<PAGE>

                                                                      EXHIBIT 13


                            MARKET FOR COMMON STOCK
                        AND RELATED STOCKHOLDER MATTERS

     Market for Common Stock.  The Company's common stock was first quoted and
began trading on the Nasdaq Small Cap Market System on January 5, 1998, under
the symbol "UTBI."  At that date there were approximately 1,454,750 shares of
the Company's common stock outstanding, and there were approximately 850 record
holders of the Company's common stock.

     The payment of dividends on the common stock is subject to determination
and declaration by the Board of Directors of our holding company.  The Board of
Directors has adopted a policy of paying 3% cash dividends at an annualized rate
of $0.30 per share commencing with the Company's first dividend paid in April
1998.  The payment of future dividends will be subject to the requirements of
applicable law and the determination by our holding company's Board of Directors
that our net income, capital and financial condition, thrift industry trends and
general economic conditions justify the payment of dividends, and we cannot
assure you that dividends will be paid or, if paid, will continue to be paid in
the future.  Under Tennessee law, dividends may be paid upon determination that
following payment of the dividend our holding company would be able to pay its
debts in the ordinary course of business and its assets would exceed its
liabilities.

                                       2
<PAGE>

                      SELECTED  FINANCIAL AND OTHER DATA

SELECTED FINANCIAL CONDITION DATA

<TABLE>
<CAPTION>
                                                   At December 31,
                                     -------------------------------------------
                                      1997     1996     1995     1994     1993
                                     -------  -------  -------  -------  -------
                                               (Dollars in thousands)
<S>                                  <C>      <C>      <C>      <C>      <C>

Total assets.......................  $90,008  $60,611  $54,019  $53,238  $51,465
Loans receivable, net..............   47,158   44,230   40,365   36,568   34,121
Cash received for stock
 subscriptions.....................   23,598       --       --       --       --
Other cash and amounts due from
 depository institutions...........    1,892    2,889    1,832      930    2,250
Investment securities:
   Available for sale..............   15,204   11,689   10,286   10,325   10,428
   Held to maturity................    1,077    1,212    1,046    4,863    4,317
Escrow accounts for stock
 subscriptions.....................   23,598       --       --       --       --
Other deposits.....................   58,071   53,767   47,954   48,761   47,310
Equity.............................    7,052    6,103    5,419    4,262    3,835

Number of:
  Real estate loans................    1,427    1,448    1,421    1,371    1,351
  Deposit accounts.................    7,532    6,908    6,494    5,918    5,159
  Offices..........................        2        2        2        2        2
</TABLE>

SELECTED OPERATIONS DATA

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                     -------------------------------------------
                                      1997     1996     1995     1994     1993
                                     -------  -------  -------  -------  -------
                                               (Dollars in thousands)
<S>                                  <C>      <C>      <C>      <C>      <C>
Interest income....................  $ 5,120  $ 4,536  $ 4,282  $ 3,906  $ 3,926
Interest expense...................    2,711    2,400    2,218    1,655    1,688
                                     -------  -------  -------  -------  -------
Net interest income before
 provision for loan losses.........    2,409    2,136    2,064    2,251    2,238
Provision for loan losses..........      150       --       --       33       99
                                     -------  -------  -------  -------  -------
Net interest income after
  provision for loan losses........    2,259    2,136    2,064    2,218    2,139
Noninterest income.................      121      150      167      119      112
Noninterest expense................    1,361    1,478    1,082    1,038      917
                                     -------  -------  -------  -------  -------
Income before income taxes.........    1,019      808    1,149    1,299    1,334
Income taxes.......................      365      225      435      456      433
                                     -------  -------  -------  -------  -------
Net income.........................  $   654  $   583  $   714  $   843  $   901
                                     =======  =======  =======  =======  =======
</TABLE>

                                       3
<PAGE>

SELECTED RATIOS

<TABLE>
<CAPTION>
                                                                  At or for the
                                                             Year Ended December 31,
                                                   -------------------------------------------
                                                    1997     1996     1995     1994     1993
                                                   -------  -------  -------  -------  -------
                                                             (Dollars in thousands)
<S>                                                <C>      <C>      <C>      <C>      <C>
PERFORMANCE RATIOS:
  Return on average assets (net income
    divided by average total assets).............    1.01%    1.01%    1.33%    1.60%    1.80%
  Return on average equity (net income
    divided by average equity)...................    9.94    10.19    14.75    20.92    28.03
  Interest rate spread (combined weighted
    average interest rate earned less combined
    weighted average interest rate cost).........    3.30     3.40     3.60     4.20     4.14
  Net interest margin (net interest income
    divided by average interest-earning assets)..    3.84     3.83     3.93     4.42     4.84
  Ratio of average interest-earning assets
    to average interest-bearing liabilities......  109.30   109.30   108.70   107.70   101.65
  Ratio of noninterest expense to
    average total assets.........................    2.09     2.57     2.02     1.97     1.83
  Efficiency Ratio (noninterest expense
    divided by total of net interest income
    and noninterest income)......................   53.81    64.65    48.50    44.42    40.74

ASSET QUALITY RATIOS:
  Nonperforming assets to total assets at
    end of period................................     .93      .63      .54      .96      .81
  Nonperforming loans to total loans at
    end of period................................    1.70      .84      .72     1.28     1.20
  Allowance for loan losses to total loans
    at end of period.............................    1.31     1.10     1.21     1.34     1.36
  Allowance for loan losses to nonperforming
    loans at end of period.......................   76.73   129.93   168.86   104.40   113.86
  Provision for loan losses to total loans.......     .31       --       --      .09      .28
  Net charge-offs to average loans
    outstanding..................................     .03      .01      .01      .01      .03

CAPITAL RATIOS:
 Equity to total assets at end of period             7.83    10.07    10.03     8.01     7.45
 Average equity to average assets                   10.12     9.95     9.05     7.63     6.42
</TABLE>

                                       4
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS

     Our principal business consists of accepting deposits from the general
public through our main office and branch office and investing those funds in
loans secured by one- to four-family residential properties located in our
primary market area. We also maintain a portfolio of investment securities and
originate a limited amount of commercial real estate loans and consumer loans.
Our investment securities portfolio consists of U.S. Treasury notes and U.S.
government agency securities, local municipal bonds and mortgage-backed
securities which are guaranteed as to principal and interest by the FHLMC, FNMA
or other governmental agencies.  We also maintain an investment in Federal Home
Loan Bank of Cincinnati common stock and FHLMC preferred stock.

     Our net income primarily depends on our net interest income, which is the
difference between interest income earned on loans and investment securities and
interest paid on customers' deposits. Our net income is also affected by
noninterest income, such as service charges on customers' deposit accounts, loan
service charges and other fees, and noninterest expense, primarily consisting of
compensation expense, deposit insurance and other expenses incidental to our
operations.  Based on our review of our internal bookkeeping practices and our
conferences with our third party service companies, we do not expect to incur
significant additional bookkeeping, data processing or other expenses, and in
particular we do not expect to encounter significant difficulties with our data
processing service provider, in connection with issues related to the upcoming
millennium (that is, "Year 2000" issues).

     Our operations and those of the thrift industry as a whole are
significantly affected by prevailing economic conditions, competition and the
monetary and fiscal policies of governmental agencies. Our lending activities
are influenced by demand for and supply of housing and competition among lenders
and the level of interest rates in our market area. Our deposit flows and costs
of funds are influenced by prevailing market rates of interest, primarily on
competing investments, account maturities and the levels of personal income and
savings in our market area.

ASSET/LIABILITY MANAGEMENT

     Net interest income, the primary component of our net income, is determined
by the difference or "spread" between the yield earned on our interest-earning
assets and the rates paid on our interest-bearing liabilities, and the relative
amounts of such assets and liabilities.  Key components of an asset/liability
strategy are the monitoring and managing of interest rate sensitivity on both
the interest-earning assets and interest-bearing liabilities.  The matching of
our assets and liabilities may be analyzed by examining the extent to which our
assets and liabilities are interest rate sensitive and by monitoring the
expected effects of interest rate changes on our net portfolio value.

                                       5
<PAGE>

     An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. If our assets mature or reprice more slowly or to a lesser extent than
our liabilities, our net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but increase during periods of
falling interest rates. Our policy has been to mitigate the interest rate risk
inherent in the traditional savings institution business of originating long
term loans funded by short term deposits by pursuing the following strategies:
(i) we have historically maintained liquidity and capital levels to compensate
for unfavorable movements in market interest rates; and (ii) in order to
mitigate the adverse effect of interest rate risk on future operations, we
emphasize the origination of variable rate mortgage loans, and we make limited
amounts of shorter term consumer loans.

     The OTS requires us to measure our interest rate risk by computing
estimated changes in the net portfolio value ("NPV") of our cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. These computations estimate the effect
on our NPV of sudden and sustained 1% to 4% increases and decreases in market
interest rates. Our board of directors has adopted an interest rate risk policy
which establishes maximum decreases in our estimated NPV in the event of 1%, 2%,
3% and 4% increases and decreases in market interest rates, respectively.

     The following table sets forth our policy limits and certain calculations,
based on information provided to us by the OTS, with respect to the sensitivity
of our NPV to changes in market interest rates at December 31, 1997.

<TABLE>
<CAPTION>
                Change in                      Change in NPV
                                        --------------------------
          Market Interest Rates         Policy Limit   Computation
          ---------------------         ------------   -----------
          <S>                           <C>            <C>
                   +4%                      -90%            -5%
                   +3%                      -50             *
                   +2%                      -25             *
                   +1%                      -10             *
                    0%                      --              --
                   -1%                      -10             *
                   -2%                      -25             *
                   -3%                      -50             *
                   -4%                      -90             *
</TABLE>
        ---------------
        * No loss calculated.

                                       6
<PAGE>

     These calculations indicate that our net portfolio value could be adversely
affected by increases in interest rates.  Changes in interest rates also may
affect our net interest income, with increases in rates expected to decrease
income and decreases in rates expected to increase income, as our interest-
bearing liabilities would be expected to mature or reprice more quickly than our
interest-earning assets.

     While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgage loans, generally have features which restrict changes in interest rates
on a short term basis and over the life of the asset.  In the event of a change
in interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making the calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.

     Our Board of Directors is responsible for reviewing our asset and liability
policies. On at least a quarterly basis, the Board reviews interest rate risk
and trends, as well as liquidity and capital ratios and requirements.  Our
management is responsible for administering the policies and determinations of
the Board of Directors with respect to our asset and liability goals and
strategies.

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

     The following table sets forth information about our average interest-
earning assets and interest-bearing liabilities and reflects the average yield
of interest-earning assets and the average cost of interest-bearing liabilities
for the periods and at the date indicated. Average balances are derived from
month-end balances. We do not believe that the use of month-end balances instead
of daily balances has caused any material difference in the information
presented. Investment securities include the aggregate of securities available
for sale and held to maturity. The average balance and average yield on
investment securities is based on the fair value of securities available for
sale and the amortized cost of securities held to maturity. The average balance
of loans receivable includes delinquent loans, which are not considered
significant. The average balance of equity includes the net unrealized gain on
available for sale securities. The following table does not reflect any effect
of income taxes.

                                       7
<PAGE>

     The following table also sets forth information for the periods indicated
about the difference between our weighted average yield earned on interest-
earning assets and our weighted average rate paid on interest-bearing
liabilities, or "interest rate spread," which savings institutions have
traditionally used as an indicator of profitability. Another indicator of an
institution's net interest income is its "net yield on interest-earning assets,"
which is its net interest income divided by the average balance of interest-
earning assets. Net interest income is affected by the interest rate spread and
by the relative amounts of interest-earning assets and interest-bearing
liabilities. Whenever interest-earning assets equal or exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income.

<TABLE>
<CAPTION>


                                                                             Year Ended December 31,
                                             ---------------------------------------------------------------------------------------
                                                         1997                         1996                            1995
                                             ----------------------------   ---------------------------   --------------------------
                                                                  Average                       Average                      Average
                                             Average               Yield/   Average              Yield/   Average             Yield/
                                             Balance   Interest     Cost    Balance   Interest    Cost    Balance  Interest     Cost
                                             -------   --------     ----    -------   --------    ----    -------  --------     ----
                                                                             (Dollars in thousands)
<S>                                          <C>       <C>        <C>       <C>       <C>       <C>       <C>      <C>       <C>
Interest-earning assets:
  Loans receivable /1/.....................  $45,765     $4,009       8.8%  $42,426     $3,720      8.8%  $38,262    $3,383     8.8%

  Investment securities....................   14,591        897       6.1    11,662        726      6.2    13,637       876     6.4
  Other interest-earning assets............    3,488        214       6.1     1,727         90      5.2       578        23     4.0
                                             -------     ------             -------     ------            -------    ------
    Total interest-earning assets..........   63,844      5,120       8.0    55,815      4,536      8.1    52,477     4,282     8.2
Noninterest-earning assets.................    1,144         --        --     1,748         --       --       991        --      --
                                             -------     ------             -------     ------            -------    ------
    Total assets...........................  $64,988     $5,120        --   $57,563     $4,536       --   $53,468    $4,282      --
                                             =======     ======             =======     ======            =======    ======

Interest-bearing liabilities:
  Deposits.................................  $57,397     $2,711       4.7   $51,083     $2,399      4.7   $48,259    $2,218     4.6
Noninterest-bearing liabilities............    1,014         --        --       752         --       --       368        --      --
                                             -------     ------             -------     ------            -------    ------
    Total liabilities......................   58,411      2,711        --    51,835      2,399       --    48,627     2,218      --
Equity.....................................    6,577         --        --     5,728         --       --     4,841        --      --
                                             -------     ------             -------     ------            -------    ------
    Total liabilities and equity...........  $64,988      2,711        --   $57,563      2,399       --   $53,468     2,218      --
                                             =======     ------             =======     ------            =======    ------
Net interest income........................              $2,409                         $2,137                       $2,064
                                                         ======                         ======                       ======
Interest rate spread.......................                           3.3%                          3.4%                        3.6%
                                                                  =======                        ======                      ======
Net yield on interest-earning assets.......                           3.8%                          3.8%                        3.9%
                                                                  =======                        ======                      ======
Ratio of average interest-earning assets
  to average interest-bearing liabilities..                         109.3%                        109.3%                      108.7%
                                                                  =======                        =======                     ======
</TABLE>

--------------------
/1/  Includes nonaccrual loans.

                                       8
<PAGE>

RATE/VOLUME ANALYSIS

     The following table sets forth information about changes in our interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to: (i) changes in volume (changes in volume multiplied
by prior period rate), (ii) changes in rate (changes in rate multiplied by prior
period volume) and (iii) changes in rate-volume (changes in rate multiplied by
the changes in volume).

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                    ------------------------------------------------------------------------------
                                           1997    vs.      1996                    1996      vs.     1995
                                    -----------------------------------      -------------------------------------
                                            Increase (Decrease)                   Increase (Decrease)
                                                  Due to                                   Due  to
                                    -----------------------------------      -------------------------------------
                                                        Rate/                                     Rate/
                                    Volume    Rate     Volume     Total      Volume    Rate      Volume     Total
                                    ------    ----     ------     -----      ------    ----      ------     -----
                                                                 (In thousands)
<S>                                 <C>       <C>      <C>        <C>        <C>       <C>       <C>        <C>
Interest income:
 Loans receivable................   $  294    $ --     $   (5)    $ 289      $  366    $ (15)    $  (14)    $ 337
 Investment securities...........      182     (12)         1       171        (126)     (27)         3      (150)
 Other interest-earning assets...       92      16         16       124          46        7         14        67
                                    ------    ----      -----     -----      ------    -----     ------     -----
  Total interest-earning assets..      568       4         12       584         286      (35)         3       254
                                    ------    ----      -----     -----      ------    -----     ------     -----

Interest expense:
 Deposits........................      297      --         15       312         130       48          3       181
                                    ------    ----      -----     -----      ------    -----     ------     -----

Change in net interest income....   $  271    $  4      $  (3)    $ 272      $  156    $ (83)    $   --     $  73
                                    ======    ====      =====     =====      ======    =====     ======     =====
</TABLE>

                                       9
<PAGE>

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996

     Total assets grew from December 31, 1996 to December 31, 1997 as total
assets increased $29.4 million, or 48.5%, from $60.6 million at December 31,
1996 to $90.0 million at December 31, 1997.  Investment securities available for
sale increased $3.5 million, or 30%, from December 31, 1996 to December 31,
1997, while investment securities held to maturity decreased slightly.  We
purchased investment securities with funds received from increases in deposit
accounts and because of a slight reduction in loan demand.  The proceeds from
the stock subscriptions of our Holding Company's stock which were still held in
escrow increased our total assets at December 31, 1997 by $23.6 million.

     Loans receivable increased slightly from December 31, 1996 to December 31,
1997 as originations exceeded repayments for the period by approximately $2.9
million. Our market area has experienced an increase in refinancing activity
during this period.  While the proceeds from the conversion initially will be
invested in short-term investment securities, over time we expect to use the
proceeds to increase our loans receivable.

     Total deposits increased $27.9 million, or 51.9%, from $53.8 million at
December 31, 1996 to $81.7 million at December 31, 1997.  The increase has been
primarily due to holding $23.6 million in escrow accounts for our Holding
Company's stock subscriptions at December 31, 1997.  Our other growth of $4.3
million is primarily due to larger institutions closing branches in the area
and we have benefitted from new customer growth.

     Our equity increased $949,000 from $6,103,000 at December 31, 1996 to
$7,052,000 at December 31, 1997.  The increase was due to $654,000 of net income
and an increase in our net unrealized gain on investment securities available
for sale of $295,000.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996
AND 1995

     Net income was $654,000 for the year ended December 31, 1997 compared to
net income of 583,000 for the year ended December 31, 1996 and net income of
$714,000 for the year ended December 31, 1995.  The decrease in net income in
1996 over 1995 was primarily attributable to the special assessment paid to the
FDIC of $317,000 (see Note 7 of the Notes to Consolidated Financial Statements).
The decrease was partially offset by a larger growth rate in interest-earning
assets than interest-bearing liabilities. Our net interest margin increased 1
basis point from 3.83% for 1996 to 3.84% for 1997 and decreased 10 basis points
from 3.93% for 1995 to 3.83% for 1996.  Net income for 1997 resulted in a return
on average assets of 1.01% compared to 1.01% and 1.33% for 1996 and 1995,
respectively, and a return on average equity of 9.94% for 1997 as compared to
10.19% and 14.75% for 1996 and 1995, respectively.

     Interest Income. Interest income totaled $5.1 million, $4.5 million and
$4.3 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The average yield on interest-earning assets increased in 1995 from 7.7% to 8.2%
then decreased slightly in 1996 to 8.1% and decreased

                                       10
<PAGE>

slightly to 8.0% in 1997 due to a slight decrease in market interest rates for
investment securities. The increase in 1995 was due to an overall increase in
the market interest rates in all categories of interest-earning assets. The
slight decrease in 1996 was attributable to a small decline in the market rates
of investment securities. The average balance of interest-earning assets
increased $8.0 million in 1997, and $3.3 million and $1.5 million in 1996 and
1995, respectively, in response to similar increases in average balances of
deposit accounts.

     Our primary source of interest income for the three-year period ended
December 31, 1997 was from loans receivable. Interest income from loans
receivable was $4.0 million, $3.7 million and $3.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively.  The average yield earned on
loans receivable remained 8.8% in 1995, 1996 and 1997.  The average balances of
loans receivable also increased during the period with a $2.4 million increase
in 1995, a $4.2 million increase in 1996 and a $3.3 million increase in 1997 due
to strong loan demand in our market area.  Interest income on investment
securities increased in 1997 by $170,000 due to a $2.9 million increase in
average balances and a slight decrease in average rates, and decreased in 1996
by $150,000 due to a $2.0 million decrease in average balances which was used to
fund loan growth, and the average rate declined slightly in accordance with a
general market rate decline.

     Interest Expense. For the three year period ended December 31, 1997, our
interest-bearing liabilities consisted totally of customers deposits, as we had
no borrowed funds during that period.  Interest expense on deposits increased
each of the three years ended December 31, 1997.  Interest expense totaled $2.7
million, $2.4 million and $2.2 million for the three years ended December 31,
1997, 1996 and 1995, respectively. The increase in interest expense was due to
the average rates paid on deposits increasing from 4.6% for 1995, to 4.7% for
1996 and remaining at 4.7% for 1997, coupled with increases in average balances
of deposits of $946,000 in 1995, $2.8 million in 1996 and $6.3 million in 1997.
The increase in the average rates paid on deposits was reflective of the
increase in both market interest rates and rates paid on deposits by local
competitors.

     Net Interest Income.  Net interest income was $2.4 million, $2.1 million
and $2.0 million for the years ended December 31, 1997, 1996 and 1995. The
change in net interest income reflects a decrease in our interest rate spread
from 3.6% for 1995 to 3.4% for 1996 and to 3.3% for 1997, coupled with a slight
increase in average interest-earning assets over average interest-bearing
liabilities each year.  Our net interest margin was 3.84%, 3.83% and 3.93% for
the years ended December 31, 1997, 1996 and 1995.

     Provision for Loan Losses. The provision for loan losses was $150,000 in
1997 and zero in 1996 and 1995. The amount of provision, if any, for any period
is determined as of the end of the period based on a comparison of the amount of
existing loan loss reserves with our analysis of various risk factors that
affect the loan portfolio.  The provision for each of the two years prior to
1997 was nonexistent, due in part to our history of modest charge-offs and
strong asset quality. In 1997, we saw an increase in past-due loans and
classified assets. Our analysis of the reserve for loan losses led to the
conclusion that a provision of $150,000 was necessary, even though charge-offs
still remained modest at $18,000.

                                       11
<PAGE>

     Noninterest Income. Noninterest income for the years ended December 31,
1997, 1996 and 1995 was $121,000, $150,000 and $167,000, respectively.
Noninterest income consisted primarily of customer service fees related to
customers' deposit accounts and loan service charges. Noninterest income
decreased from 1995 to 1996 primarily due to a net loss on sales of investment
securities available for sale in 1996 of $4,000 compared to a gain in 1995 of
$27,000 and decreased from 1996 to 1997 due to a $32,000 reduction in deposit
account service charges.  This reduction was a one-time adjustment on certain
service charge accounts and management anticipates that deposit account service
charges will return to historical levels in the future.

     Noninterest Expense. Noninterest expense for the years ended December 31,
1997, 1996 and 1995 was $1.4 million, $1.5 million and $1.1 million,
respectively.  The increase in noninterest expense in 1996 was primarily due to
a special assessment for deposit insurance totaling $317,000 (see Note 7 of the
Notes to Consolidated Financial Statements).  The decrease in noninterest
expense in 1997 was primarily due to a $401,000 decrease in federal deposit
insurance premiums which was partially offset by an increase of $214,000 in
compensation expense.  The increase in compensation expense was due to the
implementation of a long-term incentive plan for our Board of Directors and
general salary increases.

     Our operating efficiency, measured by our efficiency ratios (noninterest
expense divided by the total of net interest income and noninterest income), was
53.8%, 64.7% and 48.5% for the years ended December 31, 1997, 1996 and 1995,
respectively. The higher operating efficiency ratio for 1996 was due to the
inclusion of the special assessment for deposit insurance in noninterest expense
of $317,000.  Excluding this special assessment, our adjusted operating
efficiency ratio for 1996 would have been 50.8%. The slight increase in the
ratio was due to the addition of  new employees to provide customer service for
our increases in loans and deposits.  The adjusted ratios of noninterest expense
to average total assets ratio (excluding the FDIC special assessment) were
2.09%, 2.02% and 2.02% for the years ended December 31, 1997, 1996 and 1995,
respectively.  We also expect that following the completion of the Conversion,
our noninterest expenses for compensation and other operating expenses will
increase, particularly if our holding company's management recognition plan is
implemented.

     Income Taxes. Our effective tax rate remained relatively stable for each of
the three years ended December 31, 1997. Our effective tax rate was 36%, 28% and
38% for the years ended December 31, 1997, 1996 and 1995, respectively. The 1996
effective tax rate was lower than anticipated primarily due to the effect on
deferred taxes of changes in our tax bad debt reserve and the methods required
to be used to calculate tax bad debt deductions.  See Note 6 of the Notes to
Consolidated Financial Statements.

                                       12
<PAGE>

SOURCES OF CAPITAL AND LIQUIDITY

     We have historically maintained substantial levels of capital. The
assessment of capital adequacy depends on several factors, including asset
quality, earnings trends, liquidity and economic conditions. We seek to maintain
high levels of regulatory capital to give us maximum flexibility in the changing
regulatory environment and to respond to changes in market and economic
conditions. These levels of capital have been achieved through consistent
earnings enhanced by low levels of noninterest expense and have been maintained
at those high levels as a result of our policy of moderate growth generally
confined to our market area. Average equity to average total assets at December
31, 1997 1996 and 1995 was 10.12%, 9.95% and 9.05%, respectively. At December
31, 1997, we exceeded all current regulatory capital requirements and met the
definition of a "well-capitalized" institution, the highest regulatory category.

     Our holding company has no business other than ours.  The net proceeds of
the Conversion retained by our holding company on January 1, 1998 have provided
sufficient funds for its initial operations. Our holding company's primary
sources of liquidity in the future will be dividends paid by us and repayment of
the ESOP loan. We are subject to certain regulatory limitations with respect to
the payment of dividends to our holding company.

     We are required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which may be varied at the discretion of the
OTS depending on economic conditions and deposit outflows, is based upon a
percentage of deposits and, if any, short-term borrowings.  At December 31,
1997, current OTS regulations required that a savings institution maintain
liquid assets of not less than 4% of its average daily balance of net withdrawal
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%.  At December 31, 1997, our
liquidity, as measured for regulatory purposes, was 40.5% or $27.2 million in
excess of the minimum OTS liquidity requirement of 4% and 31.5% or $17.2 million
in excess of the OTS short-term liquidity requirement of 1%. We seek to maintain
a relatively high level of liquidity in order to retain flexibility in terms of
lending and investment opportunities and deposit pricing, and in order to meet
funding needs of deposit outflows and loan commitments.  Current OTS regulations
require that a savings institution maintain liquid assets of not less than 4% of
its average daily balance of net withdrawal deposit accounts and borrowings
payable in one year or less.  Historically, we have been able to meet our
liquidity demands through internal sources of funding.

     Our most liquid assets are cash and amounts due from depository
institutions, which are short-term highly liquid investments with original
maturities of less than three months that are readily convertible to known
amounts of cash. The levels of these assets are dependent on our operating,
financing and investing activities during any given period. At December 31,
1997, 1996 and 1995, cash and amounts due from depository institutions totaled
$1.9 million, $2.9 million and $1.8 million, respectively.

                                       13
<PAGE>

     Our primary sources of funds are deposits, proceeds from principal and
interest payments on loans and investment securities and earnings. While
scheduled principal repayments on loans and investment securities are a
relatively predictable source of funds, deposit flows and loan and investment
securities prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.  We do not solicit deposits
outside of our market area through brokers or other financial institutions.

     We have also designated certain securities as available for sale in order
to meet liquidity demands.  At December 31, 1997, we had designated securities
with a fair value of $15.2 million as available for sale.  In addition to
internal sources of funding, we as a member of the Federal Home Loan Bank of
Cincinnati have substantial borrowing authority with the Federal Home Loan Bank
of Cincinnati. Our use of a particular source of funds is based on need,
comparative total costs and availability.

     At December 31, 1997, we had outstanding approximately $1.9 million in
commitments to originate loans and unused lines of credit. At the same date, the
total amount of certificates of deposit which were scheduled to mature in one
year or less was $37.7 million. We anticipate that we will have resources to
meet our current commitments through internal funding sources described above.
Historically, we have been able to retain a significant amount of our deposits
as they mature.

IMPACT OF INFLATION AND CHANGING PRICES

     The financial statements and related notes appearing elsewhere in this
report have been prepared in accordance with generally accepted accounting
principles, 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.

     Virtually all of our assets and liabilities are monetary. As a result,
changes in interest rates have a greater impact on our performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.

IMPACT OF NEW ACCOUNTING STANDARDS

     The following are recently issued accounting standards which we have yet to
adopt. For information about recent accounting standards which we have adopted,
see the Notes to Consolidated Financial Statements in this report.

     Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities.  In June 1996, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No.
125, "Accounting for Transfers and Servicing of

                                       14
<PAGE>

Financial Assets and Extinguishment of Liabilities." SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities.

     Those standards are based on consistent application of a financial-
components approach that focuses on control.  Under that approach, 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 provides standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively.

     In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125."  SFAS No. 127 provides a one year deferral on selected
portions of SFAS No. 125.

     We have never entered into any transactions related to transfers of
financial assets, sales of loans with servicing retained, or servicing of loans
for other entities.  In addition, we do not anticipate entering into any of
these types of transactions in the future.  Therefore, SFAS No. 125 and SFAS No.
127 will not have any effect on our financial condition or results of
operations.

     Earnings Per Share. In August 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," and Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about Capital
Structure." SFAS Nos. 128 and 129 establish standards for computing and
presenting earnings per share and makes them comparable to international
standards. These statements are effective for financial statements issued for
periods ending after December 15, 1997.

     Although we do not have any outstanding stock at December 31, 1997, these
statements will apply to our holding company's consolidated financial statements
after the conversion. Application of these statements is not anticipated to have
a significant impact on the preparation of our holding company's consolidated
financial statements.

     Reporting Comprehensive Income and Segment Information. In June 1997, the
FASB issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS Nos.
130 and 131 establish additional reporting requirements that will apply to our
holding company's consolidated financial statements in 1998, but are not
anticipated to have a significant impact on the preparation of our holding
company's consolidated financial statements. Both statements are effective for
financial statements issued for periods beginning after December 15, 1997.

     Employers' Disclosures about Pensions and Other Postretirement Benefits.
In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits."  SFAS No. 132 revises employers' disclosures about pension and other
post retirement benefit plans but does not change the measurement or recognition
of those plans.  SFAS No. 132 amends FASB Statements 87, 88 and 106 and is
effective for fiscal years beginning after December 15, 1997.  SFAS No. 132 does
not apply to any of the benefit plans we currently provide or anticipate
providing to our employees in the near future.  Therefore, it will not have any
effect on our financial condition, results of operations, or preparation of our
Consolidated Financial Statements.

                                       15
<PAGE>

                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION

                                AND SUBSIDIARY

                              NEWPORT, TENNESSEE

                       CONSOLIDATED FINANCIAL STATEMENTS

                       DECEMBER 31, 1997, 1996 AND 1995

<PAGE>

                                                                             -1-

               [LETTERHEAD OF PUGH & COMPANY, P.C. APPEARS HERE]

                         INDEPENDENT AUDITOR'S REPORT



Board of Directors
Newport Federal Savings
and Loan Association
Newport, Tennessee


We have audited the accompanying consolidated statements of financial condition
of Newport Federal Savings and Loan Association and subsidiary as of December
31, 1997 and 1996, and the related consolidated statements of income, changes in
equity, and cash flows for the years ended December 31, 1997, 1996 and 1995.
These consolidated financial statements are the responsibility of the
Association's management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Newport Federal
Savings and Loan Association and subsidiary as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years ended
December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.


                                          /s/ Pugh & Company, P.C.

                                          Certified Public Accountants
                                          Knoxville, Tennessee
                                          January 30, 1998
<PAGE>

                                                                             -2-

                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
                                AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                      As of December 31,                 1997          1996
                                                     ------------  ------------

                                      - ASSETS -

<S>                                                  <C>          <C>
Cash Received for Stock Subscriptions                $23,598,226  $       -0-
Cash and Amounts Due From Depository Institutions      1,891,544    2,888,527
Investment Securities:
 Available for Sale, at Fair Value                    15,204,003   11,688,661
 Held to Maturity, at Amortized Cost                   1,077,494    1,212,377
Loans Receivable, Net                                 47,158,115   44,229,918
Premises and Equipment, Net                              196,056      227,755
Foreclosed Real Estate - Held for Sale                    18,900          -0-
Accrued Interest Receivable                              377,485      294,357
Prepaid Conversion Costs                                 466,862          -0-
Other Assets                                              18,979       69,780
                                                     -----------  -----------

TOTAL ASSETS                                         $90,007,664  $60,611,375
                                                     ===========  ===========


                    - LIABILITIES AND EQUITY -

LIABILITIES
 Deposits
  Escrow Accounts for Stock Subscriptions            $23,598,226  $       -0-
  Demand                                              17,467,564   15,354,820
  Term                                                40,603,811   38,412,125
                                                     -----------  -----------

   TOTAL DEPOSITS                                     81,669,601   53,766,945


 Accrued Interest Payable                                254,683      225,997

 Accrued Income Taxes                                    209,292          -0-

 Deferred Income Taxes                                   594,502      484,548
 Other Liabilities                                       227,698       30,975
                                                     -----------  -----------

   TOTAL LIABILITIES                                  82,955,776   54,508,465
                                                     -----------  -----------

COMMITMENTS AND CONTINGENCIES                                 --           --

EQUITY
 Retained Earnings                                     6,285,141    5,631,487
 Net Unrealized Gain on Investment Securities            766,747      471,423

   TOTAL EQUITY                                        7,051,888    6,102,910
                                                     -----------  -----------

TOTAL LIABILITIES AND EQUITY                         $90,007,664  $60,611,375
                                                     ===========  ===========

</TABLE>



  The accompanying notes are an integral part of these financial statements.
<PAGE>

                                                                             -3-

                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
                                AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                             For the Years Ended December 31,
                                           -----------------------------------
                                              1997        1996         1995
                                           ----------  -----------  ----------
<S>                                        <C>         <C>          <C>
INTEREST INCOME
 Loans                                     $4,009,224  $3,719,759   $3,383,137
 Investment Securities                        896,464     726,423      875,650
 Other Interest-Earning Assets                214,289      90,035       22,971
                                           ----------  ----------   ----------
  TOTAL INTEREST INCOME                     5,119,977   4,536,217    4,281,758

INTEREST EXPENSE ON DEPOSITS                2,710,757   2,399,548    2,217,664
                                           ----------  ----------   ----------

NET INTEREST INCOME                         2,409,220   2,136,669    2,064,094

PROVISION FOR LOAN LOSSES                     150,000         -0-          -0-
                                           ----------  ----------   ----------

NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                            2,259,220   2,136,669    2,064,094
                                           ----------  ----------   ----------

NONINTEREST INCOME
 Deposit Account Service Charges               50,562      82,627       70,186
 Loan Service Charges and Fees                 57,852      57,194       58,295
 Net Gain (Loss) on Sales of Investment
 Securities Available for Sale                    -0-      (3,589)      26,789
 Other                                         12,229      13,395       11,652
  TOTAL NONINTEREST INCOME                    120,643     149,627      166,922
                                           ----------  ----------   ----------

NONINTEREST EXPENSE
 Compensation and Benefits                    731,233     517,002      476,442
 Occupancy and Equipment                      150,446     146,133      136,290
 Federal Deposit Insurance Premiums            51,000     452,000      132,000
 Data Processing Fees                         110,564     112,856      109,455
 Advertising and Promotion                     54,931      53,468       52,775

 Loss on Foreclosed Real Estate                   -0-         988          712

 Other                                        263,027     195,582      174,453
                                           ----------  ----------   ----------
  TOTAL NONINTEREST EXPENSE                 1,361,201   1,478,029    1,082,127
                                           ----------  ----------   ----------

INCOME BEFORE INCOME TAXES                  1,018,662     808,267    1,148,889

INCOME TAXES                                  365,008     224,800      434,737
                                           ----------  ----------   ----------

NET INCOME                                 $  653,654  $  583,467   $  714,152
                                           ==========  ==========   ==========

</TABLE>



  The accompanying notes are an integral part of these financial statements.
<PAGE>

                                                                             -4-



                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
                                AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

                  FOR THE THREE YEARS ENDED DECEMBER 31, 1997




<TABLE>
<CAPTION>


                                                        Net
                                                    Unrealized
                                                       Gain
                                                     (Loss) on
                                         Retained   Investment     Total
                                         Earnings   Securities     Equity
                                        ----------  -----------  ----------
<S>                                     <C>         <C>          <C>
BALANCES, JANUARY 1, 1995               $4,333,868    $(71,973)  $4,261,895

Net Income                                 714,152         -0-      714,152

Change in Net Unrealized Gain (Loss)
 on Investment Securities                      -0-     443,001      443,001
                                        ----------    --------   ----------

BALANCES, DECEMBER 31, 1995              5,048,020     371,028    5,419,048

Net Income                                 583,467         -0-      583,467


Change in Net Unrealized Gain (Loss)
 on Investment Securities                      -0-     100,395      100,395
                                        ----------    --------   ----------

BALANCES, DECEMBER 31, 1996              5,631,487     471,423    6,102,910

Net Income                                 653,654         -0-      653,654

Change in Net Unrealized Gain (Loss)
on Investment Securities                       -0-     295,324      295,324
                                        ----------    --------   ----------


BALANCES, DECEMBER 31, 1997             $6,285,141    $766,747   $7,051,888
                                        ==========    ========   ==========

</TABLE>


  The accompanying notes are an integral part of these financial statements.
<PAGE>

                                                                             -5-

                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
                                AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                            For the Years Ended December 31,
                                                         ----------------------------------------
                                                             1997          1996          1995
                                                         ------------  ------------  ------------
<S>                                                      <C>           <C>           <C>
OPERATING ACTIVITIES
Net Income                                               $   653,654   $   583,467   $   714,152
                                                         -----------   -----------   -----------
Adjustments to Reconcile Net Income to Net
 Cash Provided by Operating Activities:
  Provision for Loan Losses                                  150,000           -0-           -0-
  Depreciation                                                43,721        44,450        49,613
  Amortization of Investment Securities
Premiums and Discounts, Net                                  (26,200)       (7,612)       25,389
  Increase in Unearned Loan Fees                              16,058        13,150        32,969
  Net Gain on Sales of Foreclosed Real Estate                 (1,858)       (5,377)       (4,129)
  Federal Home Loan Bank Stock Dividends                     (37,500)      (34,000)      (30,400)
  Net (Gain) Loss on Sales of Investment Securities
Available for Sale                                               -0-         3,589       (26,789)
  Deferred Income Taxes (Benefit)                            (71,051)       18,584       166,993
  (Increase) Decrease in:
   Accrued Interest Receivable                               (83,128)     (101,187)      (38,280)
   Prepaid Conversion Costs                                 (466,862)          -0-           -0-
   Other Assets                                               50,801       (22,731)       (7,457)
  Increase (Decrease) in:
   Accrued Interest Payable                                   28,686        28,375        23,518
   Accrued Income Taxes                                      209,292           -0-           -0-
   Other Liabilities                                         196,723       (12,762)        2,440
                                                         -----------   -----------   -----------
    Total Adjustments                                          8,682       (75,521)      193,867
                                                         -----------   -----------   -----------
     NET CASH PROVIDED BY OPERATING ACTIVITIES               662,336       507,946       908,019
                                                         -----------   -----------   -----------

INVESTING ACTIVITIES
 Purchases of Investment Securities Available
  for Sale                                                (4,975,359)   (3,965,945)   (1,038,511)
 Proceeds From Sales of Investment Securities
  Available for Sale                                             -0-     1,003,203     4,191,894
 Proceeds From Maturities of Investment Securities
  Available for Sale                                         500,000       500,000           -0-
 Principal Payments Received on Investment Securities
  Available for Sale                                       1,500,756     1,260,389     1,188,975
 Purchases of Investment Securities Held to Maturity        (157,556)     (166,667)          -0-
 Proceeds From Maturities of Investment Securities
  Held to Maturity                                           290,000           -0-       260,000
 Principal Payments Received on Investment Securities
  Held to Maturity                                             1,729           -0-           -0-
 Net Increase in Loans                                    (3,204,312)   (3,872,912)   (3,814,824)
 Purchases of Plant and Equipment, Net                       (12,022)      (22,427)      (12,274)
 Proceeds From Sales of Foreclosed Real Estate                93,015           -0-        25,162
                                                         -----------   -----------   -----------
     NET CASH PROVIDED BY (USED IN) INVESTING
      ACTIVITIES                                          (5,963,749)   (5,264,359)      800,422
                                                         -----------   -----------   -----------
</TABLE>
<PAGE>

                                                                             -6-

                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
                                AND SUBSIDIARY

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,
                                                              ----------------------------------------
                                                                  1997          1996          1995
                                                              -------------  -----------  ------------
<S>                                                           <C>            <C>          <C>
FINANCING ACTIVITIES
 Net Increase (Decrease) in Deposits                             4,304,430     5,812,778     (806,377)
 Cash Received From Stock Subscriptions                         23,598,226           -0-          -0-
 Increase in Stock Subscription Escrow Accounts                (23,598,226)          -0-          -0-
     NET CASH PROVIDED BY (USED IN) FINANCING
      ACTIVITIES                                                 4,304,430     5,812,778     (806,377)
                                                              ------------    ----------   ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (996,983)    1,056,365      902,064

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                     2,888,527     1,832,162      930,098
                                                              ------------    ----------   ----------

CASH AND CASH EQUIVALENTS, END OF YEAR                        $  1,891,544    $2,888,527   $1,832,162
                                                              ============    ==========   ==========

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
 Cash Paid During the Year for:
  Interest                                                    $  2,682,071    $2,371,173   $2,194,146
  Income Taxes                                                $    192,440    $  231,305   $  269,749

SUPPLEMENTARY DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
 Transfer of Investment Securities
 From Held to Maturity Category to

 Available for Sale Category                                  $        -0-    $      -0-   $3,218,265

 Sale of Foreclosed Real Estate
  by Origination of Mortgage Loans                            $     56,968    $   61,000   $  109,395
 Acquisition of Foreclosed Real Estate                        $    167,025    $   49,380   $   94,554
 Change in Unrealized Gain on Investment Securities
 Available for Sale                                           $    476,329    $  161,928   $  714,517
   Change in Deferred Income Tax Associated With
   Unrealized Gain on Investment Securities Available
    for Sale                                                  $    181,005    $   61,533   $  271,516
 Change in Net Unrealized Gain on Investment
  Securities Available for Sale                               $    295,324    $  100,395   $  443,001

</TABLE>

   The accompanying notes are an integral part of these financial statements
<PAGE>

                                                                             -7-

                 NEWPORT FEDERAL SAVINGS AND LOAN ASSOCIATION
                                AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       DECEMBER 31, 1997, 1996 AND 1995



NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of Newport Federal Savings and Loan Association and its wholly owned
subsidiary, NFS Service Corporation.  The subsidiary is a service corporation
whose only asset is a $15,000 investment in Data Services Corporation of
Cincinnati, Ohio, (see Note 2) which provides data processing services to the
Association.  The subsidiary had liabilities of $698 payable to the Association
and shareholder's equity of $14,302 as of December 31, 1996.  Results of
operations of the subsidiary were $-0- for each of the years  1997, 1996 and
1995.   All intercompany accounts have been eliminated.  In December 1997 the
subsidiary was dissolved and its only asset transferred to Newport Federal
Savings and Loan Association.

REORGANIZATION - On January 1, 1998 the Association converted from a mutual
savings association to a capital stock savings bank, changed its name to Newport
Federal Bank, and was simultaneously acquired by its holding company, United
Tennessee Bankshares, Inc.  See Note 12 for additional information concerning
the Association's stock conversion.

NATURE OF OPERATIONS - The Association provides a variety of financial services
to individuals and corporate customers through its two offices in Newport,
Tennessee.  The Association's primary deposit products are interest-bearing
savings accounts and certificates of deposit.  Its primary lending products are
one-to-four family first mortgage loans.

USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures.  Actual results could differ from those estimates.  Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for losses on loans and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of loans.

The allowance for loan losses is established through a provision for loan losses
charged to expense.  Loans are charged against the allowance for loan losses
when management believes that the collection of the principal is unlikely.  The
allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible, based on evaluations of
the collectibility of loans and prior loan loss experience.  The evaluations
take into consideration such factors as changes in the nature and volume of the
loan portfolio, overall portfolio quality, review of specific problem loans, and
economic conditions that may affect the borrowers' ability to pay.

Real estate acquired through, or in lieu of, loan foreclosure is carried at the
lower of cost or fair value less estimated costs to sell.  Cost includes the
balance of the loan plus acquisition costs and improvements made thereafter to
facilitate sale.  Costs related to the holding of the real estate are expensed.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents include "Cash and Amounts
Due from Depository Institutions."
<PAGE>

                                                                             -8-



CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS - Cash and amounts due from
depository institutions includes the following approximate amounts on deposit
with the Federal Home Loan Bank of Cincinnati:

                                                    12/31/97    12/31/96
                                                   ----------  ----------

     Unrestricted Deposits                         $1,308,000  $2,270,000



INVESTMENT SECURITIES - In accordance with SFAS No. 115, the Association has
segregated its securities into the following categories:

(a)  HELD TO MATURITY - These debt securities are carried at cost, adjusted for
     amortization of premiums and accretion of discounts, which are recognized
     as adjustments to interest income, using a method which approximates the
     level yield method.  In placing securities in this category, the
     Association has expressed a positive intent and ability to hold such
     securities until they mature.  The Association has classified all of its
     obligations of states and political subdivisions in its held to maturity
     portfolio.

(b)  AVAILABLE FOR SALE - All other debt and equity securities have been placed
     in this category.  These securities are carried at fair value based on
     quoted market prices for securities that are marketable.  Fair value for
     non-marketable securities is estimated to be equivalent to historical cost.
     Securities placed in this category may be sold in response to changes in
     interest rates, liquidity needs, or for other purposes.  Any unrealized
     gain or loss is reported in the consolidated statements of financial
     condition as a component of equity, net of any deferred tax effect.

Realized gains or losses on the sales of securities available for sale are based
on the net proceeds and amortized cost of the securities sold, using the
specific identification method.  See Note 2 for additional information on
investment securities.

LOAN FEES - Loan fees, net of initial direct costs related to initiating and
closing loans, have been deferred and are being amortized into interest income
over the contractual lives of the loans as an adjustment of yield, using the
level yield method.

RECOGNITION OF INTEREST ON LOANS - Unearned interest on installment loans is
recognized as income over the terms of the loans using a declining balance
method.  Interest on other loans is calculated by using the simple interest
method on the principal outstanding.  Accrual of interest is discontinued on a
loan when management believes, after considering economic and business
conditions and collection efforts, that the borrowers' financial condition is
such that the collection of interest is doubtful.  The Association's nonaccrual
policy conforms to regulatory requirements that generally require the placement
of loans which are ninety or more days past due on nonaccrual status, unless the
loan is both well secured and in the process of collection.

PREMISES AND EQUIPMENT, NET - Premises and equipment are stated at cost less
accumulated depreciation.  Depreciation, computed principally using the
straight-line method for financial accounting purposes and accelerated methods
for income tax reporting purposes, is based on estimated useful lives of five to
thirty years.

INCOME TAXES - Income taxes are provided in accordance with SFAS No. 109 for the
tax effects of the transactions reported in the consolidated financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of investment securities, allowance
for loan losses, deferred loan fees, and accumulated depreciation for financial
accounting and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.  An appropriate provision is made in the consolidated financial
statements for deferred income taxes in recognition of these differences.
<PAGE>

                                                                             -9-

NOTE 2 - INVESTMENT SECURITIES:


The amortized cost and estimated fair value of investment securities classified
as available for sale are as follows:


<TABLE>
<CAPTION>
                                         Investment Securities Available for Sale
                                     -------------------------------------------------
                                                    Gross        Gross      Estimated
                                       Amortized  Unrealized  Unrealized          Fair
                                            Cost       Gains      Losses         Value
                                     -----------  ----------    --------   -----------
<S>                                  <C>          <C>         <C>          <C>
As of December 31, 1997:
------------------------

DEBT SECURITIES:
 U.S. Treasury Securities and
  Obligations of  U.S. Government
  Corporations and Agencies          $ 3,985,829  $   40,901    $   (937)  $ 4,025,793
 Mortgage-Backed Securities            9,390,737      92,994     (44,373)    9,439,358
                                     -----------  ----------    --------   -----------
  Total Debt Securities               13,376,566     133,895     (45,310)   13,465,151
                                     -----------  ----------    --------   -----------

EQUITY SECURITIES:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost           548,300         -0-         -0-       548,300
 Federal Home Loan Mortgage
  Corporation Preferred Stock             27,448   1,148,104         -0-     1,175,552
 Data Services Corporation Stock,
  at Cost                                 15,000         -0-         -0-        15,000
                                     -----------  ----------    --------   -----------
                                         590,748   1,148,104         -0-     1,738,852
                                     -----------  ----------    --------   -----------
  Total Equity Securities            $13,967,314  $1,281,999    $(45,310)  $15,204,003
                                     ===========  ==========    ========   ===========


As of December 31, 1996:
------------------------

DEBT SECURITIES:
 U.S. Treasury Securities and
  Obligations of U.S. Government
  Corporations and Agencies          $ 2,977,719  $   22,151    $(11,212)  $ 2,988,658
 Mortgage-Backed Securities            7,397,334      87,245     (83,884)    7,400,695
                                     -----------  ----------    --------   -----------
  TOTAL DEBT SECURITIES               10,375,053     109,396     (95,096)   10,389,353
                                     -----------  ----------    --------   -----------

EQUITY SECURITIES:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost           510,800         -0-         -0-       510,800
 Federal Home Loan Mortgage
  Corporation Preferred Stock,
   at Cost                                27,448     746,060         -0-       773,508
 Data Services Corporation Stock          15,000         -0-         -0-        15,000
                                     -----------  ----------    --------   -----------
  TOTAL EQUITY SECURITIES                553,248     746,060         -0-     1,299,308
                                     -----------  ----------    --------   -----------
                                     $10,928,301  $  855,456    $(95,096)  $11,688,661
                                     ===========  ==========    ========   ===========

</TABLE>


Gross realized gains and losses from sales of investment securities classified
as available for sale are as follows:
<TABLE>
<CAPTION>

                                         For the Years Ended December 31,
                                         --------------------------------
                                          1997        1996        1995
                                         -------     -------     --------
<S>                                      <C>         <C>         <C>

Gross Realized Gains                     $   -0-     $   -0-     $ 40,039
Gross Realized Losses                        -0-      (3,589)     (13,250)
                                         -------     -------     --------
                                         $   -0-     $(3,589)    $ 26,789
                                         =======     =======     ========
</TABLE>
<PAGE>

                                                                            -10-
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>


                        December 31, 1997       December 31, 1996
                      ----------------------  ----------------------
                                   Estimated               Estimated
                       Amortized     Fair     Amortized      Fair
                         Cost        Value      Cost         Value
                      ----------  ----------  ----------  ----------
<S>                   <C>         <C>         <C>         <C>
FNMA Certificates     $1,790,034  $1, 797,635  $  975,004  $  972,168
GNMA Certificates      2,873,508   2,  954,819   2,326,619   2,412,301
FHLMC Certificates     4,727,195   4,  686,904   4,095,711   4,016,226
                      ----------  ---  -------  ----------  ----------
                      $9,390,737  $9,  439,358  $7,397,334  $7,400,695
                      ==========  ==========  ==========  ==========
</TABLE>

The amortized cost and estimated fair value of investment securities classified
as held to maturity are as follows:
<TABLE>
<CAPTION>

                                  Investment Securities Held to Maturity
                              ----------------------------------------------
                                            Gross       Gross     Estimated
                               Amortized  Unrealized  Unrealized    Fair
                                 Cost       Gains      Losses       Value
                              ----------  ----------  ----------  ----------
<S>                           <C>         <C>         <C>         <C>
As of December 31, 1997:
------------------------
 Obligations of States and
  Political Subdivisions      $1,077,494     $27,180        $-0-  $1,104,674
                              ==========  ==========  ==========  ==========

As of December 31, 1996:
------------------------
 Obligations of States and
  Political Subdivisions      $1,212,377     $28,333        $-0-  $1,240,710
                              ==========  ==========  ==========  ==========

</TABLE>

The obligations of states and political subdivisions shown above are issued by
state and local governmental instrumentalities in the State of Tennessee and are
backed by the full faith and credit of said issuing instrumentalities.

The amortized cost and estimated fair value of debt securities as of December
31, 1997, by contractual maturity, are as follows:

<TABLE>
<CAPTION>

                              Available for Sale        Held to Maturity
                           ------------------------  ----------------------
                                         Estimated               Estimated
                             Amortized     Fair       Amortized    Fair
                               Cost        Value        Cost       Value
                           -----------  -----------  ----------  ----------
<S>                        <C>          <C>          <C>         <C>
Due in One Year or Less    $   674,448  $   677,269  $      -0-  $      -0-
Due After One Year
 Through Five Years          6,988,981    6,998,896     277,850     278,045
Due After Five Years
 Through Ten Years           2,338,974    2,335,564     799,644     826,629
Due After Ten Years          3,374.163    3,453,422         -0-         -0-
                           -----------  -----------  ----------  ----------
                           $13,376,566  $13,465,151  $1,077,494  $1,104,674
                           ===========  ===========  ==========  ==========

</TABLE>

For the purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the contractual maturities of underlying collateral.  The mortgage-
backed securities may mature earlier than their contractual maturities because
of principal prepayments.

The Association did not sell any investment securities classified as held to
maturity during the years ended December 31, 1997, 1996, and 1995.  In 1995, in
accordance with paragraph 61 of the FASB Special Report No. 155-B, the
Association transferred mortgage-backed securities with an amortized cost of
$3,218,265 from its held to maturity category to its available for sale
category.  These securities had a net unrealized loss of approximately $26,000
on the date transferred.  There were no transfers between categories in 1997 or
1996.

Investments with book values of approximately $1,600,000 and $1,400,000 (which
approximates market values) as of December 31, 1997 and 1996, respectively, were
pledged to secure deposits of public funds.
<PAGE>

                                                                            -11-


NOTE 3 - LOANS RECEIVABLE

The Association provides mortgage and consumer lending services to individuals
primarily in the East Tennessee area.  Loans receivable are summarized as
follows:
<TABLE>
<CAPTION>


                                                       As of December 31,
                                                    ------------------------
                                                       1997         1996
                                                    -----------  -----------
<S>                                                 <C>          <C>
First mortgage loans (principally conventional):
 Secured by one-to-four family residences           $40,482,484  $39,549,254
 Secured by other properties                          3,493,067    2,264,532
 Construction loans                                   3,266,150    1,889,100
                                                    -----------  -----------
                                                     47,241,701   43,702,886

Less:

 Undisbursed portion of construction loans            1,308,467      688,450

 Net deferred loan origination fees                     278,013      261,955
                                                    -----------  -----------
  Net first mortgage loans                           45,655,221   42,752,481
                                                    -----------  -----------

Consumer and commercial loans:
 Loans to depositors, secured by deposits               634,113      509,139
 Automobile                                             646,007      664,253
 Home equity and second mortgage                        243,213      233,882
 Other                                                  608,017      564,579
                                                    -----------  -----------
                                                      2,131,350    1,971,853
Less unearned interest                                      787          698
                                                    -----------  -----------
  Net consumer and commercial loans                   2,130,563    1,971,155
                                                    -----------  -----------
Less allowance for loan losses                          627,669      493,718
                                                    -----------  -----------
                                                    $47,158,115  $44,229,918
                                                    ===========  ===========

</TABLE>

The Association had outstanding loan commitments of approximately $1,891,000 and
$799,000 (in addition to undisbursed portion of construction loans) at rates
ranging from 6% to 10% as of December 31, 1997 and 1996, respectively.

Activity in the allowance for loan losses consists of the following:

<TABLE>
<CAPTION>

                                               For the Years Ended December 31,
                                               -------------------------------
                                                 1997       1996       1995
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>

Allowance at beginning of year                 $493,718   $496,445   $498,452
 Provision charged to expense                   150,000        -0-        -0-
 Recoveries of loans previously charged off       1,567      4,411     10,251
 Loans charged off                              (17,616)    (7,138)   (12,258)
                                               --------   --------   --------

Allowance at end of year                       $627,669   $493,718   $496,445
                                               ========   ========   ========

</TABLE>

The Association has recognized the following amounts related to impaired loans
in conformity with FASB Statements No. 114 and No. 118:
<TABLE>
<CAPTION>

                                                             As of December 31,
                                                             ------------------
<S>                                                          <C>       <C>
                                                                 1997      1996
                                                             --------  --------
Recorded value of all impaired loans                         $818,000  $380,000
Average individual loan balance                              $ 29,000  $ 25,000
Total allowance for loan losses related to impaired loans    $    -0-  $    -0-

</TABLE>

The Association has had an increase in past-due loans and foreclosures in 1997
which caused impaired loans to increase.
<PAGE>

                                                                            -12-


The Association records payments received on impaired loans that are well
secured and in the process of collection on the cash receipts method, whereby
payments are first applied to accrued interest and then to reduce principal
balances.  Payments received on impaired loans which do not represent a remote
chance of further loss to the Association are credited to the loan's principal
balance under the cost recovery method.  The following is a summary of cash
receipts on impaired loans and how they were applied during the periods
indicated:
<TABLE>
<CAPTION>
                                                     For the Years
                                                    Ended December 31,
                                                     ----------------
                                                      1997      1996
                                                     -------  -------
<S>                                                  <C>      <C>
Cash receipts applied to reduce principal balance    $ 3,070  $36,747
Cash receipts recognized as interest income           72,511   33,061
                                                     -------  -------
Total cash receipts                                  $75,581  $69,808
                                                     =======  =======

</TABLE>


NOTE 4 - PREMISES AND EQUIPMENT, NET


Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>

                                 As of December 31,
                                 ------------------
                                   1997      1996
                                 --------  --------
<S>                              <C>       <C>
Land                             $ 46,000  $ 46,000
Buildings                         606,430   606,430
Furniture and equipment           249,151   256,799
                                 --------  --------
                                  901,581   909,229
Less accumulated depreciation     705,525   681,474
                                 --------  --------
                                 $196,056  $227,755
                                 ========  ========
</TABLE>

Depreciation expense for the years ended December 31, 1997, 1996 and 1995
totalled $43,721, $44,450, and $49,613, respectively.


NOTE 5 - DEPOSITS

A summary of deposits is as follows:
<TABLE>
<CAPTION>

                                                            As of December 31,
                                                         ------------------------
<S>                                                      <C>          <C>

                                                                1997         1996
                                                         -----------  -----------
Escrow Accounts for Stock Subscriptions (See Note 12)    $23,598,226  $       -0-
                                                         -----------  -----------
Demand Deposits:
 Now Accounts                                              3,837,853    3,387,886
 Money Market Deposit Accounts                             2,738,994    2,273,793
 Passbook Savings                                         10,890,717    9,693,141
                                                         -----------  -----------
   Total Demand Deposits                                  17,467,564   15,354,820
                                                         -----------  -----------
Term Deposits:
 Less than $100,000                                       27,470,014   26,421,000
 $100,000 or More                                         13,133,797   11,991,125
                                                         -----------  -----------
  Total Term Deposits                                     40,603,811   38,412,125
                                                         -----------  -----------
                                                         $81,669,601  $53,766,945
                                                         ===========  ===========
</TABLE>

Deposits in excess of $100,000 are not federally insured.

The scheduled maturities of certificates of deposit as of December 31, 1997 are
as follows:

<TABLE>
<CAPTION>


<S>                                                          <C>
     1998                                                    $37,688,458
     1999                                                      2,647,375
     2000                                                        267,978
                                                             -----------
                                                             $40,603,811
                                                             ===========
</TABLE>
<PAGE>

                                                                            -13-



NOTE 6 - INCOME TAXES


Income taxes as shown in the consolidated statements of income differ from the
amount computed using the statutory federal income tax rate for the following
reasons:

<TABLE>
<CAPTION>

                                         For the Years Ended December 31,
                       -------------------------------------------------------------------
                               1997                   1996                   1995
                       ---------------------  ---------------------  ---------------------
                                    Percent                Percent                Percent
                                  of Pretax              of Pretax              of Pretax
                         Amount      Income     Amount      Income     Amount      Income
                       --------   ---------   --------   ---------   --------   ---------
<S>                    <C>        <C>         <C>        <C>         <C>        <C>
Federal income
 tax at statutory
 rate                  $346,345       34.0 %  $274,811       34.0 %  $390,622       34.0 %
Increase (Decrease)
 resulting from
  tax effects of:
   Nontaxable
    interest            (19,195)       (1.9)   (20,840)       (2.6)   (23,725)       (2.1)
   Tax bad debt
    deduction
    based on a
    percentage of
    taxable income          -0-          (0)       -0-          (0)   (25,638)       (2.2)
   State excise
    tax and other,
    net                  37,858         3.7    (29,171)       (3.6)    93,478         8.1
                       --------   ---------   --------   ---------   --------   ---------
                       $365,008       35.8 %  $224,800       27.8 %  $434,737       37.8 %
                       ========   =========   ========   =========   ========   =========
</TABLE>


Income taxes consist of:

<TABLE>
<CAPTION>

                                                             For the Years Ended December 31,
                                                             --------------------------------
                                                                1997       1996      1995
                                                             ---------   --------  ----------
<S>                                                           <C>        <C>       <C>

 Current                                                      $436,059   $206,216  $267,744

 Deferred (Benefit)                                            (71,051)    18,584   166,993
                                                              --------   --------  --------
                                                              $365,008   $224,800  $434,737
                                                              ========   ========  ========
</TABLE>

Deferred tax liabilities have been provided for taxable temporary differences
related to the allowance for loan losses, accumulated depreciation, investments
and loans. Deferred tax assets have been provided for deductible temporary
differences related to the allowance for loan losses and deferred loan fees.
The net deferred tax liability in the accompanying consolidated statements of
financial condition include the following components:

<TABLE>
<CAPTION>
                                                            As of December 31,
                                                            ------------------
                                                              1997      1996
                                                            --------  --------
<S>                                                         <C>       <C>
Deferred Tax Liabilities                                    $747,716  $583,986

Deferred Tax Assets                                          153,214    99,438
                                                            --------  --------
 Net Deferred Tax Liability                                 $594,502  $484,548
                                                            ========  ========

</TABLE>

In 1996, Congress enacted the Small Business Job Protection Act which
effectively removed any recapture provisions related to tax bad debt reserves
accumulated by the Association prior to 1988.  However, any reserves accumulated
after 1987 must be recaptured over a six year period.  The tax liability
associated with this recapture is included in the Association's deferred tax
liability as of December 31, 1997 and 1996. This change in tax law did not have
a significant impact on income tax expense in 1996.
<PAGE>

                                                                            -14-


NOTE 7 - REGULATORY MATTERS

The Association is subject to various regulatory capital requirements
administered by its primary federal regulator, the Office of Thrift Supervision
(OTS).  Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material affect on the Association and
the consolidated financial statements.  Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Association must meet specific capital guidelines involving quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices.  The Association's
capital amounts and classification under the prompt corrective action guidelines
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Management believes that the Association
meets all capital adequacy requirements to which it is subject.

Quantitative measures established by OTS regulations to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of "tangible
capital" and "core capital" to "adjusted total assets" and "risk based capital"
to "risk-weighted assets" (as defined in the regulations).  Reconciliation of
capital under generally accepted accounting principles to the capital amounts
per the regulations is as follows:

<TABLE>
<CAPTION>


                                                         As of December 31,
                                                      ------------------------
                                                         1997         1996
                                                      ----------   ----------
<S>                                                   <C>          <C>
Capital (total equity) per generally accepted
 accounting principles                                $7,051,888   $6,102,910
Less net unrealized gain on investment securities       (766,747)    (471,423)
                                                      ----------   ----------
Tangible capital per the regulations                   6,285,141    5,631,487
Less adjustments for core capital                            -0-          -0-
                                                      ----------   ----------
Core capital per the regulations                       6,285,141    5,631,487
Add allowable portion of allowance for loan losses       444,000      341,000
                                                      ----------   ----------
Risk-based capital per the regulations                $6,729,141   $5,972,487
                                                      ==========   ==========

</TABLE>

The Association's actual capital amounts and minimum capital requirements of the
OTS are presented in the following table.  All amounts are in thousands of
dollars.


<TABLE>
<CAPTION>

                                                                To Comply With
                                                                Minimum Capital
                                                     Actual      Requirements
                                                -------------   --------------
                                                Amount  Ratio   Amount  Ratio
                                                ------  -----   ------  ------
<S>                                             <C>     <C>     <C>     <C>
As of December 31, 1997:
------------------------

Tangible Capital (To Adjusted Total Assets)     $6,285    7.0%  $1,339    1.5%
Core Capital (To Adjusted Total Assets)         $6,285    7.0%  $2,677    3.0%
Risk-Based Capital (To Risk-Weighted Assets)    $6,729   19.0%  $2,826    8.0%




As of December 31, 1996:
------------------------

Tangible Capital (To Adjusted Total Assets)     $5,631    9.3%  $  909    1.5%
Core Capital (To Adjusted Total Assets)         $5,631    9.3%  $1,818    3.0%
Risk-Based Capital (To Risk-Weighted Assets)    $5,972   21.9%  $2,179    8.0%

</TABLE>
<PAGE>

                                                                            -15-

As of December 31, 1997, the Association is categorized as well capitalized
under the regulatory framework for prompt corrective action.  To be categorized
as well capitalized, the Association must maintain minimum total risk-based,
Tier I risk-based and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since that date that management believes have
changed the institution's category. The Association's actual capital amounts and
ratios are also presented in the following table.  All amounts are in thousands
of dollars.
<TABLE>
<CAPTION>

                                                                 To Be Well
                                                              Capitalized Under
                                                              Prompt Corrective
                                                Actual        Action Provisions
                                            -------------     -----------------
                                            Amount  Ratio     Amount     Ratio
                                            ------  -----     ------    -------
<S>                                         <C>     <C>       <C>       <C>
As of December 31, 1997:
------------------------
Total Capital (To Risk-Weighted Assets)     $6,729   19.0%    $3,533     10.0%
Tier I Capital (To Risk-Weighted Assets)    $6,285   17.8%    $2,120      6.0%
Tier I Capital (To Average Assets)          $6,285    8.3%    $2,250      5.0%
As of December 31, 1996:
------------------------
Total Capital (To Risk-Weighted Assets)     $5,972   21.9%    $2,724     10.0%
Tier I Capital (To Risk-Weighted Assets)    $5,631   20.7%    $1,634      6.0%
Tier I Capital (To Average Assets)          $5,631    9.8%    $2,866      5.0%

</TABLE>

In 1996 Congress enacted the Deposit Insurance Funds Act, which required the
Association to pay a special assessment to the Federal Deposit Insurance
Corporation of $316,765 in November 1996.


NOTE 8 - RETIREMENT PLANS

The Association has established a 401(k) retirement plan which allows eligible
officers and employees to contribute up to fifteen percent of their annual
compensation on a tax-deferred basis.  The Association has the option, at the
discretion of the board of directors, to make contributions to the plan.  Total
retirement plan expense was $42,038, $36,521, and $40,147 for the years ended
December 31, 1997, 1996, and 1995, respectively.

In June 1997, the Association established a long-term incentive plan for the
board of directors to provide target retirement benefits of 75% of board fees
for ten years for directors who retire with twenty or more years of service.
Activity in the directors' retirement plan for the year ended December 31, 1997
is as follows:
<TABLE>
<CAPTION>
<S>                                                      <C>
Liability balance at beginning of year                  $     -0-
Accrued and expensed for 1997                             150,991
Death benefit payment                                     (25,810)
                                                        ---------
Liability balance at end of year                        $ 125,181
                                                        =========
</TABLE>


NOTE 9 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Association's business activity is with customers located within
East Tennessee.  Investments in state and municipal securities involve
governmental entities within the State of Tennessee.  As of December 31, 1997,
the Association had concentrations of loans in real estate lending and consumer
lending.  Generally these loans are secured by the underlying real estate and
consumer goods.  The usual risk associated with such concentrations are
generally mitigated by being spread over several hundred unrelated borrowers and
by adequate collateral loan to value ratios.


NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES

The Association is subject to claims and lawsuits which arise primarily in the
ordinary course of business.  It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the consolidated financial position of the
Association.
<PAGE>

                                                                            -16-

NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107, Disclosures About Fair Value of Financial
Instruments (SFAS No. 107), which requires the Association to disclose the fair
value of financial instruments, both assets and liabilities recognized and not
recognized in the consolidated statements of financial condition, for which it
is practicable to estimate fair value.

According to SFAS No. 107, a financial instrument is defined as cash, evidence
of an ownership interest in an entity, or a contract that both:  (1) imposes on
one entity a contractual obligation to deliver cash or another financial
instrument to a second entity, or to exchange other financial instruments on
potentially unfavorable terms with the second entity, and (2) conveys to that
second entity a contractual right to receive cash or another financial
instrument from the first entity, or to exchange other financial instruments on
potentially favorable terms with the first entity.

SFAS No. 107 also states that the fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.  Quoted
market prices in an active market, if available, are the best evidence of the
fair value of financial instruments. For financial instruments that do not trade
regularly, management's best estimate of fair value is based on either the
quoted market price of a financial instrument with similar characteristics or on
valuation techniques such as the present value of estimated future cash flows
using a discount rate commensurate with the risks involved.

For the Association, as for most financial institutions, the majority of its
assets and liabilities are considered financial instruments as defined above.
However, a large majority of those assets and liabilities do not have an active
trading market nor are their characteristics similar to other financial
instruments for which an active trading market exists.  In addition, it is the
Association's practice and intent to hold the majority of its financial
instruments to maturity and not to engage in trading or sales activities.
Therefore, much of the information as well as the amounts disclosed below are
highly subjective and judgmental in nature.  The subjective factors include
estimates of cash flows, risks characteristics, credit quality, and interest
rates, all of which are subject to change.  Because the fair value is estimated
as of the dates indicated, the amounts which will actually be realized or paid
upon settlement or maturity of the various financial instruments could be
significantly different.

The estimates of fair value are based on existing financial instruments without
attempting to estimate the value of anticipated future business or activity nor
the value of assets and liabilities that are not considered financial
instruments.  For example, the value of mortgage loan servicing rights and the
value of the Association's long-term relationships with depositors, commonly
known as core deposit intangibles, have not been considered in the estimates of
fair values presented below.  In addition, the tax implications related to the
realization of unrealized gains and losses can have a significant effect on fair
value estimates and have not been included in the estimated fair values below.

The following methods and assumptions were used to estimate the fair value of
the following classes of financial instruments:

CASH RECEIVED FOR STOCK SUBSCRIPTIONS AND ESCROW ACCOUNTS FOR STOCK
SUBSCRIPTIONS - For these short-term assets and liabilities, the recorded book
value is a reasonable estimate of fair value.
<PAGE>

                                                                            -17-

CASH AND AMOUNTS DUE FROM DEPOSITORY INSTITUTIONS - For these short-term
instruments, the recorded book value is a reasonable estimate of fair value.

INVESTMENT SECURITIES - Quoted market prices are used to determine the estimated
fair value of investment securities that are marketable.  Fair value for
nonmarketable securities is estimated to be equivalent to historical cost.

LOANS RECEIVABLE, NET - The estimated fair value of fixed rate mortgage loans is
calculated by discounting future cash flows to their present value.  Future cash
flows, consisting of both principal and interest payments, are discounted using
current local market rates for similar loans with similar maturities.  The
estimated fair value of variable rate loans is considered equal to recorded book
value.  The estimated fair value of the allowance for loan losses is considered
to be its recorded book value.  Additionally, the credit exposure known to exist
in the loan portfolio is embodied in the allowance for loan losses.

DEPOSITS - The estimated fair value of demand, savings, NOW and money market
deposits is the amount payable on demand at the reporting date.  The fair value
of fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar maturities.

OFF-BALANCE-SHEET LOAN COMMITMENTS - The fair value of loan commitments is based
on 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.
The fair value of these items is not material to the Association as of the dates
indicated below.

The recorded book value and estimated fair value of the Association's financial
instruments are as follows (amounts in thousands):

<TABLE>
<CAPTION>

                                  As of December 31, 1997  As of December 31, 1996
                                  -----------------------  -----------------------
                                    Recorded    Estimated    Recorded    Estimated
                                      Book         Fair        Book         Fair
                                      Value        Value       Value        Value
                                  ----------  -----------  ----------  -----------
 <S>                               <C>         <C>          <C>         <C>
 FINANCIAL ASSETS:
  Cash Received for Stock
  Subscriptions                      $23,598      $23,598     $   -0-      $   -0-
 Cash and Amounts Due
  From Depository Institutions       $ 1,892      $ 1,892     $ 2,889      $ 2,889
 Investment Securities -
  Available for Sale                 $15,204      $15,204     $11,689      $11,689
 Investment Securities - Held
  to Maturity                        $ 1,077      $ 1,105     $ 1,212      $ 1,241
 Loans Receivable, Net               $47,158      $47,890     $44,230      $44,328

FINANCIAL LIABILITIES:
Escrow Accounts for Stock
Subscriptions                        $23,598      $23,598     $   -0-      $   -0-
Other Deposits                       $58,071      $58,134     $53,767      $53,838
</TABLE>
<PAGE>

                                                                            -18-



NOTE 12 - STOCK CONVERSION

In May 1997, the board of directors approved a plan of reorganization from a
mutual savings association to a capital stock savings bank and the concurrent
formation of a holding company. In November 1997 the Office of Thrift
Supervision approved the plan of conversion subject to the approval of the
members, and in December 1997 the members of the Association also approved the
plan of conversion. The conversion was accomplished effective January 1, 1998
through amendment of the Association's charter and the sale of the Holding
Company's (United Tennessee Bankshares, Inc.) common stock in an amount equal to
the appraised pro forma consolidated market value of the Holding Company and the
Association after giving effect to the conversion.  A subscription offering of
the shares of common stock was offered to depositors, borrowers, directors,
officers, employees and employee benefit plans of the Association and to certain
other eligible subscribers. The subscription offering opened on November 20,
1997 and closed on December 16, 1997. The Association held cash receipts of
$23,598,226 as of December 31, 1997 in escrow accounts for stock subscribers.
These funds were invested in overnight deposits at the Federal Home Loan Bank of
Cincinnati. On January 1, 1998, in accordance with its approved plan of
conversion, the Holding Company issued 1,454,750 of its $10 par value stock
providing gross receipts of $14,547,500. The remainder of the subscription
receipts were returned to subscribers in January 1998. On January 1, 1998, the
Association changed its name to Newport Federal Bank and issued 100,000 shares
of its $1 par value stock to the Holding Company in exchange for $7,100,000.

Conversion costs were being deferred until completion of the conversion.  As of
December 31, 1997, conversion costs that had been incurred and deferred totaled
$466,862. Total conversion costs of $571,822 were repaid to the Association by
the Holding Company in January 1998, and the Holding Company deducted them from
the proceeds of the shares sold in the conversion.

At the time of the conversion, the Association was required to establish a
liquidation account in an amount equal to its capital as of June 30, 1997.  The
liquidation account will be maintained for the benefit of eligible
accountholders who continue to maintain their accounts at the Bank after the
conversion.  The liquidation account will be reduced annually to the extent that
eligible accountholders have reduced their qualifying deposits as of each
anniversary date. Subsequent increases will not restore an eligible
accountholder's interest in the liquidation account.  In the event of a complete
liquidation, each eligible accountholder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
current adjusted qualifying balances for accounts then held. The Bank and the
Holding Company will be subject to several restrictions concerning the
repurchase of stock and dividend payment restrictions pursuant to the applicable
rules and policies of the OTS.