W. Broad Street                         1995             1,500            5,525
Murfreesboro, Tennessee 37130                                                 
                                                                              
123 Cason Lane (2)                             1997             1,967           10,810
Murfreesboro, Tennessee 37130                                                 
                                                                              
604 N. Main Street                             1958             1,500           17,647
Shelbyville, Tennessee 37160                                                  
                                                                              
269 S. Lowry Street                            1972             3,898           22,202
Smyrna, Tennessee 37167                                                       
                                                                              
Hazelwood Drive and Nashville Highway          1997             1,100              266
Smyrna, Tennessee 37167
</TABLE>

                      (table continued on following page)

                                       71
<PAGE>
 
<TABLE>
<CAPTION>

 
                                                             Approximate
Location                                    Year Opened    Square Footage    Deposits
- --------                                    -----------    --------------    --------
                                                                             (In thousands)
<S>                                         <C>            <C>               <C>

Almaville Road and Interstate 24 East (3)      1997               935             $112
Smyrna, Tennessee 37167
 
Loan Production Office:
 
236 Public Square (4)
Franklin, Tennessee 37604                      1985             1,200              N/A
</TABLE>

- ------------
(1)  The Bank has received approval from the OTS to relocate this office to
     Southeast Broad and Rutherford Boulevard.
(2)  The Bank relocated this office from 110 John R. Rice Boulevard,
     Murfreesboro, Tennessee, effective June 16, 1997.
(3)  Lease expires in April 2001 with a 5-year option to renew.
(4)  Leased month-to-month.

     The Bank owns two commercial building lots for future branch office
development. The lots are located on U.S. Highway 231 South, Murfreesboro,
Tennessee, and State Highway 96 N.E., Murfreesboro, Tennessee. To date, the Bank
has not contracted with an architect or builder and has not filed the required
regulatory notices to establish branch offices at either of these locations.

     The Bank uses the services of an outside service bureau for its significant
data processing applications. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year 2000 Considerations." At
September 30, 1997, the Bank had 15 proprietary automated teller machines. At
September 30, 1997, the net book value of the Bank's office properties and the
Bank's fixtures, furniture and equipment was $7.9 million.

Personnel

     As of September 30, 1997, the Bank had 132 full-time and 35 part-time
employees, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.

Legal Proceedings

     Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.

                       MANAGEMENT OF THE HOLDING COMPANY

     Directors shall be elected by the stockholders of the Holding Company for
staggered three-year terms, or until their successors are elected and qualified.
The Holding Company's Board of Directors consists of nine persons divided into
three classes, each of which contains approximately one-third of the Board. One
class, consisting of Messrs. Brown, Huddleston and Haynes, has a term of office
expiring at the first annual meeting of stockholders; a second class, consisting
of Messrs. Crosslin, Loughry and Cope, has a term of office expiring at the
second annual meeting of stockholders; and a third class, consisting of Messrs.
Durham, Elam and Knight, has a term of office expiring at the third annual
meeting of stockholders.

                                       72
<PAGE>
 
     The executive officers of the Holding Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors.  The executive
officers of the Holding Company are:

<TABLE> 
<CAPTION> 
     Name                            Position
     ----                            --------
     <S>                             <C> 
     William H. Huddleston, III      Chairman of the Board
     Gary Brown                      Vice Chairman of the Board
     Ed C. Loughry, Jr.              President and Chief Executive Officer
     Ronald F. Knight                Executive Vice President and Chief Operating Officer
     Hillard C. "Bud" Gardner        Senior Vice President and Chief Financial Officer
     William S. Jones                Senior Vice President
     Ira B. Lewis, Jr.               Vice President and Secretary
</TABLE> 

     Since the formation of the Holding Company, none of the executive officers,
Directors or other personnel has received remuneration from the Holding Company.
For information concerning the principal occupations, employment and
compensation of the directors and executive officers of the Holding Company
during the past five years, see "MANAGEMENT OF THE BANK -- Biographical
Information."

                             MANAGEMENT OF THE BANK

Directors and Executive Officers

     The Board of Directors of the Bank is presently composed of nine members
who are elected for terms of three years, approximately one-third of whom are
elected annually in accordance with the Bylaws of the Bank.  The executive
officers of the Bank are elected annually by the Board of Directors and serve at
the Board's discretion.  The following table sets forth information with respect
to the Directors and executive officers of the Bank.

                                   Directors

<TABLE>
<CAPTION>
                                                                           
                                                                                                Current
                                                                                   Director     Term   
Name                           Age (1)    Position with Bank                       Since        Expires
- ----                           -------    ------------------                       --------     -------
<S>                            <C>        <C>                                      <C>          <C>
William H. Huddleston, III       68       Chairman of the Board                    1967         2000
Gary Brown                       55       Vice Chairman of the Board               1984         2000
Ed C. Loughry, Jr.               55       Director, President and Chief            1982         1998
                                          Executive Officer                        
Ronald F. Knight                 47       Director, Executive Vice President       1990         1999
                                          and Chief Operating Officer              
Frank E. Crosslin, Jr.           61       Director                                 1985         1998
Tim J. Durham                    44       Director                                 1986         1999
Ed Elam                          57       Director                                 1977         1999
James C. Cope                    48       Director                                 1992         1998
Terry G. Haynes                  40       Director                                 1997         2000
</TABLE>

                                       73
<PAGE>
 
                    Executive Officers Who Are Not Directors

<TABLE>
<CAPTION>

Name                         Age (1)      Position with Bank
- ----                         -------      ------------------
<S>                          <C>          <C>
Hillard C. "Bud" Gardner         49       Senior Vice President and Chief Financial Officer
David W. Hopper                  54       Senior Vice President and Trust Officer
William S. Jones                 37       Senior Vice President and Trust Officer/Investor Relations
Ira B. Lewis, Jr.                51       Vice President/CRA Compliance Officer and Secretary
R. Dale Floyd                    47       Senior Vice President
M. Glenn Layne                   43       Vice President
Joy B. Jobe                      53       Vice President
</TABLE> 
- ---------------------
(1)  As of September 30, 1997.


Biographical Information

     Set forth below is certain information regarding the Directors and
executive officers of the Bank.  Unless otherwise stated, each Director and
executive officer has held his current occupation for the last five years.
There are no family relationships among or between the Directors or executive
officers.

     William H. Huddleston, III is a Civil Engineer and has been a part-time
employee of Huddleston-Steele Engineering, Inc., an engineering company,
Murfreesboro, Tennessee, since 1994.  Prior to that time, Mr. Huddleston was
President and Chief Executive Officer of Huddleston Engineering, Inc. from 1955
until 1993.  Mr. Huddleston is Chairman of the Public Building Authority of
Rutherford County and is a director of the Christy/Houston Foundation.

     Ed C. Loughry, Jr. joined the Bank in 1968 and has served as President and
Chief Executive Officer of the Bank since 1982.  Mr. Loughry has served on the
Boards of Directors of the Rutherford County Chamber of Commerce, United Way and
Heart Fund, and currently serves as a director of the FHLB of Cincinnati,
Tennessee Bankers Association, Rutherford County 20/20 and the Murfreesboro
Conference Center Authority.  He was selected Business Person of the Year in
1993 by the Chamber of Commerce.

     Ronald F. Knight joined the Bank in 1972 and has served as Executive Vice
President and Chief Operating Officer since 1982.  Mr. Knight serves on the
Board of Directors of the Rutherford County Chamber of Commerce, the Tennessee
Housing Development Agency, and is a committee member of the United Way and is
co-founder of a local charity, "Christmas For The Children."  Mr. Knight has
also served as a director of the Tennessee Bankers Association.

     Gary Brown is the owner and manager of Roscoe Brown, Inc., a heating and
air conditioning company, Murfreesboro, Tennessee.  Mr. Brown is a member of the
Murfreesboro Water Sewer Department Board, the Electrical Examining Board and
the Middle Tennessee State University Foundation Board.

     Frank E. Crosslin, Jr. is President and Chairman of the Board of Crosslin
Supply Company, Inc., a building supply company, Smyrna, Tennessee.  Mr.
Crosslin is a member of the Rutherford County Industrial Bond Board, the Public
Building Authority of Rutherford County and the Smyrna Economic Development
Board.  Mr. Crosslin is also a past director of the Tennessee Housing
Development Agency.

     Tim J. Durham is the owner of Durham Realty & Auction, Inc., a real estate
and auction service company, Murfreesboro, Tennessee.  Mr. Durham is also a
partner in D&H Development Co., commercial and residential developers.  He is a
member of the Murfreesboro Water and Sewer Board.  He served on the Murfreesboro
Planning

                                       74
<PAGE>
 
Commission for eight years and is a former member of the Board of Zoning
Appeals.  Mr. Durham is past President and Director of the Rutherford County
Board of Realtors.

     Ed Elam is the Rutherford County Clerk, Murfreesboro, Tennessee, a position
he has held since 1973.  Mr. Elam is a member of the Christy/Houston Foundation
Board and the Evergreen Cemetery Board.

     James C. Cope is a partner in the law firm, Murfree, Cope, Hudson &
Scarlett, Murfreesboro, Tennessee.  Mr. Cope serves as attorney for Rutherford
County, Tennessee, Middle Tennessee Electric Membership Corporation, the
Murfreesboro Housing Authority, the Smyrna/Rutherford County Airport Authority
and otherwise engages in a general civil practice of law.  He was past President
of the Middle Tennessee State University Foundation and the Murfreesboro Rotary
Club.

     Terry G. Haynes is the Chief Executive Officer, General Manager and Chief
Operating Officer of Haynes Bros. Lumber Co., a retail building supply dealer
located in Murfreesboro, Tennessee.  Mr. Haynes is the Chairman of the
Rutherford County Chamber of Commerce.

     Hillard C. "Bud" Gardner joined the Bank in 1981 and has been Senior Vice
President and Chief Financial Officer since 1982.  Mr. Gardner is a member of
the Tennessee Society of Certified Public Accountants, the Security for Public
Deposit Task Force, the American Institute of Certified Public Accountants and
the Optimist International.

     David W. Hopper joined the Bank in 1992 and has been Senior Vice President
and Trust Officer since that time.  Mr. Hopper is a member of the Murfreesboro
Rotary Club, the Hospice of Murfreesboro, and the Murfreesboro School Board.

     William S. Jones joined the Bank in 1992 and has been Senior Vice President
since January 1997.  Prior to that time, Mr. Jones was Vice President/Senior
Vice President and Trust Officer of the Bank.  Mr. Jones is an executive officer
and a member of the Board of Trustees of the Middle Tennessee State University
Foundation and a member of the Board of Trustees of the Middle Tennessee Medical
Center Foundation.

     Ira B. Lewis, Jr. joined the Bank in 1993 and has been Vice President/CRA
Compliance Officer and Secretary since January 1996.  Before joining the Bank,
Mr. Lewis was a Field Examiner and Field Manager of the OTS's Nashville Area
Office, an affiliate office of the OTS Central Regional Office, Chicago,
Illinois.

     R. Dale Floyd joined the Bank in September 1987 and has been Senior Vice
President since October 1988.  As Senior Vice President, he supervises the
Bank's mortgage lending activities, including originations, construction and
land development lending and mortgage loan servicing.  Mr. Floyd's civic
activities include participation in Leadership Rutherford, Habitat for Humanity,
Stones River Ducks Unlimited and Kids Castle Volunteers.  Mr. Floyd is also a
member of the Affordable Housing Advisory Council of the City of Murfreesboro.

     M. Glenn Layne joined the Bank in August 1994 with over 17 years of banking
experience and has served as Vice President and Manager of Commercial and
Consumer Lending since that time.  Before joining the Bank Mr. Layne served as
Vice President and Manager of a Commercial Lending Group with Sun Trust Bank.
Mr Layne is an active member of the Murfreesboro Downtown Lions Club and the
Belle Aire Baptist Church.

     Joy B. Jobe joined the Bank in May 1995 with over 24 years of banking
experience and serves as Vice President of Retail Banking and Business
Development.  Before joining the Bank Ms. Jobe was a Commercial Loan Officer,
Relationship Manager and Assistant Vice President with Sun Trust Bank.  Ms. Jobe
is a member of the Rotary Club and the American Red Cross.

                                       75
<PAGE>
 
Meetings and Committees of the Board of Directors

     The business of the Bank is conducted through meetings and activities of
the Board of Directors and its committees.  During the fiscal year ended
December 31, 1996, the Board of Directors held 12 regular meetings and no
special meetings.  No director attended fewer than 75% of the total meetings of
the Board of Directors and of committees on which such director served.

     The Executive Committee, consisting of Directors Huddleston (Chairman),
Elam, Brown, Loughry and Knight, has the authority to act on behalf of the Board
of Directors in the event of an emergency.  The Executive Committee did not meet
during the year ended December 31, 1996.

     The full Board of Directors functions as a personnel committee responsible
for all personnel issues, including recommending compensation levels for all
employees and senior management to the Board of Directors.  The Board of
Directors, functioning as a personnel committee, met 12 times during the year
ended December 31, 1996.

     The Audit Committee, consisting of Directors Durham (Chairman), Elam,
Crosslin and Haynes, receives and reviews all reports prepared by the Bank's
external and internal auditor.  The Committee meets semi-annually in April and
October to review the reports issued by the internal auditor and the external
auditor.  The Audit Committee met twice during the year ended December 31, 1996.

     The Chairman of the Board annually appoints three directors to serve as the
Nominating Committee for the annual selection of management's nominees for
election as directors.  The Nominating Committee met once during the year ended
December 31, 1996.

     The Bank also maintains standing Loan, Investment, Asset Classification,
Asset/Liability Management, Trust and Compliance Committees.

Directors' Compensation

     All directors, other than the Chairman of the Board and the Vice-Chairman
of the Board, receive a monthly fee of $1,000.  The Chairman of the Board
receives a monthly fee of $1,200 and the Vice-Chairman of the Board receives a
monthly fee of $1,050.  Outside directors receive an additional fee of $200 per
Executive Committee, Audit Committee and Trust Committee meeting attended.
Directors' fees totalled $72,000 for the year ended December 31, 1996.
Following consummation of the Conversion, directors' fees will continue to be
paid by the Bank and, no separate fees are expected to be paid initially for
service on the Holdings Company's Board of Directors.

                                       76
<PAGE>
 
Executive Compensation

     Summary Compensation Table.  The following information is furnished for
Messrs. Loughry and Knight for the year ended December 31, 1996.

<TABLE>
<CAPTION>
                               Annual Compensation(1)
                       ----------------------------------------
Name and                                         Other Annual       All Other
Position               Year   Salary    Bonus   Compensation(2)  Compensation(3)
- --------               ----  --------  -------  ---------------  ---------------
<S>                    <C>   <C>       <C>      <C>              <C>
Ed C. Loughry, Jr.     1996  $140,000  $43,120        --            $18,432     
President and Chief                                                             
Executive Officer                                                               
                                                                                
Ronald F. Knight       1996   120,000   36,960        --             16,332     
Executive Vice
President and Chief
Operating Officer
</TABLE> 
- ---------------------------------
(1) Compensation information for the years ended December 31, 1995 and 1994 has
    been omitted as the Bank was not a public company nor a subsidiary thereof
    at such times.
(2) The aggregate amount of perquisites and other personal benefits was less
    than 10% of the total annual salary and bonus reported.
(3) Includes employer paid medical, dental, group term life and disability
    insurance premiums and employer 401(k) and pension plan contributions.

    Employment Agreements.  In connection with the Stock Conversion, the Holding
Company and the Bank (collectively, the "Employers") will enter into three-year
employment agreements ("Employment Agreements") with Messrs. Loughry and Knight
(individually, the "Executive").  Under the Employment Agreements, the initial
salary levels for Messrs. Loughry and Knight will be $162,000 and $135,000,
respectively, which amounts will be paid by the Bank and may be increased at the
discretion of the Board of Directors or an authorized committee of the Board.
On each anniversary of the commencement date of the Employment Agreements, the
term of each agreement may be extended for an additional year at the discretion
of the Board.  The agreement is terminable by the Employers at any time, by the
Executive if the Executive is assigned duties inconsistent with his initial
position, duties, responsibilities and status, or upon the occurrence of certain
events specified by federal regulations.  In the event that an Executive's
employment is terminated without cause or upon the Executive's voluntary
termination following the occurrence of an event described in the preceding
sentence, the Bank would be required to honor the terms of the agreement through
the expiration of the current term, including payment of current cash
compensation and continuation of employee benefits.

    The Employment Agreements also provide for severance payments and other
benefits in the event of involuntary termination of employment in connection
with any change in control of the Employers.  Severance payments also will be
provided on a similar basis in connection with a voluntary termination of
employment where, subsequent to a change in control, an Executive is assigned
duties inconsistent with his position, duties, responsibilities and status
immediately prior to such change in control.  The term "change in control" is
defined in the agreement as having occurred when, among other things, (a) a
person other than the Holding Company purchases shares of Common Stock pursuant
to a tender or exchange offer for such shares, (b) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of securities of the Holding Company
representing 25% or more of the combined voting power of the Holding Company's
then outstanding securities, (c) the membership of the Board of Directors
changes as the result of a contested election, or (d) shareholders of the
Holding Company approve a merger, consolidation, sale or disposition of all or
substantially all of the Holding Company's assets, or a plan of partial or
complete liquidation.

                                       77
<PAGE>
 
    The maximum value of the severance benefits under the Employment Agreements
is 2.99 times the Executive's average annual compensation during the five-year
period preceding the effective date of the change in control (the "base
amount").  The Employment Agreements provide that the value of the maximum
benefit may be distributed, at the Executive's election, (i) in the form of a
lump sum cash payment equal to 2.99 times the Executive's base amount or (ii) a
combination of a cash payment and continued coverage under the Employers'
health, life and disability programs for a 36-month period following the change
in control, the total value of which does not exceed 2.99 times the Executive's
base amount.  Assuming that a change in control had occurred at September 30,
1997 and that each Executive elected to receive a lump sum cash payment, Messrs.
Loughry and Knight would be entitled to payments of approximately $566,000 and
$491,000, respectively.  Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"), provides that severance payments that equal or exceed three
times the individual's base amount are deemed to be "excess parachute payments"
if they are contingent upon a change in control.  Individuals receiving excess
parachute payments are subject to a 20% excise tax on the amount of such excess
payments, and the Employers would not be entitled to deduct the amount of such
excess payments.

    The Employment Agreements restrict each Executive's right to compete against
the Employers for a period of one year from the date of termination of the
agreement if an Executive voluntarily terminates employment, except in the event
of a change in control.

    Severance Agreements.  In connection with the Stock Conversion, the Holding
Company and the Bank will enter into severance agreements with senior officers
of the Bank.  On each anniversary of the commencement date of the severance
agreements, the term of each agreement may be extended for an additional year at
the discretion of the Board.  It is anticipated that the severance agreements
will have initial terms of two years.

    The severance agreements will provide for severance payments and
continuation of insured employee welfare benefits in the event of involuntary
termination of employment in connection with any change in control of the
Employers in the same manner as provided for in the employment agreements.
Severance payments and benefits also will be provided on a similar basis in
connection with a voluntary termination of employment where, subsequent to a
change in control, an officer is assigned duties inconsistent with his position,
duties, responsibilities and status immediately prior to such change in control.
The term "change in control" is defined in the agreement as having occurred
when, among other things, (a) a person other than the Holding Company purchases
shares of Common Stock pursuant to a tender or exchange offer for such shares,
(b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Holding Company representing 25% or more of the combined
voting power of the Holding Company's then outstanding securities, (c) the
membership of the Board of Directors changes as the result of a contested
election, or (d) shareholders of the Holding Company approve a merger,
consolidation, sale or disposition of all or substantially all of the Holding
Company's assets, or a plan of partial or complete liquidation.

    Assuming that a change in control had occurred at September 30, 1997, and
excluding any other benefits due under the severance agreements, the aggregate
value of the severance benefits payable to the seven officers would be
approximately $650,000.

    Key Personnel Severance Compensation Plan.  In connection with the Stock
Conversion, the Board of Directors of the Bank intends to adopt the Severance
Plan to provide benefits to eligible employees in the event of a change in
control of the Holding Company or the Bank.  In general, all officers (except
for officers who enter into separate employment or severance agreements with the
Holding Company and the Bank) will be eligible to participate in the Severance
Plan.  Under the Severance Plan, in the event of a change in control of the
Holding Company or the Bank, eligible officers, who are terminated or who
terminate employment (but only upon the occurrence of events specified in the
Severance Plan) within 12 months of the effective date of a change in control
will be entitled to a payment based on years of service with the Bank.  However,
the maximum payment for any eligible employee would be equal to three months of
their then current compensation.  Assuming that a change in control had occurred
at September 30, 1997 and the termination of all eligible employees, the maximum
aggregate payment due under the Severance Plan would be approximately $116,000.

                                       78
<PAGE>
 
Benefits

    General.  The Bank currently pays 100% of the premiums for medical, life and
disability insurance benefits for full-time employees, subject to certain
deductibles.

     Defined Benefit Plan.  The Bank formerly maintained a non-contributory
defined benefit pension plan for the benefit of eligible employees.  The plan
was terminated by resolution of the Board of Directors effective December 31,
1997.  The Bank realized a curtailment loss of $200,000 during the fourth
quarter of fiscal 1997 in connection with the funding of the plan at
termination.  The plan covered all employees who completed one year of service
and attained the age of 21 years.  The normal retirement benefit, payable at age
65, was a monthly amount equal to 1.2% times the participant's years of service
up to 25 years.  Optional forms of benefit included, at the participant's
election, a lump sum distribution or various annuity forms of distribution.  The
plan also provided for payment of benefits reduced on an actuarial basis if the
participant elected early retirement at age 60 with 10 years of service and
unreduced benefits if the participant elected early retirement at age 55 with 30
years of service.  Benefits under the plan were not subject to offset for social
security benefits. Pension expense for the fiscal year ended December 31, 1996
was $170,000.  As of September 30, 1997, Messrs. Loughry and Knight had 30 and
26 years, respectively, of credited service under the plan.

     The following table illustrates annual pension benefits payable at normal
retirement age, based on various levels of compensation and years of service.

<TABLE>
<CAPTION>
                 
Highest Five-Year                         Years of Service
Average Annual                 ------------------------------------------
Compensation                     5       10       15       25       35
- ------------                   ------  -------  -------  -------  -------
<S>                            <C>     <C>      <C>      <C>      <C>
$ 10,000.....................  $  600  $ 1,200  $ 1,800  $ 3,000  $ 3,000
  20,000.....................   1,200    2,400    3,600    6,000    6,000
  30,000.....................   1,800    3,600    5,400    9,000    9,000
  40,000.....................   2,400    4,800    7,200   12,000   12,000
  60,000.....................   3,600    7,200   10,800   18,000   18,000
  80,000.....................   4,800    9,600   14,400   24,000   24,000
 100,000.....................   6,000   12,000   18,000   30,000   30,000
 120,000.....................   7,200   14,400   21,600   36,000   36,000
</TABLE>

     401(k) Savings Plan.  The Bank maintains the Cavalry Banking 401(k) Savings
Plan ("401(k) Plan") for the benefit of eligible employees of the Bank.  The
401(k) Plan is intended to be a tax-qualified plan under Sections 401(a) and
401(k) of the Code.  Employees of the Bank who have completed 1,000 hours of
service during 12 consecutive months and who have attained age 21 are eligible
to participate in the 401(k) Plan.  Participants may contribute from 1% to 15%
of their annual compensation to the 401(k) Plan through a salary reduction
election.  The Bank matches participant contributions on a discretionary basis
to a maximum of 3% of compensation contributed by the participant.  In addition
to employer matching contributions, the Bank may contribute a discretionary
amount to the 401(k) Plan in any plan year which is allocated to individual
participants in the proportion that their annual compensation bears to the total
compensation of all participants during the plan year.  To be eligible to
receive a discretionary employer contribution, the participant must complete
1,000 hours of service during the plan year and remain employed by the Bank on
the last day of the plan year.  Participants are at all times 100% vested in all
contributions.  For the year ended December 31, 1996, the Bank incurred total
contribution-related expenses of $143,000 in connection with the 401(k) Plan.

     Generally, the investment of 401(k) Plan assets is managed by the Bank's
Trust Department which serves as the 401(k) Plan trustee.  In connection with
the Stock Conversion, the investment options available to participants will be
expanded to include the opportunity to direct the investment of their 401(k)
Plan account balance to purchase shares of the Common Stock.  A participant in
the 401(k) Plan who elects to purchase Common Stock in the

                                       79
<PAGE>
 
Conversion through the 401(k) Plan will receive the same subscription priority
and be subject to the same individual purchase limitations as if the participant
had elected to make such purchase using other funds.  See "THE CONVERSION --
Limitations on Purchases of Shares."

     Employee Stock Ownership Plan.  The Board of Directors has authorized the
adoption by the Bank of an ESOP for employees of the Bank to become effective
upon the completion of the Stock Conversion.  The ESOP is intended to satisfy
the requirements for an employee stock ownership plan under the Code and ERISA.
Full-time employees of the Holding Company and the Bank who have been credited
with at least 1,000 hours of service during a 12-month period and who have
attained age 21 will be eligible to participate in the ESOP.

     In order to fund the purchase of up to 8% of the Common Stock to be issued
in the Stock Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company.  Such loan will equal 100% of the aggregate purchase price
of the Common Stock.  The loan to the ESOP will be repaid principally from the
Bank's contributions to the ESOP and dividends payable on Common Stock held by
the ESOP over the anticipated 12-year term of the loan.  The interest rate for
the ESOP loan is expected to be the prime rate as published in The Wall Street
Journal on the closing date of the Stock Conversion.  See "PRO FORMA DATA."  To
the extent that the ESOP is unable to acquire 8% of the Common Stock issued in
the Stock Conversion, such additional shares will be acquired following the
Stock Conversion through open market purchases.

     In any plan year, the Bank may make additional discretionary contributions
to the ESOP for the benefit of plan participants in either cash or shares of
Common Stock, which may be acquired through the purchase of outstanding shares
in the market or from individual stockholders or which constitute authorized but
unissued shares or shares held in treasury by the Holding Company.  The timing,
amount, and manner of such discretionary contributions will be affected by
several factors, including applicable regulatory policies, the requirements of
applicable laws and regulations, and market conditions.

     Shares purchased by the ESOP with the proceeds of the loan will be held in
a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation.  Forfeitures will be reallocated among
the remaining plan participants.

     Participants will vest in their accrued benefits under the ESOP at the rate
of 20% per year, beginning upon the completion of one year of participation.  A
participant is fully vested at retirement, in the event of disability or upon
termination of the ESOP.  Benefits are distributable upon a participant's
retirement, early retirement, death, disability, or termination of employment.
The Bank's contributions to the ESOP are not fixed, so benefits payable under
the ESOP cannot be estimated.

     It is anticipated that members of the Board of Directors or officers of the
Bank will be appointed by the Board of Directors to serve as trustees of the
ESOP.  Under the ESOP, the trustees must vote all allocated shares held in the
ESOP in accordance with the instructions of plan participants and unallocated
shares and allocated shares for which no instructions are received must be voted
in the same ratio on any matter as those shares for which instructions are
given.

     Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is recorded
at the fair market value of the ESOP shares when committed to be released to
participants' accounts.  See "RISK FACTORS -- New Expenses Associated With ESOP
and MRP," "PRO FORMA DATA" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of Operations --
Comparison of Operating Results for the Nine Months Ended September 30, 1997 and
1996."

                                       80
<PAGE>
 
     If the ESOP purchases newly issued shares from the Holding Company, total
stockholders' equity would neither increase nor decrease.  However, on a per
share basis, stockholders' equity and per share net earnings would decrease
because of the increase in the number of outstanding shares.

     The ESOP will be subject to the requirements of ERISA and the regulations
of the IRS and the Department of Labor issued thereunder.  The Bank intends to
request a determination letter from the IRS regarding the tax-qualified status
of the ESOP.  Although no assurance can be given that a favorable determination
letter will be issued, the Bank expects that a favorable determination letter
will be received by the ESOP.

     Stock Option Plan.  The Board of Directors of the Holding Company intends
to adopt the Stock Option Plan and to submit the Stock Option Plan to the
stockholders for approval at a meeting held no earlier than six months following
consummation of the Stock Conversion.  Under current OTS regulations, the
approval of a majority vote of the Holding Company's outstanding shares is
required prior to the implementation of the Stock Option Plan within one year of
the consummation of the Stock Conversion.  The Stock Option Plan will comply
with all applicable regulatory requirements.  However, the Stock Option Plan
will not be approved or endorsed by the OTS.

     The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Bank, and to reward officers and key employees for outstanding performance.
The Stock Option Plan will provide for the grant of incentive stock options
("ISOs") intended to comply with the requirements of Section 422 of the Code and
for nonqualified stock options ("NQOs").  Upon receipt of stockholder approval
of the Stock Option Plan, stock options may be granted to key employees of the
Holding Company and its subsidiaries, including the Bank.  Unless sooner
terminated, the Stock Option Plan will continue in effect for a period of ten
years from the date the Stock Option Plan is approved by stockholders.

     A number of authorized shares of Common Stock equal to 10% of the number of
shares of Common Stock issued in connection with the Stock Conversion will be
reserved for future issuance under the Stock Option Plan (655,500 shares based
on the issuance of 6,555,000 shares at the maximum of the Estimated Valuation
Range).  Shares acquired upon exercise of options will be authorized but
unissued shares or treasury shares.  In the event of a stock split, reverse
stock split, stock dividend, or similar event, the number of shares of Common
Stock under the Stock Option Plan, the number of shares to which any award
relates and the exercise price per share under any option may be adjusted by the
Committee (as defined below) to reflect the increase or decrease in the total
number of shares of Common Stock outstanding.

     The Stock Option Plan will be administered and interpreted by a committee
of the Board of Directors ("Committee").  Subject to applicable OTS regulations,
the Committee will determine which nonemployee directors, officers and key
employees will be granted options, whether, in the case of officers and
employees, such options will be ISOs or NQOs, the number of shares subject to
each option, and the exercisability of such options.  All options granted to
nonemployee directors will be NQOs.  The per share exercise price of all options
will equal at least 100% of the fair market value of a share of Common Stock on
the date the option is granted.

     Under current OTS regulations, if the Stock Option Plan is implemented
within one year of the consummation of the Stock Conversion, (i) no officer or
employees could receive an award of options covering in excess of 25%, (ii) no
nonemployee director could receive in excess of 5% and (iii) nonemployee
directors, as a group, could not receive in excess of 30% of the number of
shares reserved for issuance under the Stock Option Plan.

     It is anticipated that all options granted under the Stock Option Plan will
be granted subject to a vesting schedule whereby the options become exercisable
over a specified period following the date of grant.  Under OTS regulations, if
the Stock Option plan is implemented within the first year following
consummation of the Conversion the minimum vesting period will be five years.
All unvested options will be immediately exercisable in the event of the
recipient's death or disability.  Unvested options also will be exercisable
following a change in control (as

                                       81
<PAGE>
 
defined in the Stock Option Plan) of the Holding Company or the Bank to the
extent authorized or not prohibited by applicable law or regulations.  OTS
regulations currently provide that if the Stock Option Plan is implemented prior
to the first anniversary of the Stock Conversion, vesting may not be accelerated
upon a change in control of the Holding Company or the Bank.

     Each stock option that is awarded to an officer or key employee will remain
exercisable at any time on or after the date it vests through the earlier to
occur of the tenth anniversary of the date of grant or three months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee.  Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board.  All stock options are
nontransferable except by will or the laws of descent or distribution.

     Under current provisions of the Code, the federal tax treatment of ISOs and
NQOs is different.  With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised.  If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option.  If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates.  A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements.  With respect to NQOs, the grant of an NQO generally is not a
taxable event for the optionee and no tax deduction will be available to the
Holding Company.  However, upon the exercise of an NQO, the difference between
the fair market value of the Common Stock on the date of exercise and the option
exercise price generally will be treated as compensation to the optionee upon
exercise, and the Holding Company will be entitled to a compensation expense
deduction in the amount of income realized by the optionee.

     Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations.  The size of
individual awards will be determined prior to submitting the Stock Option Plan
for stockholder approval, and disclosure of anticipated awards will be included
in the proxy materials for such meeting.

     Management Recognition Plan.  Following the Stock Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Bank,
subject to shareholder approval.  The MRP will enable the Holding Company and
the Bank to provide participants with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Bank.  The MRP will comply with all applicable regulatory requirements.
However, the MRP will not be approved or endorsed by the OTS.  Under current OTS
regulations, the approval of a majority vote of the Holding Company's
outstanding shares is required prior to the implementation of the MRP within one
year of the consummation of the Stock Conversion.

     The MRP expects to acquire a number of shares of Common Stock equal to 4%
of the Common Stock issued in connection with the Stock Conversion (262,200
shares based on the issuance of 6,555,000 shares in the Conversion at the
maximum of the Estimated Valuation Range).  Such shares will be acquired on the
open market, if available, with funds contributed by the Holding Company or the
Bank to a trust which the Holding Company may establish in conjunction with the
MRP ("MRP Trust") or from authorized but unissued shares or treasury shares of
the Holding Company.

     A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed.  The trustees will be responsible for the investment

                                       82
<PAGE>
 
of all funds contributed by the Holding Company or the Bank to the MRP Trust.
The Board of Directors of the Holding Company may terminate the MRP at any time
and, upon termination, all unallocated shares of Common Stock will revert to the
Holding Company.

     Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock payable ratably over a specified vesting period following the
date of grant.  During the period of restriction, all shares will be held in
escrow by the Holding Company or by the MRP Trust.  Under OTS regulations, if
the MRP is implemented within the first year following consummation of the Stock
Conversion, the minimum vesting period will be five years.  All unvested MRP
awards will vest in the event of the recipient's death or disability.  Unvested
MRP awards will also vest following a change in control (as defined in the MRP)
of the Holding Company or the Bank to the extent authorized or not prohibited by
applicable law or regulations.  OTS regulations currently provide that, if the
MRP is implemented prior to the first anniversary of the Stock Conversion,
vesting may not be accelerated upon a change in control of the Holding Company
or the Bank.

     A recipient of an MRP award in the form of restricted stock generally will
not recognize income upon an award of shares of Common Stock, and the Holding
Company will not be entitled to a federal income tax deduction, until the
termination of the restrictions.  Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the recipient may elect to recognize ordinary income in the year the
restricted stock is granted in an amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions.  In that
event, the Holding Company will be entitled to a deduction in such year and in
the same amount.  Any gain or loss recognized by the recipient upon subsequent
disposition of the stock will be either a capital gain or capital loss.

     Although no specific award determinations have been made at this time, the
Holding Company and the Bank anticipate that if stockholder approval is obtained
it would provide awards to its directors, officers and employees to the extent
and under terms and conditions permitted by applicable regulations.  Under
current OTS regulations, if the MRP is implemented within one year of the
consummation of the Stock Conversion, (i) no officer or employees could receive
an award covering in excess of 25%, (ii) no nonemployee director could receive
in excess of 5% and (iii) nonemployee directors, as a group, could not receive
in excess of 30% of the number of shares reserved for issuance under the MRP.
The size of individual awards will be determined prior to submitting the MRP for
stockholder approval, and disclosure of anticipated awards will be included in
the proxy materials for such meeting.

Transactions with the Bank

     Federal regulations require that all loans or extensions of credit to
executive officers and directors must generally be made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons (unless the loan or
extension of credit is made under a benefit program generally available to all
other employees and does not give preference to any insider over any other
employee) and must not involve more than the normal risk of repayment or present
other unfavorable features.  The Bank's policy is not to make any new loans or
extensions of credit to the Bank's executive officers and directors at different
rates or terms than those offered to the general public.  In addition, loans
made to a director or executive officer in an amount that, when aggregated with
the amount of all other loans to such person and his related interests, are in
excess of the greater of $25,000 or 5% of the Bank's capital and surplus (up to
a maximum of $500,000) must be approved in advance by a majority of the
disinterested members of the Board of Directors.  See "REGULATION -- Federal
Regulation of Savings Associations -- Transactions with Affiliates."  The
aggregate amount of loans by the Bank to its executive officers and directors
was approximately $609,000 at September 30, 1997, or approximately 0.71% of pro
forma stockholders' equity (based on the issuance of the maximum of the
Estimated Valuation Range).

     President and Chief Executive Officer Ed C. Loughry, Jr.'s wife is a
principal partner in an insurance agency from which the Bank purchases some of
its insurance coverage.  Mr. Loughry has no ownership interest in

                                       83
<PAGE>
 
the insurance agency and does not participate in its business affairs.  Mrs.
Loughry is not paid any direct commissions on sales to the Bank.  Premiums paid
to the insurance agency by the Bank amounted to approximately $88,000 and
$68,000 for the year ended December 31, 1996 and the nine months ended September
30, 1997, respectively.

     Director Cope's law firm provides periodic routine legal services to the
Bank.  The Bank paid legal fees to the firm of approximately $25,000 and $11,000
for the year ended December 31, 1996 and the nine months ended September 30,
1997, respectively.  Neither of these amounts represented more than 5% of the
law firm's gross revenues for the law firm's last full fiscal year.

     Periodically, the Bank has used the services of Director Brown's heating
and air conditioning company for maintenance and repair work to the Bank's
office facilities.  The Bank paid to Mr. Brown's company approximately $8,000
and $6,000 during the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively, for work performed.

                                   REGULATION

General

     The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act, as amended ("HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA") and the regulations issued by the OTS and the FDIC to
implement these statutes.  These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements.  In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents.  The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions.  There are periodic
examinations by the OTS and the FDIC to review the Bank's compliance with
various regulatory requirements.  The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.  Any change in such policies, whether by
the OTS, the FDIC or Congress, could have a material adverse impact on the
Holding Company, the Bank and their operations.  The Holding Company, as a
savings and loan holding company, will also be required to file certain reports
with, and otherwise comply with the rules and regulations of, the OTS and the
SEC.

Federal Regulation of Savings Associations

     Office of Thrift Supervision.  The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS generally possesses the supervisory and regulatory duties and
responsibilities formerly vested in the Federal Home Loan Bank Board.  Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.

     Federal Home Loan Bank System.  The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB").  The
designated duties of the FHFB are to:  supervise the FHLBs; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
ensure that the FHLBs operate in a safe and sound manner.  The Bank, as a member
of the FHLB-Cincinnati, is required to acquire and hold shares of capital stock
in the FHLB-Cincinnati in an amount equal to the greater of (i) 1.0% of the
aggregate outstanding principal amount of residential

                                       84
<PAGE>
 
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB-
Cincinnati.  The Bank is in compliance with this requirement with an investment
in FHLB-Cincinnati stock of $1.6 million at September 30, 1997.  Among other
benefits, the FHLB-Cincinnati provides a central credit facility primarily for
member institutions.  It is funded primarily from proceeds derived from the sale
of consolidated obligations of the FHLB System.  It makes advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB-Cincinnati.

     Federal Deposit Insurance Corporation.  The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and soundness of
the banking industry.  The FDIC maintains two separate insurance funds: the Bank
Insurance Fund ("BIF") and the SAIF.  As insurer of the Bank's deposits, the
FDIC has examination, supervisory and enforcement authority over all savings
associations.

     The Bank's deposit accounts are insured by the FDIC under the SAIF to the
maximum extent permitted by law.  The Bank pays deposit insurance premiums to
the FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions.  Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of an
institution's capital ("well capitalized," "adequately capitalized" or
"undercapitalized"), which are defined in the same manner as the regulations
establishing the prompt corrective action system under the FDIA as discussed
below. The matrix so created results in nine assessment risk classifications,
with rates that until September 30, 1996 ranged from 0.23% for well capitalized,
financially sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the SAIF
unless effective corrective action is taken.  The Bank's assessments expensed
for the year ended December 31, 1996 equaled $1.2 million.

     Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio.  In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Bank, paying 0%.  This
assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995.  In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980's to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.

     The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date.  The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations.  It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.

     The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC.  It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital.  If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC.  Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.

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     Liquidity Requirements.  Under OTS regulations, each savings institution is
required to maintain an average daily balance of liquid assets (cash, certain
time deposits and savings accounts, bankers' acceptances, and specified U.S.
Government, state or federal agency obligations and certain other investments)
equal to a monthly average of not less than a specified percentage (currently
4.0%) of its net withdrawable accounts plus short-term borrowings.  Monetary
penalties may be imposed for failure to meet liquidity requirements.  See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources."

     Prompt Corrective Action.  Under the FDIA, as added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), each federal banking
agency is required to implement a system of prompt corrective action for
institutions that it regulates.  The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt corrective
action.  Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a leverage ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well capitalized;"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a
leverage ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets that is equal to or less than
2.0%.

     A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has received
in its most recent examination, and has not corrected, a less than satisfactory
rating for asset quality, management, earnings or liquidity.  The OTS may not,
however, reclassify a significantly undercapitalized institution as critically
undercapitalized.

     An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each company
that controls the institution, with the appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized.  Immediately upon becoming undercapitalized, an
institution shall become subject to various mandatory and discretionary
restrictions on its operations.

     At September 30, 1997, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.

     Standards for Safety and Soundness.  The FDIA requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions relating to: (i) internal controls, information systems
and internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees
and benefits.  The federal banking agencies recently adopted final regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines").  The Guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired.  If the OTS
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard.  OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.

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     Qualified Thrift Lender Test.  All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations.  A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following restrictions
on its operations:  (i) the association may not make any new investment or
engage in activities that would not be permissible for national banks; (ii) the
association may not establish any new branch office where a national bank
located in the savings institution's home state would not be able to establish a
branch office; (iii) the association shall be ineligible to obtain new advances
from any FHLB; and (iv) the payment of dividends by the association shall be
subject to the statutory and regulatory dividend restrictions applicable to
national banks.  Also, beginning three years after the date on which the savings
institution ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB.  In addition, within one year of the date on which a savings association
controlled by a company ceases to be a QTL, the company must register as a bank
holding company and become subject to the rules applicable to such companies.  A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.

     Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Code or that 65% of an
institution's "portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of every 12
months.  Assets that qualify without limit for inclusion as part of the 65%
requirement are loans made to purchase, refinance, construct, improve or repair
domestic residential housing and manufactured housing; home equity loans;
mortgage-backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; direct or indirect
obligations of the FDIC; and loans for educational purposes, loans to small
businesses and loans made through credit cards.  In addition, the following
assets, among others, may be included in meeting the test subject to an overall
limit of 20% of the savings institution's portfolio assets:  50% of residential
mortgage loans originated and sold within 90 days of origination; 100% of
consumer loans; and stock issued by Federal Home Loan Mortgage Corporation or
FNMA.  Portfolio assets consist of total assets minus the sum of (i) goodwill
and other intangible assets, (ii) property used by the savings institution to
conduct its business, and (iii) liquid assets up to 20% of the institution's
total assets.  At September 30, 1997, the qualified thrift investments of the
Bank were approximately 70.6% of its portfolio assets.

     Capital Requirements.  Under OTS regulations a savings association must
satisfy three minimum capital requirements: core capital, tangible capital and
risk-based capital.  Savings associations must meet all of the standards in
order to comply with the capital requirements.  The Holding Company is not
subject to any minimum capital requirements.

     OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets).  Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities.  In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion of
certain assets from capital and to account appropriately for the investments in
and assets of both includable and nonincludable subsidiaries.  An institution
that fails to meet the core capital requirement would be required to file with
the OTS a capital plan that details the steps they will take to reach
compliance.  In addition, the OTS's prompt corrective action regulation provides
that a savings institution that has a leverage ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.  See "--
Federal Regulation of Savings Associations -- Prompt Corrective Action."

     As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks.  The OTS has proposed that only those savings associations rated
a composite one (the highest rating) under the CAMEL rating system for savings
associations will

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be permitted to operate at or near the regulatory minimum leverage ratio of 3%.
All other savings associations will be required to maintain a minimum leverage
ratio of 4% to 5%.  The OTS will assess each individual savings association
through the supervisory process on a case-by-case basis to determine the
applicable requirement.  No assurance can be given as to the final form of any
such regulation, the date of its effectiveness or the requirement applicable to
the Bank.

     Savings associations also must maintain "tangible capital" not less than
1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.

     Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets.  Total risk-based capital consists of the sum
of core and supplementary capital, provided that supplementary capital cannot
exceed core capital, as previously defined.  Supplementary capital includes (i)
permanent capital instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt and mandatory convertible subordinated debt, (ii)
maturing capital instruments such as subordinated debt, intermediate-term
preferred stock and mandatory convertible subordinated debt, subject to an
amortization schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.

     The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets.  Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets.  The categories range from 0% for cash and securities that
are backed by the full faith and credit of the U.S. Government to 100% for
repossessed assets or assets more than 90 days past due.  Qualifying residential
mortgage loans (including multi-family mortgage loans) are assigned a 50% risk
weight.  Consumer, commercial, home equity and residential construction loans
are assigned a 100% risk weight, as are nonqualifying residential mortgage loans
and that portion of land loans and nonresidential construction loans that do not
exceed an 80% loan-to-value ratio.  The book value of assets in each category is
multiplied by the weighing factor (from 0% to 100%) assigned to that category.
These products are then totalled to arrive at total risk-weighted assets.  Off-
balance sheet items are included in risk-weighted assets by converting them to
an approximate balance sheet "credit equivalent amount" based on a conversion
schedule.  These credit equivalent amounts are then assigned to risk categories
in the same manner as balance sheet assets and included risk-weighted assets.

     The OTS has incorporated an interest rate risk component into its
regulatory capital rule.  Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements.  A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
                               ----                                     
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth by
the OTS.  A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate risk component in calculating its total
capital under the risk-based capital rule.  The interest rate risk component is
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
association's assets.  That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data.  A savings association with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise.  The rule
also provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis.  Under certain
circumstances, a savings association may request an adjustment to its interest
rate risk component if it believes that the OTS-calculated interest rate risk
component overstates its interest rate risk exposure.  In addition, certain
"well-capitalized" institutions may obtain authorization to use their own
interest rate risk model to calculate their interest rate risk component in lieu

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of the OTS-calculated amount.  The OTS has postponed the date that the component
will first be deducted from an institution's total capital.

     See "HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE" for a table
that sets forth in terms of dollars and percentages the OTS tangible, core and
risk-based capital requirements, the Bank's historical amounts and percentages
at September 30, 1997 and pro forma amounts and percentages based upon the
assumptions stated therein.

     Limitations on Capital Distributions.  OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers.  In addition, OTS regulations require the Bank to give the OTS 30 days'
advance notice of any proposed declaration of dividends, and the OTS has the
authority under its supervisory powers to prohibit the payment of dividends.
The regulation utilizes a three-tiered approach which permits various levels of
distributions based primarily upon a savings association's capital level.

     A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
A Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus one-half
its surplus capital ratio (i.e., the amount of capital in excess of its fully
                           ----                                              
phased-in requirement) at the beginning of the calendar year or the amount
authorized for a Tier 2 association.  Capital distributions in excess of such
amount require advance notice to the OTS.  A Tier 2 savings association has
capital equal to or in excess of its minimum capital requirement but below its
fully phased-in capital requirement (both before and after the proposed capital
distribution).  Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the previous
four quarters depending on how close the association is to meeting its fully
phased-in capital requirement.  Capital distributions exceeding this amount
require prior OTS approval.  A Tier 3 savings association has capital below the
minimum capital requirement (either before or after the proposed capital
distribution).  A Tier 3 savings association may not make any capital
distributions without prior approval from the OTS.

     The Bank currently meets the criteria to be designated a Tier 1 association
and, consequently, could at its option (after prior notice to, and no objection
made by, the OTS) distribute up to 100% of its net income during the calendar
year plus 50% of its surplus capital ratio at the beginning of the calendar year
less any distributions previously paid during the year.

     Loans to One Borrower.  Under the HOLA, savings institutions are generally
subject to the national bank limit on loans to one borrower.  Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion.  The OTS by regulation has amended the loans to one borrower rule
to permit savings associations meeting certain requirements, including capital
requirements, to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.  At September 30, 1997, the Bank's limit on loans to one borrower
was $9.7 million.  At September 30, 1997, the Bank's largest aggregate amount of
loans to one borrower was $6.1 million.

     Activities of Associations and their Subsidiaries.  When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require.  Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.

     The OTS may determine that the continuation by a savings association of its
ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the

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FDIC or the OTS has the authority to order the savings association to divest
itself of control of the subsidiary.  The FDIC also may determine by regulation
or order that any specific activity poses a serious threat to the SAIF.  If so,
it may require that no SAIF member engage in that activity directly.

     Transactions with Affiliates.  Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank.   A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA.  Generally, Sections 23A and 23B:  (i) limit the extent to which
the insured association or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to 10% of such institution's
capital and surplus and place an aggregate limit on all such transactions with
affiliates to an amount equal to 20% of such capital and surplus, and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a non-
affiliate.  The term "covered transaction" includes the making of loans, the
purchase of assets, the issuance of a guarantee and similar types of
transactions.  Any loan or extension of credit by the Bank to an affiliate must
be secured by collateral in accordance with Section 23A.

     Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest in securities
issued by an affiliate (other than securities of a subsidiary); and (iii) the
OTS may, for reasons of safety and soundness, impose more stringent restrictions
on savings associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B.  Exemptions from Section 23A or 23B may be granted
only by the Federal Reserve Board, as is currently the case with respect to all
FDIC-insured banks.  The Bank has not been significantly affected by the rules
regarding transactions with affiliates.

     The Bank's authority to extend credit to executive officers, directors and
10% shareholders, as well as entities controlled by such persons, is governed by
Sections 22(g) and 22(h) of the Federal Reserve Act, and Regulation O
thereunder.  Among other things, these regulations generally require that such
loans be made on terms and conditions substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of repayment.
Generally, Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position, and requires certain board approval procedures to be followed.
The OTS regulations, with certain minor variances, apply Regulation O to savings
institutions.

     Community Reinvestment Act.  Under the federal CRA, all federally-insured
financial institutions have a continuing and affirmative obligation consistent
with safe and sound operations to help meet all the credit needs of its
delineated community.  The CRA does not establish specific lending requirements
or programs nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to meet all the credit
needs of its delineated community.  The CRA requires the federal banking
agencies, in connection with regulatory examinations, to assess an institution's
record of meeting the credit needs of its delineated community and to take such
record into account in evaluating regulatory applications to establish a new
branch office that will accept deposits, relocate an existing office, or merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution, among others.  The CRA requires
public disclosure of an institution's CRA rating.  The Bank received a
"satisfactory" rating as a result of its latest evaluation.

     Regulatory and Criminal Enforcement Provisions.  The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance.  Civil
penalties cover a wide range of violations and can amount

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<PAGE>
 
to $27,500 per day, or $1.1 million per day in especially egregious cases.
Under the FDIA, the FDIC has the authority to recommend to the Director of the
OTS that enforcement action be taken with respect to a particular savings
institution.  If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances.  Federal law also establishes
criminal penalties for certain violations.

Savings and Loan Holding Company Regulations

     Holding Company Acquisitions.  The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without prior
OTS approval, from acquiring more than 5% of the voting stock of any other
savings association or savings and loan holding company or controlling the
assets thereof.  They also prohibit, among other things, any director or officer
of a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.

     Holding Company Activities.  As a unitary savings and loan holding company,
the Holding Company generally is not subject to activity restrictions under the
HOLA.  If the Holding Company acquires control of another savings association as
a separate subsidiary other than in a supervisory acquisition, it would become a
multiple savings and loan holding company.  There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company.  The HOLA provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than:  (i) furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
insured institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by regulation as of March 5,
1987 to be engaged in by multiple holding companies or (vii) those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies, unless the OTS by regulation, prohibits or limits such activities for
savings and loan holding companies.  Those activities described in (vii) above
also must be approved by the OTS prior to being engaged in by a multiple savings
and loan holding company.

     Qualified Thrift Lender Test.  The HOLA provides that any savings and loan
holding company that controls a savings association that fails the QTL test, as
explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding company
subject to all applicable laws and regulations.

Bank Holding Company Regulation

     General.  Upon consummation of the Bank Conversion, the Holding Company
would become a bank holding company and would register as such with the Federal
Reserve.  Bank holding companies are subject to comprehensive regulation by the
Federal Reserve under the BHCA and the regulations of the Federal Reserve.  As a
bank holding company, the Holding Company will be required to file with the
Federal Reserve annual reports and such additional information as the Federal
Reserve may require and will be subject to regular examinations by the Federal
Reserve.  The Federal Reserve also has extensive enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties to issue cease and desist or removal orders and to require that
a holding company divest subsidiaries (including its bank subsidiaries).  In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices.

     Under the BHCA, a bank holding company must obtain Federal Reserve approval
before: (1) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the

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<PAGE>
 
majority of such shares); (2) acquiring all or substantially all of the assets
of another bank or bank holding company; or (3) merging or consolidating with
another bank holding company.

     Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted, may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition.  Most
states have authorized interstate bank acquisitions by out-of-state bank holding
companies on either a regional or a national basis, and most such statutes
require the home state of the acquiring bank holding company to have enacted a
reciprocal statute.  Tennessee law permits on out-of-state bank holding company
to acquire banks or bank holding companies located in Tennessee subject to the
requirements that the laws of the state in which the acquiring bank holding
company is located permit bank holding companies located in Tennessee to acquire
banks or bank holding companies in the acquiror's state and that the Tennessee
bank sought to be acquired has been in existence for at least five years.

     The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries.  The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks.  The list of activities permitted by the Federal Reserve
includes, among other things, operating a savings institutions, mortgage
company, finance company, credit card company or factoring company, performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers.  The Holding Company has no present plans to
engage in any of these activities.

     Dividends.  The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition.  The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."  See "-- Federal Regulation of
Savings Associations -- Prompt Corrective Action."

     Bank holding companies are required to give the Federal Reserve prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth.  The Federal Reserve may disapprove such a purchase or redemption of
it determines that the proposal would constitute an unsafe or unsound practice
or would violate any law, regulation, Federal Reserve order, or any condition
imposed by, or written agreement with, the Federal Reserve.

     Capital Requirements.  The Federal Reserve has established capital
requirements for bank holding companies that generally parallel the capital
requirements for national banks under the Office of the Comptroller of the
Currency's regulations.  The Federal Reserve regulations provide that capital
standards will generally be applied on a bank only (rather than on a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets.  SEE "HISTORICAL AND PRO FORMA CAPITAL
COMPLIANCE."

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                                 TAXATION

Federal Taxation

     General.  The Holding Company and the Bank will report their income on a
fiscal year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below.  The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Holding Company.

     Bad Debt Reserve.  Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income.  The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve.  Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.

     The provisions repealing the current thrift bad debt rules were passed by
Congress as part of "The Small Business Job Protection Act of 1996."  The new
rules eliminate the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995.  These rules also require that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988).  The Bank has previously recorded a deferred
tax liability equal to the bad debt recapture and as such the new rules will
have no effect on the net income or federal income tax expense.  For taxable
years beginning after December 31, 1995, the Bank's bad debt deduction will be
determined under the experience method using a formula based on actual bad debt
experience over a period of years or, if the Bank is a "large" association
(assets in excess of $500 million) on the basis of net charge-offs during the
taxable year.  The new rules allow an institution to suspend bad debt reserve
recapture for the 1996 and 1997 tax years if the institution's lending activity
for those years is equal to or greater than the institutions average mortgage
lending activity for the six taxable years preceding 1996 adjusted for
inflation.  For this purpose, only home purchase or home improvement loans are
included and the institution can elect to have the tax years with the highest
and lowest lending activity removed from the average calculation.  If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year.  The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking.  In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provisions of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.

     Distributions. To the extent that the Bank makes "nondividend
distributions" to the Holding Company, such distributions will be considered to
result in distributions from the balance of its bad debt reserve as of December
31, 1987 (or a lesser amount if the Bank's loan portfolio decreased since
December 31, 1987) and then from the supplemental reserve for losses on loans
("Excess Distributions"), and an amount based on the Excess Distributions will
be included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "REGULATION" and "DIVIDEND POLICY" for
limits on the

                                       93
<PAGE>
 
payment of dividends by the Bank.  The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.

     Corporate Alternative Minimum Tax.  The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%.  The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI.  In addition, only 90%
of AMTI can be offset by net operating loss carryovers.  AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses).  For taxable years beginning after December
31, 1986, and before January 1, 1996, an environmental tax of 0.12% of the
excess of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax is
paid.

     Dividends-Received Deduction.  The Holding Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations.  The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Holding Company and the Bank will not file a consolidated tax
return, except that if the Holding Company or the Bank owns more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be deducted.

     Audits.  The Bank's federal income tax returns have not been audited within
the past five years.

State Taxation

     General.  The following is a summary of certain Tennessee state tax
considerations relating to the Stock Conversion and the Bank Conversion, but
does not purport to be a complete analysis of all the potential tax
considerations relating thereto.  Investors should consult their own tax
advisors with respect to the application of Tennessee state tax laws to their
particularly situations, as well as any consequences arising under the laws of
any other state, local or foreign tax jurisdiction.

     Tennessee.  Tennessee imposes franchise and excise taxes.  The franchise
tax ($0.25 per $100) is applied either to the Bank's apportioned net worth or
the value of property owned and used in Tennessee, whichever is greater, as of
the close of the Bank's fiscal year.  The excise tax (6%) is applied to net
earnings derived from business done in Tennessee.  Under Tennessee regulations,
bad debt deductions are deductible from the excise tax.  There have not been any
audits of the Bank's state tax returns during the past five years.

     Any cash dividends, in excess of a certain exempt amount, that are paid
with respect to the Common Stock to a shareholder (including a partnership and
certain other entities) who is a resident of the State of Tennessee will be
subject to the Tennessee income tax which is levied at a rate of six percent.
Any distribution by a corporation from earnings according to percentage
ownership is considered a dividend, and the definition of a dividend for
Tennessee income tax purposes may not be the same as the definition of a
dividend for federal income tax purposes.  A corporate distribution may be
treated as a dividend for Tennessee tax purposes if it is made from funds that
exceed the corporation's earned surplus and profits under certain circumstances.

                                 THE CONVERSION

     The OTS has approved the Plan of Conversion subject to its approval by the
members of the Bank entitled to vote thereon and to the satisfaction of certain
other conditions imposed by the OTS in its approval.  OTS approval does not
constitute a recommendation or endorsement of the Plan of Conversion.

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<PAGE>
 
General

     On August 7, 1997, the Board of Directors of the Bank unanimously adopted,
and on December 11, 1997 unanimously amended, the Plan of Conversion, pursuant
to which the Bank will be converted from a federally chartered mutual savings
bank to a federally chartered stock savings bank and, in the discretion of the
Board of Directors, subsequently convert to a Tennessee-chartered  commercial
bank held by the Holding Company, a newly formed Tennessee corporation.  The
following discussion of the Plan of Conversion is qualified in its entirety by
reference to the Plan of Conversion, which is attached as Exhibit A to the
Bank's Proxy Statement and is available to members of the Bank upon request.
The Plan of Conversion is also filed as an exhibit to the Registration
Statement.  See "ADDITIONAL INFORMATION."  The OTS has approved the Plan of
Conversion subject to its approval by the members of the Bank entitled to vote
on the matter at a Special Meeting called for that purpose to be held on March
2, 1998, and subject to the satisfaction of certain other conditions imposed by
the OTS in its approval.

     If the Board of Directors of the Bank decides for any reason, such as
possible delays resulting from overlapping regulatory processing or policies or
conditions that could adversely affect the Bank's or the Holding Company's
ability to consummate the Stock Conversion and transact its business as
contemplated herein and in accordance with the Bank's operating policies, at any
time prior to the issuance of the Common Stock, not to use the holding company
form of organization in implementing the Stock Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Stock Conversion.  In the event that such a decision is made, the Bank
will promptly refund all subscriptions or orders received together with accrued
interest, will withdraw the Holding Company's registration statement from the
SEC and will take all steps necessary to complete the Stock Conversion and
proceed with a new offering without the Holding Company, including filing any
necessary documents with the OTS.  In such event, and provided there is no
regulatory action, directive or other consideration upon which basis the Bank
determines not to complete the Conversion, the Bank will issue and sell the
common stock of the Bank.  There can be no assurance that the OTS would approve
the Stock Conversion if the Bank decided to proceed without the Holding Company.
The following description of the Plan of Conversion assumes that a holding
company form of organization will be utilized in the Stock Conversion.  In the
event that a holding company form of organization is not utilized, all other
pertinent terms of the Plan of Conversion as described below will apply to the
conversion of the Bank from the mutual to stock form of organization and the
sale of the Bank's common stock.

     The Stock Conversion will be accomplished through adoption of a Federal
Stock Charter and Bylaws to authorize the issuance of capital stock by the Bank,
the issuance of all the Bank's capital stock to be outstanding upon consummation
of the Stock Conversion to the Holding Company, the offer and sale of the Common
Stock of the Holding Company and, if undertaken, the Bank Conversion.  Upon
issuance of the Bank's shares of capital stock to the Holding Company, the Bank
will be a wholly owned subsidiary of the Holding Company.  If undertaken, the
Bank Conversion, whereby the Bank would convert to a Tennessee-chartered
commercial bank, would occur after the Stock Conversion.  Pursuant to the Plan
of Conversion, 4,845,000 to 6,555,000 shares of Common Stock are being offered
for sale by the Holding Company at the Purchase Price of $10.00 per share.  As
part of the Stock Conversion, the Bank will issue all of its newly issued common
stock (1,000 shares) to the Holding Company in exchange for 50% of the net
proceeds from the sale of Common Stock by the Holding Company.

     The Plan of Conversion provides generally that:  (i) the Bank will convert
from a federally chartered mutual savings bank to a federally chartered stock
savings bank; (ii) the Common Stock will be offered by the Holding Company in
the Subscription Offering to persons having Subscription Rights; (iii) if
necessary, shares of Common Stock not subscribed for in the Subscription
Offering will be offered in a Direct Community Offering to certain members of
the general public, with preference given to natural persons and trusts of
natural persons residing in the Local Community, and then to certain members of
the general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers pursuant to selected dealers agreements; (iv) the
Holding Company will purchase all of the capital stock of the Bank to be issued
in connection with the Conversion; and (v) subject to the discretion of the
Board of Directors, the Bank would convert to a Tennessee-chartered commercial
bank. The Stock

                                       95
<PAGE>
 
Conversion will be effected only upon completion of the sale of at least
$48,450,000 of Common Stock to be issued pursuant to the Plan of Conversion.

     As part of the Stock Conversion, the Holding Company is making a
Subscription Offering of its Common Stock to holders of Subscription Rights in
the following order of priority: (i) Eligible Account Holders (depositors with
$50.00 or more on deposit as of June 30, 1996); (ii) the Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of December 31, 1997); and (iv) Other Members (depositors of the Bank as of
January 12, 1998 and borrowers of the Bank with loans outstanding as of January
24, 1991, which continue to be outstanding as of January 12, 1998).

     Shares of Common Stock not subscribed for in the Subscription Offering may
be offered for sale in the Direct Community Offering to members of the general
public, with priority being given to natural persons and trusts of natural
persons residing in the Local Community.  The Direct Community Offering, if one
is held, is expected to begin immediately after the Expiration Date, but may
begin at any time during the Subscription Offering.  Shares of Common Stock not
sold in the Subscription and Direct Community Offerings may be offered in the
Syndicated Community Offering.  Regulations require that the Direct Community
and Syndicated Community Offerings be completed within 45 days after completion
of the fully extended Subscription Offering unless extended by the Bank or the
Holding Company with the approval of the regulatory authorities.  If the
Syndicated Community Offering is determined not to be feasible, the Board of
Directors of the Bank will consult with the regulatory authorities to determine
an appropriate alternative method for selling the unsubscribed shares of Common
Stock.  The Plan of Conversion provides that the Stock Conversion must be
completed within 24 months after the date of the approval of the Plan of
Conversion by the members of the Bank.

     No sales of Common Stock may be completed, either in the Subscription
Offering, Direct Community Offering or Syndicated Community Offerings unless the
Plan of Conversion is approved by the members of the Bank.

     The completion of the Offerings, however, is subject to market conditions
and other factors beyond the Bank's control.  No assurance can be given as to
the length of time after approval of the Plan of Conversion at the Special
Meeting that will be required to complete the Direct Community or Syndicated
Community Offerings or other sale of the Common Stock.  If delays are
experienced, significant changes may occur in the estimated pro forma market
value of the Holding Company and the Bank, as converted, together with
corresponding changes in the net proceeds realized by the Holding Company from
the sale of the Common Stock.  In the event the Stock Conversion is terminated,
the Bank would be required to charge all Stock Conversion expenses against
current income.

     Orders for shares of Common Stock will not be filled until at least
4,845,000 shares of Common Stock have been subscribed for or sold and the OTS
approves the final valuation and the Stock Conversion closes.  If the Stock
Conversion is not completed within 45 days after the last day of the fully
extended Subscription Offering and the OTS consents to an extension of time to
complete the Stock Conversion, subscribers will be given the right to increase,
decrease or rescind their subscriptions.  Unless an affirmative indication is
received from subscribers that they wish to continue to subscribe for shares,
the funds will be returned promptly, together with accrued interest at the
Bank's passbook rate from the date payment is received until the funds are
returned to the subscriber.  If such period is not extended, or, in any event,
if the Stock Conversion is not completed, all withdrawal authorizations will be
terminated and all funds held will be promptly returned together with accrued
interest at the Bank's passbook rate from the date payment is received until the
Stock Conversion is terminated.

Purposes of Conversion

     The Board of Directors and management believe that the Conversion is in the
best interests of the Bank, its members and the communities it serves.  The
Bank's Board of Directors has formed the Holding Company to serve as a holding
company, with the Bank as its subsidiary, upon the consummation of the
Conversion.  By converting to the stock form of organization, the Holding
Company and the Bank will be structured in the form used

                                     
                                      96
<PAGE>
 
by holding companies of commercial banks and by a growing number of savings
institutions.  Management of the Bank believes that the Conversion offers a
number of advantages which will be important to the future growth and
performance of the Bank.  The capital raised in the Conversion is intended to
support the Bank's current lending and investment activities and may also
support possible future expansion and diversification of operations, although
there are no current specific plans, arrangements or understandings, written or
oral, regarding any such expansion or diversification.  The Conversion is also
expected to afford the Bank's members and others the opportunity to become
stockholders of the Holding Company and participate more directly in, and
contribute to, any future growth of the Holding Company and the Bank.  The
Conversion will also enable the Holding Company and the Bank to raise additional
capital in the public equity or debt markets should the need arise, although
there are no current specific plans, arrangements or understandings, written or
oral, regarding any such financing activities.  The Bank, as a mutual savings
bank, does not have the authority to issue capital stock or debt instruments,
other than by accepting deposits.

Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank

     Voting Rights.  Savings members and borrowers will have no voting rights in
the converted Bank or the Holding Company and therefore will not be able to
elect directors of the Bank or the Holding Company or to control their affairs.
Currently, these rights are accorded to savings members of the Bank.  Subsequent
to the Stock Conversion, voting rights will be vested exclusively in the Holding
Company with respect to the Bank and the holders of the Common Stock as to
matters pertaining to the Holding Company.  Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the stockholders of the
Holding Company. A stockholder will be entitled to one vote for each share of
Common Stock owned.

     After the Bank Conversion, if undertaken, holders of savings accounts in
and obligors on loans of the Bank will not have voting rights in the Bank.
Exclusive voting rights with respect to the Holding Company shall be vested in
the holders of the Common Stock, account holders and borrowers of the Bank will
not have any voting rights in the Holding Company except and to the extent that
such persons become stockholders of the Holding Company, and the Holding Company
will have exclusive voting rights with respect to the Bank's capital stock.

     Savings Accounts and Loans.  The Bank's savings accounts, account balances
and existing FDIC insurance coverage of savings accounts will not be affected by
the Conversion.  Furthermore, the Conversion will not affect the loan accounts,
loan balances or obligations of borrowers under their individual contractual
arrangements with the Bank.

     Tax Effects.  The Bank has received an opinion from Breyer & Aguggia,
Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code.  Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Bank in its
mutual or stock form by reason of the Stock Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Bank immediately after the Stock Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Bank in its mutual
form plus interest in the liquidation account; (iii) the tax basis of account
holders' accounts in the Bank immediately after the Stock Conversion will be the
same as the tax basis of their accounts immediately prior to Stock Conversion;
(iv) the tax basis of each account holder's interest in the liquidation account
will be zero; (v) the tax basis of the Common Stock purchased in the Stock
Conversion will be the amount paid and the holding period for such stock will
commence at the date of purchase; (vi) no gain or loss will be recognized to
account holders upon the receipt or exercise of Subscription Rights in the
Conversion, except to the extent Subscription Rights are deemed to have value as
discussed below; and (vii) if the Bank Conversion is undertaken, the Bank (as a
Tennessee-chartered commercial bank), will be required to restate its tax
reserve for bad debt to a level generally based on its bad debt experience and
the excess of the restated amount is required to be included in its taxable
income ratably over a six year period.  Unlike a private letter ruling issued by
the IRS, an opinion of counsel is not binding on the IRS and the IRS could
disagree with the conclusions reached therein.  In the event of such
disagreement, no assurance can be given that the conclusions reached in an
opinion of counsel would be sustained by a court if contested by the IRS.


                                      97
<PAGE>
 
     Based upon past rulings issued by the IRS, the opinion provides that the
receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value.  Ferguson, a financial consulting firm retained by the Bank,
whose findings are not binding on the IRS, has issued a letter indicating that
the Subscription Rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration and afford the recipients the right only to purchase shares of
the Common Stock at a price equal to its estimated fair market value, which will
be the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock.  If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights.  The Bank could also recognize a
gain on the distribution of such Subscription Rights.  Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisors as to the tax consequences in the event the
Subscription Rights are deemed to have a fair market value.

     The Bank has also received an opinion from Bass, Berry & Sims PLC,
Nashville, Tennessee, that, assuming the Conversion does not result in any
federal income tax liability to the Bank, its account holders, or the Holding
Company, implementation of the Plan of Conversion will not result in any
Tennessee income tax liability to such entities or persons.

     The opinions of Breyer & Aguggia and Bass, Berry & Sims PLC and the letter
from Ferguson are filed as exhibits to the Registration Statement.  See
"ADDITIONAL INFORMATION."

     PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.

     Liquidation Account.  In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor in the Bank would receive a
pro rata share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors up to the withdrawal value
of their accounts).  Each depositor's pro rata share of such remaining assets
would be in the same proportion as the value of his deposit account to the total
value of all deposit accounts in the Bank at the time of liquidation.

     After the Stock Conversion, holders of withdrawable deposit(s)) in the
Bank, including certificates of deposit ("Savings Account(s)"), shall not be
entitled to share in any residual assets in the event of liquidation of the
Bank. However, pursuant to OTS regulations, the Bank shall, at the time of the
Stock Conversion, establish a liquidation account in an amount equal to its
total equity as of the date of the latest statement of financial condition
contained herein.

     The liquidation account shall be maintained by the Bank subsequent to the
Stock Conversion for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who retain their Savings Accounts in the Bank.  Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to each Savings Account held, have a related inchoate interest in a
portion of the liquidation account balance ("subaccount").

     The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction of
which the numerator is the amount of such holder's "qualifying deposit" in the
Savings Account and the denominator is the total amount of the "qualifying
deposits" of all such holders.  Such initial subaccount balance shall not be
increased, and it shall be subject to downward adjustment as provided below.

     If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing day of the Bank subsequent to June 30, 1996 or December 31, 1997 is less
than the lesser of (i) the deposit balance in such Savings Account at the close
of business on any other annual closing date subsequent to June 30, 1996 or
December 31, 1997 or (ii) the amount of the


                                      98
<PAGE>
 
"qualifying deposit" in such Savings Account on June 30, 1996 or December 31,
1997, then the subaccount balance for such Savings Account shall be adjusted by
reducing such subaccount balance in an amount proportionate to the reduction in
such deposit balance.  In the event of a downward adjustment, such subaccount
balance shall not be subsequently increased, notwithstanding any increase in the
deposit balance of the related Savings Account.  If any such Savings Account is
closed, the related subaccount balance shall be reduced to zero.

     In the event of a complete liquidation of the Bank (and only in such event)
each Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidation distribution from the liquidation account in
the amount of the then current adjusted subaccount balance(s) for Savings
Account(s) then held by such holder before any liquidation distribution may be
made to stockholders.  No merger, consolidation, bulk purchase of assets with
assumptions of Savings Accounts and other liabilities or similar transactions
with another federally insured institution in which the Bank is not the
surviving institution shall be considered to be a complete liquidation.  In any
such transaction the liquidation account shall be assumed by the surviving
institution.

     If undertaken, the Bank Conversion shall not be deemed to be a complete
liquidation of the Bank for purposes of the distribution of the liquidation
account.  The liquidation account, and all rights and obligations of the Bank in
connection therewith, would be assumed by the Bank as a Tennessee-chartered
commercial bank.

The Subscription, Direct Community and Syndicated Community Offerings

     Subscription Offering.  In accordance with the Plan of Conversion,
nontransferable Subscription Rights to purchase the Common Stock have been
issued to persons and entities entitled to purchase the Common Stock in the
Subscription Offering.  The amount of the Common Stock which these parties may
purchase will be subject to the availability of the Common Stock for purchase
under the categories set forth in the Plan of Conversion.  Subscription
priorities have been established for the allocation of stock to the extent that
the Common Stock is available.  These priorities are as follows:

     Category 1:  Eligible Account Holders.  Each depositor with $50.00 or more
on deposit at the Bank as of June 30, 1996 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $655,500 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Eligible Account Holder and the denominator is the total amount of qualifying
deposits of all Eligible Account Holders.  If the exercise of Subscription
Rights in this category results in an oversubscription, shares of Common Stock
will be allocated among subscribing Eligible Account Holders so as to permit
each Eligible Account Holder, to the extent possible, to purchase a number of
shares sufficient to make such person's total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less.  Thereafter,
unallocated shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription Rights received by officers and directors in this category based on
their increased deposits in the Bank in the one year period preceding June 30,
1996 are subordinated to the Subscription Rights of other Eligible Account
Holders.

     Category 2:  ESOP.  The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 10% of the shares
of Common Stock issued in the Stock Conversion.  The ESOP intends to purchase 8%
of the shares of Common Stock issued in the Stock Conversion.  In the event the
number of shares offered in the Stock Conversion is increased above the maximum
of the Estimated Valuation Range, the ESOP shall have a priority right to
purchase any such shares exceeding the maximum of the Estimated Valuation Range
up to an aggregate of 8% of the Common Stock.  However, the ESOP may purchase
all or part of its shares in the open market after the consummation of the
Conversion.


                                      99
<PAGE>
 
     Category 3:  Supplemental Eligible Account Holders.  Each depositor with
$50.00 or more on deposit as of December 31, 1997 will receive nontransferable
Subscription Rights to subscribe for up to the greater of $655,500 of Common
Stock, one-tenth of one percent of the total offering of Common Stock or 15
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of qualifying deposit of the
Supplemental Eligible Account Holder and the denominator is the total amount of
qualifying deposits of all Supplemental Eligible Account Holders.  If the
exercise of Subscription Rights in this category results in an oversubscription,
shares of Common Stock will be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each Supplemental Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal 100 shares or the number of shares actually subscribed for,
whichever is less.  Thereafter, unallocated shares will be allocated among
subscribing Supplemental Eligible Account Holders proportionately, based on the
amount of their respective qualifying deposits as compared to total qualifying
deposits of all Supplemental Eligible Account Holders.

     Category 4:  Other Members.  Each depositor of the Bank as of the Voting
Record Date (January 12, 1998) and each borrower with a loan outstanding on
January 24, 1991, which continues to be outstanding as of the Voting Record Date
will receive nontransferable Subscription Rights to purchase up to $655,500 of
Common Stock in the Stock Conversion to the extent shares are available
following subscriptions by Eligible Account Holders, the Bank's ESOP and
Supplemental Eligible Account Holders.  In the event of an oversubscription in
this category, the available shares will be allocated proportionately based on
the amount of the respective subscriptions.

     Subscription Rights are nontransferable.  Persons selling or otherwise
transferring their rights to subscribe for Common Stock in the Subscription
Offering or subscribing for Common Stock on behalf of another person will be
subject to forfeiture of such rights and possible further sanctions and
penalties imposed by the OTS or another agency of the U.S. Government.  Each
person exercising Subscription Rights will be required to certify that he or she
is purchasing such shares solely for his or her own account and that he or she
has no agreement or understanding with any other person for the sale or transfer
of such shares.  ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE BANK AND THE HOLDING COMPANY.

     The Holding Company and the Bank will make reasonable attempts to provide a
Prospectus and related offering materials to holders of Subscription Rights.
However, the Subscription Offering and all Subscription Rights under the Plan of
Conversion will expire at 12:00 Noon, Central Time, on the Expiration Date,
whether or not the Bank has been able to locate each person entitled to such
Subscription Rights.  Orders for Common Stock in the Subscription Offering
received by the Bank after the Expiration Date will not be accepted.  The
Subscription Offering may be extended by the Holding Company and the Bank up to
March 12, 1998 without the OTS's approval.  OTS regulations require that the
Holding Company complete the sale of Common Stock within 45 days after the close
of the Subscription Offering.  If the Direct Community Offering and the
Syndicated Community Offering are not completed by April 10, 1998 (or April 24,
1998, if the Subscription Offering is fully extended), all funds received will
be promptly returned with interest at the Bank's passbook rate and all
withdrawal authorizations will be canceled or, if regulatory approval of an
extension of the time period has been granted, all subscribers and purchasers
will be given the right to increase, decrease or rescind their orders.  If an
extension of time is obtained, all subscribers will be notified of such
extension and of the duration of any extension that has been granted, and will
be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled).  No single extension can exceed 90 days.

     Direct Community Offering.  Any shares of Common Stock which remain
unsubscribed for in the Subscription Offering will be offered by the Holding
Company to certain members of the general public in a Direct Community Offering,
with preference given to natural persons and trusts of natural persons residing
in the Local Community (Rutherford and Bedford Counties of Tennessee).
Purchasers in the Direct Community Offering are


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<PAGE>
 
eligible to subscribe for up to $655,500 of Common Stock in the Stock
Conversion.  In the event an insufficient number of shares are available to fill
orders in the Direct Community Offering, the available shares will be allocated
on a pro rata basis determined by the amount of the respective orders.  The
Direct Community Offering, if held, is expected to commence immediately
subsequent to the Expiration Date, but may begin at anytime during the
Subscription Offering.  The Direct Community Offering may terminate on or at any
time subsequent to the Expiration Date, but no later than 45 days after the
close of the Subscription Offering, unless extended by the Holding Company and
the Bank, with approval of the OTS.  Any extensions beyond 45 days after the
close of the fully extended Subscription Offering would require a resolicitation
of orders, wherein subscribers for the maximum numbers of shares of Common Stock
would be, and certain other large subscribers in the discretion of the Holding
Company and the Bank may be, given the opportunity to continue their orders, in
which case they will need to reconfirm affirmatively their subscriptions prior
to the expiration of the resolicitation offering or their subscription funds
will be promptly refunded with interest at the Bank's passbook rate, or be
permitted to modify or cancel their orders.  The right of any person to purchase
shares in the Direct Community Offering is subject to the absolute right of the
Holding Company and the Bank to accept or reject such purchases in whole or in
part.  If an order is rejected in part, the purchaser does not have the right to
cancel the remainder of the order.  The Holding Company presently intends to
terminate the Direct Community Offering as soon as it has received orders for
all shares available for purchase in the Stock Conversion.

     If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering.

     Syndicated Community Offering.  The Plan of Conversion provides that, if
necessary, all shares of Common Stock not purchased in the Subscription Offering
and Direct Community Offering, if any, may be offered for sale to certain
members of the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers to be managed by Trident Securities
acting as agent of the Holding Company.  The Holding Company and the Bank have
the right to reject orders, in whole or part, in their sole discretion in the
Syndicated Community Offering.  Neither Trident Securities nor any registered
broker-dealer shall have any obligation to take or purchase any shares of the
Common Stock in the Syndicated Community Offering; however, Trident Securities
has agreed to use its best efforts in the sale of shares in the Syndicated
Community Offering.

     Stock sold in the Syndicated Community Offering also will be sold at the
$10.00 Purchase Price.  See "--Stock Pricing and Number of Shares to be Issued."
No person will be permitted to subscribe in the Syndicated Community Offering
for shares of Common Stock with an aggregate purchase price of more than
$655,500.  See "-- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings" for a description of the commission to be
paid to the selected dealers and to Trident Securities.

     Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the Syndicated Community Offering.  During the
Syndicated Community Offering, selected dealers may only solicit indications of
interest from their customers to place orders with the Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock.
When and if Trident Securities and the Holding Company believe that enough
indications of interest and orders have been received in the Subscription
Offering, the Direct Community Offering and the Syndicated Community Offering to
consummate the Stock Conversion, Trident Securities will request, as of the
Order Date, selected dealers to submit orders to purchase shares for which they
have received indications of interest from their customers.  Selected dealers
will send confirmations to such customers on the next business day after the
Order Date.  Selected dealers may debit the accounts of their customers on a
date which will be three business days from the Order Date ("Settlement Date").
Customers who authorize selected dealers to debit their brokerage accounts are
required to have the funds for payment in their account on but not before the
Settlement Date.  On the Settlement Date, selected dealers will remit funds to
the account that the Holding Company established for each selected dealer.  Each
customer's funds so forwarded to the Holding Company, along with all other
accounts held in the same title, will be insured by the FDIC up to the
applicable $100,000 legal limit.  After payment has been received by the Holding
Company from selected dealers, funds will earn interest at the Bank's passbook
rate until the completion of the Offerings.  At the completion of the Stock
Conversion, the funds


                                      101
<PAGE>
 
received in the Offerings will be used to purchase the shares of Common Stock
ordered.  The shares issued in the Stock Conversion cannot and will not be
insured by the FDIC or any other government agency.  In the event the Stock
Conversion is not consummated as described above, funds with interest will be
returned promptly to the selected dealers, who, in turn, will promptly credit
their customers' brokerage accounts.

     The Syndicated Community Offering may terminate on or at any time
subsequent to the Expiration Date, but no later than 45 days after the close of
the Subscription Offering, unless extended by the Holding Company and the Bank,
with approval of the OTS.

     In the event the Bank is unable to find purchasers from the general public
for all unsubscribed shares, other purchase arrangements will be made by the
Board of Directors of the Bank, if feasible.  Such other arrangements will be
subject to the approval of the OTS.  The OTS may grant one or more extensions of
the offering period, provided that (i) no single extension exceeds 90 days, (ii)
subscribers are given the right to increase, decrease or rescind their
subscriptions during the extension period, and (iii) the extensions do not go
more than two years beyond the date on which the members approved the Plan of
Conversion.  If the Stock Conversion is not completed within 45 days after the
close of the Subscription Offering, either all funds received will be returned
with interest (and withdrawal authorizations canceled) or, if the OTS has
granted an extension of time, all subscribers will be given the right to
increase, decrease or rescind their subscriptions at any time prior to 20 days
before the end of the extension period.  If an extension of time is obtained,
all subscribers will be notified of such extension and of their rights to modify
their orders.  If an affirmative response to any resolicitation is not received
by the Holding Company from a subscriber, the subscriber's order will be
rescinded and all funds received will be promptly returned with interest (or
withdrawal authorizations will be canceled).

     Persons in Non-Qualified States.  The Holding Company and the Bank will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
Plan of Conversion reside.  However, the Holding Company and the Bank are not
required to offer stock in the Subscription Offering to any person who resides
in a foreign country or resides in a state of the United States with respect to
which (i) a small number of persons otherwise eligible to subscribe for shares
of Common Stock reside in such state or (ii) the Holding Company or the Bank
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including but not limited to a
request or requirement that the Holding Company and the Bank or their officers,
directors or trustees register as a broker, dealer, salesman or selling agent,
under the securities laws of such state, or a request or requirement to register
or otherwise qualify the Subscription Rights or Common Stock for sale or submit
any filing with respect thereto in such state.  Where the number of persons
eligible to subscribe for shares in one state is small, the Holding Company and
the Bank will base their decision as to whether or not to offer the Common Stock
in such state on a number of factors, including the size of accounts held by
account holders in the state, the cost of reviewing the registration and
qualification requirements of the state (and of actually registering or
qualifying the shares) or the need to register the Holding Company, its
officers, directors or employees as brokers, dealers or salesmen.

Plan of Distribution for the Subscription, Direct Community and Syndicated
Community Offerings

     The Bank and the Holding Company have retained Trident Securities to
consult with and advise the Bank and to assist the Bank and the Holding Company,
on a best efforts basis, in the distribution of shares in the Offerings.
Trident Securities is a broker-dealer registered with the SEC and a member of
the NASD.  Trident Securities will assist the Bank in the Stock Conversion as
follows:  (i) it will act as marketing advisor with respect to the Subscription
Offering and will represent the Bank as placement agent on a best efforts basis
in the sale of the Common Stock in the Direct Community Offering if one is held;
(ii) it will conduct training sessions with directors, officers and employees of
the Bank regarding the Stock Conversion process; and (iii) it will assist in the
establishment and supervision of the Stock Information Center and, with
management's input, will train the Bank's staff to record properly and tabulate
orders for the purchase of Common Stock and to respond appropriately to customer
inquiries.


                                      102
<PAGE>
 
     Based upon negotiations between Trident Securities on the one hand and the
Holding Company and the Bank on the other hand concerning fee structure, Trident
Securities will receive a commission equal to 1.5% of the aggregate amount of
Common Stock sold in the Subscription and Direct Community Offerings to persons
other than the Bank's directors, executive officers and, in each case, their
associates and to the ESOP.  Trident Securities and selected dealers
participating in the Syndicated Community Offering may receive a commission in
the Syndicated Community Offering in an amount to be agreed upon by the Holding
Company and the Bank.  Fees and commissions paid to Trident Securities and to
any selected dealers may be deemed to be underwriting fees, and Trident
Securities and such selected dealers may be deemed to be underwriters.  Trident
Securities will also be reimbursed for its reasonable out-of-pocket expenses not
to exceed $10,000 and its legal fees not to exceed $30,000.  Trident Securities
has received an advance of $10,000 towards its reimbursable expenses.  For
additional information, see "-- Stock Pricing and Number of Shares to be Issued"
and "USE OF PROCEEDS."

     Subject to certain limitations, the Holding Company and the Bank have also
agreed to indemnify Trident Securities against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering material for the Common Stock or with regard to allocations of shares
(in the event of oversubscription) or determinations of eligibility to purchase
shares.

Description of Sales Activities

     The Common Stock will be offered in the Subscription Offering and Direct
Community Offering principally by the distribution of this Prospectus and
through activities conducted at the Bank's Stock Information Center at its main
office facility.  The Stock Information Center is expected to operate during
normal business hours throughout the Subscription Offering and Direct Community
Offering.  It is expected that at any particular time one or more Trident
Securities employees will be working at the Stock Information Center.  Such
employees of Trident Securities will be responsible for mailing materials
relating to the Offerings, responding to questions regarding the Conversion and
the Offerings and processing stock orders.

     Sales of Common Stock will be made by registered representatives affiliated
with Trident Securities or by the selected dealers managed by Trident
Securities.  The management and employees of the Bank may participate in the
Offerings in clerical capacities, providing administrative support in effecting
sales transactions or, when permitted by state securities laws, answering
questions of a mechanical nature relating to the proper execution of the Order
Form.  Management of the Bank may answer questions regarding the business of the
Bank when permitted by state securities laws.  Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives.  The management and
employees of the Holding Company and the Bank have been instructed not to
solicit offers to purchase Common Stock or provide advice regarding the purchase
of Common Stock.

     No officer, director or employee of the Bank or the Holding Company will be
compensated, directly or indirectly, for any activities in connection with the
offer or sale of securities issued in the Stock Conversion.

     None of the Bank's personnel participating in the Offerings is registered
or licensed as a broker or dealer or an agent of a broker or dealer.  The Bank's
personnel will assist in the above-described sales activities pursuant to an
exemption from registration as a broker or dealer provided by Rule 3a4-1 ("Rule
3a4-1") promulgated under the Exchange Act.  Rule 3a4-1 generally provides that
an "associated person of an issuer" of securities shall not be deemed a broker
solely by reason of participation in the sale of securities of such issuer if
the associated person meets certain conditions.  Such conditions include, but
are not limited to, that the associated person participating in the sale of an
issuer's securities not be compensated in connection therewith at the time of
participation, that such person not be associated with a broker or dealer and
that such person observe certain limitations on his participation in the sale of
securities.  For purposes of this exemption, "associated person of an issuer" is
defined to include any person who is a director, officer or employee of the
issuer or a company that controls, is controlled by or is under common control
with the issuer.
 

                                      103
<PAGE>
 
Procedure for Purchasing Shares in the Subscription and Direct Community
Offerings

     To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 under the Exchange Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date.  Execution of the Order
Form will confirm receipt or delivery in accordance with Rule 15c2-8.  Order
Forms will only be distributed with a Prospectus.  The Bank will accept for
processing only orders submitted on original Order Forms.  The Bank is not
obligated to accept orders submitted on photocopied or telecopied Order Forms.
Orders cannot and will not be accepted without the execution of the
Certification appearing on the reverse side of the Order Form.

     To purchase shares in the Subscription Offering, an executed Order Form
with the required full payment for each share subscribed for, or with
appropriate authorization for withdrawal of full payment from the subscriber's
deposit account with the Bank (which may be given by completing the appropriate
blanks in the Order Form), must be received by the Bank by 12:00 Noon, Central
Time, on the Expiration Date.  Order Forms which are not received by such time
or are executed defectively or are received without full payment (or without
appropriate withdrawal instructions) are not required to be accepted.  The
Holding Company and the Bank have the right to waive or permit the correction of
incomplete or improperly executed Order Forms, but do not represent that they
will do so.  Pursuant to the Plan of Conversion, the interpretation by the
Holding Company and the Bank of the terms and conditions of the Plan of
Conversion and of the Order Form will be final.  In order to purchase shares in
the Direct Community Offering, the Order Form, accompanied by the required
payment for each share subscribed for, must be received by the Bank prior to the
time the Direct Community Offering terminates, which may be on or at any time
subsequent to the Expiration Date.  Once received, an executed Order Form may
not be modified, amended or rescinded without the consent of the Bank unless the
Stock Conversion has not been completed within 45 days after the end of the
Subscription Offering, unless such period has been extended.

     In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (June 30,
1996) and/or the Supplemental Eligibility Record Date (December 31, 1997) and/or
the Voting Record Date (January 12, 1998) must list all accounts on the Order
Form giving all names in each account, the account number and the approximate
account balance as of such date.

     Full payment for subscriptions may be made (i) in cash if delivered in
person at the Stock Information Center, (ii) by check, bank draft, or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with the Bank.  Appropriate means by which such withdrawals may be authorized
are provided on the Order Form.  Payments from private third parties or payments
through electronic transfer of funds will not be accepted.  No wire transfers
will be accepted.  Interest will be paid on payments made by cash, check, bank
draft or money order at the Bank's passbook rate from the date payment is
received until the completion or termination of the Stock Conversion.  If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the Stock
Conversion (unless the certificate matures after the date of receipt of the
Order Form but prior to closing, in which case funds will earn interest at the
passbook rate from the date of maturity until consummation of the Stock
Conversion), but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Stock
Conversion.  At the completion of the Stock Conversion, the funds received in
the Offerings will be used to subscribe for the shares of Common Stock ordered.
The shares of Common Stock issued in the Stock Conversion cannot and will not be
insured by the FDIC or any other government agency.  In the event that the Stock
Conversion is not consummated for any reason, all funds submitted will be
promptly refunded with interest as described above.

     If a subscriber authorizes the Bank to withdraw the amount of the aggregate
Purchase Price from his deposit account, the Bank will do so as of the effective
date of the Stock Conversion, though the account must contain the full amount
necessary for payment at the time the subscription order is received.  The Bank
will waive any applicable penalties for early withdrawal from certificate
accounts.  If the remaining balance in a certificate account is reduced


                                      104
<PAGE>
 
below the applicable minimum balance requirement at the time that the funds
actually are transferred under the authorization the certificate will be
canceled at the time of the withdrawal, without penalty, and the remaining
balance will earn interest at the Bank's passbook rate.

     The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but rather may pay for such shares of Common Stock
subscribed for at the Purchase Price upon consummation of the Stock Conversion,
provided that there is in force from the time of its subscription until such
time, a loan commitment from an unrelated financial institution or the Holding
Company to lend to the ESOP, at such time, the aggregate Purchase Price of the
shares for which it subscribed.

     IRAs maintained in the Bank do not permit investment in the Common Stock.
A depositor interested in using his IRA funds to purchase Common Stock must do
so through a self-directed IRA.  Since the Bank does not offer self-directed
IRAs, it will allow such a depositor to make a trustee-to-trustee transfer of
the IRA funds to a trustee offering a self-directed IRA program with the
agreement that such funds will be used to purchase the Holding Company's Common
Stock in the Offerings.  There will be no early withdrawal or IRS interest
penalties for such transfers.  The new trustee would hold the Common Stock in a
self-directed account in the same manner as the Bank now holds the depositor's
IRA funds.  An annual administrative fee may be payable to the new trustee.
Depositors interested in using funds in a Bank IRA to purchase Common Stock
should contact the Stock Information Center so that the necessary forms may be
forwarded for execution and returned prior to the Expiration Date.  In addition,
the provisions of ERISA and IRS regulations require that officers, directors and
10% shareholders who use self-directed IRA funds to purchase shares of Common
Stock in the Subscription Offering, make such purchases for the exclusive
benefit of IRAs.

     Certificates representing shares of Common Stock purchased, and any refund
due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms or to the last address of such persons appearing
on the records of the Bank as soon as practicable following consummation of the
sale of all shares of Common Stock.  Any certificates returned as undeliverable
will be disposed of in accordance with applicable law.  Purchasers may not be
able to sell the shares of Common Stock which they purchased until certificates
for the Common Stock are available and delivered to them, even though trading of
the Common Stock may have commenced.  Shares sold prior to the receipt of a
stock certificate are the responsibility of the purchaser.

Stock Pricing and Number of Shares to be Issued

     Federal regulations require that the aggregate purchase price of the
securities sold in connection with the Stock Conversion be based upon an
estimated pro forma value of the Holding Company and the Bank, as converted
(i.e., taking into account the expected receipt of proceeds from the sale of
- -----                                                                       
securities in the Stock Conversion), as determined by an independent appraisal.
The Bank and the Holding Company have retained Ferguson to prepare an appraisal
of the pro forma market value of the Holding Company and the Bank, as converted,
as well as a business plan.  Ferguson will receive a fee expected to total
approximately $25,000 for its appraisal services and assistance in the
preparation of a business plan, plus reasonable out-of-pocket expenses incurred
in connection with the appraisal.  The Bank has agreed to indemnify Ferguson
under certain circumstances against liabilities and expenses (including legal
fees) arising out of, related to, or based upon the Conversion.

     Ferguson has prepared an appraisal of the estimated pro forma market value
of the Holding Company and the Bank, as converted, taking into account the
formation of the Holding Company as the holding company for the Bank.  For its
analysis, Ferguson undertook substantial investigations to learn about the
Bank's business and operations.  Management supplied financial information,
including annual financial statements, information on the composition of assets
and liabilities, and other financial schedules.  In addition to this
information, Ferguson reviewed the Bank's Form AC Application for Approval of
Conversion and the Holding Company's Form S-1 Registration Statement.
Furthermore, Ferguson visited the Bank's facilities and had discussions with the
Bank's management and its special conversion legal counsel, Breyer & Aguggia.
No detailed individual analysis of the


                                      105
<PAGE>
 
separate components of the Holding Company's or the Bank's assets and
liabilities was performed in connection with the evaluation.

     In estimating the pro forma market value of the Holding Company and the
Bank, as converted, as required by applicable regulatory guidelines, Ferguson's
analysis utilized three selected valuation procedures, the Price/Book ("P/B")
method, the Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all
of which are described in its report.  Ferguson placed the greatest emphasis on
the P/E and P/B methods in estimating pro forma market value.  In applying these
procedures, Ferguson reviewed, among other factors, the economic make-up of the
Bank's primary market area, the Bank's financial performance and condition in
relation to publicly-traded institutions that Ferguson deemed comparable to the
Bank, the specific terms of the offering of the Holding Company's Common Stock,
the pro forma impact of the additional capital raised in the Stock Conversion,
conditions of securities markets in general, and the market for thrift
institution common stock in particular.  Ferguson's analysis provides an
approximation of the pro forma market value of the Holding Company and the Bank,
as converted, based on the valuation methods applied and the assumptions
outlined in its report.  Included in its report were certain assumptions as to
the pro forma earnings of the Holding Company after the Stock Conversion that
were utilized in determining the appraised value.  These assumptions included
expenses of $1,120,000 at the midpoint of the Estimated Valuation Range, an
assumed after-tax rate of return on the net Stock Conversion proceeds of 3.41%,
purchases by the ESOP of 8% of the Common Stock sold in the Stock Conversion and
purchases in the open market by the MRP of a number of shares equal to 4% of the
Common Stock sold in the Stock Conversion at the Purchase Price.  See "PRO FORMA
DATA" for additional information concerning these assumptions.  The use of
different assumptions may yield different results.

     On the basis of the foregoing, Ferguson has advised the Holding Company and
the Bank that, in its opinion, as of November 7, 1997, the aggregate estimated
pro forma market value of the Holding Company and the Bank, as converted, and,
therefore, the Common Stock was within the valuation range of $48,450,000 to
$65,550,000 with a midpoint of $57,000,000.  After reviewing the methodology and
the assumptions used by Ferguson in the preparation of the appraisal, the Board
of Directors established the Estimated Valuation Range which is equal to the
valuation range of $48,450,000 to $65,550,000 with a midpoint of $57,000,000.
Assuming that the shares are sold at $10.00 per share in the Stock Conversion,
the estimated number of shares would be between 4,845,000 and 6,555,000 with a
midpoint of 5,700,000.  The Purchase Price of $10.00 was determined by
discussion among the Boards of Directors of the Bank and the Holding Company and
Trident Securities, taking into account, among other factors (i) the requirement
under OTS regulations that the Common Stock be offered in a manner that will
achieve the widest distribution of the stock, (ii) desired liquidity in the
Common Stock subsequent to the Conversion, and (iii) the expense of issuing
shares for purposes of Tennessee franchise taxes.  Since the outcome of the
Offerings relate in large measure to market conditions at the time of sale, it
is not possible to determine the exact number of shares that will be issued by
the Holding Company at this time.  The Estimated Valuation Range may be amended,
with the approval of the OTS, if necessitated by developments following the date
of such appraisal in, among other things, market conditions, the financial
condition or operating results of the Bank, regulatory guidelines or national or
local economic conditions.

     Ferguson's appraisal report is filed as an exhibit to the Registration
Statement.  See "ADDITIONAL INFORMATION."

     If, upon completion of the Subscription Offering, at least the minimum
number of shares are subscribed for, Ferguson, after taking into account factors
similar to those involved in its prior appraisal, will determine its estimate of
the pro forma market value of the Holding Company and the Bank, as converted, as
of the close of the Subscription Offering.

     No sale of the shares will take place unless prior thereto Ferguson
confirms to the OTS that, to the best of Ferguson's knowledge and judgment,
nothing of a material nature has occurred that would cause it to conclude that
the actual total purchase price on an aggregate basis was incompatible with its
estimate of the total pro forma market value of the Holding Company and the
Bank, as converted, at the time of the sale.  If, however, the facts do not


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justify such a statement, the Offerings or other sale may be canceled, a new
Estimated Valuation Range and price per share set and new Subscription, Direct
Community and Syndicated Community Offerings held.  Under such circumstances,
subscribers would have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest and holds on funds
authorized for withdrawal from deposit accounts would be released or reduced.

     Depending upon market and financial conditions, the number of shares issued
may be more or less than the range in number of shares discussed herein.  In the
event the total amount of shares issued is less than 4,845,000 or more than
7,538,250 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $48,450,000 or more than $75,382,500,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise.  In the event a new valuation range is
established by Ferguson, such new range will be subject to approval by the OTS.

     If purchasers cannot be found for an insignificant residue of unsubscribed
shares from the general public, other purchase arrangements will be made by the
Boards of Directors of the Bank and the Holding Company, if possible.  Such
other purchase arrangements will be subject to the approval of the OTS and may
provide for purchases for investment purposes by directors, officers, their
associates and other persons in excess of the limitations provided in the Plan
of Conversion and in excess of the proposed director purchases set forth herein,
although no such purchases are currently intended.  If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate.

     In formulating its appraisal, Ferguson relied upon the truthfulness,
accuracy and completeness of all documents the Bank furnished to it.  Ferguson
also considered financial and other information from regulatory agencies, other
financial institutions, and other public sources, as appropriate.  While
Ferguson believes this information to be reliable, Ferguson does not guarantee
the accuracy or completeness of such information and did not independently
verify the financial statements and other data provided by the Bank and the
Holding Company or independently value the assets or liabilities of the Holding
Company and the Bank.  The appraisal by Ferguson is not intended to be, and must
not be interpreted as, a recommendation of any kind as to the advisability of
voting to approve the Plan of Conversion or of purchasing shares of Common
Stock.  Moreover, because the appraisal is necessarily based on many factors
which change from time to time, there is no assurance that persons who purchase
such shares in the Stock Conversion will later be able to sell shares thereafter
at prices at or above the Purchase Price.

Limitations on Purchases of Shares

     The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion.  Each subscriber must subscribe for a minimum of 25 shares.  With
the exception of the ESOP, which is expected to subscribe for 8% of the shares
of Common Stock issued in the Stock Conversion, the Plan of Conversion provides
that no person (including all persons on a joint account), either alone or
together with associates of or persons acting in concert with such person, may
purchase in the Stock Conversion shares of Common Stock with an aggregate
purchase price of more than $655,500.  For purposes of the Plan of Conversion,
the directors are not deemed to be acting in concert solely by reason of their
Board membership.  Pro rata reductions within each Subscription Rights category
will be made in allocating shares to the extent that the maximum purchase
limitations are exceeded.

     The Bank's and the Holding Company's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the shares of Common Stock sold in the Stock Conversion, provided that orders
for shares which exceed 5% of the shares of Common Stock sold in the Stock
Conversion may not exceed, in the aggregate, 10% of the shares sold in the Stock
Conversion.  The Bank and the Holding Company do not intend to increase the
maximum purchase limitation unless market conditions are such that an increase
in the maximum purchase limitation is necessary to sell a number of shares in
excess of the minimum of the Estimated Valuation Range.  If the Boards of
Directors decide to increase the purchase limitation above,


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<PAGE>
 
persons who subscribed for the maximum number of shares of Common Stock will be,
and other large subscribers in the discretion of the Holding Company and the
Bank may be, given the opportunity to increase their subscriptions accordingly,
subject to the rights and preferences of any person who has priority
Subscription Rights.

     The term "acting in concert" is defined in the Plan of Conversion to mean
(i) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an express
agreement; or (ii) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether written or
otherwise.  In general, a person who acts in concert with another party shall
also be deemed to be acting in concert with any person who is also acting in
concert with that other party.

     The term "associate" of a person is defined in the Plan of Conversion to
mean (i) any corporation or organization (other than the Bank or a majority-
owned subsidiary of the Bank) of which such person is an officer or partner or
is, directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity (excluding tax-qualified employee plans); and
(iii) any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a director or officer of the
Bank or any of its parents or subsidiaries.  For example, a corporation of which
a person serves as an officer would be an associate of such person and,
therefore, all shares purchased by such corporation would be included with the
number of shares which such person could purchase individually under the above
limitations.

     The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Bank, including its Chairman of the Board, President,
Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in charge of
principal business functions, Secretary and Treasurer.

     Common Stock purchased pursuant to the Stock Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank
and the Holding Company and by NASD members.  See "--Restrictions on
Transferability by Directors and Officers and NASD Members."

Restrictions on Repurchase of Stock

     Pursuant to OTS regulations, OTS-regulated savings associations (and their
holding companies) may not for a period of three years from the date of an
institution's mutual-to-stock conversion repurchase any of its common stock from
any person, except in the event of (i) an offer made to all of its stockholders
to repurchase the common stock on a pro rata basis, approved by the OTS; or (ii)
the repurchase of qualifying shares of a director; or (iii) a purchase in the
open market by a tax-qualified or non-tax-qualified employee stock benefit plan
in an amount reasonable and appropriate to fund the plan.  Furthermore,
repurchases of any common stock are prohibited if the effect thereof would cause
the association's regulatory capital to be reduced below (a) the amount required
for the liquidation account or (b) the regulatory capital requirements imposed
by the OTS.  Repurchases are generally prohibited during the first year
following conversion.  Upon ten days' written notice to the OTS, and if the OTS
does not object, an institution may make open market repurchases of its
outstanding common stock during years two and three following the conversion,
provided that certain regulatory conditions are met and that the repurchase
would not adversely affect the financial condition of the association.  Any
repurchases of common stock by the Holding Company would be subject to these
regulatory restrictions unless the OTS would provide otherwise.

Restrictions on Transferability by Directors and Officers and NASD Members

     Shares of Common Stock purchased in the Offerings by directors and officers
of the Holding Company may not be sold for a period of one year following
consummation of the Stock Conversion, except in the event of the death of the
stockholder or in any exchange of the Common Stock in connection with a merger
or acquisition of the Holding Company.  Shares of Common Stock received by
directors or officers through the ESOP or the MRP or upon exercise of options
issued pursuant to the Stock Option Plan or purchased subsequent to the Stock
Conversion


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<PAGE>
 
are not subject to this restriction.  Accordingly, shares of Common Stock issued
by the Holding Company to directors and officers shall bear a legend giving
appropriate notice of the restriction and, in addition, the Holding Company will
give appropriate instructions to the transfer agent for the Holding Company's
Common Stock with respect to the restriction on transfers.  Any shares issued to
directors and officers as a stock dividend, stock split or otherwise with
respect to restricted Common Stock shall be subject to the same restrictions.

     Purchases of outstanding shares of Common Stock of the Holding Company by
directors, executive officers (or any person who was an executive officer or
director of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following the Stock Conversion may be
made only through a broker or dealer registered with the SEC, except with the
prior written approval of the OTS.  This restriction does not apply, however, to
negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.

     The Holding Company has filed with the SEC a registration statement under
the Securities Act for the registration of the Common Stock to be issued
pursuant to the Stock Conversion.  The registration under the Securities Act of
shares of the Common Stock to be issued in the Stock Conversion does not cover
the resale of such shares.  Shares of Common Stock purchased by persons who are
not affiliates of the Holding Company may be resold without registration.
Shares purchased by an affiliate of the Holding Company will be subject to the
resale restrictions of Rule 144 under the Securities Act.  If the Holding
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Holding Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Holding Company or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks.  Provision may be made in the future
by the Holding Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.

     Under guidelines of the NASD, members of the NASD and their associates are
subject to certain restrictions on the transfer of securities purchased in
accordance with Subscription Rights and to certain reporting requirements upon
purchase of such securities.

               RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY

     The following discussion is a summary of certain provisions of federal law
and regulations and Tennessee corporate law, as well as the Charter and Bylaws
of the Holding Company, relating to stock ownership and transfers, the Board of
Directors and business combinations, all of which may be deemed to have "anti-
takeover" effects.  The description of these provisions is necessarily general
and reference should be made to the actual law and regulations and to the
Charter and Bylaws of the Holding Company contained in the Registration
Statement filed with the SEC.  See "ADDITIONAL INFORMATION" as to how to obtain
a copy of these documents.

Conversion Regulations

     OTS regulations prohibit any person from making an offer, announcing an
intent to make an offer or participating in any other arrangement to purchase
stock or acquiring stock or subscription rights in a converting institution (or
its holding company) from another person prior to completion of its conversion.
Further, without the prior written approval of the OTS, no person may make such
an offer or announcement of an offer to purchase shares or actually acquire
shares in the converting institution (or its holding company) for a period of
three years from the date of the completion of the conversion if, upon the
completion of such offer, announcement or acquisition, that person would become
the beneficial owner of more than 10% of the outstanding stock of the
institution (or its holding company).  The OTS has defined "person" to include
any individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution.


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<PAGE>
 
However, offers made exclusively to an association (or its holding company) or
an underwriter or member of a selling group acting on the converting
institution's (or its holding company's) behalf for resale to the general public
are excepted.  The regulation also provides civil penalties for willful
violation or assistance in any such violation of the regulation by any person
connected with the management of the converting institution (or its holding
company) or who controls more than 10% of the outstanding shares or voting
rights of a converting or converted institution (or its holding company).

Change of Control Regulations

     Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings and loan association or its parent holding company
unless the OTS has been given 60 days' prior written notice and has not issued a
notice disapproving the proposed acquisition.  In addition, OTS regulations
provide that no company may acquire control of a savings association without the
prior approval of the OTS.  Any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation by the OTS.

     Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution.  Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the regulations.  Such control factors include
the acquiror being one of the two largest stockholders.  The determination of
control may be rebutted by submission to the OTS, prior to the acquisition of
stock or the occurrence of any other circumstances giving rise to such
determination, of a statement setting forth facts and circumstances which would
support a finding that no control relationship will exist and containing certain
undertakings.  The regulations provide that persons or companies which acquire
beneficial ownership exceeding 10% or more of any class of a savings
association's stock must file with the OTS a certification form that the holder
is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.  There are also rebuttable presumptions in
the regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."

     The OTS may prohibit an acquisition of control if it finds, among other
things, that (i) the acquisition would result in a monopoly or substantially
lessen competition, (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the institution, or (iii) the competence,
experience or integrity of the acquiring person indicates that it would not be
in the interest of the depositors or the public to permit the acquisition of
control by such person.

Tennessee Anti-Takeover Statutes

     The TBCA contains several provisions, described below, which may be
applicable to the Holding Company upon consummation of the Stock Conversion.

     Business Combination Act. The TBCA generally prohibits a "business
combination" (generally defined to include mergers, share exchanges, sales and
leases of assets, issuances of securities and similar transactions) by a
"resident domestic corporation" (as defined below) or a subsidiary with an
"Interested Shareholder" (generally defined as any person or entity which
beneficially owns 10% or more of the voting power of any class or series of the
corporation's stock then outstanding) for a period of five years after the date
the person becomes an Interested Shareholder unless, prior to such date, the
board of directors approved either the business combination or the transaction
which resulted in the shareholder becoming an Interested Shareholder and the
business combination satisfies any other applicable requirements imposed by law
or by the corporation's charter or bylaws. The Business

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<PAGE>
 
Combination Act also limits the extent to which a "resident domestic
corporation" which has a class of voting stock traded on any national securities
exchange or registered pursuant to Section 12(g) of the Exchange Act or any of
its officers or directors could be held liable for resisting any business
combination.

     For purposes of the Business Combination Act, the term "resident domestic
corporation" is defined  as an issuer of voting stock which, as of the share
acquisition date in question, is organized under the laws of Tennessee and meets
two or more of the following requirements: (i) the corporation has more than
10,000 stockholders or 10% of its stockholders resident in Tennessee or more
than 10% of its shares held by stockholders who are Tennessee residents; (ii)
the corporation has its principal office or place of business located in
Tennessee; (iii) the corporation has the principal office or place of business
of a significant subsidiary, representing not less than 25% of the corporation's
consolidated net sales located in Tennessee; (iv) the corporation employs more
than 250 individuals in Tennessee or has a combined annual payroll paid to
Tennessee residents which is in excess of $5.0 million; (v) the corporation
produces goods and services in Tennessee which result in annual gross receipts
in excess of $10.0 million; or (vi) the corporation has physical assets and/or
deposits, including those of any subsidiary located within Tennessee which
exceed $10.0 million in value.

     Control Share Acquisition Act. The Tennessee Control Share Acquisition Act
generally provides that any person or group that acquires the power to vote more
than certain specified levels (one-fifth, one-third or a majority) of the shares
of certain Tennessee corporations will not have the right to vote such shares
unless granted voting rights by the holders of a majority of the votes entitled
to be cast, excluding "interested shares." Interested shares are those shares
held by the acquiring person, officers of the corporation and persons who are
both employees and directors of the corporation. If approval of voting power for
the shares is obtained at one of the specified levels, additional stockholder
approval is required when a stockholder seeks to acquire the power to vote
shares at the next level. In the absence of such approval, the additional shares
acquired by the stockholder may not be voted until they are transferred to
another person in a transaction other than a control share acquisition.  The
statutory provisions will only apply to a Tennessee corporation if its charter
or bylaws so provides and which has: (i) 100 or more stockholders; (ii) its
principal place of business, its principal office or substantial assets within
Tennessee; and (iii) either (A) more than 10% of its stockholders resident in
Tennessee, (B) more than 10% of its shares owned by stockholders resident in
Tennessee, or (C) 10,000 or more stockholders resident in Tennessee.  The
Tennessee Control Share Acquisition Act applies only to corporations which
expressly elect its application in their charters or bylaws.  Neither the
Holding Company's Charter nor its Bylaws contains a provision declaring that the
Holding Company will be subject to the provisions of the Control Share
Acquisition Act, although the Holding Company could amend its Charter or Bylaws
in the future to include such a provision.  At this time, the Holding Company
has cannot determine whether it would otherwise meet the requirements to be
subject to its provisions.

     Greenmail Act. The Tennessee Greenmail Act prohibits a Tennessee
corporation having a class of voting stock registered or traded on a national
securities exchange or registered pursuant to Section 12(g) of the Exchange Act
from purchasing, directly or indirectly, any of its shares at a price above the
market value of such shares from any person who holds more than 3% of the class
of securities to be purchased if such person has held such shares for less than
two years, unless: (i) such purchase has been approved by the affirmative vote
of a majority of the outstanding shares of each class of voting stock issued by
such corporation or (ii) the corporation makes an offer, at least equal value
per share, to all holders of shares of such class.  Market value is defined as
the average of the highest and lowest closing market price of such shares during
the 30 trading days preceding the purchase or preceding the commencement or
announcement of a tender offer if the seller of such shares has commenced a
tender offer or announced an intention to seek control of the corporation.

     The Common Stock will be registered pursuant to Section 12(g) of the
Exchange Act. As such, the Holding Company will be subject to the restrictions
of the Greenmail Act upon consummation of the Stock Conversion.

     Investor Protection Act. The Tennessee Investor Protection Act prohibits
any party owning, directly or indirectly, 5% or more of any class of equity
securities of an "offeree company" (as defined below), any of which were
purchased within one year before the proposed takeover offer, from making a
takeover offer, unless the offeror:

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(i) before making such purchase, had made a public announcement of his intention
to change or influence the management or control of the "offeree company;" (ii)
has made a full, fair and effective disclosure of such intention to the persons
from whom he acquired such securities; and (iii) has filed with the Tennessee
Commissioner of Commerce and Insurance and with the "offeree company" a
statement signifying such intentions and containing such additional information
as the Commissioner may require.  An "offeree company" is defined as a
corporation or other issuer of equity securities which is incorporated or
organized under the laws of Tennessee or has its principal office in Tennessee,
has substantial assets located in Tennessee and which is or may be involved in a
takeover offer relating to any class of its equity securities.

     The Investor Protection Act also imposes certain requirements on takeover
offers, including (i) requiring that offerees of such an offer be permitted to
withdraw tendered or deposited securities within seven days, or after 60 days,
after an offer has become effective; (ii) requiring offerors for less than all
of the equity securities of any class to accept pro rata securities tendered or
deposited by each offeror; and (iii) requiring offerors who vary the offer terms
by increasing the consideration payable to each offeror to pay such increased
consideration to all offerees whether securities were tendered or deposited
before or after the variation in terms.

     The Investor Protection Act also prohibits any offeror from making a
takeover offer which is not made to the holders of record or beneficial owners
of the equity securities of an offeree company who reside in Tennessee on
substantially the same terms as the offer is made to holders residing elsewhere.

Anti-takeover Provisions in the Holding Company's Charter and Bylaws and
Tennessee Law

     Several provisions of the Holding Company's Charter and Bylaws deal with
matters of corporate governance and certain rights of stockholders.  The
following discussion is a general summary of certain provisions of the Holding
Company's Charter and Bylaws and regulatory provisions relating to stock
ownership and transfers, the Board of Directors and business combinations, which
might be deemed to have a potential "anti-takeover" effect.  These provisions
may have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Holding Company
stockholders may deem to be in their best interests or in which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have an opportunity to do so.  Such provisions will also render the
removal of incumbent Board of Directors or management of the Holding Company
more difficult.  The following description of certain of the provisions of the
Charter and Bylaws of the Holding Company is necessarily general, and reference
should be made in each case to such Charter and Bylaws, which are incorporated
herein by reference.  See "ADDITIONAL INFORMATION" as to how to obtain a copy of
these documents.

     Limitation on Voting Rights.  Article XII of the Holding Company's Charter
provides that, if at any time following the consummation of the Conversion, any
person acquires beneficial ownership of more than 10% of any class of equity
security of the Holding Company without the prior approval of two-thirds of the
"Continuing Directors" (as defined below), then the record holders of the voting
stock of the Holding Company beneficially owned by such acquiring person shall
have only voting rights, with respect to each share in excess of 10%, equal to
one one-hundredth (1/100th) of a vote. The aggregate voting power of such record
holders will be allocated proportionately among such record holders by
multiplying the aggregate voting power, as so limited, of the outstanding shares
of voting stock of the Holding Company beneficially owned by such acquiring
person by a fraction whose numerator is the number of votes represented the
shares of voting stock of the Holding Company owned of record by such person
(and which are beneficially owned by such acquiring person) and whose
denominator is the total number of votes represented by the shares of voting
stock of the Holding Company that are beneficially owned by such acquiring
person. A person who is the record owner of shares of voting stock of the
Holding Company that are beneficially and simultaneously owned by more than one
person shall have, with respect to such shares, the right to cast the least
number of votes that such person would be entitled to cast under Article XII.
"Continuing Directors" are defined in the Holding Company's Charter to be those
members of the board of directors who are unaffiliated with any "Related Person"
(as defined below) and who were members of the board of directors

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<PAGE>
 
prior to the time that a "Related Person" (as defined below) became a "Related
Person" and any successor to such directors who are recommended to succeed a
Continuing Director by a majority of the Continuing Directors then on the Board
of Directors. The term "Related Person" is defined as any individual,
corporation, partnership or other person or entity which, together with its
affiliates, beneficially owns in the aggregate 10% or more of the outstanding
shares of Common Stock and any affiliate of such individual, corporation,
partnership or other person or entity.

     Board of Directors.  The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the whole number of the members of the Board.  The members of each class
shall be elected for a term of three years, with the terms of office of all
members of one class expiring each year so that approximately one-third of the
total number of directors are elected each year.  The Holding Company's Charter
provides that the size of the Board shall be as set forth in the Bylaws.  The
Bylaws currently set the number of directors at nine.  The Charter provides that
any vacancy occurring in the Board, including a vacancy created by an increase
in the number of directors, shall be filled by a vote of two-thirds of the
directors then in office and any director so chosen shall hold office for a term
expiring at the next meeting of stockholders at which directors are elected.
The classified Board is intended to provide for continuity of the Board of
Directors and to make it more difficult and time consuming for a stockholder
group to fully use its voting power to gain control of the Board of Directors
without the consent of the incumbent Board of Directors of the Holding Company.
The Charter of the Holding Company provides that a director may be removed from
the Board of Directors prior to the expiration of his or her term only for cause
and only upon the vote of at least a majority of the outstanding shares of
voting stock.

     Cumulative Voting, Special Meetings and Action by Written Consent.  The
Charter does not provide for cumulative voting for any purpose.  Moreover, the
Charter provides that special meetings of stockholders of the Holding Company
may be called only by the Board of Directors or a committee of the Board of
Directors of the Holding Company.

     Authorized Shares.  The Charter authorizes the issuance of 49,750,000
shares of Common Stock and 250,000 shares of preferred stock.  The shares of
Common Stock and preferred stock were authorized in an amount greater than that
to be issued in the Conversion to provide the Holding Company's Board of
Directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits,
restricted stock grants and the exercise of stock options.  However, these
additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Holding Company.  The Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences.  As a result of
the ability to fix voting rights for a series of preferred stock, the Board has
the power, to the extent consistent with its fiduciary duty, to issue a series
of preferred stock to persons friendly to management in order to attempt to
block a tender offer, merger or other transaction by which a third party seeks
control of the Holding Company, and thereby assist members of management to
retain their positions.  The Holding Company's Board currently has no plans for
the issuance of additional shares, other than the issuance of shares of Common
Stock upon exercise of stock options and in connection with the MRP.

     Stockholder Vote Required to Approve Business Combinations.  To approve
mergers and similar transactions, the TBCA generally requires the approval of
the Board of Directors of the corporation and of the holders of a majority of
all the votes entitled to be cast, unless the Charter or the Board of Directors
requires a greater vote. The TBCA permits a corporation to merge with another
corporation without obtaining the approval of its stockholders (unless the
Charter provides otherwise) if: (i) the corporation's separate corporate
existence will not cease as a result of the merger and, except for certain types
of amendments, its charter will not differ from its charter before the merger;
(ii) each stockholder of the corporation whose shares were outstanding
immediately before the effective date of the merger will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights, immediately after the effective date of the merger; (iii) the voting
power of the shares outstanding immediately after the merger, plus the voting
power of the shares issuable as a result of the merger (either by the conversion
of securities issued pursuant to the merger or by the exercise of rights and
warrants issued pursuant to

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<PAGE>
 
the merger) will not exceed by more than 20% the voting power of the total
shares of the corporation outstanding immediately before the merger or exchange;
and (iv) the number of participating shares outstanding immediately after the
merger, plus the number of participating shares issuable as a result of the
merger (either by the conversion of securities issued pursuant to the merger or
by the exercise of rights and warrants issued pursuant to the merger) will not
exceed more than 20% the total number of participating shares outstanding
immediately before the merger.

     The TBCA also provides that any sale, lease, exchange, or other disposition
of all, or substantially all, of the property and assets not made in the usual
and regular course of business must be made in the following manner: (i) the
board of directors must adopt a resolution recommending that such a transaction
be approved by stockholders, unless the board of directors for any reason
determines that it should not make such a recommendation, in which case the
board may adopt a resolution directing that the transaction be submitted to
stockholders without a recommendation, (ii) the board of directors may submit
the proposed transaction for authorization by the company's stockholders at an
annual or special meeting of stockholders, (iii) written notice of such meeting
shall be given to stockholders of record, stating that the purpose, or one of
the purposes of the meeting is to propose the transaction, (iv) at such meeting
the stockholders may authorize the transaction, upon the affirmative vote of a
majority of all the votes entitled to be cast on the transaction, unless the
board of directors or the corporation's charter requires a greater vote or
voting by voting groups, (v) after such authorization by vote of the
stockholders, the board of directors may nevertheless abandon such transaction,
subject to the rights of third parties under any contract, without further
action or approval by the stockholders.

     As holder of all the outstanding common stock of the Bank after
consummation of the Stock Conversion, the Holding Company will be able to
authorize a merger, consolidation or other business combination involving the
Bank as permitted by Tennessee law and the Holding Company's Charter.  In
addition to the provisions of Tennessee law, the Holding Company's Charter
requires the approval of the holders of at least 80% of the Holding Company's
outstanding shares of voting stock, and a majority of such shares not including
shares deemed beneficially owned by a Related Person, to approve certain
"Business Combinations," as defined therein. The Charter requires the approval
of the stockholders in accordance with the increased voting requirements in
connection with any such transactions except in cases where the proposed
transaction has been approved in advance by at least two-thirds of the Holding
Company's Continuing Directors. These provisions of the Charter apply to any
"Business Combination" which generally is defined to include: (i) any merger,
share exchange or consolidation of the Holding Company or a subsidiary thereof
with or into a Related Person; (ii) any sale, lease, exchange, transfer or other
disposition of, including without limitation, the granting of any mortgage, or
any other security interest in, all or any substantial part of the assets of the
Holding Company (including, without limitation, any voting securities of a
subsidiary) or of a subsidiary to a Related Person or proposed by or on behalf
of a Related Person; (iii) any sale, lease, exchange, transfer or other
disposition, including without limitation, a mortgage, pledge or any other
security interest in, all or any substantial part of the assets of a Related
Person to the Holding Company or a subsidiary; (iv) the issuance or transfer of
any securities of the Holding Company or a subsidiary to a Related Person other
than pursuant to a dividend or distribution made pro rata to all stockholders of
the Holding Company; (v) the acquisition by the Holding Company or a subsidiary
of any securities of a Related Person or of any securities convertible into
securities of a Related Person; (vi) any transaction proposed by or on behalf of
a Related Person or pursuant to an agreement,  arrangement or understanding with
a Related Person which has the effect, directly or indirectly, of increasing the
Related Person's proportionate ownership of voting securities of the Holding
Company or a subsidiary thereof or of securities that are convertible to,
exchangeable for or carry the right to acquire such voting securities; (vii) the
adoption of any plan or proposal of liquidation or dissolution of the Holding
Company any reincorporation of the Holding Company in another state or
jurisdiction, any reclassification of the Common Stock, or any recapitalization
involving the Common Stock proposed by or on behalf of a Related Person; (viii)
any loans, advances, guarantees, pledges, financial assistance, security
arrangements, restrictive covenants or any tax credits or other tax advantages
provided by, through or to the Holding Company or any subsidiary thereof as a
result of which a Related Person receives a benefit, directly or indirectly,
other than proportionately as a stockholder; and (ix) any agreement, contract or
other arrangement providing for any of the transactions described in (i) -
(viii) above.

                                      114
<PAGE>
 
     Amendment of Charter and Bylaws.  No amendment of the Holding Company's
Charter may be made unless it is first approved by the Board of Directors of the
Holding Company, recommended to the stockholders for approval and thereafter is
approved by the holders of a majority of the shares of the Holding Company
entitled to be cast. An 80% vote of the shares of the Holding Company is
required to amend, adopt, alter, change or repeal any provision inconsistent
with Article VI (setting quorum and voting requirements), Article VII (setting
the requirements for the Board of Directors, including classification of the
Board and vacancies), Article VIII (setting the procedures for nomination of
directors and stockholder proposals), Article IX (removal of directors), Article
X (elimination of director liability), Article XI (indemnification), Article XII
(restrictions on voting rights of certain holders), Article XIII (approval of
Business Combinations), Article XIV (evaluation of business combinations),
Article XVII (amendment of Bylaws) and Article XVIII (amendment of Charter),
unless such amendment is first approved by a majority of the Continuing
Directors, in which case such amendment may be made by the affirmative vote of a
majority of the shares at the Holding Company.

     Stockholder Nominations and Proposals.  The Charter of the Holding Company
requires a stockholder who intends to nominate a candidate for election to the
Board of Directors or to raise new business at a stockholder meeting to give
advance written notice to the Secretary of the Holding Company 120 calendar days
in advance of the month and day of the Holding Company's proxy statement to
shareholders was mailed to shareholders the preceding year; provided, however,
that if notice of the meeting is effective fewer than 40 calendar days before
the meeting, such written notice shall be delivered to the Secretary of the
Holding Company not later than the close of the tenth calendar day following the
day on which notice of the meeting was mailed to shareholders.  The notice
provision requires a stockholder who desires to raise new business to provide
certain information to the Holding Company concerning the nature of the new
business, the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide the Holding Company with certain information concerning
the nominee and the proposing stockholder.

     Purpose and Takeover Defensive Effects of the Holding Company's Charter and
Bylaws.  The Board of Directors of the Bank believes that the provisions
described above are prudent and will reduce the Holding Company's vulnerability
to takeover attempts and certain other transactions which have not been
negotiated with and approved by its Board of Directors.  These provisions will
also assist in the orderly deployment of the Offering  proceeds into productive
assets during the initial period after the Conversion.  The Board of Directors
believes these provisions are in the best interest of the Bank and the Holding
Company and its stockholders.  In the judgment of the Board of Directors, the
Holding Company's Board will be in the best position to determine the true value
of the Holding Company and to negotiate more effectively for what may be in the
best interests of its stockholders.  Accordingly, the Board of Directors
believes that it is in the best interest of the Holding Company and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and that these provisions will
encourage such negotiations and discourage hostile takeover attempts.  It is
also the view of the Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at a price
reflective of the true value of the Holding Company and which is in the best
interest of all stockholders.

     Attempts to acquire control of financial institutions and their holding
companies have become increasingly common.  Takeover attempts that have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available.  A transaction that is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value of the Holding Company and its
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.

     An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense.  Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company.  As a result, stockholders may be
presented with the alternative of partially liquidating their investment

                                      115
<PAGE>
 
at a time that may be disadvantageous, or retaining their investment in an
enterprise that is under different management and whose objective may not be
similar to those of the remaining stockholders.  The concentration of control,
which could result from a tender offer or other takeover attempt, could also
deprive the Holding Company's remaining stockholders of benefits of certain
protective provisions of the Exchange Act, if the number of beneficial owners
became less than 300, thereby allowing for Exchange Act deregistration.

     Despite the belief of the Bank and the Holding Company as to the benefits
to stockholders of these provisions of the Holding Company's Charter and Bylaws,
these provisions may also have the effect of discouraging a future takeover
attempt that would not be approved by the Holding Company's Board, but pursuant
to which stockholders may receive a substantial premium for their shares over
then current market prices.  As a result, stockholders who might desire to
participate in such a transaction may not have any opportunity to do so.  Such
provisions will also render the removal of the Holding Company's Board of
Directors and of management more difficult.  The Board of Directors of the Bank
and the Holding Company, however, have concluded that the potential benefits
outweigh the possible disadvantages.

     Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the acquisition of its equity securities that would
be permitted for a Tennessee business corporation.  The Holding Company and the
Bank do not presently intend to propose the adoption of further restrictions on
the acquisition of the Holding Company's equity securities.

     The cumulative effect of the restrictions on acquisition of the Holding
Company contained in the Charter and Bylaws and Holding Company, federal law and
Tennessee law may be to discourage potential takeover attempts and perpetuate
incumbent management, even though certain stockholders of the Holding Company
may deem a potential acquisition to be in their best interests, or deem existing
management not to be acting in their best interests.

              DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY

General

     The Holding Company is authorized to issue 49,750,000 shares of Common
Stock having no par value  per share and 250,000 shares of preferred stock
having no par value per share.  The Holding Company currently expects to issue
up to 6,555,000 shares of Common Stock and no shares of preferred stock in the
Stock Conversion.  Each share of the Holding Company's Common Stock will have
the same relative rights as, and will be identical in all respects with, each
other share of Common Stock.  Upon payment of the Purchase Price for the Common
Stock, in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.

     The Common Stock of the Holding Company will represent nonwithdrawable
capital, will not be an account of any type, and will not be insured by the FDIC
or any other government agency.

Common Stock

     Dividends.  The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation.  Tennessee law
prohibits dividend payments or other distributions to shareholders that would
either render the Holding Company unable to pay its debts as they became due in
the normal course of business or cause the Holding Company's total liabilities
to exceed its total assets.  See "DIVIDEND POLICY" and "REGULATION."  The
holders of Common Stock of the Holding Company will be entitled to receive and
share equally in such dividends as may be declared by the Board of Directors of
the Holding Company out of funds legally available therefor.  If the Holding
Company issues preferred stock, the holders thereof may have a priority over the
holders of the Common Stock with respect to dividends.

     Stock Repurchases.  The Plan of Conversion and OTS regulations place
certain limitations on the repurchase of the Holding Company's capital stock.
See "THE CONVERSION -- Restrictions on Repurchase of

                                      116
<PAGE>
 
Stock" and "USE OF PROCEEDS."  Under Tennessee law stock repurchases are subject
to the same limitations as dividends.  See "DIVIDEND POLICY."

     Voting Rights.  Upon consummation of the Stock Conversion, the holders of
Common Stock of the Holding Company will possess exclusive voting rights in the
Holding Company.  They will elect the Holding Company's Board of Directors and
act on such other matters as are required to be presented to them under
Tennessee law or as are otherwise presented to them by the Board of Directors.
Except as discussed in "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY,"
each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors.  If the Holding
Company issues preferred stock, holders of the Holding Company preferred stock
may also possess voting rights.  Certain matters require a vote of 80% of the
outstanding shares entitled to vote thereon.  See "RESTRICTIONS ON ACQUISITION
OF THE HOLDING COMPANY."

     As a federal mutual savings bank, corporate powers and control of the Bank
are vested in its Board of Directors, who elect the officers of the Bank and who
fill any vacancies on the Board of Directors as it exists upon Conversion.
Subsequent to the Stock Conversion, voting rights will be vested exclusively in
the owners of the shares of capital stock of the Bank, all of which will be
owned by the Holding Company, and voted at the direction of the Holding
Company's Board of Directors.  Consequently, the holders of the Common Stock
will not have direct control of the Bank.

     Liquidation.  In the event of any liquidation, dissolution or winding up of
the Bank, the Holding Company, as holder of the Bank's capital stock would be
entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders and Supplemental Eligible Account Holders
(see "THE CONVERSION"), all assets of the Bank available for distribution.  In
the event of liquidation, dissolution or winding up of the Holding Company, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of the
Holding Company available for distribution.  If Holding Company preferred stock
is issued, the holders thereof may have a priority over the holders of the
Common Stock in the event of liquidation or dissolution.

     Preemptive Rights.  Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares that may be
issued.  The Common Stock is not subject to redemption.

Preferred Stock

     None of the shares of the authorized Holding Company preferred stock will
be issued in the Conversion and there are no plans to issue the preferred stock.
Such stock may be issued with such designations, powers, preferences and rights
as the Board of Directors may from time to time determine.  The Board of
Directors can, without stockholder approval, issue preferred stock with voting,
dividend, liquidation and conversion rights that could dilute the voting
strength of the holders of the Common Stock and may assist management in
impeding an unfriendly takeover or attempted change in control.

Restrictions on Acquisition

     Acquisitions of the Holding Company are restricted by provisions in its
Charter and Bylaws and by the rules and regulations of various regulatory
agencies.  See "REGULATION" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING
COMPANY."

                           REGISTRATION REQUIREMENTS

     The Holding Company will register the Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act upon the completion of the Stock Conversion
and will not deregister its Common Stock for a period

                                      117
<PAGE>
 
of at least three years following the completion of the Stock Conversion.  Upon
such registration, the proxy and tender offer rules, insider trading reporting
and restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable.

                             LEGAL AND TAX OPINIONS

     The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C.  The federal tax consequences of
the Conversion have been opined upon by Breyer & Aguggia and the Tennessee tax
consequences of the Conversion have been opined upon by Bass, Berry & Sims PLC,
Nashville, Tennessee.  Breyer & Aguggia and Bass, Berry & Sims PLC have
consented to the references herein to their opinions.  Certain legal matters
will be passed upon for Trident Securities by Peabody & Brown, Washington, D.C.

                                    EXPERTS

     The consolidated financial statements of the Bank as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994 included in
this Prospectus have been audited by Rayburn, Betts & Bates, P.C., independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.

     Ferguson has consented to the publication herein of the summary of its
report to the Bank setting forth its opinion as to the estimated pro forma
market value of the Holding Company and the Bank as converted and its letter
with respect to subscription rights and to the use of its name and statements
with respect to it appearing herein.

                             ADDITIONAL INFORMATION

     The Holding Company has filed with the SEC a Registration Statement on Form
S-1 (File No. 333-40057) under the Securities Act with respect to the Common
Stock offered in the Conversion.  This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC.  Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and 7 World Trade Center, Suite 1300, New York, New York  10048.  Copies
may be obtained at prescribed rates from the Public Reference Section of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549.  The Registration Statement
also is available through the SEC's World Wide Web site on the Internet
(http://www.sec.gov).

     The Bank has filed with the OTS an Application for Approval of Conversion,
which includes proxy materials for the Bank's Special Meeting and certain other
information.  This Prospectus omits certain information contained in such
Application.  The Application, including the proxy materials, exhibits and
certain other information that are a part thereof, may be inspected, without
charge, at the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552
and at the office of the Regional Director of the OTS at the Regional Director
of the OTS at the Central Regional Office of the OTS, Madison Plaza, 200 West
Madison Street, Suite 1300, Chicago, Illinois 60606.

                                      118
<PAGE>
 
                   Index To Consolidated Financial Statements
                        Cavalry Banking and Subsidiaries



<TABLE>
<CAPTION>
                                                                   Page
                                                                   ----
 
<S>                                                                 <C>
Independent Auditors' Report                                        F-1
 
Consolidated Balance Sheets as of September 30, 1997 (unaudited)
 and December 31, 1996 and 1995...................................  F-2
 
Consolidated Statements of Earnings for the
 Nine Months Ended September 30, 1997 and 1996 (unaudited)
 and the Years Ended December 31, 1996, 1995 and 1994.............   23
 
Consolidated Statements of Equity for the Nine Months Ended
 September 30, 1997 and 1996 (unaudited) and for the Years
 Ended December 31, 1996, 1995 and 1994...........................  F-3
 
Consolidated Statements of Cash Flows for the
 Nine Months Ended September 30, 1997 and 1996 (unaudited)
 and the Years Ended December 31, 1996, 1995 and 1994.............  F-4
 
Notes to Consolidated Financial Statements........................  F-6
 
</TABLE>
                                   *   *   *


     All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.

     Separate financial statements for the Holding Company have not been
included herein because the Holding Company, which has engaged in only
organizational activities to date, has no significant assets, liabilities
(contingent or otherwise), revenues or expenses.

                                      119
<PAGE>
 
           [LETTERHEAD OF RAYBURN, BETTS & BATES, P.C. APPEARS HERE]


                         INDEPENDENT AUDITORS' REPORT
                         ----------------------------



Board of Directors
Cavalry Banking and Subsidiaries


We have audited the consolidated balance sheets of Cavalry Banking and
Subsidiaries (the Bank) as of December 31, 1996 and 1995 and the related
consolidated statements of earnings, changes in equity and cash flows for each
of the years in the three year period ended December 31, 1996.  These
consolidated financial statements are the responsibility of the Bank's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cavalry Banking and
Subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three year period ended
December 31, 1996, in conformity with generally accepted accounting principles.


                                               /s/ Rayburn, Betts & Bates, P.C.
                                               --------------------------------

RAYBURN, BETTS & BATES, P.C.
Nashville, Tennessee
September 25, 1997
    
(October 9, 1997 as to the 1st
paragraph of Note 20)        
                                      F-1
<PAGE>
 
 
                       CAVALRY BANKING AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                          DECEMBER 31, 1996 AND 1995
                        SEPTEMBER 30, 1997 (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

<TABLE>    
<CAPTION>
                                                                                                 September 30          December
                                                                                                 ------------          --------
         Assets                                                                                     1997           1996       1995
         --------                                                                                  -------        -------    -------

                                                                                                 (Unaudited)
<S>                                                                                              <C>              <C>        <C>
Cash (note 2)                                                                                    $  9,691         9,497      7,420
Interest-bearing deposits with other financial institutions                                        17,000        10,022      6,515
                                                                                                 --------       -------    -------
   Cash and cash equivalents                                                                       26,691        19,519     13,935
Investment securities available for sale (note 3)                                                  10,107          -          -
Investment securities held to maturity (note 3)                                                     3,700         7,705     35,550
Mortgage-backed securities held to maturity (note 4)                                                1,333         1,419      1,541
Loans held for sale, at estimated fair value (note 5)                                               4,149         5,253      3,689
Loans receivable, net (notes 5 and 10)                                                            216,410       200,600    159,943
Accrued interest receivable:
  Loans, net of allowance for delinquent interest of
   $2, $5 and $9 in 1997, 1996
 and 1995, respectively                                                                             1,485         1,280      1,092
  Investment securities                                                                               374           155        509
  Mortgage-backed securities                                                                           11            11         13
Office properties and equipment, net (note 6)                                                       7,864         6,203      5,286
Required investment in stock of Federal Home Loan Bank,
  at cost (note 7)                                                                                  1,602         1,519      1,418
Deferred tax asset, net (note 11)                                                                   1,185           755        523
Other assets (note 12)                                                                              1,014           545        383
                                                                                                 --------       -------    -------
 
                                                                                                 $275,925       244,964    223,882 
                                                                                                 ========       =======    =======
 
     Liabilities and Retained Earnings
     ---------------------------------
Liabilities:
  Deposits (note 9)                                                                              $241,950       214,533    196,734
  Accrued interest payable                                                                            353           264        271
  Advance payments by borrowers for property
   taxes and insurance                                                                              1,120           328        487
  Income taxes payable (note 11)                                                                    1,211         1,089        620
  Accrued expenses and other liabilities                                                            1,790         1,500      1,334
                                                                                                 --------       -------    -------
    Total liabilities                                                                             246,424       217,714    199,446
                                                                                                 --------       -------    -------
  Equity: Retained earnings, substantially restricted
   (notes 13 and 14)                                                                               29,508        27,250     24,436
  Net unrealized loss on investment securities
   available-for-sale, net of taxes                                                                    (7)         -          -
                                                                                                 --------       -------    -------
    Total equity                                                                                   29,501        27,250     24,436
                                                                                                 --------       -------    -------
      Total liabilities and equity                                                               $275,925       244,964    223,882
                                                                                                 ========       =======    =======
</TABLE>     

Commitments and contingencies (notes 2, 12 and 16)

See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>
 
                        CAVALRY BANKING AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          Unrealized
                                                           Loss on
                                                          Investment
                                                          Securities
                                             Retained   Available-for
                                             Earnings        Sale        Total
                                             --------        ----        -----
<S>                                          <C>       <C>             <C>
 
Balance at December 31, 1993                  $18,777              -   18,777
 
  Net earnings                                  2,458              -    2,458
                                              -------  -------------   ------
 
Balance at December 31, 1994                   21,235              -   21,235
 
  Net earnings                                  3,201              -    3,201
                                              -------  -------------   ------
 
Balance at December 31, 1995                   24,436              -   24,436
 
  Net earnings                                  2,814              -    2,814
                                              -------  -------------   ------
 
Balance at December 31, 1996                   27,250              -   27,250
 
  Net earnings (unaudited)                      2,258              -    2,258
 
Change in valuation allowance for
  securities available-for-sale, net of
  income taxes of $4 (unaudited)                    -             (7)      (7)
                                              -------  -------------   ------
 
Balance at September 30, 1997 (unaudited)     $29,508             (7)  29,501
                                              =======  =============   ======
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
           NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      Nine months ended                 Years ended
                                                         September 30,                  December 31,
                                                      -----------------      --------------------------------
                                                      1997         1996      1996          1995          1994
                                                      ----         ----      ----          ----          ----
                                                         (Unaudited)
<S>                                               <C>             <C>       <C>           <C>           <C> 
Operating activities:
 Net earnings                                     $  2,258        1,840     2,814         3,201         2,458
 Adjustments to reconcile net earnings
  to net cash provided by operating
  activities:
   Provision for loan losses                           700           90       120            80           113
   Gain on sales of real estate acquired
     in settlement of loans, net                         -           (7)      (11)          (23)          (18)
   Gain on sales of loans, net                        (674)        (733)     (890)         (882)         (530)
   Gain on sale of office properties
     and equipment                                       -            -       (40)            -             -
   Depreciation and amortization on
     office properties and equipment                   780          535       733           538           525
   Net amortization (accretion) of
     investment and mortgage-backed
     securities premiums, net                           10           95       102           (37)          189
   Accretion of discount on loans
     acquired through merger                             -            -         -             -           (60)
   Amortization of deferred loan
     origination fees                                 (820)        (836)   (1,152)         (918)       (1,157)
   Loan fees collected                                 867          978     1,294           946         1,160
   Deferred income tax benefit                        (430)        (253)     (231)          (40)          (73)
   Proceeds from sales of loans                     48,684       52,278    71,235        67,136        48,939
   Origination of loans held for sale              (46,907)     (50,660)  (71,909)      (68,491)      (45,056)
   Decrease (increase) in accrued
     interest receivable                              (423)           5       167          (255)         (263)
   Decrease (increase) in other assets                (464)        (210)     (162)         (169)          493
   Increase (decrease) in accrued
     interest payable                                   88           (5)       (7)           78            23
   Stock dividends on Federal Home
     Loan Bank stock                                   (83)         (50)     (102)         (114)          (66)
   Increase in accrued expenses
     and other liabilities                             290        1,382       170           301           162
   Increase (decrease) in current
     income taxes payable                              123         (158)      469           151            36
                                                  --------      -------   -------      --------      --------
      Net cash provided by
       operating activities                          3,999        4,291     2,600         1,502         6,875
                                                  --------      -------   -------      --------      --------
Investing activities:
 Increase (decrease) in loans
  receivable, net                                  (16,557)     (36,578)  (40,962)        5,420       (11,585)
 Principal payments on mortgage
  backed securities                                     83           63       116           118           427
</TABLE>

See accompanying notes to conslidated statements.

                                      F-4
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)

                 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
           NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
 
 
                                           Nine months ended              Years ended
                                              September 30,               December 31,
                                          ------------------   -----------------------------------   
                                              1997      1996      1996      1995           1994
                                          --------   -------      ----      ----           ----
                                             (Unaudited)
<S>                                       <C>        <C>       <C>       <C>            <C>  
Investing activities: (Continued)
 Proceeds from the sales of branch and
  office properties and equipment                -         -       153         3              -
 Purchases of investment securities
  available for sale                       (10,120)        -         -         -              -
 Purchases of investment securities
  held to maturity                               -    (2,000)   (2,002)  (32,609)       (16,036)
 Proceeds from maturities of
  investment securities                      4,000    20,000    29,750    17,000          9,500
 Purchases of office properties
  and equipment                             (2,441)     (807)   (1,763)     (913)          (770)
 Proceeds from sale of real estate
  acquired through foreclosure                   -        51        51       129            820
                                          --------   -------   -------   -------        -------
     Net cash used in investing
      activities                           (25,035)  (19,271)  (14,657)  (10,852)       (17,644)
                                                               -------   -------
Financing activities:
 Net increase in deposits                   27,416    12,555    17,800    16,450         (4,891)
 Advance from (repayment to)
  Federal Home Loan Bank                         -         -         -    (5,000)         5,000
 Net increase (decrease) in advance
  payments by borrowers for
  property taxes and insurance                 792       711      (159)     (143)           (22)
                                          --------   -------   -------   -------        -------
      Net cash provided by
       financing activities                 28,208    13,266    17,641    11,307             87
                                          --------   -------   -------   -------        -------
Increase (decrease) in cash and
 cash equivalents                            7,172    (1,714)    5,584     1,957        (10,682)
Cash and cash equivalents,
 beginning of year                          19,519    13,935    13,935    11,978         22,660
                                          --------   -------   -------   -------        -------
Cash and cash equivalents, end of year    $ 26,691    12,221    19,519    13,935         11,978
                                          ========   =======   =======   =======        =======
SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION:
Payments during the period for:
  Interest                                $  4,648     4,076     5,500     5,185          4,272
                                          ========   =======   =======   =======        =======
  Income taxes                            $  1,920     1,526     1,591     1,771          1,453
                                          ========   =======   =======   =======        =======
SUPPLEMENTAL DISCLOSURES OF NONCASH
 INVESTING AND FINANCING ACTIVITIES:
Foreclosures and in substance
 foreclosures of loans during year        $      -        44        44        22            232
                                          ========   =======   =======   =======        =======
Interest credited to deposits             $  2,079     2,046     2,775     2,433          2,004
                                          ========   =======   =======   =======        =======
Net unrealized losses on investment
 securities available for sale            $     11         -         -         -              -
                                          ========   =======   =======   =======        =======
Increase in deferred tax asset related
 to unrealized loss on investments        $      4         -         -         -              -
                                          ========   =======   =======   =======        =======
</TABLE>

See accompanying notes to conslidated statements.

                                      F-5
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)

(1)  Summary of Significant Accounting Policies:
     ------------------------------------------ 
     Business
     --------
     Cavalry Banking and Subsidiaries and its wholly-owned subsidiaries' (the
       Bank) primary business activities include attracting deposits from the
       general public and originating residential property loans (one-to-four
       family home mortgage, cooperative apartment and multi-family property
       loans).  The Bank also makes commercial real estate loans and consumer
       loans.  The Bank is subject to competition from other financial
       institutions.  Deposits at the Bank are insured up to applicable limits
       by the Federal Deposit Insurance Corporation (FDIC).  The Bank is a
       federally chartered savings bank and is subject to comprehensive
       regulation, examination and supervision by the OTS and the FDIC.

     The consolidated financial statements have been prepared in conformity with
       generally accepted accounting principles. In preparing the consolidated
       financial statements, management is required to make estimates and
       assumptions that affect the reported amounts of assets and liabilities as
       of the date of the consolidated balance sheet and revenues and expenses
       for the year. Actual results could differ significantly from those
       estimates. Material estimates that are particularly susceptible to
       significant change relate to the determination of the allowance for loan
       losses and the valuation of real estate acquired in connection with
       foreclosures or in satisfaction of loans. In connection with the
       determination of the allowances for loan losses and foreclosed real
       estate, management obtains independent appraisals for significant
       properties.

     A substantial portion of the Bank's loans are secured by real estate in the
       Middle Tennessee market. In addition, foreclosed real estate, is located
       in this same market. Accordingly, the ultimate collectibility of a
       substantial portion of the Bank's loan portfolio and the recovery of a
       substantial portion of the carrying amount of foreclosed real estate is
       susceptible to changes in local market conditions.

     Management believes that the allowance for loan losses is adequate. While
       management uses available information to recognize losses on loans and
       foreclosed real estate, future additions to the allowances may be
       necessary based on changes in local economic conditions. In addition,
       regulatory agencies, as an integral part of their examination process,
       periodically review the Bank's allowances for losses on loans and
       foreclosed real estate. Such agencies may require the Bank to recognize
       additions to the allowances based on their judgments about information
       available to them at the time of their examination.

    
     As more fully discussed in note 19, the Bank plans to convert from a mutual
       to capital stock form of ownership. As a stock institution and as a
       result of the public offering of the stock of the holding company
       intended to be formed by the Bank, the Bank will be subject to the
       financial reporting requirements of the Securities Exchange Act of 1934,
       as amended. Accordingly, in connection with the conversion, the Bank
       has implemented procedures to meet the increased level of reporting
       required. The procedures include methods to accumulate and analyze,
       consistently with past practice, information necessary for reporting in 
       an efficient and timely     

                                      F-6
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Business (Continued)
     --------            

     manner. These procedures relate principally to the analysis of the adequacy
       of the allowance for loan losses.     

     Certain reclassifications have been made to prior periods amounts to
       conform to the current period presentation.

     Cash Equivalents
     ----------------
     Cash equivalents include cash and demand and time deposits at other
       financial institutions with remaining maturities of three months or less.

     Investment Securities
     ---------------------
     In accordance with Statement of Financial Accounting Standards No. (SFAS)
       115, Accounting for Certain Investments in Debt and Equity Securities,
       which the Bank adopted effective January 1, 1994, the Bank is required to
       report debt, readily-marketable equity, mortgage-backed and mortgage
       related securities in one of the following categories: (i) "held-to-
       maturity" (management has a positive intent and ability to hold to
       maturity) which are to be reported at amortized cost adjusted, in the
       case of debt securities, for the amortization of premiums and accretion
       of discounts; (ii) "trading" (held for current resale) which are to be
       reported at fair value, with unrealized gains and losses included in
       earnings; and (iii) "available for-sale" (all other debt, equity,
       mortgage-backed and mortgage related securities) which are to be reported
       at fair value, with unrealized gains and losses reported net of tax as a
       separate component of retained earnings. The Bank classified all of its
       holdings of debt, readily-marketable equity, mortgage-backed and mortgage
       related securities at January 1, 1994 as either "held-to-maturity" or
       "available-for-sale," thereafter, at the time of new securities
       purchases, a determination is made as to the appropriate classification.
       Realized and unrealized gains and losses on trading securities are
       included in net income. Unrealized gains and losses on securities
       available-for-sale are recognized as direct increases or decreases in
       retained earnings, net of any tax effect. Cost of securities sold is
       recognized using the specific identification method.

     Mortgage-backed Securities
     --------------------------
     Mortgage-backed securities represent participating interests in pools of
       long-term first mortgage loans originated and serviced by issuers of the
       securities. Mortgage-backed securities are carried at the unpaid
       principal balances, adjusted for unamortized premiums and unearned
       discounts. Premiums and discounts are amortized using methods
       approximating the interest method over the remaining period to
       contractual maturity, adjusted for anticipated prepayments. Management
       intends and has the ability to hold such securities to maturity. The Bank
       has classified all mortgage-backed securities in its portfolio as held to
       maturity. Should any be sold, cost of securities sold is determined using
       the specific identification method.

                                      F-7
<PAGE>
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Loans Receivable
     ----------------
    
     Loans are stated at unpaid principal balances, less the allowance for loan
       losses and net deferred loan fees and unearned discounts. Unearned
       discounts on installment loans are recognized as income over the term of
       the loans using the sum-of-the-months digits method that approximates the
       interest method.     

     Loan origination and commitment fees, as well as certain origination costs,
       are deferred and amortized as a yield adjustment over the lives of the
       related loans adjusted for estimated prepayments based on the Bank's
       historical prepayment experience, using the interest method. Loans are
       placed on nonaccrual when a loan is specifically determined to be
       impaired or when principal or interest is delinquent for 90 days or more.
       Any unpaid interest previously accrued on these loans is reversed from
       income and an allowance for accrued interest is recorded.
    
     The allowance for loan losses is maintained at a level which, in
       management's judgment, is adequate to absorb losses inherent in the loan
       portfolio. The amount of the allowance is based on management's
       evaluation of the collectibility of the loan portfolio, including the
       nature of the portfolio, credit concentrations, trends in historical loss
       experience, specific impaired loans, and economic conditions. Allowances
       for impaired loans are generally determined based on collateral values or
       the present value of estimated cash flows. The allowance is increased by
       a provision for loan losses, which is charged to expense, and reduced by
       charge-offs, net of recoveries. Changes in the allowance relating to
       impaired loans are charged or credited to the provision for loan 
       losses.     

     In May 1993, SFAS 114, Accounting by Creditors for Impairment of a Loan was
       issued. The statement is effective for financial statements for fiscal
       years beginning after December 15, 1994. According to SFAS 114,
       impairment is measured based upon the present value of expected future
       cash flows or fair value of the loan's collateral, if collateral
       dependent.

     In October 1994, SFAS 118, Accounting by Creditors for Impairment of a 
       Loan-Income Recognition and Disclosures was issued. SFAS 118 is also
       effective for fiscal years beginning after December 15, 1994 and amends
       SFAS 114 to allow a creditor to use existing methods for recognizing
       interest income on an impaired loan. This statement also amends the
       disclosure requirements of SFAS 114 to require information about the
       recorded investment in certain impaired loans and about how a creditor
       recognizes interest income related to those impaired loans. The Bank
       adopted SFAS 114 and SFAS 118 on January 1, 1995. The adoption of SFAS
       114 and SFAS 118 did not have a significant effect on the Bank's
       consolidated financial statements.

                                      F-8

<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)

(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Loans Held for Sale
     -------------------
     Mortgage loans originated and held for sale in the secondary market are
       carried at the lower of cost or market value determined on an aggregate
       basis. Net unrealized losses are recognized in a valuation allowance
       through charges to income. Gains and losses on the sale of loans held for
       sale are determined using the specific identification method.

     Real Estate Acquired in Settlement of Loans
     -------------------------------------------
     Real estate acquired in settlement of loans includes property acquired
       through foreclosure and deeds in lieu of foreclosure. Property acquired
       by deed in lieu of foreclosure results when a borrower voluntarily
       transfers title to the Bank in full settlement of the related debt in an
       attempt to avoid foreclosure. Real estate acquired in settlement of loans
       is valued at the date of acquisition and thereafter at the lower of fair
       value less costs to sell or the Bank's net investment in the loan and
       subsequent improvements to the property. Certain costs relating to
       holding the properties, and gains or losses resulting from the
       disposition of properties are recognized in the current period's
       operations.

     Office Properties and Equipment
     -------------------------------
     Depreciation and amortization are provided over the estimated useful lives
       of the respective assets which range from 3 to 40 years. All office
       properties and equipment are recorded at cost and are depreciated on the
       straight-line method.

     Income Taxes
     ------------
       Under the asset and liability method of SFAS 109, deferred tax assets and
       liabilities are recognized for the future tax consequences attributable
       to differences between the financial statement carrying amounts of
       existing assets and liabilities and their respective tax bases. To the
       extent that current available evidence about the future raises doubt
       about the realization of a deferred tax asset, a valuation allowance must
       be established. Deferred tax assets and liabilities are measured using
       enacted tax rates expected to apply to taxable income in the years in
       which those temporary differences are expected to be recovered or
       settled. The effect on deferred tax assets and liabilities of a change in
       tax rates is recognized in income in the period that includes the
       enactment date.

     The Bank files a consolidated federal income and combined state franchise
       and excise tax return. Each of the members of the consolidated group
       accrues tax expense on a separate entity basis.

     Pension and Savings Plans
     -------------------------
     The Bank has a noncontributory, defined benefit employee pension plan and a
       401(k) savings plan covering substantially all employees upon attainment
       of age 21 and completion of one year of service. The Bank contributes
       actuarially determined amounts necessary to fund defined plan benefits of
       at least the minimum amount required by the Employee Retirement Income
       Security Act of 1974, as amended.

                                      F-9




 
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)
                                        
(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Fair Values of Financial Instruments
     ------------------------------------

     Statement of Financial Accounting Standards No. 107, Disclosures about Fair
       Value of Financial Instruments, requires disclosure of fair value
       information about financial instruments, whether or not recognized in the
       consolidated balance sheets for which it is practicable to estimate that
       value. In cases where quoted market prices are not available, fair values
       are based on estimates using present value or other valuation techniques.
       Those techniques are significantly affected by the assumptions used,
       including the discount rate and estimates of future cash flows. In that
       regard, the derived fair value estimates cannot be substantiated by
       comparison to independent markets and, in many cases, could not be
       realized in immediate settlement of the instruments. Fair value estimates
       are made at a point in time, based on relevant market information and
       information about the financial instrument. Accordingly, such estimates
       involve uncertainties and matters of judgment and therefore cannot be
       determined with precision. Statement No. 107 excludes certain financial
       instruments and all nonfinancial instruments from its disclosure
       requirements. Accordingly, the aggregate fair value amounts presented do
       not represent the underlying value of the Bank.

     The following are the more significant methods and assumptions used by the
       Bank in estimating its fair value disclosures for financial instruments:

     Cash and cash equivalents: The carrying amounts reported in the statement
       of financial condition for cash and cash equivalents approximate those
       assets' fair values, because they mature within 90 days or less and do
       not present credit risk concerns.

     Investment securities and mortgage-backed securities: Fair values for
       investment securities and mortgage-backed securities are based on quoted
       market prices, where available. If quoted market prices are not
       available, fair values are based on quoted market prices of comparable
       instruments.

     Loans receivable: The fair values for loans receivable are estimated using
       discounted cash flow analysis which considers future repricing dates and
       estimated repayment dates, and further using interest rates currently
       being offered for loans with similar terms to borrowers of similar credit
       quality. Loan fair value estimates include judgments regarding future
       expected loss experience and risk characteristics.

     Loans held for sale: Fair value is based on investor commitments, or in the
       absence of such commitments, on current investor yield requirements.

     Accrued interest receivable: Fair value is estimated to approximate the
       carrying amount because such amounts are expected to be received within
       90 days or less and any credit concerns have been previously considered
       in the carrying value.

                                      F-10
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)

(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Fair Values of Financial Instruments (Continued)
     ------------------------------------            

     Deposits: The fair values disclosed for deposits with no stated maturity
       such as demand deposits, interest-bearing checking accounts and passbook
       savings accounts are, by definition, equal to the amount payable on
       demand at the reporting date (that is, their carrying amounts). The fair
       values for certificates of deposit and other fixed maturity time deposits
       are estimated using a discounted cash flow calculation that applies
       interest rates currently being offered on such type accounts to a
       schedule of aggregated contractual maturities on such time deposits.

     Advance from Federal Home Loan Bank: This advance matures within 90 days of
       the balance sheet date; therefore, the carrying value will approximate
       fair value.

     Accrued interest payable: The carrying amount will approximate fair value
       as the majority of such interest will be paid within 90 days or less.

     Commitments to extend credit: Commitments to extend credit were evaluated
       and fair value was estimated using the fees currently charged to enter
       into similar agreements, taking into account the remaining terms of the
       agreements and the present creditworthiness of the counterparties. For
       fixed-rate loan commitments, fair value also considers the difference
       between current levels of interest rates and the committed rates.

     Sale and Servicing of Mortgage Loans
     ------------------------------------
     The Bank sells mortgage loans for cash proceeds equal to the principal
       amount of the loans sold but with yield rates which reflect the current
       market rate. Gain or loss is recorded at the time of sale in an amount
       reflecting the difference between the contractual interest rates of the
       loans sold and the current market rate. Certain loans are sold with the
       servicing retained by the Bank. Servicing income is recognized as
       collected and is based on the normal agency servicing fee as defined by
       GNMA, FNMA, or FHLMC. In May 1994, SFAS 122, Accounting for Mortgage
       Servicing Rights was issued. SFAS 122 is effective for fiscal years
       beginning after December 15, 1995, with earlier adoption permitted. The
       statement amends SFAS 65, Accounting for Certain Mortgage Banking
       Activities, to require that a mortgage banking enterprise recognize, as
       separate assets, rights to service mortgage loans for others, however
       acquired. For mortgage servicing rights that are created through the
       origination of mortgage loans, and where the loans are subsequently sold
       or securitized with servicing rights retained, the statement requires
       that the total cost of the mortgage loans should be allocated to the
       mortgage servicing rights and the loans based on their relative fair
       values. The statement also requires the assessment of capitalized
       mortgage servicing rights for impairment to be based on the current fair
       value of those rights and recognized through a valuation allowance. The
       Bank adopted SFAS 122 effective January 1, 1996, the impact of which was
       not material to its financial statements.

     Fees earned for servicing loans are reported as income when the related
       mortgage loan payments are collected. Mortgage servicing rights (MSRs)
       are amortized, as a reduction to loan service fee income, using the
       interest method over the estimated remaining life of the underlying
       mortgage loans. MSR assets are carried at fair value and impairment, if
       any, is recognized through a valuation allowance. The Bank primarily
       sells its mortgage loans on a non-recourse basis.

                                      F-11
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Effect of New Accounting Pronouncements
     ---------------------------------------
     In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
          Servicing of Financial Assets and Extinguishments of Liabilities. This
          statement supersedes SFAS No. 122, Accounting for Mortgage Servicing
          Rights. The statement provides accounting and reporting standards for
          transfers and servicing of financial assets and extinguishments of
          liabilities. After a transfer of financial assets, an entity
          recognizes the financial and servicing assets it controls and the
          liabilities it has incurred, derecognizes financial assets when
          control has been surrendered, and derecognizes liabilities when
          extinguished.

     This Statement requires that liabilities and derivatives incurred or
          obtained by transferors as part of a transfer of financial assets be
          initially measured at fair value, if practicable. It also requires
          that servicing assets and other retained interests in the transferred
          assets be measured by allocating the previous carrying amount between
          the assets sold, if any, and retained interests, if any, based on
          their relative fair values at the date of the transfer. This Statement
          requires that servicing assets and liabilities be subsequently
          measured by (a) amortization in proportion to and over the period of
          estimated net servicing income or loss and (b) assessment for asset
          impairment or increased obligation based on their fair values. This
          Statement requires that debtors reclassify financial assets pledged as
          collateral and that secured parties recognize those assets and their
          obligation to return them in certain circumstances in which the
          secured party has taken control of those assets.

     This Statement requires that a liability be derecognized if and only if
          either (a) the debtor pays the creditor and is relieved of its
          obligation for the liability or (b) the debtor is legally released
          from being the primary obligor under the liability either judicially
          or by the creditor. Therefore, a liability is not considered
          extinguished by an in-substance defeasance.

     This Statement is effective for transfers and servicing of financial assets
          and extinguishments of liabilities occurring after January 1, 1998 as
          deferred by SFAS 127, and is to be applied prospectively. The impact
          on the financial statements for implementation of the Statement is not
          expected to be material.

     In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. The
          statement establishes standards for computing and presenting earnings
          per share ("EPS") and applies to entities with publicly-held common
          stock or potential common stock. It replaces the presentation of
          primary EPS with a presentation of basic EPS and requires the dual
          presentation of basic and diluted EPS on the face of the income
          statement. This statement is effective for financial statements issued
          for periods ending after December 15, 1997 including interim periods;
          earlier applications not permitted. This statement requires
          restatement of all prior period EPS data presented.

                                     F-12
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Effect of New Accounting Pronouncements (Continued)
     ---------------------------------------            

     In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
          about Capital Structure. The statement establishes standards for
          disclosing information about an entity's capital structure and applies
          to all entities. This statement continues the previous requirements to
          disclose certain information about an entity's capital structure found
          in Accounting Principles Board ("APB") Opinions No. 10, Omnibus
          Opinion - 1966, and No. 15, Earnings Per Share, and SFAS No. 47,
          Disclosure of Long-Term Obligations, for entities that were subject to
          those standards. This statement is effective for financial statements
          for periods ending after December 15, 1997. This statement contains no
          change in disclosure requirements for entities that were previously
          subject to the requirements of APB Opinions Nos. 10 and 15 and SFAS
          No. 47. The adoption of the provisions of this statement is not
          expected to have a material impact on the Bank.

     In July 1997, the FASB issued SFAS No. 130, Comprehensive Income. The
          statement establishes standards for reporting and presentation of
          comprehensive income and its components (revenues, expenses, gains,
          and losses) in a full set of general-purpose financial statements. It
          requires that all items that are required to be recognized under
          accounting standards as components of comprehensive income be reported
          in a financial statement that is presented with the same prominence as
          other financial statements. This statement requires that companies (i)
          classify items of other comprehensive income by their nature in a
          financial statement and (ii) display the accumulated balance of other
          comprehensive income separately from retained earnings and additional
          paid-in capital in the equity section of the statement of financial
          condition. This statement is effective for fiscal years beginning
          after December 15, 1997. Reclassification of financial statements for
          earlier periods provided for comprehensive purposes is required.

     In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
          Enterprise and Related Information. The statement establishes
          standards for disclosure about operating segments in annual financial
          statements and selected information in interim financial reports. It
          also establishes standards for related disclosures about products and
          services, geographic areas, and major customers. This statement
          supersedes SFAS No. 14, Financial Reporting for Segments of a Business
          Enterprise. This statement becomes effective for the Bank's fiscal
          year ending December 31, 1998, and requires that comparative
          information from earlier years be restated to conform to its
          requirements. The adoption of the provisions of this statement is not
          expected to have a material impact on the Bank.

                                     F-13
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(1)  Summary of Significant Accounting Policies: (Continued)
     ------------------------------------------             
     Unaudited Financial Information
     -------------------------------

     Information as of September 30, 1997 and for the nine month periods ended
          September 30, 1997 and 1996 is unaudited. The unaudited information
          furnished reflects all adjustments, which consist solely of normal
          recurring accruals, which are, in the opinion of management, necessary
          for a fair presentation of the financial position at September 30,
          1997 and the results of operations and cash flows for the nine-month
          periods ended September 30, 1997 and 1996. The results of the nine-
          month periods are not necessarily indicative of the results of the
          Bank which may be expected for the entire year.

     Reclassification:
     -----------------
     Certain amounts in the December 31, 1995 financial statements have been
          reclassified to conform with December 31, 1996 financial statement
          presentation.

(2)  Cash:
     ---- 

     The Bank is required to maintain cash on hand or in the Federal Reserve
          Bank account for various regulatory purposes. During 1997 and 1996,
          such required cash averaged approximately $1,400,000 and $2,000,000,
          respectively.

(3)  Investment Securities Held to Maturity and Investment Securities Available
     --------------------------------------------------------------------------
     for Sale:
     -------- 

     The amortized cost and estimated fair values of investment securities held
          to maturity and available for sale at September 30, 1997, December 31,
          1996 and 1995, are as follows:

Investment securities held to maturity:

<TABLE>
<CAPTION>
                                                                             September 30, 1997 (Unaudited)
                                                                 ----------------------------------------------------
                                                                                    Gross          Gross    Estimated
                                                                   Amortized     Unrealized     Unrealized     Fair
                                                                     Cost           Gains         Losses       Value
                                                                     ----           -----         ------       -----
<S>                                                              <C>            <C>            <C>          <C>
U.S. Treasury securities and obligations
 of U.S. Government agencies                                            $3,700              5              2    3,703
                                                                 =============  =============  =============  =======
  <CAPTION> 
                                                                                     December 31, 1996
                                                                 --------------------------------------------------------
                                                                                    Gross         Gross        Estimated
                                                                   Amortized     Unrealized     Unrealized        Fair
                                                                      Cost          Gains         Losses          Value
                                                                      ----          -----         ------          -----
<S>                                                                <C>           <C>            <C>            <C> 
U.S. Treasury securities and obligations
 of U.S. Government agencies                                            $7,705             12             15      7,702
                                                                   ===========   ============   ============   ========
</TABLE>

                                     F-14
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)

 
(3)  Investment Securities Held to Maturity and Available-for-Sale: (Continued)
     --------------------------------------------------------------------------
     Investment securities held to maturity: (Continued)

<TABLE>
<CAPTION>
                                                                                      December 31, 1995                     
                                                                 ----------------------------------------------------------       
                                                                                    Gross           Gross       Estimated         
                                                                   Amortized      Unrealized     Unrealized        Fair           
                                                                     Cost           Gains          Losses          Value           
                                                                     ----           -----          ------          -----
<S>                                                              <C>            <C>             <C>            <C>                
U.S. Treasury securities and obligations                                                                                          
  of U.S. Government agencies                                          $35,550             104             31        35,623       
                                                                 =============  ==============  =============  ============        
</TABLE> 
 


Investment securities available for sale:

<TABLE>
<CAPTION>
                                                                            September 30, 1997 (Unaudited)
                                                                 ----------------------------------------------------- 
                                                                    Gross          Gross        Estimated              
                                                                  Amortized     Unrealized     Unrealized      Fair    
                                                                     Cost          Gains         Losses        Value   
                                                                     ----          -----         ------        -----
<S>                                                              <C>           <C>            <C>            <C>       
U.S. Treasury securities and obligations                                                                               
  of U.S. Government agencies                                         $10,118              -             11     10,107 
                                                                 ============  =============  =============  =========  
 </TABLE>

The amortized cost and estimated market value of investment securities held to
  maturity and available-for-sale at September 30, 1997, by contractual
  maturity, are shown below.

Investment securities held to maturity:

<TABLE>
<CAPTION>
 
                                                                                         Estimated
                                                                         Amortized          Fair  
                                                                           Cost             Value  
                                                                           ----             -----  
<S>                                                                      <C>             <C>
U.S. Treasury securities and obligations
  of U.S. Government agencies:
     Maturing within one year                                              $3,000           3,005
     Maturing from one to five years                                          700             698
                                                                          -------         -------
                                                                           $3,700           3,703
                                                                          =======         =======
 </TABLE>

                                     F-15
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)

 
(3)  Investment Securities Held to Maturity and Available-for-Sale: (Continued)
     ------------------------------------------------------------- 
     Investment securities available-for-sale:

<TABLE>
<CAPTION>  
                                                                                          Estimated
                                                                      Amortized             Fair
                                                                         Cost               Value
                                                                         ----               -----     
                                                                                (Unaudited)
<S>                                                                   <C>                 <C>   
U.S. Treasury securities and obligations
 of U.S. Government agencies:
   Maturing within one year                                             $ 5,040               5,034   
   Maturing from one to five years                                        5,078               5,073   
                                                                        -------           ---------   
                                                                        $10,118              10,107   
                                                                        =======           =========    
</TABLE>

The amortized cost and estimated market value of investment securities held to
  maturity at December 31, 1996, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                                                                          Estimated
                                                                      Amortized              Fair               
                                                                        Cost                 Value    
                                                                        ----                 -----            
<S>                                                                   <C>                 <C>        
U.S. Treasury securities and obligations                                                              
  of U.S. Government agencies:                                                                        
     Maturing within one year                                            $6,004                6,011  
     Maturing from one to five years                                      1,701                1,691  
                                                                         ------            ---------  
                                                                         $7,705                7,702  
                                                                         ======            =========   
</TABLE>

The amortized cost and estimated market value of investment securities held to
  maturity at December 31, 1995, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
 
                                                                                          Estimated    
                                                                       Amortized             Fair       
                                                                         Cost                Value      
                                                                         ----                -----          
<S>                                                                    <C>                <C>          
U.S. Treasury securities and obligations                                                               
  of U.S. Government agencies:                                                                         
     Maturing within one year                                            $15,047             15,052    
     Maturing from one to five years                                      20,503             20,571    
                                                                         -------             ------    
                                                                         $35,550             35,623    
                                                                         =======             ======     
</TABLE>

At September 30, 1997, December 31, 1996 and 1995, investment securities with
  amortized cost values of $2,000,529, $2,000,000 and $9,032,217, respectively,
  were pledged as collateral as permitted or required by law.

There were no sales of investment securities available-for-sale in the years
  ended December 31, 1996, 1995, and 1994, or in the unaudited nine months ended
  September 30, 1997 and 1996.

                                     F-16
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(4)  Mortgage-backed Securities:
     -------------------------- 
     The amortized cost and estimated fair values of mortgage-backed securities
          at September 30, 1997, December 31, 1996 and 1995, are as follows:

<TABLE>
<CAPTION>
                                                                                September 30, 1997 (Unaudited)
                                                                  -------------------------------------------------------
                                                                                    Gross          Gross      Estimated
                                                                    Amortized    Unrealized     Unrealized       Fair
                                                                       Cost         Gains         Losses         Value
                                                                       ----         -----         ------         -----  
<S>                                                                 <C>          <C>            <C>           <C>
Mortgage-backed securities:
 FHLMC                                                                  $  430           9            -           439               

 FNMA                                                                      903          12            5           910               
                                                                        ------       -----        -----        ------               
  Total mortgage-backed securities                                      $1,333          21            5         1,349               
                                                                        ======       =====        =====        ======               
 
<CAPTION> 
                                                                                          December 31, 1996
                                                                  -------------------------------------------------------
                                                                                    Gross         Gross       Estimated
                                                                    Amortized    Unrealized     Unrealized      Fair
                                                                       Cost         Gains         Losses        Value
                                                                       ----         -----         ------        -----
<S>                                                                 <C>          <C>            <C>           <C> 
Mortgage-backed securities:
 FHLMC                                                                $  459          3                2           460
 FNMA                                                                    960          4                7           957
                                                                      ------      -----            -----         -----
  Total mortgage-backed securities                                    $1,419          7                9         1,417
                                                                      ======      =====            =====         =====
<CAPTION> 
                                                                                          December 31, 1995   
                                                                  ------------------------------------------------------- 
                                                                                   Gross           Gross      Estimated
                                                                    Amortized    Unrealized     Unrealized       Fair
                                                                       Cost        Gains          Losses         Value
                                                                       ----        -----          ------         -----
<S> 
Mortgage-backed securities:
 FHLMC                                                               $  520           1                2           519
 FNMA                                                                 1,021           -                6         1,015
                                                                     ------       -----            -----         -----
  Total mortgage-backed securities                                   $1,541           1                8         1,534
                                                                     ======       =====            =====         ===== 
</TABLE>

There were no sales of mortgage-backed securities in the years ended December
  31, 1996, 1995, and 1994 or in the unaudited nine months ended September 30,
  1997 and 1996.

                                     F-17
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(5)  Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net:
     ---------------------------------------------------------------------- 
     Loans held for sale, net are summarized as follows:

<TABLE>
<CAPTION>
                                                  September 30,        December 31,       
                                                  -------------        ------------      
                                                      1997           1996      1995 
                                                      ----           ----      ----
                                                  (Unaudited)                       
          <S>                                    <C>                <C>       <C>   
 
          One-to-four family loans                  $4,149          5,253     3,689       
                                                    ------          -----     -----       
                                                                                          
               Total loans held for sale, net       $4,149          5,253     3,689       
                                                    ======          =====     =====        
</TABLE>

     The Bank originates most fixed rate loans for immediate sale to the Federal
     National Mortgage Association (FNMA) or other investors. Generally, the
     sale of such loans is arranged at the time the loan application is received
     through commitments.

     Loans receivable at September 30, 1997 and December 31, 1996 and 1995,
       consisted of the following:

<TABLE>
<CAPTION>
                                                         September 30,     December 31,     
                                                         --------------  ----------------   
                                                              1997        1996     1995     
                                                         --------------  -------  -------   
                                                           (Unaudited)                       
     <S>                                                 <C>             <C>      <C>
     Loans secured by first mortgages on real estate:
       One-to-four family                                     $ 84,036    81,279   72,302
       Multi-family                                              1,385     2,847    1,705
       Land                                                     10,634    18,799   13,816
       Commercial real estate                                   37,104    30,099   22,140
       Construction and development                             68,794    61,032   47,416
                                                              --------   -------  -------
          Total first mortgage loans                           201,953   194,056  157,379
     
     Second mortgage loans                                       2,829     1,964      941
     Commercial loans                                           22,136    20,698   14,771
     Consumer loans                                             30,405    28,533   25,713
                                                              --------   -------  -------
                                                               257,323   245,251  198,804
     Less:
       Loans in process                                         33,201    36,573   32,615
       Allowance for loan losses                                 2,801     2,123    1,997
       Deferred loan fees, net                                     762       702      560
       Loans held for sale                                       4,149     5,253    3,689
                                                              --------   -------  -------
          Loans receivable, net                               $216,410   200,600  159,943
                                                              ========   =======  =======
</TABLE>

                                      F-18
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(5)  Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net:
     ---------------------------------------------------------------------- 
     (Continued)

     Loans are presented net of loans serviced for the benefit of others
      totaling approximately $116.7 million, $120.5 million, $123.3 million,
      $132.8 million and $139.2 million at September 30, 1997 and 1996 and
      December 31, 1996, 1995 and 1994, respectively. Servicing loans for others
      generally consists of collecting mortgage payments, maintaining escrow
      amounts, disbursing payments to investors and foreclosure processing.

     Impaired loans and related allowances for loan losses have been identified
      and calculated in accordance with the provisions of SFAS 114. The total
      allowance for loan losses has been determined in accordance with the
      provisions of SFAS 5, Accounting for Contingencies. As such, the Bank has
      provided amounts for anticipated losses that exceed the immediately
      identified losses associated with loans that have been deemed impaired.
      Provisions have been made and established accordingly, based upon
      experience and expectations, for losses associated with the general
      population of loans, specific industry and loan types, including
      residential and consumer loans which are not subject to the provisions of
      SFAS 114.

     No loans were considered impaired at September 30, 1997 and December 31,
      1996.

     Activity in the allowance for loan losses, consisted of the following:

<TABLE>
<CAPTION>
                                          Nine months ended              Years ended       
                                            September 30,                December 31,       
                                          ----------------        -------------------------
                                          1997        1996         1996      1995      1994      
                                          ----        ----         ----      ----      ----       
                                              (Unaudited)                                                         
     <S>                                   <C>       <C>          <C>       <C>       <C>         
     Balance at beginning of period        $2,123    1,997        1,997     1,776     1,681      
     Provision for loan losses                700       90          120        80       113      
     Recoveries                                14      211          218       192        59      
     Charge-offs                              (36)    (212)        (212)      (51)      (77)     
                                           ------    -----        -----     -----     -----      
      Balance at end of period              2,801    2,086        2,123     1,997     1,776      
                                           ======    =====        =====     =====     =====       
</TABLE>

     Nonaccrual loans totaled approximately $59,000, $51,000 and $107,000 at
      September 30, 1997, December 31, 1996 and 1995, respectively. Interest
      income foregone on such loans was approximately $8,700, $7,725, $10,300,
      $21,100 and $45,300 during the nine month periods ended September 30, 1997
      and 1996 and the years ended December 31, 1996, 1995 and 1994,
      respectively. The Bank is not committed to lend additional funds to
      borrowers whose loans have been placed on a nonaccrual basis.

                                      F-19
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)

 

(5)  Loans Held-for-Sale, Net and Loans Receivable Held for Investment, Net: 
     ----------------------------------------------------------------------
     (Continued)

     Loans in arrears three months or more were as follows:

<TABLE>
<CAPTION>
                                                   Amount  % of loans  
                                                   ------  ----------
                <S>                                <C>     <C>        
                September 30, 1997 (unaudited)      $108        0.05%
                                                    ====        ==== 
                December 31, 1996                   $ 25        0.01%
                                                    ====        ==== 
                December 31, 1995                   $ 97        0.06%
                                                    ====        ====  
</TABLE>

     The Bank's policy is to make consumer and mortgage loans to directors,
       officers, and employees pursuant to board of directors' approval.

     The following summarizes the activity of these loans:

<TABLE>
<CAPTION>
                                           September 30,        December 31,   
                                          -------------       ---------------
                                             1997             1996       1995      
                                            -----             ----       ----       
                                          (Unaudited)                              
     <S>                                  <C>                 <C>        <C>        
     Balance at beginning of period         $ 542              104        122      
     New loans                                320              645        121      
     Principal repayments                    (253)            (207)      (139)     
                                            -----             ----       ----      
     Balance at end of period               $ 609              542        104      
                                            =====             ====       ====       
</TABLE>

     In the opinion of management, such loans were made on substantially the
      same terms, including interest rates and collateral, as those prevailing
      at the time for comparable transactions with other borrowers and did not
      involve more than the normal risk of collectibility or present other
      unfavorable features.

(6)  Office Properties and Equipment, Net:
     ------------------------------------ 
     Office properties and equipment, less accumulated depreciation and
      amortization, consisted of the following at September 30, 1997 and
      December 31, 1996 and 1995:
 
<TABLE>
<CAPTION>
 
                                                      September 30,       December 31,    
                                                         1997          1996         1995    
                                                         ----          ----         ----    
                                                     (Unaudited)                                                                   
     <S>                                             <C>              <C>           <C>     
     Land                                              $ 2,525         2,088        1,543   
     Office buildings                                    3,759         3,363        3,125   
     Furniture, fixtures, and equipment                  5,760         4,422        3,425   
     Leasehold improvements                                150           150          150   
     Automobiles                                           102            96          106   
     Construction in process                               144             8          165   
                                                       -------        ------        -----   
                                                        12,440        10,127        8,514   
     Less accumulated depreciation and amortization      4,576         3,924        3,228   
                                                       -------        ------        -----   
      Office properties and equipment, net             $ 7,864         6,203        5,286   
                                                       =======        ======        =====    
</TABLE>

                                      F-20
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(7)  Required Investment in Stock of Federal Home Loan Bank:
     ------------------------------------------------------ 

     The Bank is a member of the Federal Home Loan Bank (FHLB). As a member of
      this system, the Bank is required to maintain an investment in capital
      stock of the Federal Home Loan Bank of Cincinnati in an amount equal to
      the greater of 1% of residential mortgage loans and mortgage-backed
      securities, or .3% of total assets of the Bank. At December 31, 1996, no
      additional investments are required. No ready market exists for the stock,
      and it has no quoted market value, but may be redeemed for face value by
      the FHLB if the Bank withdraws its membership. Accordingly, this
      investment is carried at the Bank's historical cost.

(8)  Mortgage Servicing Rights:
     --------------------------

     An analysis of the activity for originated mortgage servicing rights is as
     follows:

<TABLE>
     <S>                                                                      <C>                                 
     Balance of adoption of Statement of                                                                          
     Financial Accounting Standards                                                                               
      No. 122 on January 1, 1996                                                $      -                          
     Originations                                                                     29                          
     Amortization                                                                     (6)                         
                                                                              ----------                          
                                                                                                                  
     Balance, December 31, 1996                                                       23                          
     Originations (unaudited)                                                        176                          
     Amortization (unaudited)                                                        (34)                         
                                                                              ----------                          
                                                                                                                  
     Balance, September 30, 1997 (unaudited)                                    $    165                          
                                                                              ==========                          
</TABLE> 
 
(9)  Deposits:
     --------

     Savings, demand, and time deposit account balances are summarized as
     follows:

<TABLE> 
<CAPTION> 
                                                                   September 30, 1997                              
                                                                ------------------------                                
                                                                       (Unaudited)                                 
                                                                   Weighted                                        
        Type of Account                                          Average Rate     Amount                           
        ---------------                                         -------------     ------                           
     <S>                                                         <C>            <C>                                
     Personal accounts                                               -  %       $ 24,757                           
     NOW accounts                                                   1.70          29,981                           
     Savings accounts                                               2.00          15,202                           
     Certificates of deposit                                        5.52         132,108                           
     Money market accounts                                          4.34          39,902                           
                                                                               ---------                           
                                                                                $241,950                           
                                                                               =========                           
</TABLE>

                                      F-21
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES 

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994 

                   SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) 
                         (TABLE AMOUNTS IN THOUSANDS)
 
(9)  Deposits: (Continued)
     ---------------------

<TABLE> 
<CAPTION>                                       December 31, 1996         
                                              ---------------------       
                                              Weighted                    
         Type of Account                     Average Rate     Amount      
         ---------------                     ------------     ------      
     <S>                                     <C>            <C>           
     Personal accounts                             -  %     $ 19,844      
     NOW accounts                                 1.69        27,735      
     Savings accounts                             1.99        15,806      
     Certificates of deposit                      5.38       122,649      
     Money market accounts                        4.32        28,499      
                                                            --------      
                                                            $214,533      
                                                            ========      
                                                                          
                                                                          
                                                December 31, 1995         
                                             -----------------------      
                                              Weighted                    
         Type of Account                     Average Rate     Amount      
         ---------------                     ------------     ------      
     <S>                                     <C>            <C>           
     Personal accounts                             -  %     $ 19,877      
     NOW accounts                                 2.10%       24,325      
     Savings accounts                             2.20%       17,228      
     Certificates of deposit                      5.51%      114,859      
     Money market accounts                        4.04%       20,445      
                                                            --------      
                                                            $196,734      
                                                            ========      
</TABLE> 

     Scheduled maturities of certificates of deposit are as follows:

<TABLE> 
<CAPTION> 
                                                      September 30, 1997                                                         
                                                  --------------------------                                                     
                                                          (Unaudited)                                                            
                                              Weighted                                                                           
         Type of Account                     Average Rate      Amount    Percent                                                 
         ---------------                     ------------      ------    -------                                                 
     <S>                                     <C>             <C>           <C>                                                   
     1 year or less                               5.51%      $112,254      84.97%                                                
     Greater than 1 year through 2 years          5.51         14,155      10.72                                                 
     Greater than 2 years through 3 years         6.32          3,254       2.46                                                 
     Greater than 3 years through 4 years         5.59            996       0.75                                                 
     Greater than 4 years through 5 years         5.66          1,449       1.10                                                 
     Over 5 years                                    -              -          -                                                 
                                                             --------   --------                                                 
                                                             $132,108     100.00%                                                
                                                             ========   ========                                                 
</TABLE>

                                      F-22
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)
 
(9)  Deposits: (Continued)
     --------

<TABLE> 
<CAPTION> 
                                                             December 31, 1996           
                                                 ------------------------------------------
                                                   Weighted                           
         Type of Account                         Average Rate     Amount          Percent                               
         ---------------                         ------------     -------         -------                               
     <S>                                         <C>             <C>              <C>              
     1 year or less                                  3.77%       $ 92,104          75.10%                              
     Greater than 1 year through 2 years             5.58          22,487          18.33                               
     Greater than 2 years through 3 years            5.82           4,902           4.00                               
     Greater than 3 years through 4 years            6.06           3,153           2.57                               
     Greater than 4 years through 5 years            6.24               3            -                               
     Over 5 years                                     -                -             -                               
                                                                  -------         --------                               
                                                                 $122,649         100.00%          
                                                                  =======         ========         

<CAPTION>                                                                                                                        
                                                            December 31, 1995                    
                                                 ---------------------------------------         
                                                   Weighted                                                    
         Type of Account                         Average Rate      Amount         Percent                                  
         ---------------                         ------------      ------         -------                       
     <S>                                         <C>             <C>             <C>             
     1 year or less                                  3.91%       $ 87,650          76.31%                                 
     Greater than 1 year through 2 years             5.66%         13,832          12.04                                  
     Greater than 2 years through 3 years            5.74%          6,528           5.68                                  
     Greater than 3 years through 4 years            6.03%          6,816           5.93                                  
     Greater than 4 years through 5 years            5.59%             33           0.04                                  
     Over 5 years                                     -  %             -            -                          
                                                                 --------        -------         
                                                                 $114,859         100.00%                      
                                                                 ========        =======          
</TABLE>                     
                             
     Certificates of deposit in excess of $100,000 were approximately $25.9
      million, $20.9 million and $18.8 million at September 30, 1997 (unaudited)
      and at December 31, 1996 and 1995, respectively.      

     The FDIC insures deposits of account holders up to $100,000 per insured
      depositor. To provide for this insurance, the Bank must pay a risk-based
      annual assessment which considers the financial soundness of the
      institution and capitalization level (note 17). At December 31, 1996, the
      Bank was assessed at the FDIC's lowest assessment level, as a well
      capitalized institution.

                                      F-23
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)
 
 
(9)  Deposits: (Continued)
     --------

     Interest expense on deposit balances is summarized as follows:

<TABLE>
<CAPTION>
                                          Nine months          Years ended    
                                         ended September 30,   December 31,       
                                         -------------------   ------------       
                                            (Unaudited)               
                                           1997   1996   1996   1995   1994        
                                         ------  -----  -----  -----  -----        
        <S>                              <C>     <C>    <C>    <C>    <C>    
        Savings accounts                 $  227    272    350    399    445        
        Money market and NOW accounts     1,396  1,181  1,595  1,145    827        
        Certificates of deposit           5,192  4,664  6,287  6,096  4,908        
                                         ------  -----  -----  -----  -----        
                                         $6,815  6,117  8,232  7,640  6,180        
                                         ======  =====  =====  =====  =====         
</TABLE>

(10) Advance from the Federal Home Loan Bank:
     --------------------------------------- 

     As of September 30, 1997, December 31, 1996 and 1995, no funds are owed to
      the Federal Home Loan Bank of Cincinnati (FHLB). Available advances were
      $10,000,000 at December 31, 1996 and $12,100,000 at September 30, 1997
      (unaudited) and are secured by a blanket agreement to maintain residential
      first mortgage loans with a principal value of 150% of the outstanding
      advances and has a variable interest rate. At September 30, 1997 and
      December 31, 1996, there were no draws outstanding against advance line.

     By pledging additional residential first mortgage loans, the Bank can
      increase its borrowings from the FHLB to $45,254,666 (unaudited) at
      September 30, 1997.
 
(11) Income Taxes:
     -------------

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

<TABLE>
<CAPTION>
                                                       Nine months                 Years ended    
                                                    ended September 30,             December 31,
                                                  ----------------------     --------------------------
                                                       (Unaudited)                             
                                                     1997       1996          1996      1995      1994           
                                                     ----       ----          ----      ----      ----           
     <S>                                            <C>        <C>           <C>       <C>     <C>               
     Current income tax expense:                                                                                 
       Federal                                      $1,640     1,238         1,775     1,541      1,428          
       State                                           337       144           210       210        183          
                                                    ------     -----         -----     -----      -----          
          Total current income tax expense           1,977     1,382         1,985     1,751      1,611          
                                                    ------     -----         -----     -----      -----          
                                                                                                                 
     Deferred income tax expense (benefit):                                                                      
       Federal                                        (385)     (235)         (215)      (35)       (64)         
       State                                           (45)      (18)          (16)       (5)        (9)         
                                                    ------     -----         -----     -----      -----          
          Total deferred income tax benefit           (430)     (253)         (231)      (40)       (73)         
                                                    ------     -----         -----     -----      -----          
       Income tax expense                           $1,547     1,129         1,754     1,711      1,538          
                                                    ======     =====         =====     =====      =====           
</TABLE>
        

                                      F-24
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(11) Income Taxes: (Continued)
     ------------             
     The following table presents a reconciliation of the provision for income
      taxes as shown in the consolidated statements of earnings with that which
      would be computed by applying the statutory federal income tax rate of 34%
      to earnings before income taxes.


<TABLE>
<CAPTION>
                                                         Nine months                         Years ended    
                                                     ended September 30,                     December 31,
                                                 ---------------------------   ----------------------------------------- 
                                                     (Unaudited)
 
                                                     1997            1996           1996          1995          1994
                                                --------------   ------------  -------------  ------------   ----------- 
<S>                                             <C>      <C>     <C>     <C>    <C>     <C>   <C>     <C>    <C>    <C>      
Tax expense at statutory rates                  $1,294   34.0%   1,009   34.0   1,553   34.0  1,670   34.0   1,359  34.0
Increases (decrease) in taxes
 resulting from:
  State income tax, net of
    federal effect                                 193    5.0       83    2.8     128    2.8    136    2.8     115   2.9
  Other, net                                        60    1.7       37    1.2      73    1.6    (95)  (2.0)     64   1.6
                                                 -----  -----    -----  -----   -----  -----  -----  -----   ----- -----
 
   Total income tax expense                     $1,547   40.7%   1,129   38.0   1,754   38.4  1,711   34.8   1,538  38.5
                                                 =====  =====   ======  =====   =====   ====  =====   ====   =====  ====
</TABLE>

     During 1996, legislation was passed which repealed the percentage of
      taxable income reserve method of accounting for bad debts being utilized
      by the Bank, effective for tax years beginning after 1995. The new law
      required that, prospectively, the Bank account for bad debts utilizing the
      experience reserve method beginning in tax year 1996.

     The law also required that the Bank would be taxed on "applicable excess
      reserves" which is determined by calculating the difference between the
      balance of reserves as of the tax year ended 1995 and pre-1988 reserves.
      These "applicable excess reserves" will be taxed over a six-taxable year
      period beginning in 1996 unless a residential loan requirement is met. If
      the residential loan requirement is met in 1996 and 1997, the payment of
      the tax will commence in 1998. The Bank met the requirement in 1996.

     The Bank's computed "applicable excess reserves" totaled $1,956,670 and,
      based on an effective tax rate of 34%, would render additional tax of
      $665,268. This computed tax is recorded as income taxes payable as of
      December 31, 1996 and September 30, 1997 (unaudited).

     The tax effects of temporary differences that give rise to the significant
      portions of deferred tax asset and liabilities at September 30, 1997
      (unaudited) and December 31, 1996 and 1995, are as follows:


                                     F-25
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


 
(11) Income Taxes: (Continued)
     -------------            

<TABLE>
<CAPTION>
                                                   September 30,  December 31,
                                                      1997      1996      1995
                                                     -----     -----     -----
                                                     (Unaudited)     
<S>                                                 <C>        <C>       <C>   
     Deferred tax assets:                                             
      Loans receivable, allowance for loan losses   $1,063       806       680
      Deferred loan fees                               289       266       192
      Office properties and equipment                  188         -         -
      Excess mortgage servicing asset                    9        18        26
      Other                                              2         2         4
                                                     -----     -----     -----
                                                                      
          Total deferred tax asset                   1,551     1,092       902
                                                     -----     -----     -----
                                                                      
     Deferred tax liabilities:                                        
      FHLB stock                                       306       275       212
      Office properties and equipment                    -         8        55
      Tax bad debt reserve                               -         -        60
      Other                                             60        54        52
                                                     -----     -----     -----
                                                                      
          Total deferred tax liability                 366       337       379
                                                     -----     -----     -----
                                                                      
   Net deferred tax asset                           $1,185       755       523
                                                     =====     =====     =====
</TABLE>

     SFAS No. 109, Accounting for Income Taxes, requires that the tax benefit of
      deductible temporary differences be recorded as an asset to the extent
      that management assesses the utilization of such temporary differences to
      be "more likely than not." In accordance with SFAS No. 109, the
      realization of tax benefits of deductible temporary differences depends on
      whether the Bank has sufficient taxable income within the carryback and
      carryforward period permitted by tax law to allow for utilization of the
      deductible amounts. Taxable income in the carryback period and estimates
      of taxable income in the carryforward period were expected to be
      sufficient to utilize such differences. As such, no valuation allowance
      was established at September 30, 1997 (unaudited), December 31, 1996 or
      December 31, 1995.

(12) Pension Plan:
     ------------ 

     The Bank sponsors a defined benefit pension plan and a 401(k) savings plan
      to provide employees income at retirement. All employees of the Bank are
      eligible to participate in both plans upon attainment of age 21 and
      completion of one year of service. Both plans are administered by a
      pension committee appointed by the Board of Directors of the Bank.

     Under the defined benefit pension plan, the Bank contributes actuarially
      determined amounts necessary to fund plan benefits of at least the minimum
      amount required by the Employee Retirement Income Security Act of 1974, as
      amended. No contributions are required or allowed by employees.



                                     F-26
<PAGE>
 
                        CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(12)  Pension Plan: (Continued)
      ------------             
     Net pension expense included the following components for the years ended
 December 31, 1996 and 1995 (the latest valuation dates):

<TABLE>
<CAPTION>
                                                           December 31,
                                                      ----------------------
                                                       1996    1995    1994
                                                      ------  ------  ------
<S>                                                   <C>     <C>     <C> 
Service cost for benefits earned during the period    $ 151     111     140
Interest cost on projected benefit obligation           104      86      86
Actual net return on plan assets                        (84)   (169)     12
Net amortization and deferrals                           (1)     99     (56)
                                                      -----    ----    ----
 
Net periodic pension expense                          $ 170     127     182
                                                      =====    ====    ====
</TABLE>

The following table sets forth the defined benefit pension plan's funded status
 and amounts recognized in the Bank's consolidated balance sheets for December
 31, 1996 and 1995 (the latest valuation dates).

<TABLE>
<CAPTION>
                                                         December 31,
                                                        ---------------
                                                         1996     1995
                                                        -------  ------
<S>                                                     <C>      <C>
Plan assets at fair value, primarily bonds              $1,312   1,144
                                                        ======   =====
Actuarial present value of benefit for service
 rendered to date:
  Accumulated benefit obligation, including vested
   benefits of $714,198 and $660,838, respectively      $  812     739
  Additional benefits based on projected future
   compensation                                            832     844
                                                        ------   -----
 
     Projected benefit obligation                        1,644   1,583
                                                        ======   =====
 
Plan assets less than projected benefit obligation        (332)   (439)
Unrecognized prior service cost                             39      43
Unrecognized net loss from past experience,
 different from that assumed and effects of changes
 in assumptions                                            521     631
Unrecognized net transition asset at January 1, 1989      (109)   (120)
                                                        ------   -----
 
Prepaid pension benefit                                 $  119     115
                                                        ======   =====
</TABLE>

The weighted average discount rate used in determining the actuarial present
 value was 7% for the years ended December 31, 1996 and 1995, respectively.  The
 rate of increase in future compensation levels used in determining the
 actuarial present value was 5% for the years ended December 31, 1996 and 1995,
 respectively.  The expected long-term rate of return on plan assets was 8% in
 1996 and 1995.

 
                                     F-27
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(12)  Pension Plan: (Continued)
      ------------             

      On January 1, 1993, management adopted the 401(k) savings plan (the Plan)
      for employees of the Bank. Employees may enter the plan on January 1 or
      July 1, whichever occurs first, after completion of eligibility
      requirements. Management has contributed 2% of employees' earnings to the
      Plan on the employees' behalf. Employees are allowed to contribute up to
      15% of earnings and, in addition, management will match employee
      contributions up to 3%. The expense incurred by the Plan for the nine
      months ended September 30, 1997 and 1996 and for the years ended December
      31, 1996, 1995 and 1994 was $126,795, $115,530 and $142,584,$141,523,
      and $148,847 respectively.

(13)  Retained Earnings:
      ----------------- 

      The Bank has been allowed a special bad debt deduction for Federal income
      tax purposes, limited generally to 8% of otherwise taxable income and
      subject to certain limitations based on aggregate loans and savings
      account balances at the end of the year. The Bank could use each year for
      Federal income tax purposes the greater of this percentage deduction or
      actual charge-offs of loans. If the amounts that qualify as deductions
      under the percentage method for Federal income tax purposes are later used
      for purposes other than for bad debt losses, they would be subject to
      Federal income tax at the then current corporate rate. During 1996,
      legislation was passed prohibiting the utilization of percentage of
      taxable income reserve method (see note 11). Retained earnings at
      September 30, 1997, December 31, 1996 and 1995, include approximately
      $2,800,000, $2,800,000 and $4,800,000, respectively, for which Federal
      income tax has not been provided.

(14)  Regulatory Matters:
      ------------------ 

      The amounts for retained earnings and net earnings reported to the Office
      of Thrift Supervision (OTS) agree to the amounts per the accompanying
      consolidated financial statements at December 31, 1996 and 1995, and for
      the years then ended.

      The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
      established a capital based supervisory system of Prompt Corrective Action
      (PCA) for all insured depository institutions. The regulations adopted
      pursuant to FDICIA and effective December 19, 1992, established capital
      categories that determine the degree of supervisory PCA to which a
      depository institution could be subjected. The categories consist of "well
      capitalized," "adequately capitalized," "undercapitalized," "significantly
      undercapitalized" and "critically undercapitalized". An institution is
      deemed to be "well capitalized" if (a) its risk-based capital ratio is 10%
      or greater, (b) its Tier 1 risk-based capital ratio is 6% or greater, and
      (c) its leverage ratio is 5% or greater. At September 30, 1997
      (unaudited), the Bank was "well-capitalized."

      When an insured depository institution's capital ratios fall below the
      "well-capitalized" level it becomes subject to a series of increasingly
      restrictive supervisory actions, to the point where a conservator or
      receiver must be designated for a "critically undercapitalized"
      institution unless certain certifications are made by the appropriate
      regulatory agencies. An institution is deemed to be "critically
      undercapitalized" if its ratio of Tier 1 capital to total assets is 2% or
      less.

 
                                     F-28
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(14) Regulatory Matters: (Continued)
     ------------------             
     The following table presents the Bank's retained earnings (equity capital)
     and regulatory capital ratios as of September 30, 1997 (unaudited) and
      December 31, 1996 and 1995:


<TABLE>
<CAPTION>
                                                                         September 30, 1997 (unaudited and rounded)         
                              -----------------------------------------------------------------------------------------------------
                                                                                                         Tier 1     Total
                                                                                         Core 1           risk-     risk-
                                  Equity         Tangible          Tangible            leverage           based     based
                                 capital          capital            equity             capital         capital   capital
                                ----------       ---------         --------            --------        --------  --------
<S>                             <C>              <C>               <C>                 <C>             <C>       <C>
     Equity capital              $ 29,500          29,500            29,500              29,500          29,500    29,500
     Nonincludable subsidiaries         -               -                 -                   -               -         -
     Unrealized loss on                    
      available for sale                   
      securities                        -               7                 7                   7               7         7
     General valuation                     
     allowances                         -               -                 -                   -               -     2,801
                                 --------        --------          --------             -------         -------   -------
                                        
     Regulatory capital measure  $ 29,500          29,507            29,507              29,507          29,507    32,308
                                 ========        ========          ========             =======         =======   =======
 
     Total assets                $275,925
                                 ======== 
 
     Adjusted total assets      $ 275,925         272,604           272,604
                                  =======         =======           =======   
   
     Risk-weighted assets                                                                              $246,830   246,830
                                                                                                       ========   =======
 
     Capital ratio                  10.69%          10.69%            10.82%              10.82%          11.95%    13.09%
                                 ========         =======            ======             =======         =======   =======
<CAPTION>  
 
                                                             December 31, 1996 (rounded)
                                         --------------------------------------------------------------------------
                                                                                                         Tier 1     Total
                                                                                        Core 1            risk-     risk-
                                    Equity       Tangible          Tangible           leverage            based     based
                                   capital        capital            equity            capital          capital   capital
                                ----------       --------          --------            -------          -------  --------
<S>                             <C>              <C>               <C>               <C>              <C>        <C>  
     Equity capital              $ 27,250          27,250            27,250             27,250           27,250    27,250
     Nonincludable
      subsidiaries                      -              (2)               (2)                (2)              (2)       (4)
     General valuation
      allowances                        -               -                 -                  -                -     2,123
                                 --------         -------            ------           --------         --------   -------        
 
     Regulatory capital measure  $ 27,250          27,248            27,248             27,248           27,248    29,369
                                 ========        ========           =======           ========         ========   ======= 
 
     Total assets               $ 244,964
                                 ========
 
     Adjusted total assets                       $ 244,962          242,748            242,748
                                                  ========          =======            ======= 
 
     Risk-weighted assets                                                                              $227,556   227,748
                                                                                                       ========   =======
 
     Capital ratio                  11.12%           11.12%           11.22%             11.22%           11.97%    12.91%
                                  =======         ========           ======           ========         ========   =======   
</TABLE>

                                     F-29
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(14)  Regulatory Matters: (Continued)
      ------------------             

<TABLE>
<CAPTION>
                                                            December 31, 1995 (rounded)
                                   -------------------------------------------------------------------------
                                                                                        Tier 1      Total
                                                                           Core 1        risk-       risk-
                                    Equity     Tangible      Tangible     leverage       based       based
                                    capital     capital       equity       capital      capital     capital
                                    -------     -------       ------       -------      -------     -------
      <S>                           <C>        <C>           <C>          <C>           <C>         <C>
      Equity capital                $ 24,436     24,436       24,436        24,436       24,436      24,436
      Nonincludable
       subsidiaries                     -            (2)          (2)           (2)          (2)         (4)
      General valuation
       allowances                       -          -            -             -            -          1,997
                                    --------    -------      -------       -------      -------     -------
 
      Regulatory capital measure    $ 24,436     24,434       24,434        24,434       24,434      26,429
                                    ========    =======      =======       =======      =======     =======
 
      Total assets                  $223,882
                                    ========
 
      Adjusted total assets                    $223,880      223,841       223,841
                                               ========      =======       =======
 
      Risk-weighted assets                                                             $184,669     184,669
                                                                                       ========     =======
 
      Capital ratio                    10.91%     10.91%       10.91%        10.91%       13.23%      14.31%
                                       ======     ======       ======        ======       ======      ======
</TABLE>

      The Bank's management believes that at December 31, 1996, that the Bank
          meets all capital requirements to which it is subject.


(15)  Financial Instruments with Off-Balance-Sheet Risk:
      ------------------------------------------------- 

      The Bank is a party to financial instruments with off-balance-sheet risk
          in the normal course of business to meet the financing needs of its
          customers and to reduce its own exposure to fluctuations in interest
          rates. These financial instruments include commitments to extend
          credit, standby letters of credit, and financial guarantees. Those
          instruments involve, to varying degrees, elements of credit and
          interest rate risk in excess of the amount recognized in the
          consolidated balance sheets. The contract or notional amounts of those
          instruments reflect the extent of involvement the Bank has in
          particular classes of financial instruments.

      The Bank's exposure to credit loss in the event of nonperformance by the
          other party to the financial instrument for commitments to extend
          credit and standby letters of credit and financial guarantees written
          is represented by the contractual notional amount of those
          instruments. The Bank uses the same credit policies in making these
          commitments and conditional obligations as it does for on-balance-
          sheet instruments.

                                      F-30
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(15)  Financial Instruments with Off-Balance-Sheet Risk: (Continued)
      -------------------------------------------------             

      At December 31, 1996 and 1995, unused lines of credit were approximately
          $16,770,000 and $10,992,000, respectively, with the majority having
          terms of one year for commercial and two to five years for consumer;
          outstanding letter of credit balances were approximately $8,804,000
          and $5,648,000, respectively; and commitments to originate or purchase
          loans were approximately $44,715,000 and $20,651,000, respectively.
          The commitments to originate loans at December 31, 1996 were composed
          of variable rate loans of approximately $36,850,000 and fixed rate
          loans of approximately $7,865,000. The fixed rate loans had interest
          rates ranging from 7.92% to 9.33%. The commitments to originate loans
          at December 31, 1995 were composed of variable rate loans of
          approximately $13,044,000 and fixed rate loans of approximately
          $7,607,000. The fixed rate loans had interest rates ranging from 7.5%
          to 9.0%.

      At September 30, 1997 (unaudited), unused lines of credit totaled
          approximately $22,692,000 with the majority having terms of one year
          for commercial and two to five years for consumer; the outstanding
          letter of credit balance was approximately $8,131,000 and commitments
          to originate or purchase loans was approximately 3,789,190. The
          commitments to originate loans at September 30, 1997 (unaudited) was
          composed of variable rate loans of approximately $770,165 and fixed
          rate loans of approximately $3,019,025. The fixed rate loans had
          interest rates ranging from 5.75% to 9.50%.

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

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

                                      F-31
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(16)  Fair Value of Financial Instruments:
      ----------------------------------- 

      Information about the fair value of the financial instruments in the
          consolidated balance sheets, which should be read in conjunction with
          note 1 and certain other notes to the consolidated financial
          statements presented elsewhere herein, is set forth as follows:

<TABLE> 
<CAPTION> 
                                                       September 30,             December 31,             December 31,
                                                           1997                      1996                     1995
                                                  ----------------------     ---------------------     ---------------------
                                                          (Unaudited)
                                                              Estimated                  Estimated                 Estimated
                                                  Carrying      Fair         Carrying       Fair       Carrying       Fair
                                                   Amount      Value          Amount       Value        Amount       Value
                                                   ------      -----          ------       -----        ------       -----
      <S>                                         <C>         <C>            <C>         <C>           <C>         <C>
      Financial assets:
        Cash and cash equivalents                 $ 26,691     26,691         19,519      19,519        13,935        13,935
        Investment securities available
         for sale                                   10,107     10,107           -           -             -             -
        Investment securities held to maturity       3,700      3,703          7,705       7,702        35,550        35,623
        Mortgage-backed securities                   1,333      1,349          1,419       1,417         1,541         1,534
        Loans receivable, net                      216,410    212,175        200,600     202,792       159,943       162,452
        Loans available for sale                     4,149      4,149          5,253       5,253         3,689         3,689
        Accrued interest receivable                  1,870      1,870          1,446       1,446         1,614         1,614
        Required investment in stock of
         the Federal Home Loan Bank                  1,602      1,602          1,519       1,519         1,418         1,418

        Financial liabilities:
        Deposits with no stated maturity           109,842    109,842         91,884      91,884        81,875        81,875
        Certificates of deposits                   132,108    132,556        122,649     112,808       114,859       107,934
  
    Off-balance sheet assets (liabilities):
      Unused lines of credit                          -                                     -                           -
      Standby letters of credit                       -                                     -                           -
      Commitments to extend credit                    -                                     -                           -
</TABLE>

(17)  Federal Insurance Premiums:
      -------------------------- 

      During 1996, all Savings Association Insurance Fund (SAIF) members were
          required to pay a one-time special assessment to the FDIC on SAIF-
          assessable deposits to capitalize the SAIF at its target Designated
          Reserve Ratio of 1.25% of insured deposits effective October 1, 1996.
          The assessment was required to be applied against SAIF-assessable
          deposits as of March 31, 1995 with an assessment rate of 67.5 basis
          points. The expense incurred by the Bank for the nine months ended
          September 30, 1997 and 1996 and the years ended December 31, 1996,
          1995 and 1994 was $76,184. $1,536,641 and $1,653,727, $417,731 and
          $422,768 respectively.

(18)  Commitments and Contingencies:
      ----------------------------- 

      In the normal course of the Bank's business, there are outstanding various
          commitments and contingent liabilities that have not been reflected in
          the consolidated statements. In the opinion of management, the
          financial position of the Bank will not be affected materially as a
          result of such commitments and contingent liabilities.

                                      F-32
<PAGE>
 
                       CAVALRY BANKING AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)


(18)  Commitments and Contingencies: (Continued)
      -----------------------------             

      In the normal course of business, there are various outstanding legal
          proceedings. In the opinion of management, after consultation with
          legal counsel, the financial position of the Bank will not be affected
          materially by the outcome of such legal proceedings.

      The Bank's profitability depends to a large extent on its net interest
          income, which is the difference between interest income on loans and
          investments and interest expense on deposits. Like most financial
          institutions, the Bank's interest income and interest expense are
          significantly affected by changes in market interest rates and other
          economic factors beyond its control. The Bank's interest earning
          assets consist primarily of mortgage loans and investments which
          adjust more slowly to changes in interest rates than its interest-
          bearing savings deposits. Accordingly, the Bank's earnings would be
          adversely affected during periods of rising interest rates.

(19)  Conversion to Capital Stock Form of Ownership:
      --------------------------------------------- 

      On August 7, 1997, the Board of Directors of the Bank adopted a Plan of
          Conversion (Plan), to convert from a federally chartered mutual
          savings bank to a federally chartered capital stock savings bank with
          the concurrent formation of a holding company, Cavalry Bancorp, Inc.
          (Company), subject to the approval by regulatory authorities and
          depositors of the Bank. The conversion is expected to be accomplished
          through amendment of the Bank's state charter and the sale of the
          holding company's common stock in an amount equal to the consolidated
          pro forma market value of the holding company and the Bank after
          giving effect to the conversion. A subscription offering of the shares
          of common stock will be offered initially to eligible account holders,
          employee benefit plans of the Bank, supplemental eligible account
          holders and other members of the Bank. Any shares of common stock not
          sold in the offering are expected to be sold to the general public in
          a community offering. 

      At the time of conversion, the Bank will establish a liquidation account
          in an amount equal to its capital as of the date of the latest
          consolidated statement of financial condition appearing in the final
          prospectus. The liquidation account will be maintained for the benefit
          of eligible account holders who continue to maintain their accounts at
          the Bank after the conversion. The liquidation account will be reduced
          annually to the extent that eligible account holders have reduced
          their qualifying deposits as of each anniversary date. Subsequent
          increases will not restore an eligible account holder's interest in
          the liquidation account. In the event of a complete liquidation, each
          eligible account holder will be entitled to receive balances for
          accounts then held.

      Subsequent to the conversion, the Bank may not declare or pay cash
          dividends on or repurchase any of its shares of common stock if the
          effect thereof would cause stockholder's equity to be reduced below
          applicable regulatory capital maintenance requirements or if such
          declaration and payment would otherwise violate regulatory
          requirements.

     Conversion costs will be deferred and reduce the proceeds from the shares
          sold in conversion. If the conversion is not completed, all costs will
          be charged as expense. As of September 30, 1997, conversion costs of
          $23,244 have been incurred.

                                      F-33
<PAGE>
 
                       Cavalry Banking and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                       DECEMBER 31, 1996, 1995 AND 1994
                    SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
                         (TABLE AMOUNTS IN THOUSANDS)
    
(20) Subsequent Event: 
     ----------------
     On October 9, 1997, the Board of Directors of the Bank elected to terminate
     the defined benefit pension plan, effective December 31, 1997.

     The termination of the plan resulted in the Bank realizing a curtailment 
     loss of $200,000 (unaudited) during the last quarter of 1997.

     
<PAGE>
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
  NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY CAVALRY BANCORP, INC. OR CAVALRY BANKING. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF CAVALRY BANCORP, INC. OR CAVALRY BANKING SINCE ANY OF THE DATES AS
OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................  (i)
Selected Consolidated Financial Information..............................  (x)
Risk Factors.............................................................   1
Cavalry Bancorp, Inc.....................................................   7
Cavalry Banking..........................................................   8
Use of Proceeds..........................................................   9
Dividend Policy..........................................................  10
Market for Common Stock..................................................  11
Capitalization...........................................................  12
Historical and Pro Forma Regulatory Capital Compliance...................  14
Pro Forma Data...........................................................  16
Shares to be Purchased by Management Pursuant to Subscription Rights.....  21
Cavalry Banking and Subsidiaries Consolidated Statements of Earnings.....  23
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  24
Recent Developments......................................................  39
Business of the Holding Company..........................................  45
Business of the Bank.....................................................  46
Management of the Holding Company........................................  72
Management of the Bank...................................................  73
Regulation...............................................................  84
Taxation.................................................................  93
The Conversion...........................................................  94
Restrictions on Acquisition of the Holding Company....................... 109
Description of Capital Stock of the Holding Company...................... 116
Registration Requirements................................................ 117
Legal and Tax Opinions................................................... 118
Experts.................................................................. 118
Additional Information................................................... 118
Index to Consolidated Financial Statements............................... 119
</TABLE>
 
  UNTIL THE LATER OF FEBRUARY 20, 1998, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
 
 
 
                 [LOGO OF CAVALRY BANCORP, INC. APPEARS HERE]

                         (PROPOSED HOLDING COMPANY FOR
                               CAVALRY BANKING)
 
                           UP TO 6,555,000 SHARES OF
                                 COMMON STOCK
 
                                  -----------
 
                                  PROSPECTUS
 
                                  -----------
 
                           TRIDENT SECURITIES, INC.
 
 
                               JANUARY 21, 1998
 
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
             [LETTERHEAD OF TRIDENT SECURITIES, INC. APPEARS HERE]
 
                                                            January 26, 1998
 
 To Members and Friends of Cavalry Banking:
 
   Trident Securities, Inc., a member of the National Association of
 Securities Dealers, Inc., is assisting Cavalry Banking in its conversion to
 a capital stock savings bank and the concurrent offering of shares of
 common stock by Cavalry Bancorp, Inc. (the "Company"), a Tennessee
 corporation recently formed for the purpose of acquiring all of the stock
 of Cavalry Banking.
 
   At the request of Cavalry Banking, we are enclosing materials explaining
 the conversion process and your right to subscribe for common stock of the
 Company. Please read the enclosed offering materials carefully before
 subscribing for stock.
 
   If you have any questions, please call the Stock Information Center at
 (615) 849-3335.
 
                                         Sincerely,
 
                                         TRIDENT SECURITIES, INC.
 
 Enclosures
 
   The shares of common stock offered in the conversion are not savings
 accounts or deposits and will not be insured by the Federal Deposit
 Insurance Corporation or any other government agency.
 
   This is not an offer to sell or a solicitation of an offer to buy stock.
 The offer is made only by the Prospectus. There shall be no sale of stock
 in any state in which any offer, solicitation of an offer or sale of stock
 would be unlawful.
 

<PAGE>
 
                 [LETTERHEAD OF CALVARY BANKING APPEARS HERE]
 
                                                                January 26, 1998
 
Dear Friend:
 
  Cavalry Banking is pleased to announce that we have received regulatory
approval to proceed with our plan to convert to a federally chartered stock
savings bank, conditioned upon receipt of approval by Cavalry Banking's
members, among other things. This stock conversion is the most significant
event in the history of Cavalry Banking in that it allows customers, community
members, directors and employees an opportunity to subscribe for stock in
Cavalry Bancorp, Inc., the proposed holding company for Cavalry Banking.
 
  We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
Cavalry Banking, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Cavalry Banking. Let us also
assure you that the Conversion will not result in any changes in the
management, personnel or the Board of Directors of Cavalry Banking.
 
  Our records indicate that you were a depositor of Cavalry Banking on June 30,
1996. Therefore, under applicable law, you are entitled to subscribe for Common
Stock in Cavalry Banking's Subscription Offering. Orders submitted by you and
others in the Subscription Offering are contingent upon the current members'
approval of the Plan of Conversion at a special meeting of members to be held
on March 2, 1998 and upon receipt of all required regulatory approvals.
 
  If you decide to exercise your subscription rights to purchase shares, you
must return a properly completed stock order form together with full payment
for the subscribed shares so that it is received at Cavalry Banking not later
than 12:00 Noon, Central Time, on February 25, 1998.
 
  Enclosed is a Prospectus which fully describes Cavalry Banking, its
management, board and financial condition. Please review it carefully before
you invest. For your convenience, we have established a Stock Information
Center. If you have any questions, please call the Stock Information Center at
(615) 849-3335.
 
                                     Sincerely,
 
                                     /s/ Ed C. Loughry, Jr.

                                     Ed C. Loughry, Jr.
                                     President
 
Enclosures
 
  The shares of common stock offered in the conversion are not savings accounts
or deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
 
  This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
 

<PAGE>
 
                 [LETTERHEAD OF CALVARY BANKING APPEARS HERE]
 
                                                                January 26, 1998
 
Dear Individual Retirement Account Participant:
 
  As you know, Cavalry Banking is in the process of converting from a federally
chartered mutual savings bank to a federally chartered stock savings bank and
has formed Cavalry Bancorp, Inc. to hold all of the stock of Cavalry Banking
(the "Conversion"). Through the Conversion, certain current and former
depositors of Cavalry Banking have the opportunity to purchase shares of common
stock of Cavalry Bancorp, Inc. in a Subscription Offering. Cavalry Bancorp,
Inc. currently is offering up to 6,555,000 shares of common stock, subject to
adjustment, at a price of $10.00 per share.
 
  As the holder of an individual retirement account ("IRA") at Cavalry Banking,
you may use your IRA funds to subscribe for stock. If you desire to purchase
shares of common stock of Cavalry Bancorp, Inc. through your IRA, Cavalry
Banking can assist you in self-directing those funds. This process can be done
without an early withdrawal penalty and generally without a negative tax
consequence to your IRA.
 
  If you are interested in receiving more information on self-directing your
IRA, please contact our Stock Information Center at (615) 849-3335. Because it
takes several days to process the necessary IRA forms, a response must be
received by February 18, 1998 to accommodate your interest.
 
                                     Sincerely,
 
                                     /s/ Ed. C. Loughry, Jr.

                                     Ed C. Loughry, Jr.
                                     President
 
  The shares of common stock offered in the conversion are not savings accounts
or deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
 
  This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
 

<PAGE>
 
                 [LETTERHEAD OF CALVARY BANKING APPEARS HERE]
 
                                                                January 26, 1998
 
Dear Interested Investor:
 
  Cavalry Banking is pleased to announce that we have received regulatory
approval to proceed with our plan to convert to a federally chartered stock
savings bank, conditioned upon receipt of approval by Cavalry Banking's
members, among other things. This stock conversion is the most significant
event in the history of Cavalry Banking in that it allows customers, community
members, directors and employees an opportunity to subscribe for stock in
Cavalry Bancorp, Inc., the proposed holding company for Cavalry Banking.
 
  We want to assure you that the Conversion will not result in any changes in
the management, personnel or the Board of Directors of Cavalry Banking.
 
  Enclosed is a Prospectus which fully describes Cavalry Banking, its
management, board and financial condition. Please review it carefully before
you make an investment decision. If you decide to invest, please return to
Cavalry Banking a properly completed stock order form together with full
payment for shares at your earliest convenience. For your convenience we have
established a Stock Information Center. If you have any questions, please call
the Stock Information Center at (615) 849-3335.
 
                                     Sincerely,
 
                                     /s/ Ed C. Loughry, Jr.

                                     Ed C. Loughry, Jr.
                                     President
 
Enclosures
 
  The shares of common stock offered in the conversion are not savings accounts
or deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
 
  This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
 

<PAGE>
 
                 [LETTERHEAD OF CALVARY BANKING APPEARS HERE]
 
                                                                January 26, 1998
 
Dear Valued Customer:
 
  Cavalry Banking is pleased to announce that we have received regulatory
approval to proceed with our plan to convert to a federally chartered stock
savings bank, conditioned upon receipt of approval by Cavalry Banking's
members, among other things. This stock conversion is the most significant
event in the history of Cavalry Banking in that it allows customers, community
members, directors and employees an opportunity to subscribe for stock in
Cavalry Bancorp, Inc., the proposed holding company for Cavalry Banking.
 
  We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
Cavalry Banking, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Cavalry Banking. Let us also
assure you that the Conversion will not result in any changes in the
management, personnel or the Board of Directors of Cavalry Banking.
 
  A special meeting of the members of Cavalry Banking will be held on March 2,
1998 at 10:00 a.m., Central Time, at Cavalry Banking's main office to consider
and vote upon Cavalry Banking's Plan of Conversion. Enclosed is a proxy card.
Your Board of Directors solicits your vote "FOR" Cavalry Banking's Plan of
Conversion. A vote in favor of the Plan of Conversion does not obligate you to
purchase stock. If you do not plan to attend the special meeting, please sign
and return your proxy card promptly. Your vote is important to us.
 
  As one of our valued members, you have the opportunity to invest in Cavalry
Banking's future by subscribing for stock in Cavalry Bancorp, Inc. during the
Subscription Offering, without paying a sales commission.
 
  If you decide to exercise your subscription rights to purchase shares, you
must return a properly completed stock order form together with full payment
for the subscribed shares so that it is received by Cavalry Banking no later
than 12:00 Noon, Central Time, on February 25, 1998.
 
  We also have enclosed a Prospectus which fully describes the conversion and
provides financial and other information about Cavalry Bancorp, Inc. and
Cavalry Banking. Please review these materials carefully before you vote or
invest. For your convenience we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center at (615) 849-
3335.
 
  We look forward to continuing to provide quality financial services to you in
the future.
 
                                     Sincerely,
 
                                     /s/ Ed C. Loughry, Jr.

                                     Ed C. Loughry, Jr.
                                     President
 
Enclosures
 
  The shares of common stock offered in the conversion are not savings accounts
or deposits and will not be insured by the Federal Deposit Insurance
Corporation or any other government agency.
 
  This is not an offer to sell or a solicitation of an offer to buy stock. The
offer is made only by the Prospectus. There shall be no sale of stock in any
state in which any offer, solicitation of an offer or sale of stock would be
unlawful.
 

<PAGE>
 
                 [LETTERHEAD OF CALVARY BANKING APPEARS HERE] 
 
 
                                                                January 26, 1998
 
Dear Member:
 
  As a qualified member of Cavalry Banking ("Bank"), you have the right to vote
upon the Bank's proposed Plan of Conversion and also generally have the right
to subscribe for shares of common stock of Cavalry Bancorp, Inc., the proposed
holding company for the Bank through the mutual to stock conversion of the
Bank. However, the proposed Plan of Conversion provides that Cavalry Bancorp,
Inc. will not offer stock in any state in which compliance with the securities
laws would be impracticable for reasons of cost or otherwise. Unfortunately,
the securities laws of your state would require Cavalry Bancorp, Inc. to
register its common stock and /or its employees in order to sell the common
stock to you. Such registration would be prohibitively expensive or otherwise
impracticable in light of the few members residing in your state.
 
  You may vote on the proposed Plan of Conversion and we urge you to read the
enclosed Proxy Statement and execute the enclosed Revocable Proxy. Questions
regarding the execution of the Revocable Proxy should be directed to Cavalry
Banking's Stock Information Center at (615) 849-3335.
 
                                   Sincerely,
 
 
                                   /s/ Ed C. Loughry, Jr.

                                   Ed C. Loughry, Jr.
                                   President
 
Enclosures
 
 The shares of common stock offered in the conversion are not savings accounts
      or deposits and will not be insured by the Federal Deposit Insurance
                  Corporation or any other government agency.
 
  This is not an offer to sell or a solicitation of an offer to buy stock. The
  offer is made only by the Prospectus. There shall be no sale of stock in any
  state in which any offer, solicitation of an offer or sale of stock would be
                                   unlawful.
 
 

<PAGE>
 
                             CAVALRY BANCORP, INC.
- -------------------------------------------------------------------------------
             SUBSCRIPTION OFFERING STOCK OWNERSHIP GUIDE AND STOCK
                            ORDER FORM INSTRUCTIONS
- -------------------------------------------------------------------------------
 
- ---------------------
STOCK OWNERSHIP GUIDE
- ---------------------
 
INDIVIDUAL

Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership
rights, such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
 
JOINT TENANTS WITH RIGHT OF SURVIVORSHIP

In order to subscribe for stock jointly, all tenants must appear together on
an eligible joint tenant account at Cavalry Banking.
 
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
 
TENANTS IN COMMON

In order to subscribe for stock in common, all tenants must appear together on
an eligible tenants in common account at Cavalry Banking.
 
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of
the deceased co-tenant. All parties must agree to the transfer or sale of
shares held by tenants in common.
 
UNIFORM TRANSFER TO MINORS

Stock may be held in the name of a custodian for a minor under the Uniform
Transfer to Minors Acts of each state. The standard abbreviation for Custodian
is "CUST", while the Uniform Transfer to Minors Act is "Unif Tran Min Act".
Standard U.S. Postal Service state abbreviations should be used to describe
the appropriate state. For example, stock held by John Doe as custodian for
Susan Doe under the Tennessee Uniform Transfer to Minors Act will be
abbreviated John Doe, CUST Susan Doe Unif Tran Min Act, TN (use minor's social
security number).
 
FIDUCIARIES

Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
 
 * The name(s) of the fiduciary. If an individual, list the first name, middle
   initial and last name. If a corporation, list the full corporate title
   (name). If an individual and a corporation, list the corporation's title
   before the individual.
 * The fiduciary capacity, such as administrator, executor, personal
   representative, conservator, trustee, committee, etc.
 * A copy and description of the document governing the fiduciary
   relationship, such as living trust agreement or court order. Without
   documentation establishing a fiduciary relationship, your stock may not be
   registered in a fiduciary capacity.
 * The date of the document governing the relationship except that the date of
   a trust created by a will need not be included in the description.
 * The name of the maker, donor or testator and the name of the beneficiary.
 
An example of fiduciary ownership of stock in the case of a trust is: John
Doe, Trustee Under Agreement Dated 10-1-87 for Susan Doe.
 
You may mail your completed Stock Order Form in the envelope that has been
provided, or you may deliver your Stock Order Form to a Cavalry Banking
office. In order to purchase stock in the Subscription Offering, your Stock
Order Form, properly completed, and payment in full (or withdrawal
authorization) at the Subscription Price of $10.00 per share must be received
by Cavalry Banking no later than 12:00 noon, Central Time, on February 25,
1998, unless such date is extended, or your Stock Order Form will become void.
Stock Order Forms shall be deemed received only upon actual receipt at a
Cavalry Banking office.
 
If you need further assistance, please call the Stock Information Center at
(615) 849-3335. We will be pleased to help you with the completion of your
Stock Order Form or answer any questions you may have.

ITEM INSTRUCTIONS
- -----------------
ITEMS 1 AND 2--

Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares
purchased by the Subscription Price of $10.00 per share. The minimum number of
shares that may be subscribed for is 25 shares. No person, including all names
on a joint account, either alone or together with associates or persons acting
in concert may subscribe for more than 65,550 shares.

Cavalry Bancorp, Inc. and Cavalry Banking reserve the right to reject any
order received in the Direct Community Offering, in whole or in part.

Cavalry Bancorp, Inc. and Cavalry Banking also have the right to reject the
order of any subscriber who (i) submits false or misleading information on a
Stock Order Form or otherwise, (ii) attempts to purchase shares in violation
of the Plan of Conversion or applicable law or (iii) fails to cooperate with
attempts to verify information with respect to purchase rights.

ITEM 3--

Payment for shares may be made in cash (only if delivered by you in person) or
by check, bank draft or money order made payable to Cavalry Bancorp, Inc. Your
funds will earn interest at Cavalry Banking's current passbook savings rate
until the Conversion is completed or terminated. DO NOT MAIL CASH TO PURCHASE
STOCK! PAYMENT MAY NOT BE MADE BY WIRE TRANSFER. Please check this box if your
method of payment is by cash, check, bank draft or money order.

ITEM 4--

If you pay for your stock by a withdrawal from a Cavalry Banking deposit
account, insert the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. Your order will be rejected if, on the date
your order is received, the accounts designated by you do not contain
sufficient funds to complete your purchase. There will be no penalty assessed
for early withdrawals from certificate accounts used for stock purchases. This
form of payment may not be used if your account is an Individual Retirement
Account. If you wish to use your IRA currently at Cavalry Banking, you must
call the Stock Information Center prior to February 18, 1998 and complete all
paperwork required.

ITEM 5--

a. Please check this box if you were a depositor of Cavalry Banking on June
30, 1996 (the Eligibility Record Date). You must list the full title and
account numbers of all accounts you had on this date in order to insure proper
identification of your purchase rights and preferences.

b. Please check this box if you were a depositor of Cavalry Banking on
December 31, 1997 (the Supplemental Eligibility Record Date). You must list
the full title and account numbers of all accounts you had on this date in
order to insure proper identification of your purchase rights and preferences.

c. Please check this box if you are a borrower of Cavalry Banking who had an
outstanding loan on January 24, 1991 that continues to be outstanding on
January 12, 1998 (the "Voting Record Date") or a depositor of Cavalry Banking
on January 12, 1998 who did not have a deposit account on December 31, 1997 or
June 30, 1996. If you were a qualified borrower from Cavalry Banking, you must
list the name of all borrowers on your loan accounts and the loan account
number for all loan accounts that you had at such date in order to insure
proper identification of your purchase rights and preferences. If you were a
depositor at Cavalry Banking on the Voting Record Date, you must list the full
title and account numbers of all accounts you had on this date in order to
insure proper identification of your purchase rights and preferences.

d. Please check this box if you are a permanent resident of the specified
counties.

ITEMS 6,7 AND 8--

The stock transfer industry has developed a uniform system of shareholder
registrations that we will use in the issuance of your common stock. Please
complete items 6, 7 and 8 as fully and accurately as possible, and be certain
to supply your social security number or tax identification number and your
daytime and evening telephone number(s). We will need to call you if we cannot
execute your order as given. If you have any questions or concerns regarding
the registration of your stock, please consult your legal advisor. Stock
ownership must be registered in one of the ways described under "Stock
Ownership Guide."

ITEM 9--

Please check this box if you are a member of the NASD or if this item
otherwise applies to you.

ITEMS 10 AND 11--

Please sign and date the Stock Order Form where indicated. Review the Stock
Order Form carefully before you sign, including the acknowledgement. Normally,
one signature is required. An additional signature is required only when
payment is to be made by withdrawal from a deposit account that requires
multiple signatures to withdraw funds. If you have any remaining questions, or
if you would like assistance in completing your Stock Order Form, you may call
the Stock Information Center. The Stock Information Center phone number is
(615) 849-3335.
<PAGE>
 





                             Cavalry Bancorp, Inc.
                               Stock Order Form
================================================================================
           Cavalry Banking                  Expiration Date        
         114 W. College Street            for Stock Order Forms:     
         Murfreesboro, Tn  37130             February 25, 1998       
           (615) 849-3335               12:00 Noon, Central Time    
================================================================================
 IMPORTANT--PLEASE NOTE: A properly completed original stock order form must be
 used to subscribe for common stock. Faxes or copies of this form are not
 required to be accepted. Please read the Stock Ownership Guide and Stock Order
 Form Instructions as you complete this Form.
================================================================================
 (1) Number of Shares Subscription Price     (2) Total Payment Due
                 [___________]   x $10.00 =   [__________]
 The minimum number of shares that may be subscribed for is 25 shares. No
 person, including all names on a joint account, either alone or together with
 associates or persons acting in concert may subscribe for more than 65,550
 shares.
================================================================================
[_] (3) Employee/Officer/Director Information 
    Check here if you are a director, officer or employee of Cavalry Banking or
    a member of such person's immediate family.
================================================================================
[_] (4) METHOD OF PAYMENT/CHECK                             Check Amount
    Enclosed is a check, bank draft or money order made     [__________]
    payable to Cavalry Bancorp, Inc. in the amount of:   
================================================================================
[_] (5) METHOD OF PAYMENT/WITHDRAWAL          
    The undersigned authorizes withdrawal from the following account(s) at
    Cavalry Banking. There is no penalty for early withdrawal for purposes of
    this payment.
    ----------------------------------------------------------------------
             Account Number(s)               Withdrawal Amount(s)
    ---------------------------------------------------------------------- 

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

    ---------------------------------------------------------------------- 
          Total Withdrawal Amount                              
                                     -------------------------------------    
    If you wish to use your IRA currently at Cavalry Banking, you must call the
    Stock Information Center Prior to February 18, 1998 and complete all
    paperwork required.
================================================================================
(6) Purchaser Information               
 a. [_] Eligible Account Holder -- Check here if you were a depositor of at
        least $50.00 at Cavalry Banking on June 30, 1996. Enter information
        below for all deposit accounts that you had at Cavalry Banking on June
        30, 1996.
 b. [_] Supplemental Eligible Account Holder--Check here if you were a depositor
        of at least $50.00 at Cavalry Banking on December 31, 1997 but are not
        an Eligible Account Holder. Enter information below for all deposit
        accounts that you had at Cavalry Banking on December 31, 1997.
 c. [_] Other Member -- Check here if you were a borrower at Cavalry Banking who
        had an outstanding loan on January 24, 1991 that continues to be
        outstanding on January 12, 1998 (the Voting Record Date) or a depositor
        of at least $50.00 at Cavalry Banking on January 12, 1998 who did not
        have a deposit on December 31, 1997 or June 30, 1996.
 d. [_] Local Community Resident -- Check here if you are a permanent resident
        of Bedford or Rutherford County, Tennessee.
    ---------------------------------------------------------------------- 
            Account Title (Names on Accounts)       Account Number(s)
    ---------------------------------------------------------------------- 

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

    ---------------------------------------------------------------------- 
    Please Note: Failure to list all your accounts may result in the loss of
    part or all of your subscription rights. if additional space is needed,
    please utilize the back of this stock order form.
================================================================================
(7) Stock Registration/Form of Stock Ownership        
[_] Individual     [_] Joint Tenants     [_] Tenants in Common
[_] Fiduciary (i.e. trust, estate, etc.) [_] Corporation or Partnership     
[_] Uniform Transfer to Minors Act       [_] Other ________________            
<TABLE> 
<S>                                                                        <C> 
(8) Name(s) in which stock is to be registered (Please print clearly)      Social Security # or Tax ID
- ---------------------------------------------------------------------      ---------------------------

- ---------------------------------------------------------------------      ---------------------------
 Name(s) continued                                                         Social Security # or Tax ID
- ---------------------------------------------------------------------      ---------------------------

- ---------------------------------------------------------------------      ---------------------------
 Street Address                                 City                       State         Zip Code
- ---------------------------------------------   ---------------------      -----------   -------------

- ---------------------------------------------   ---------------------      -----------   -------------
(9) Telephone Information         Daytime                     Evening      County of Residence
        ---------------------------------  --------------------------      ----------------------
        (   )                              (   )
        ---------------------------------  --------------------------      ----------------------
</TABLE> 
================================================================================
[_](10) NASD Affiliation
   Check here if you are a member of the National Association of Securities
   Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of
   the immediate family of any such person to whose support such person
   contributes, directly or indirectly, or the holder of an account in which an
   NASD member or person associated with an NASD member has a beneficial
   interest. To comply with conditions under which an exemption from the NASD's
   Interpretation With Respect to Free-Riding and Withholding is available, you
   agree, if you have checked the NASD Affiliation box, (i) not to sell,
   transfer or hypothecate the stock for a period of three months following
   issuance, and (ii) to report this subscription in writing to the applicable
   NASD member within one day of payment therefor.
================================================================================
[_](11) Associate--Acting in Concert            
   Check here, and complete the reverse side of this Form, if you or any
   associate (as defined on the reverse side of this Form) or persons acting in
   concert with you have submitted other orders for shares in the Subscription
   and/or Direct Community Offerings.
================================================================================
   (12) Acknowledgment
   To be effective, this fully completed Stock Order Form must be actually
   received by Cavalry Banking, no later than 12:00 p.m. Noon, Central Time, on
   February 25, 1998, unless extended; otherwise this Stock Order Form and all
   subscription rights will be void. Completed Stock Order Forms, together with
   the required payment or withdrawal authorization, may be delivered to Cavalry
   Banking or may be mailed to the Post Office Box indicated on the enclosed
   business reply envelope. All rights exercisable hereunder are not
   transferable and shares purchased upon exercise of such rights must be
   purchased for the account of the person exercising such rights.
   It is understood that this Stock Order Form will be accepted in accordance
   with, and subject to, the terms and conditions of the Amended Plan of
   Conversion ("Plan of Conversion") of Cavalry Banking described in the
   accompanying Prospectus dated January 21, 1998. Receipt of such Prospectus is
   hereby acknowledged. If the Plan of Conversion is not approved by the voting
   members of Cavalry Banking at a Special Meeting to be held on March 2, 1998,
   or any adjournment thereof, all orders will be cancelled and funds received
   as payment, with accrued interest, will be returned promptly.
   The undersigned agrees that after receipt by Cavalry Banking, this Stock
   Order Form may not be modified, withdrawn or cancelled (unless the conversion
   is not completed within 45 days after the completion of the Subscription
   Offering) without Cavalry Banking's consent, and if authorization to withdraw
   from deposit accounts at Cavalry Banking has been given as payment for
   shares, the amount authorized for withdrawal shall not otherwise be available
   for withdrawal by the undersigned. 
   Under penalty of perjury, I certify that the Social Security or Tax ID Number
   and the other information provided under number 8 of this Stock Order Form
   are true, correct and complete, that I am not subject to back-up withholding,
   that I am purchasing for my own account and that there is no agreement or
   understanding regarding the transfer of my subscription rights or the sale or
   transfer of these shares.
   Applicable Federal Regulations prohibit any person from transferring or
   entering into any agreement directly or indirectly to transfer, the legal or
   beneficial ownership of conversion subscription rights, or the underlying
   securities to the account of another. Cavalry Banking and Cavalry Bancorp,
   Inc. may pursue any and all legal and equitable remedies in the event they
   become aware of the transfer of subscription rights and will not honor orders
   known by them to involve such transfer.
   I acknowledge that the common stock offered is not a savings or deposit
   account and is not insured by the Savings Association Insurance Fund, the
   Bank Insurance Fund, the Federal Deposit Insurance Corporation, or any other
   government agency, may lose value and is not guaranteed by Cavalry Bancorp,
   Inc.
   A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE
   FORM OF CERTIFICATION ON THE REVERSE HEREOF.
                                                          ----------------------
   Signature             Date   Signature            Date Date Rec'd _________
   --------------------------   ------------------------- 
                                                          Batch __ Order # ___
   --------------------------   ------------------------- 
   A SIGNED FORM OF CERTIFICATION MUST ACCOMPANY ALL      Deposit ____________ 
   STOCK ORDER FORMS (SEE REVERSE SIDE)              
- --------------------------------------------------------------------------------
<PAGE>
 
Item (6)a, b, c--(continued)
- --------------------------------------------------------------------- 
Account Title (Names on Accounts)                Account Number(s)
- ---------------------------------------------------------------------  

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

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

- --------------------------------------------------------------------- 
Item (11)--(continued)
 
List below all other orders submitted by you or your Associates (as defined) or
by persons acting in concert with you.                                 
- ------------------------------------------------------ 
                                    Number of
  Name(s) listed on other            Shares  
    Stock Order Forms                Ordered  
- ------------------------------------------------------ 

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

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

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

- ------------------------------------------------------ 
"Associate" is defined as: (i) any corporation or organization (other than
Cavalry Banking, Cavalry Bancorp, Inc., or a majority-owned subsidiary of
Cavalry Banking or Cavalry Bancorp, Inc.) of which such person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more of
any class of equity securities; (ii) any trust or other estate in which such
person has a substantial beneficial interest or as to which such person serves
as a trustee or in a similar fiduciary capacity; except for any tax-qualified
employee stock benefit plan; and (iii) any relative or spouse of such person, or
any relative of such spouse, who either has the same home as such person or who
is a director or officer of Cavalry Banking, Cavalry Bancorp, Inc. or any
subsidiaries thereof.                                 
================================================================================
 A valid stock order form must be signed and dated below and on the front of
                                  this form.

                             FORM OF CERTIFICATION
 
 I/WE ACKNOWLEDGE THAT THE COMMON STOCK, NO PAR VALUE PER SHARE, OF CAVALRY
 BANCORP, INC. IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND IS NOT FEDERALLY
 INSURED, AND IS NOT GUARANTEED BY CAVALRY BANKING OR BY THE FEDERAL
 GOVERNMENT. IF ANYONE ASSERTS THAT SUCH COMMON STOCK IS FEDERALLY INSURED
 OR GUARANTEED, OR IS AS SAFE AS AN INSURED DEPOSIT, i SHOULD CALL THE
 OFFICE OF THRIFT SUPERVISION REGIONAL DIRECTOR, RONALD N. KARR, AT (312)
 917-5000.
 
 I/We further certify that, before purchasing the common stock, no par value
 per share, of Cavalry Bancorp, Inc., the proposed holding company for
 Cavalry Banking, I/we received a Prospectus dated January 21, 1998 (the
 "Prospectus").
 
 The Prospectus that I/we received contains disclosure concerning the nature
 of the common stock being offered and describes the risks involved in the
 investment, including but not limited to:
<TABLE> 
   <S>                                                            <C> 
   1. Certain Lending Risks                                       (page 1)
   2. Interest Rate Risk                                          (page 2)
   3. New Expenses Associated with ESOP and MRP                   (page 3)
   4. Possible Dilutive Effect of Benefit Programs                (page 3)
   5. Anti-takeover Considerations                                (page 3)
   6. Return on Equity After Conversion                           (page 5)
   7. Competition                                                 (page 5)
   8. Absence of Prior Market for the Common Stock                (page 6)
   9. Possible Increase in Estimated Price Range and Number of 
      Shares Issued                                               (page 6)
  10. Potential Delay in Consummating the Stock Conversion        (page 6)
  11. Recent Legislation and the Future of the Thrift Industry    (page 6)
  12. Possible Adverse Income Tax Consequences of the 
      Distribution of Subscription Rights                         (page 7)
</TABLE> 
 Signature                    Date       Signature                    Date
 ------------------------------------    ---------------------------------  

 ------------------------------------    ---------------------------------   
 Name (Please Print)                     Name (Please Print)
 ------------------------------------    ---------------------------------   

 ------------------------------------    ---------------------------------  
================================================================================
<PAGE>
 
 
 
                    [LOGO OF CALVARY BANKING APPEARS HERE]
 
            -----------------------------------------------------
 
                 Questions and Answers about Cavalry Banking's
                         Conversion and Stock Offering
 
            -----------------------------------------------------
 
                                     Q & A



<PAGE>
 
                OFFICER AND DIRECTOR STOCK PURCHASE COMMITMENTS
 
<TABLE>
<CAPTION>
                                 ANTICIPATED     ANTICIPATED  PERCENT OF SHARES
                                  NUMBER OF     DOLLAR AMOUNT   AT MAXIMUM OF
  NAME AND POSITION            SHARES PURCHASED   PURCHASED    VALUATION RANGE
  -----------------            ---------------- ------------- -----------------
  <S>                          <C>              <C>           <C>
  William H. Huddleston, III         65,550      $   655,500         1.0%
   Chairman of the Board
  Ed C. Loughry, Jr.                 65,550          655,500         1.0
   President, Chief Executive
   Officer and Director
  Ronald F. Knight                   65,550          655,500         1.0
   Executive Vice President,
   Chief Operating Officer
   and Director
  Gary Brown                         65,550          655,500         1.0
   Vice Chairman of the Board
  Frank E. Crosslin, Jr.             65,550          655,500         1.0
   Director
  Tim J. Durham                      65,550          655,500         1.0
   Director
  Ed Elam                            65,550          655,500         1.0
   Director
  James C. Cope                      65,550          655,500         1.0
   Director
  Terry G. Haynes                    65,550          655,500         1.0
   Director
  Hillard C. "Bud" Gardner           65,550          655,500         1.0
   Senior Vice President and
   Chief Financial Officer
  William S. Jones                   65,550          655,500         1.0
   Senior Vice President and
   Trust Officer/Investor
   Relations
  David W. Hopper                    65,550          655,500         1.0
   Senior Vice President and
   Trust Officer
  R. Dale Floyd                      65,550          655,500         1.0
   Senior Vice President
  Ira B. Lewis, Jr.                  65,550          655,500         1.0
   Vice President/CRA
   Compliance Officer and
   Secretary
  M. Glenn Layne                     65,550          655,500         1.0
   Vice President
  Joy B. Jobe                        65,550          655,500         1.0
   Vice President
  Other Officers (14 persons)       282,950        2,829,500         4.3
                                  ---------      -----------        ----
  TOTAL                           1,331,750      $13,317,500        20.3%
                                  =========      ===========        ====
</TABLE>
 
   This brochure is neither an offer to sell nor a solicitation of an offer to
 buy common stock. The offer is made only by the Prospectus. There shall be no
 solicitation of an offer or sale of stock in any jurisdiction in which any
 offer, solicitation of an offer or sale of stock would be unlawful.
 
   The common stock is not a deposit or account and is not federally insured
 or guaranteed.
 
<PAGE>
 
                                CAVALRY BANKING
 
                            Murfreesboro, Tennessee
 
                             Questions and Answers
 
                                 Regarding the
 
                      Subscription and Community Offering
 
                          MUTUAL TO STOCK CONVERSION
 
  CAVALRY BANKING'S Board of Directors has unanimously voted to convert CAV-
ALRY BANKING from its present mutual form to a stock institution, subject to
approval of the conversion by CAVALRY BANKING'S members and regulatory author-
ities. Complete details on the conversion, including reasons for conversion,
are contained in the Prospectus and Proxy Statement. We urge you to read them
carefully.
 
  This brochure is provided to answer basic questions you might have about the
conversion. Remember, the conversion will not affect the rate on any of your
savings accounts, deposit certificates, or loans.
 
 1. Q. WHAT IS A "CONVERSION"?
    A. Conversion is a change in the legal form of organization. CAVALRY BANKING
       currently operates as a federally- chartered mutual savings bank with no
       stockholders. Through the conversion, CAVALRY BANKING will form a holding
       company, CAVALRY BANCORP, INC., which will ultimately own all of the out-
       standing stock of the CAVALRY BANKING. CAVALRY BANCORP, INC. will issue
       common stock in the conversion, as described below, and will be a 
       publicly-owned company.
 
 2. Q. WHY IS CAVALRY BANKING CONVERTING?
    A. As a federally-chartered mutual savings bank, CAVALRY BANKING does not
       have stockholders and has no authority to issue stock. By converting to
       the stock form of organization, CAVALRY BANKING will be structured in the
       form used by all commercial banks, most business entities and a growing
       number of savings institutions. The conversion will be important to the
       future growth and performance of CAVALRY BANKING by providing a larger
       capital base from which it may operate, enhance future access to capital
       markets and, if desired, enhance CAVALRY BANKING'S ability to diversify
       and expand it's financial service-related activities. Currently, CAVALRY
       BANKING has no specific plans, agreements, arrangements or understandings
       regarding such diversification. In addition, operating as a stock insti-
       tution also provides greater charter flexibility should CAVALRY BANKING
       determine to become a state-chartered commercial bank.
 
 3. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS ACCOUNTS, CERTIFICATES
       OF DEPOSIT OR LOANS WITH CAVALRY BANKING?
    A. No. The conversion will not change the amount, interest rate or with-
       drawal rights of any savings and checking accounts or certificates of de-
       posit. The rights and obligations of borrowers under their loan agree-
       ments will not be affected. However, upon consummation of the conversion,
       CAVALRY BANKING'S deposit account holders will no longer have voting
       rights in CAVALRY BANKING, and will not have voting rights in CAVALRY
       BANCORP, INC. unless they purchase common stock of CAVALRY BANCORP, INC.
 
 4. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR MANAGEMENT?
    A. No. The conversion will not cause any changes in personnel or management.
       The normal day-to-day operations will continue as before.
 
 5. Q. DID THE BOARD OF DIRECTORS OF CAVALRY BANKING APPROVE THE CONVERSION?
    A. Yes. The Board of Directors unanimously adopted the Plan of Conversion on
       August 7, 1997, and unanimously amended it on December 11, 1997.
 
              CONVERSION TO A TENNESSEE CHARTERED COMMERCIAL BANK
 
 6. Q. WHEN WILL THE BANK CONVERSION BE UNDERTAKEN, IF AT ALL?
    A. If undertaken, the Bank Conversion would take place after the consumma-
       tion of the Stock Conversion. The decision of the Board of Directors of
       CAVALRY BANKING whether or not to undertake the Bank Conversion will de-
       pend on the economic and regulatory climate at that time, among other
       factors.
 
 7. Q. WHAT REGULATORY AND OTHER APPROVALS WOULD HAVE TO BE RECEIVED BEFORE
       THE BANK CONVERSION WOULD BECOME EFFECTIVE?
    A. The Bank Conversion must be approved by the Office of Thrift Supervision
       and the Tennessee Department of Financial Institutions. The Board of Gov-
       ernors of the Federal Reserve System also must approve the application of
       CAVALRY BANCORP, INC. to become a bank holding company.
<PAGE>
 
       Finally, the Plan of Conversion must be approved by a majority of all
       votes eligible to be cast by CAVALRY BANKING'S voting members at a
       Special Meeting of Members that will be held on March 2, 1998 to consider
       and vote upon the Plan of Conversion.
 
                    THE SUBSCRIPTION AND COMMUNITY OFFERING
 
 8. Q. WHO IS ENTITLED TO SUBSCRIBE FOR CAVALRY BANCORP, INC. COMMON STOCK?
    A. Rights to subscribe for common stock will be given in order of priority
       to (i) depositors of CAVALRY BANKING with a $50.00 minimum deposit as of
       June 30, 1996 (the "Eligible Account Holders"); (ii) CAVALRY BANKING'S
       employee stock ownership plan (the "ESOP"), a tax qualified employee
       stock benefit plan; (iii) depositors of CAVALRY BANKING, who are not Eli-
       gible Account Holders, with $50.00 or more on deposit as of December 31,
       1997 (the "Supplemental Eligible Account Holders"); and (iv) depositors
       of CAVALRY BANKING as of January 12, 1998 ("Voting Record Date") and bor-
       rowers of CAVALRY BANKING who had loans outstanding as of January 24,
       1991, which continue to be outstanding as of January 12, 1998. ("Other
       Members"), subject to the purchase limitations set forth in the Plan of
       Conversion.
 
       It is the responsibility of each subscriber qualifying as an Eligible
       Account Holder, Supplemental Eligible Account Holder or Other Member to
       list completely all account numbers for qualifying savings accounts as of
       the qualifying date on the Stock Order Form.
 
       Shares that are not subscribed for during the Subscription Offering, if
       any, may be offered to the general public through a Direct Community
       Offering with preference given to natural persons and trusts of natural
       persons who are permanent residents of Bedford and Rutherford Counties,
       Tennessee ("Local Community"). It is anticipated that any shares not
       subscribed for in the Subscription and Direct Community Offerings will be
       offered to certain members of the general public through a syndicate of
       registered broker-dealers pursuant to selected dealers agreements in a
       Syndicated Community Offering.
 
 9. Q. HOW DO I SUBSCRIBE FOR SHARES OF STOCK?
    A. Eligible subscribers wishing to exercise their subscription rights must
       return the enclosed Stock Order Form to CAVALRY BANKING. The Stock Order
       Form must be completed and returned along with full payment or appropri-
       ate instructions authorizing a withdrawal from a deposit account at CAV-
       ALRY BANKING on or prior to the close of the Subscription Offering which
       will be 12:00 Noon, Central Time, on February 25, 1998, unless extended.
 
10. Q. HOW CAN I PAY FOR MY SUBSCRIPTION STOCK ORDER?
    A. First, you may pay for your order in cash (if delivered in person to CAV-
       ALRY BANKING) or by check or money order. Subscription funds will earn
       interest at CAVALRY BANKING'S passbook rate from the day we receive them
       until the completion or termination of the conversion.
 
       Second, you may authorize us to withdraw funds from your CAVALRY BANKING
       savings account or certificate of deposit without early withdrawal
       penalty. These funds will continue to earn interest at the rate in effect
       for your account until completion of the offering at which time your
       funds will be withdrawn for your purchase. Funds remaining in this
       account (if any) will continue at the contractual rate unless the
       withdrawal reduces the account balance below the applicable minimum in
       which case you will receive interest at the passbook rate. A hold will be
       placed on your account for the amount you specify for stock payment. You
       will not have access to these funds from the day we receive your order
       until the completion or termination of the conversion.

       If you want to use funds in your individual retirement account held at
       CAVALRY BANKING to subscribe for stock, call our Stock Information Center
       at (615) 849-3335 for assistance. There will be no early withdrawal or
       IRS penalties incurred by these transactions. It takes several days to
       process the necessary IRA forms and, therefore, it is necessary that you
       make arrangements by February 18, 1998, to accommodate your order.

11. Q. WHEN MUST I PLACE MY ORDER FOR SHARES OF STOCK?
    A. To exercise subscription rights in the Subscription Offering, a Stock Or-
       der Form must be received by CAVALRY BANKING with full payment for all
       shares subscribed for not later than 12:00 Noon, Central Time, on Febru-
       ary 25, 1998, unless extended.
 
       Non-customers desiring to order shares through the Direct Community
       Offering, if any, must order shares before the close of the Direct
       Community Offering, if any, which will be no sooner than 12:00 Noon,
       Central Time, on February 25, 1998.
 
12. Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED?
    A. CAVALRY BANCORP, INC. is offering up to 6,555,000 shares of common stock
       at a price of $10.00 per share. The number of shares may be decreased to
       4,845,000 or increased
<PAGE>
 
       to 7,538,250 in response to the independent appraiser's final determina-
       tion of the consolidated pro forma market value of CAVALRY BANCORP, INC.
       and CAVALRY BANKING, as converted.
 
13. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT I CAN PURCHASE
       DURING THE OFFERING PERIOD?
    A. The minimum number of shares that may be purchased is 25 shares. No Stock
       Order Form will be accepted for less than $250. The maximum purchase in
       the Subscription Offering for any person, including all names on a joint
       account together with associates or persons acting in concert, is 65,550
       shares or $655,500.
 
14. Q. HOW WAS IT DETERMINED THAT BETWEEN 4,845,000 SHARES AND 6,555,000
       SHARES OF STOCK WOULD BE ISSUED AT $10.00 PER SHARE?
    A. The share range was determined through an appraisal of CAVALRY BANCORP,
       INC. and CAVALRY BANKING, as converted, by Ferguson & Company, an inde-
       pendent appraisal firm specializing in the thrift industry.
 
15. Q. MUST I PAY A COMMISSION ON THE STOCK FOR WHICH I SUBSCRIBE?
    A. No. You will not pay a commission on stock purchased in the Subscription
       Offering, the Direct Community Offering, if any, or the Syndicated Commu-
       nity Offering, if any.
 
16. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR STOCK PURCHASES?
    A. Yes. CAVALRY BANKING will pay its current passbook rate from the date
       funds are received (with a completed Stock Order Form) during the Sub-
       scription and Direct Community Offerings until completion of the conver-
       sion.
 
17. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM, WHAT SHOULD I DO?
    A. CAVALRY BANKING will mail you another order form, or you may obtain one
       from CAVALRY BANKING'S main office. If you need assistance in obtaining
       or completing a Stock Order Form, please call or visit the Stock Informa-
       tion Center at (615) 849-3335.
 
18. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE STOCK?
    A. Subject to regulatory and other considerations, CAVALRY BANCORP, INC.
       anticipates paying quarterly cash dividends on the common stock at an an-
       nual rate of $0.20 per share, commencing in the first full quarter fol-
       lowing the Stock Conversion. In addition, the Board of Directors may de-
       termine to pay periodic special cash dividends in addition to, or in lieu
       of, regular cash dividends. No assurance can be given that any dividends
       (regular or special) will be paid on the common stock or that, if paid,
       such dividends will not be reduced or eliminated in future periods.
 
19. Q. HOW MUCH STOCK DO THE DIRECTORS AND OFFICERS OF CAVALRY BANKING INTEND
       TO PURCHASE THROUGH THE SUBSCRIPTION OFFERING?
    A. Directors and officers intend to purchase approximately $13.3 million of
       the stock to be offered in the conversion (approximately 20.3% if
       6,555,000 shares are sold in the conversion). The purchase price paid by
       directors and officers will be the same as that paid by customers and the
       general public.
 
20. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY?
    A. No. Pursuant to federal regulations, subscription rights granted to Eli-
       gible Account Holders, Supplemental Eligible Account Holders and Other
       Members may be exercised only by the person(s) to whom they are granted.
       Any person found to be transferring or selling subscription rights will
       be subject to forfeiture of such rights and other penalties.
 
21. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD ME THAT I AM STILL
       ELIGIBLE TO BUY STOCK. IS THAT TRUE?
    A. If you were an account holder on the Eligibility Record Date (June 30,
       1996) the Supplemental Eligibility Record Date (December 31, 1997) or the
       Voting Record Date (January 12, 1998) you are entitled to purchase stock
       regardless of whether or not you continue to hold your CAVALRY BANKING
       account.
 
22. Q. MAY I OBTAIN A LOAN FROM CAVALRY BANKING USING STOCK AS COLLATERAL TO
       PAY FOR MY SHARES?
    A. No. Federal regulations do not allow CAVALRY BANKING to make loans for
       this purpose, but another financial institution may make a loan for this
       purpose.
 
23. Q. WILL THE FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) INSURE THE SHARES
       OF STOCK?
    A. No. The shares of stock will not be insured by the FDIC. However, the
       Savings Association Insurance Fund of the FDIC will continue to insure
       savings accounts and certificates of deposit up to the applicable limits
       allowed by law.
 
24. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION?
    A. CAVALRY BANCORP, INC. has never issued stock before, and consequently
       there is no established market for its common stock. CAVALRY BANCORP,
       INC. has received conditional approval to have the common stock listed on
       the
<PAGE>
 
       NASDAQ National Market System under the symbol "CAVB". Trident
       Securities, Inc. intends to make a market in the common stock. However,
       purchasers of common stock should recognize that no assurance can be
       given that an ac-tive and liquid trading market will develop or, if
       developed, will be maintained.
 
25. Q. CAN I PURCHASE STOCK USING FUNDS IN A CAVALRY BANKING IRA ACCOUNT?
    A. Yes. Contact the Stock Information Center at (615) 849-3335 for addi-
       tional information. It takes several days to process the necessary IRA
       forms and, therefore, it is necessary that you make arrangements by Feb-
       ruary 18, 1998, to accommodate your order.
 
                   ABOUT VOTING "FOR" THE PLAN OF CONVERSION
 
26. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF MEMBERS TO BE HELD TO
       CONSIDER THE PLAN OF CONVERSION?
    A. At the Special Meeting of Members to be held on March 2, 1998, you are
       eligible to vote if you are one of the "Voting Members," who are holders
       of CAVALRY BANKING'S deposits or other authorized accounts as of January
       12, 1998, the "Voting Record Date" for the Special Meeting or if you are
       a borrower of CAVALRY BANKING with a loan outstanding as of January 24,
       1991, which continues to be outstanding as of the Voting Record Date.
       However, members of record as of the close of business on the Voting Rec-
       ord Date who cease to be depositors prior to the date of the Special
       Meeting are no longer members and will not be entitled to vote at the
       Special Meeting. If you are a Voting Member, you should have received a
       proxy statement and proxy card with which to vote.
 
27. Q. HOW MANY VOTES DO I HAVE AS A VOTING MEMBER?
    A. CAVALRY BANKING'S charter provides that each account holder is entitled
       to one vote for each $100, or fraction thereof, on deposit in such ac-
       count. Borrowers of CAVALRY BANKING are entitled to one vote for each
       loan outstanding as of January 24, 1991, which continues to be outstand-
       ing as of January 12, 1998, in addition to any votes they may be entitled
       to receive as depositors. No member may cast more than 1,000 votes.
 
28. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS APPROVED, WILL I
       BE PROHIBITED FROM BUYING STOCK DURING THE SUBSCRIPTION OFFERING?
    A. No. Voting against the Plan of Conversion in no way restricts you from
       purchasing stock in either the Subscription Offering or the Direct Commu-
       nity Offering.
 
29. Q. WHAT HAPPENS IF CAVALRY BANKING DOES NOT OBTAIN ENOUGH VOTES TO APPROVE
       THE PLAN OF CONVERSION?
    A. The conversion would not take place and CAVALRY BANKING would remain a
       mutual savings bank.
 
30. Q. AS A QUALIFYING DEPOSITOR OF CAVALRY BANKING, AM I REQUIRED TO VOTE?
    A. No. However, failure to return your proxy card will have the same effect
       as a vote "Against" the Plan of Conversion.
 
31. Q. WHAT IS A PROXY CARD?
    A. A Proxy Card gives you the ability to vote without attending the Special
       Meeting in person. However, you may attend the meeting and vote in per-
       son, even if you have previously returned your proxy card.
 
32. Q. HOW DOES THE CONVERSION AFFECT ME?
    A. The conversion is intended, among other things, to assist CAVALRY BANKING
       in maintaining and expanding its many services to CAVALRY BANKING'S cus-
       tomers and community. By subscribing for stock, you will also have the
       opportunity to invest in CAVALRY BANCORP, INC., the proposed holding com-
       pany for CAVALRY BANKING. However, there is no obligation to subscribe
       for stock. The decision to subscribe for stock is strictly optional.
 
33. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
    A. You may call the Stock Information Center, at (615) 849-3335 for further
       information or a copy of the Prospectus, Stock Order Form, Proxy State-
       ment and Proxy Card.
 
  This brochure is neither an offer to sell nor a solicitation of an offer to
buy common stock. The offer is made only by the Prospectus. A Prospectus can
be obtained at a CALVARY BANKING office or by calling the Stock Information
Center. There shall be no solicitation of an offer or sale of stock in any
jurisdiction in which any offer, solicitation of an offer or sale of stock
would be unlawful.
 
  The common stock is not a deposit or account and is not federally insured or
guaranteed.
 
                             FOR YOUR CONVENIENCE
 
  In order to assist you during the stock offering period, we have established
a Stock Information Center to answer your questions. Please call:
 
                                (615) 849-3335


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