Exhibit 13

                        UNITED TENNESSEE BANKSHARES, INC.

                                  ANNUAL REPORT

                                      2002




<PAGE>


                       United Tennessee Bankshares, Inc.
                                   P O Box 249
                          Newport, Tennessee 37822-0249
Phone: (423)623-6088                                           Fax (423)625-0301


To our Stock Holders

We are  delighted to present this Annual Report to our  Shareholders.  This past
year has been a  difficult  year for our  country,  the  economy  and the  stock
market.  We would like to express our  appreciation  to the brave people in this
country for the job they have done.

United Tennessee Bankshares, Inc. grew from $100 million at December 31, 2001 to
over $111 million at December 31, 2002.  Our loan  portfolio grew over 6 million
or 8.5% and our  deposits  grew  8.9  million  or  10.5%.  Shareholder's  equity
increased  by  $1,757,000  or 12.4%.  The increase in  shareholder's  equity was
accomplished while buying back and canceling 29,888 shares of stock.

We are very  pleased  with our results of  operations  in 2002.  Total  interest
income decreased by $219,000 in 2002 while total interest  expense  decreased by
$1,485,000.  We  increased  our  provision  for loan losses by $19,000 due to an
increase in loans during the year. We increased  non-interest  income by $54,000
and non-interest  expense by $198,000.  We are pleased to report that the result
of  this  is the  most  profitable  year  in the  history  of  United  Tennessee
Bankshares,  Inc. Net profit  increased by $650,000 or 58%. We congratulate  the
staff for their hard work that made these results possible.

The 2002 year was not a good year for stock  values in  general;  however,  UTBI
stock did manage to increase in value from $8.41 on December  31, 2001 to $11.64
on  December  31.  2002.  We  continue  to strive to provide  good value for our
stockholders  and try to access  the impact on  stockholders  value in all major
decision-making. We continue to be a well-capitalized institution poised to take
advantage of the opportunities afforded to us in our competitive market place.

Please review this Annual Report, which more fully describes our performance. We
appreciate your investment in United Tennessee Bankshares,  Inc. and invite your
continue  support of Newport Federal Bank,  Newport's truly home owned community
bank.

Sincerely,

/s/ Richard Harwood
-------------------
Richard Harwood
President




<PAGE>


                        UNITED TENNESSEE BANKSHARES, INC.

United  Tennessee  Bankshares,  Inc.  United  Tennessee  Bankshares,  Inc.  (the
"Company") became the holding company for Newport Federal Bank (the "Bank") upon
its conversion from mutual to stock form (the "Conversion"), which was completed
on January 1, 1998. In connection with the Conversion,  the Company conducted an
initial public offering of 1,454,750 shares of Common Stock at a price of $10.00
per share,  realizing gross proceeds of $14.5 million. The Company purchased all
of the Bank's  capital stock with $7.1 million of the net offering  proceeds and
retained  the  remaining  $6.9  million in net  proceeds at the holding  company
level.  Prior to January 1, 1998, the Company had no assets or  liabilities  and
engaged in no business activities. The Company's assets currently consist of its
investment  in the  Bank,  a  $517,000  loan  to the  Company's  Employee  Stock
Ownership Plan ("ESOP") and approximately $564,000 in liquid assets.

The  Company's  executive  offices  are  located  at 344 W.  Broadway,  Newport,
Tennessee 37821-0249, and its telephone number is (423) 623-6088.

Newport  Federal Bank.  The Bank was organized as a federally  chartered  mutual
savings  institution  in 1934 under the name  Newport  Federal  Savings and Loan
Association. Effective January 1, 1998, the Bank became a stock savings bank and
changed its name to Newport  Federal Bank. The Bank currently  operates  through
three  full-service  banking offices located in Newport,  Tennessee.  The Bank's
deposits are insured to applicable limits by the Savings  Association  Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").

The Bank attracts  deposits  from the general  public and invests those funds in
loans secured by first mortgages on owner-occupied,  single-family residences in
its market  area and,  to a lesser  extent,  commercial  real  estate  loans and
consumer  loans.  The Bank also  maintains a substantial  investment  portfolio,
consisting  primarily of  mortgage-backed  securities issued by the Federal Home
Loan  Mortgage   Corporation   ("FHLMC"),   the  Government   National  Mortgage
Association  ("GNMA"),  or the Federal National Mortgage  Association  ("FNMA"),
obligations  of  the  federal  government  and  agencies  and   investment-grade
obligations of states and political subdivisions.

The Bank derives income  principally  from interest earned on loans,  investment
securities and other interest-earning  assets. The Bank's principal expenses are
interest  expense  on  deposits  and  noninterest   expenses  such  as  employee
compensation,  deposit  insurance and  miscellaneous  other expenses.  Funds for
these  activities  are provided  principally  by deposit  growth,  repayments of
outstanding loans and investment  securities,  and other operating revenues and,
from  time to time,  advances  from the  Federal  Home  Loan  Bank  ("FHLB")  of
Cincinnati of which the Bank is a member.


                                       1








<PAGE>



             MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's  Common Stock trades on the NASDAQ  SmallCap Market (SM) under the
symbol "UTBI." There are approximately  1,311,124 shares of the Company's Common
Stock  outstanding,  and approximately  550 record holders.  The following table
sets forth the high and low closing sale prices for the Common Stock as reported
on the NASDAQ  SmallCap  Market (SM) for each quarter during the last two fiscal
years along with the amount of dividends declared during each quarter.


         Quarter Ended              High             Low             Dividends
         --------------             ----             ---             ---------
         March 31, 2002          $  9.75          $  8.41              $ 0.00
         June 30, 2002             11.75             9.50                0.30
         September 30, 2002        11.65            10.50                0.00
         December 31, 2002         14.02            11.64                0.00

         March 31, 2001          $  9.25         $   8.25              $ 0.00
         June 30, 2001             9.063             8.39                0.30
         September 30, 2001         9.20             8.40                0.00
         December 31, 2001          9.10             8.41                0.00


                                       2





<PAGE>


                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Selected Consolidated Financial Condition Data

<TABLE>
<CAPTION>

                                                                                  At December 31,
                                                 --------------------------------------------------------------
                                                   2002            2001         2000         1999        1998
                                                 --------        --------     --------     --------    --------
<S>                                              <C>          <C>          <C>          <C>          <C>
                                                                  (Dollars in thousands)

Total assets................................     $  111,753   $  100,811   $   98,553   $   94,120   $   97,070
Loans receivable, net.......................         78,362       72,200       68,878       61,516       53,346
Cash and amounts due from
  depository institutions...................          5,350        2,123        3,067        2,387        6,131
Investment securities:
    Available for sale......................         25,267       24,398       24,357       27,935       33,022
    Held to maturity........................             --           --           --           --        2,431
Deposits....................................         93,747       84,810       81,614       73,810       69,835
Shareholders' equity........................         15,925       14,168       13,330       11,901       19,970

Number of:
   Real estate loans........................          1,515        1,483        1,495        1,416        1,433
   Deposit accounts.........................          8,213        8,434        8,719        8,115        8,488
   Offices..................................              3            3            3            3            3

Selected Consolidated Operations Data
                                                                       Year Ended December 31,
                                                ---------------------------------------------------------------
                                                   2002            2001         2000         1999         1998
                                                 ----------   ----------   ----------   ----------   ----------
                                                     (Dollars in thousands, except per share data)

Interest income............................      $    7,213   $    7,432   $    7,251   $    6,719   $    5,783
Interest expense...........................           2,122        3,608        4,093        3,328        2,609
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income........................           5,091        3,824        3,158        3,391        3,174
Provision for loan losses..................             129          110           37           24           24
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses................           4,962        3,714        3,121        3,367        3,150
Noninterest income.........................             413          359          276          133          167
Noninterest expense........................           2,635        2,437        2,240        2,299        1,547
                                                 ----------   ----------   ----------   ----------   ----------
Income before income taxes and
  accounting change........................           2,740        1,636        1,157        1,201        1,770
Income taxes...............................             978          525          355          458          652
                                                 ----------   ----------   ----------   ----------   ----------
Income before accounting change............           1,762        1,111          802          743        1,118
Net effect of change in accounting
  principle................................              --           --           --           --          (16)
                                                 ----------   ----------   ----------   ----------   ----------
Net income.................................      $    1,762   $    1,111   $      802   $      743   $    1,102
                                                 ==========   ==========   ==========   ==========   ==========
Earnings per share:
  Basic....................................      $     1.33   $     0.82   $     0.58   $     0.54   $     0.77
                                                 ==========   ==========   ==========   ==========   ==========
  Fully diluted............................      $     1.33   $     0.82   $     0.58   $     0.53   $     0.77
                                                 ==========   ==========   ==========   ==========   ==========
</TABLE>
                                       3
<PAGE>

                                 Selected Ratios

<TABLE>
<CAPTION>

                                                                     At or for the
                                                                Year Ended December 31,
                                                 --------------------------------------------------------------
                                                   2002         2001         2000         1999         1998
                                                 --------     --------     --------     --------     --------
<S>                                                <C>          <C>          <C>         <C>          <C>

Performance Ratios:
  Return on average assets (net income
    divided by average total assets).............   1.63%       1.09%        0.83%         0.78%        1.37%
  Return on average equity (net income
    divided by average equity)...................  11.72        7.77         6.36          4.30         5.49
  Dividend Payout Ratio (dividends
    per share divided by earnings
    per share)...................................  22.56       36.59        51.72        796.30        38.96
  Interest rate spread (combined
    weighted average interest rate
    earned less combined weighted
    average interest rate cost)..................   4.70        3.30         2.70          2.90         3.00
  Net interest margin (net interest
    income divided by average
    interest-earning assets).....................   4.87        3.86         3.40          3.60         4.10
  Ratio of average interest-earning
    assets to average interest-bearing
    liabilities.................................. 113.31      115.29       114.60        121.60       130.60
  Ratio of noninterest expense to
    average total assets.........................   2.41        2.40         2.33          2.40         1.94
  Efficiency Ratio (noninterest expense
    divided by total of net interest income
    and noninterest income)......................  47.51       58.26        65.23         65.23        46.80

Asset Quality Ratios:
  Nonperforming assets to total assets
    at end of period.............................   0.74        0.99         0.57          0.48         0.50
  Nonperforming loans to total loans at
    end of period................................   1.06        1.38         0.79          0.59         0.88
  Allowance for loan losses to total
    loans at end of period.......................   1.02        1.00         0.95          1.06         1.18
  Allowance for loan losses to non-
    performing loans at end of
    period....................................... 239.00      170.86       118.28        175.33       132.98
  Provision for loan losses to total
    loans .......................................   0.16        0.15         0.05          0.04         0.04
  Net charge-offs to average loans
    outstanding..................................   0.06        0.07         0.06          0.01         0.02

Capital Ratios:
  Equity to total assets at end of period........  14.25       14.05        13.53         12.64        20.57
  Average equity to average assets...............  13.94       14.05        13.10         18.08        24.95

</TABLE>

                                        4
<PAGE>


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


The Company's  principal  business  activities are conducted  through its wholly
owned subsidiary,  the Bank. The Bank's principal business consists of accepting
deposits from the general  public through its main office and branch offices and
investing  those  funds  in  loans  secured  by  one-to-four-family  residential
properties  located  in its  primary  market  area.  The Bank also  maintains  a
portfolio of investment securities and originates a limited amount of commercial
real estate loans and consumer loans. The Bank's investment securities portfolio
consists of U.S. Treasury and U.S. government agency securities, local municipal
bonds and  mortgage-backed  securities  which are guaranteed as to principal and
interest by the FHLMC, GNMA, FNMA or other governmental  agencies. The Bank also
maintains an investment in FHLB of Cincinnati common stock and FHLMC stock.

The Bank's net income primarily depends on its net interest income, which is the
difference between interest income earned on loans and investment securities and
interest paid on customers' deposits,  FHLB advances, and other borrowings.  The
Bank's  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 its operations.

The  Bank's  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.  The Bank's  lending
activities  are  influenced by demand for and supply of housing and  competition
among  lenders and the level of interest  rates in its market  area.  The Bank's
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 its market area.

Asset/Liability Management

Net interest  income,  the primary  component of the  Company's  net income,  is
determined  by the  difference  or  "spread"  between  the  yield  earned on its
interest-earning assets and the rates paid on its 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 its assets and  liabilities  may be  analyzed by
examining  the extent to which its  assets and  liabilities  are  interest  rate
sensitive and by monitoring the expected effects of interest rate changes on its
net portfolio value.

An asset or liability is interest rate  sensitive  within a specific time period
if it will mature or reprice  within that time period.  If the Company's  assets
mature or reprice more quickly or to a greater extent than its liabilities,  its
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 its assets  mature or reprice more slowly or to a lesser  extent than
its  liabilities,  its 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.  The Company's 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) it has 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,  it emphasizes the origination of variable rate mortgage loans,  and
it makes limited amounts of shorter term consumer loans.

The OTS  requires  the Bank to  measure  its  interest  rate  risk by  computing
estimated  changes  in the net  portfolio  value  ("NPV") of its 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 its NPV of sudden and  sustained 1% to 3% increases  and  decreases in market
interest rates.  The Bank's board of directors has adopted an interest rate risk
policy which establishes  maximum decreases in its estimated NPV in the event of
1%, 2% and 3% increases and decreases in market interest rates, respectively.

                                       5
<PAGE>

The following table sets forth its policy limits and certain calculations, based
on information  provided to the Bank by the OTS, with respect to the sensitivity
of its NPV to changes in market interest rates at December 31, 2002.

         Change in                                   Change in NPV
Market Interest Rates                    Policy Limit            Computation
----------------------                   ------------           -------------

            +3%                             (50)%                     (22)%
            +2%                             (25)                      (13)
            +1%                             (10)                       (6)
             0%                              --                        --
            -1%                             (10)                        *
            -2%                             (25)                        *
            -3%                             (50)                        *

------
*  No loss calculated.

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

While the Company cannot  predict future  interest rates or their effects on its
NPV or net interest income,  it does not expect current interest rates to have a
material  adverse  effect on its NPV or net interest  income in the near 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.

The  Company's  Board of Directors is  responsible  for  reviewing its 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.
The  Company's  management is  responsible  for  administering  the policies and
determinations of the Board of Directors with respect to its asset and liability
goals and strategies.

Average Balances, Interest and Average Yields

The  following  table  sets  forth   information  about  the  Company's  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  indicated.  Average  balances are
derived from  month-end  balances.  The Company does not believe that the use of
month-end balances instead of daily balances has caused any material  difference
in  the  information  presented.  The  average  balance  and  average  yield  on
investment  securities  is  based on the  estimated  fair  value  of  securities
available for sale. 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,  which are not  considered to
significant to the yield on investment securities.

The following table also sets forth  information for the periods indicated about
the  difference   between  the  Company's   weighted  average  yield  earned  on
interest-earning  assets and its 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 interest margin," 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.

                                       6

<PAGE>

<TABLE>
<CAPTION>

                                                                     For the Year Ended December 31,
                                  -----------------------------------------------------------------------------------------------
                                              2002                              2001                               2000
                                  --------------------------------   -----------------------------   ----------------------------
                                                           Average                         Average                        Average
                                  Average                  Yield/    Average                Yield/   Average              Yield/
                                  Balance     Interest      Cost     Balance    Interest    Cost     Balance   Interest    Cost
                                 -------     --------     -------   -------    --------    ------    -------   --------   -------

<S>                                <C>        <C>          <C>     <C>       <C>          <C>      <C>          <C>         <C>
                                                                              (Dollars in thousands)
Assets
Interest-earning assets:
Loans receivable (1)............   $ 77,038   $ 5,972      7.8%    $ 72,158  $ 5,962       8.3%      $ 65,197     $ 5,480    8.4%
Investment securities...........     24,534     1,211      4.9       24,388    1,362       5.6         26,146       1,603    6.1
Other interest-earning assets...      1,463        30      2.1        2,590      108       4.2          2,727         168    6.2
                                   --------   -------              --------  -------                 --------     -------
    Total interest-earning assets   103,035     7,213      7.0       99,136    7,432       7.5         94,070       7,251    7.7
Noninterest-earning assets......      4,783        --                 2,595       --                    2,267          --
                                   --------   -------              --------  -------                 --------     -------
    Total assets................   $107,818     7,213              $101,731  $ 7,432                 $ 96,337     $ 7,251
                                   ========   =======              ========  =======                 ========     =======

Interest-bearing liabilities:
  Deposits......................   $ 90,844   $ 2,122      2.3     $ 85,330  $ 3,570       4.2       $ 77,712     $ 3,779    4.9
  FHLB advances and note payable         88        --      0.0          658       38       5.8          4,360         314    7.2
                                   --------   -------              --------  -------                 --------     -------
Total interest-bearing liabilities   90,932     2,122      2.3       85,988    3,608       4.2         82,072       4,093    5.0
Noninterest-bearing liabilities.      1,852        --                 1,452       --                    1,649          --
                                   --------   -------              --------  -------                 --------     -------
    Total liabilities...........     92,784     2,122                87,440    3,608                   83,721       4,093
Shareholders' equity............     15,034        --                14,291       --                   12,616          --
                                   --------   -------              --------  -------                 --------     -------
    Total liabilities and equity   $107,818   $ 2,122              $101,731  $ 3,608                 $ 96,337     $ 4,093
                                   ========   =======              ========  =======                 ========     =======
Net interest income.............              $ 5,091                        $ 3,824                              $ 3,158
                                              =======                        =======                              =======
Interest rate spread............                           4.7%                            3.3%                              2.7%
                                                           ====                           =====                             =====
Net interest margin.............                           4.9%                            3.9%                              3.4%
                                                           ====                           =====                             =====
Ratio of average interest-earning assets
  to average interest-bearing
  liabilities...................                         113.3%                          115.3%                            114.6%
                                                         ======                          ======                            ======
</TABLE>

---------------------------
(1)  Includes nonaccrual loans.

                                       7
<PAGE>


Rate/Volume Analysis

The  following  table  sets forth  information  about  changes in the  Company's
interest  income  and  interest  expense  for the  periods  indicated.  For each
category   of   interest-earning   assets  and   interest-bearing   liabilities,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes in volume  multiplied by prior period  rate);  and (ii) changes in rate
(changes in rate  multiplied  by prior period  volume).  Changes in  rate-volume
(changes  in rate  multiplied  by the  changes  in volume)  have been  allocated
between changes in rate and changes in volume proportionately.
<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                         -----------------------------------------------------------------
                                           2002      vs.     2001              2001     vs.    2000
                                         -------------------------------   -------------------------------
                                              Increase (Decrease)                 Increase (Decrease)
                                                   Due to                              Due to
                                         -------------------------------   -------------------------------
                                           Volume       Rate       Total      Volume      Rate      Total
                                           ------       ----       -----      ------      ----      -----
                                                                    (In thousands)
<S>                                      <C>         <C>        <C>         <C>        <C>        <C>

Interest income:
  Loans receivable....................   $   388     $  (378)   $     10    $   551    $   (69)   $  482
  Investment securities...............         7        (158)       (151)      (108)      (133)     (241)
  Other interest-earning assets.......       (28)        (50)        (78)        (8)       (52)      (60)
                                         --------    --------   ---------   --------   --------   -------
      Total interest-earning assets...       367        (586)       (219)       435       (254)      181
                                         --------    --------   ---------   --------   --------   -------
Interest expense:
  Deposits............................       132      (1,580)     (1,448)       390       (599)     (209)
  FHLB advances and note payable......         0         (38)        (38)      (225)       (51)     (276)
                                         --------    --------   ---------   --------   --------   -------
      Total interest-bearing liabilities     132      (1,618)     (1,486)       165      (650)      (485)
                                         --------    --------   ---------   --------   --------   -------
Change in net interest income.........   $   235     $ 1,032    $  1,267    $   270    $   396    $  666
                                         ========    ========   =========   ========   ========   =======

</TABLE>

Comparison of Financial Condition at December 31, 2002 and December 31, 2001

Total assets increased $11.0 million,  or 10.9%, from $100.8 million at December
31, 2001 to $111.8  million at December 31, 2002.  The Company's  asset increase
was  attributable  principally  to an increase  in loans of $6.2  million and an
increase in cash and amounts due from depository  institutions of  approximately
$3.2 million.

Investment  securities available for sale increased  approximately  $900,000, or
3.6%,  from $24.4  million at December 31, 2001 to $25.3 million at December 31,
2002. The Company receives principal  repayments on  mortgage-backed  securities
and proceeds from  maturities and sales of investment  securities  available for
sale.  The Company has  reinvested  the proceeds  from  maturities  and sales of
investment securities.

Loans receivable  increased $6.2 million, or 8.6% from $72.2 million at December
31,  2001 to  $78.4  million  at  December  31,  2002 as  originations  exceeded
repayments for the period by  approximately  $6.2 million.  Loan growth occurred
primarily in the one-to-four-family  residential loan portfolio, which increased
$5.7 million, or 10.0%.

Total deposits increased $8.9 million,  or 10.5%, from $84.8 million at December
31, 2001 to $93.7  million at December 31, 2002.  The increase was primarily due
to money market deposit  account growth of $7.7 million or 87.1%. As certificate
of deposit rates continued to fall in 2002,  customers  deposited money into the
money market demand accounts anticipating rate increases in later periods.

The Company's  shareholders'  equity increased $1.7 million, or 12.0% from $14.2
million at December 31, 2001 to $15.9 million at December 31, 2002. The increase
was due  principally  to net  income of $1.76  million  and other  comprehensive
income of $252,000 and distribution of stock held in trust accounts of $372,000.
The increase in retained  earnings was partially offset by $398,000 of dividends
paid to shareholders during the year and the purchase and retirement of $157,000
of common stock.


                                       8
<PAGE>


Comparison of Results of Operations for the Years Ended December 31, 2002,  2001
and 2000

Net income  was  $1,762,000  for the year  ended  December  31,  2002  primarily
compared to net income of  $1,111,000  for the year ended  December 31, 2001 and
net income of $802,000 for the year ended December 31, 2000. The increase in net
income during 2002 was primarily due to a decrease in interest expense offset by
a slight decrease in interest income and an increase in noninterest expense. Net
income for 2002  resulted  in a return on average  assets of 1.63%  compared  to
1.09% for 2001 and 0.83% for 2000,  and a return on average equity of 11.72% for
2002 as compared to 7.77% for 2001 and 6.36% for 2000.

Interest  Income.  Interest  income totaled $7.2 million,  $7.4 million and $7.3
million for the years ended  December  31,  2002,  2001 and 2000,  respectively,
primarily  due to increases in the average  balance of  interest-bearing  assets
during  each of the last three  years.  The  average  yield on  interest-earning
assets  decreased  to 7.0% in 2002  from  7.5% in 2001  and  7.7% in  2000.  The
decrease in 2002 was  attributable  to a decrease in rates on loans,  investment
securities  and  other   interest-earning   assets.   The  average   balance  of
interest-earning assets increased $3.9 million in 2002, $5.1 million in 2001 and
$686,000 in 2000  primarily  in response to  corresponding  increases in deposit
accounts and borrowings.

The Company's  primary source of interest income for the three-year period ended
December  31,  2002  was from  loans  receivable.  Interest  income  from  loans
receivable  was $6.0 million,  $6.0 million and $5.5 million for the years ended
December  31, 2002,  2001 and 2000,  respectively.  The average  yield earned on
loans  receivable  was 8.4% in 2000,  decreased to 8.3% in 2001 and decreased to
7.8% in 2002.  The average  balances of loans  receivable  increased  during the
period with a $7.8 million increase in 2000, a $7.0 million increase in 2001 and
a $4.9 million  increase in 2002 due to strong loan demand in the Bank's  market
area. Interest income on investment securities decreased in 2002 by $151,000 due
to a 70 basis point decrease in average rates, and decreased in 2001 by $241,000
due to a 50 basis point  decrease in average  rates,  and  decreased  in 2000 by
$132,000 due to a $5.5 million decrease in average balances and a 60 basis point
decrease in average rates.

Interest Expense.  Interest expense totaled $2.1 million,  $3.6 million and $4.1
million  for  the  three  years  ended   December  31,  2002,   2001  and  2000,
respectively.  The  decrease in interest  expense  during 2002 was due to an 190
basis point  decrease in average  rates.  Since the average rate received on the
Bank's interest-earning assets decreased,  management reduced the interest rates
paid on  interest-bearing  liabilities.  The decrease in interest expense during
2001 was due to a 70 basis point decrease in average rates  partially  offset by
an $8.5 million increase in average interest-bearing  liabilities.  The increase
in interest  expense during 2000 was due to a 80 basis point increase in average
rates.

Net Interest Income. Net interest income was $5.1 million, $3.8 million and $3.2
million for the years ended  December 31, 2002,  2001 and 2000. The net interest
spread for 2002 was 4.7% compared to 3.3% in 2001 and 2.7% in 2000. The ratio of
average   interest-earning  assets  to  average   interest-bearing   liabilities
increased from 114.6% in 2000 to 115.3% in 2001 and decreased in 2002 to 113.3%.
The Company's net interest  margin  increased in 2001 to 3.9% from 3.4% in 2000.
In 2002, the Company's net interest margin  increased to 4.9% from 3.9% in 2001,
primarily due to liabilities  repricing much more quickly than assets. Since the
Bank is  liability  sensitive,  it usually  will have  increases in net interest
income in a falling rate environment.

Provision  for Loan Losses.  The  provision for loan losses was $129,000 in 2002
and $110,000 in 2001 and $37,000 in 2000. The amount of provision 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  management's  analysis of various risk factors
that affect the loan portfolio.  In 2002, the Company increased its provision to
$129,000  for the year due to an  increase  in the  Bank's  loan  portfolio.  At
December  31,  2002,  the  ratio of the  allowance  to  nonperforming  loans was
239.00%.

Noninterest  Income.  Noninterest  income for the years ended December 31, 2002,
2001 and 2000 was  $413,000,  $359,000 and $276,000,  respectively.  Noninterest
income consists primarily of customer service fees related to customers' deposit
accounts and loan service  charges.  Noninterest  income  increased from 2001 to
2002  primarily  due to  gains on sales of  investment  securities  of  $46,000.
Noninterest  income increased from 2000 to 2001 due to an increase in the number
of deposit accounts and the restructuring of deposit fees.

                                       9
<PAGE>

Noninterest Expense.  Noninterest expense for the years ended December 31, 2002,
2001 and 2000 was $2.6 million, $2.4 million and $2.2 million, respectively. The
increase  in  noninterest  expense in 2002 was  primarily  due to  increases  in
compensation  and benefits  expense and  occupancy and  equipment  expense.  The
increase  in  noninterest  expense in 2001 was  primarily  due to  increases  in
compensation  and benefits  expense,  data  processing  fees and advertising and
promotion fees.

The  Company's   operating   efficiency,   measured  by  its  efficiency  ratios
(noninterest expense divided by the total of net interest income and noninterest
income),  for the years ended December 31, 2002, 2001, and 2000 was 47.5%, 58.3%
and 65.2%.  The  decrease in the ratio during 2002 was due to an increase in net
interest income and  noninterest  income.  The ratios of noninterest  expense to
average total assets were 2.4%,  2.4%, and 2.3% for the years ended December 31,
2002, 2001 and 2000, respectively.

Income Taxes. The Company's  effective tax rate was 35.7%,  32.1%, and 30.7% for
the years ended December 31, 2002,  2001 and 2000,  respectively.  The Company's
effective tax rates for 2001 and 2000 were lower than 2002 due to adjustments in
the Bank's  deferred  income  tax  liabilities  in  accordance  with  applicable
accounting  standards.  See  Note  8 of  the  Notes  to  Consolidated  Financial
Statements.

Sources of Capital and Liquidity

The  Bank  has  historically  maintained  substantial  levels  of  capital.  The
assessment  of capital  adequacy  depends on several  factors,  including  asset
quality,  earnings trends, liquidity and economic conditions.  The Company seeks
to  maintain  high  levels of  regulatory  capital to give the  Company  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 its policy of moderate
growth  generally  confined to its market area.  Average equity to average total
assets  at  December  31,  2002,  2001 and 2000 was  13.9%,  14.1%,  and  13.1%,
respectively.  At December 31, 2002,  the Bank  exceeded all current  regulatory
capital requirements and met the definition of a "well capitalized" institution,
the highest regulatory category.

The Bank seeks 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.  Historically, the Bank has been able to meet its liquidity demands
through internal sources of funding.

The  Company's  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 its  operating,
financing and  investing  activities  during any given  period.  At December 31,
2002, 2001 and 2000, cash and amounts due from depository  institutions  totaled
$5.4 million, $2.1 million and $3.1 million, respectively.

The Company's 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. The Company does not solicit
deposits  outside  of  its  market  area  through  brokers  or  other  financial
institutions.  However, the Company has received deposit relationships  referred
to it from a broker  during  2002 which  total  approximately  $4.89  million at
December 31, 2002.

The Company has also  designated all of its  investment  securities as available
for sale in order to meet  liquidity  demands.  At  December  31,  2002,  it had
designated  securities with a fair value of $25.3 million as available for sale.
In addition to internal sources of funding,  the Company as a member of the FHLB
of Cincinnati has substantial  borrowing  authority with the FHLB. The Company's
use of a particular  source of funds is based on need,  comparative  total costs
and availability.

                                       10
<PAGE>

At December 31, 2002, the Company had outstanding  approximately $2.9 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  $47.7  million.  The  Company  anticipates  that it will  have
resources  to meet its current  commitments  through  internal  funding  sources
described above.  Historically,  it has been able to retain a significant amount
of its certificates of deposit 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 the Company's assets and liabilities are monetary. As a result,
changes in interest rates have a greater impact on its  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 the Company has
yet to adopt. For information  about recent accounting  standards,  which it has
adopted, see the Notes to Consolidated Financial Statements in this report.

In June 2001,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial   Accounting   Standard  No.  143,  Accounting  for  Asset  Retirement
Obligations.  SFAS No. 143  applies  to legal  obligations  associated  with the
retirement of long-lived assets that result from the acquisition,  construction,
development  and/or the  normal  operation  of a  long-lived  asset,  except for
certain  obligations  of  lessees.  SFAS  No.  143 is  effective  for  financial
statements  issued for fiscal years  beginning  after June 15,  2002.  Since the
Company does not have any legal  obligations as described above,  this statement
is not  expected  to have any  impact on the  Company's  consolidated  financial
position or results of operations.

In August 2001, the Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-Lived  Assets.  SFAS No. 144.  This  statement  supercedes  SFAS No. 121
Accounting for the Impairment of Long-Lived  Assets and for Long-Lived Assets to
be Disposed of, and the accounting  and reporting  provisions of APB Opinion No.
30, Reporting the Results of  Operations-Reporting  the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events  and  Transactions,  for the  disposal  of a segment  of a  business  (as
previously  defined in that  Opinion).  SFAS No. 144 is effective  for financial
statements  issued for fiscal years  beginning  after  December  15,  2001,  and
interim  periods  within those fiscal years.  This  statement is not expected to
have a  significant  impact on the  Company's  financial  position or results of
operations.

In October 2002, the Financial  Accounting  Standards Board issued  Statement of
Financial   Accounting  Standard  No.  147,  Accounting  for  Certain  Financial
Institutions. This statement removes acquisitions of financial institutions from
the scope of FASB  Statement  No. 72,  Accounting  for Certain  Acquisitions  of
Banking or Thrift  Institutions,  and FASB  Interpretation  No. 9,  Applying APB
Opinions  No.  16 and 17  When a  Savings  and  Loan  Association  or a  Similar
Institution Is Acquired in a Business Combination  Accounted for by the Purchase
Method.  In addition,  this statement amends FASB Statement No. 144,  Accounting
for the  Impairment  or Disposal of Long-Lived  Assets,  to include in its scope
long-term customer relationship intangible assets of financial institutions such
as depositor- and borrower-relationship  intangible assets and credit cardholder
intangible  assets.  This  statement  intends to improve  the  comparability  of
financial reporting by requiring  institutions to follow FASB Statement No. 141,
Business Combinations.  SFAS No. 147 is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002.  Management  does not expect
this  statement  to have a  significant  impact  on the  Company's  consolidated
financial position or results of operations.

                                       11
<PAGE>

In December 2002, the Financial  Accounting  Standards Board issued Statement of
Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation -
Transition  and  Disclosure  - an  amendment  of FASB  Statement  No. 123.  This
statement provides  alternative  methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition,  this statement amends the disclosure requirements of Statement 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported  results.  Statement  No. 148 is effective
for financial statements for fiscal years ending after December 15, 2002 and for
interim  periods  beginning  after  December 15, 2002.  The Company and the Bank
apply the intrinsic  value based method of accounting  prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees,  in accounting for their stock
option  plans and have not  elected a  voluntary  change to the fair value based
method  prescribed  in Statement  No. 123.  The  Company's  consolidated  annual
financial  statements  beginning  in 2002  and  consolidated  interim  financial
statements beginning in 2003 will include the additional disclosures required by
SFAS No.  148,  but  management  does not  anticipate  this  statement  having a
significant impact on the Company's  consolidated  financial position or results
of operations.

                                       12

<PAGE>



                              PUGH & COMPANY, P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
WILL J. PUGH, CPA
RONNIE G. CATE, CPA       HOME FEDERAL PLAZA - SUITE 200           MEMBERS
C. LARRY ELMORE, CPA      315 NORTH CEDAR BLUFF ROAD
W. JAMES PUGH, JR., CPA   KNOXVILLE, TENNESSEE 37923       AMERICAN INSTITUTE OF
DANIEL C. FRANKLIN, CPA                             CERTIFIED PUBLIC ACCOUNTANTS
P. RICK HINCHEY, CPA
JAMES H. JONES, CPA          P.O. BOX 31409                TENNESSEE SOCIETY OF
LISA W. HILL, CPA         KNOXVILLE, TENNESSEE      CERTIFIED PUBLIC ACCOUNTANTS
SUSAN R. FOARD, CPA              37930-1409
                        865-769-0660 800-332-7021
                        TELECOPIER 865-769-1660



                          INDEPENDENT AUDITOR'S REPORT


Board of Directors
United Tennessee Bankshares, Inc.
Newport, Tennessee

We have audited the accompanying  consolidated statements of financial condition
of United Tennessee Bankshares,  Inc. and subsidiary as of December 31, 2002 and
2001, and the related consolidated  statements of income,  comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
2002,  2001,  and  2000.  These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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 United Tennessee
Bankshares, Inc. and subsidiary as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for the years ended December
31, 2002, 2001, and 2000, in conformity with accounting principles generally
accepted in the United States of America.


                                          /s/  Pugh & Company, P.C.
                                          Certified Public Accountants
                                          Knoxville, Tennessee
                                          March 13, 2003

                                       13
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>


                                                 As of December 31,       2002                  2001
                                                                      --------------      -------------
<S>                                                                   <C>                 <C>

                 ASSETS
Cash and Amounts Due From Depository Institutions                     $    5,349,997      $   2,123,180
Investment Securities Available for Sale, at Fair Value                   25,267,260         24,397,891
Loans Receivable, Net                                                     78,361,818         72,200,227
Premises and Equipment, Net                                                  969,074            496,373
Accrued Interest Receivable                                                  669,458            602,659
Real Estate Acquired Through Foreclosure                                     126,406                  0
Excess of Cost Over Fair Value of Net Assets Acquired                        873,242            953,233
Prepaid Expenses and Other Assets                                            135,268             37,264
                                                                      --------------      -------------
TOTAL ASSETS                                                          $  111,752,523      $ 100,810,827
                                                                      ==============      =============

                 LIABILITIES AND EQUITY
LIABILITIES
 Deposits:
 Demand                                                               $   38,544,192      $  29,152,923
 Term                                                                     55,202,423         55,656,903
                                                                      --------------      -------------
 Total Deposits                                                           93,746,615         84,809,826
                                                                      --------------      -------------

 Accrued Interest Payable                                                    131,683            161,554
 Accrued Income Taxes                                                              0              1,995
 Deferred Income Taxes                                                     1,007,512            868,896
 Accrued Benefit Plan Liabilities                                            856,466            743,177
 Other Liabilities                                                            85,274             57,628
                                                                      --------------      -------------
  Total Liabilities                                                       95,827,550         86,643,076
                                                                      --------------      -------------

SHAREHOLDERS' EQUITY
 Common Stock - No Par Value, Authorized 20,000,000
  Shares; Issued and Outstanding 1,311,124 Shares in 2002
  (1,341,012 Shares in 2001)                                              12,447,852         12,719,235
 Unearned Compensation - Employee Stock Ownership Plan                      (516,573)          (678,370)
 Shares in Grantor Trust - Contra Account                                   (198,995)          (195,149)
 Shares in MRP Plan - Contra Account                                         (56,194)          (209,770)
 Shares in Stock Option Plan Trusts - Contra Account                      (1,490,999)        (1,591,409)
 Retained Earnings                                                         4,199,465          2,835,393
 Accumulated Other Comprehensive Income                                    1,540,417          1,287,821
                                                                       -------------      -------------

 Total Shareholders' Equity                                               15,924,973         14,167,751
                                                                       -------------      -------------
 TOTAL LIABILITIES AND EQUITY                                         $  111,752,523      $ 100,810,827
                                                                      ==============      =============
</TABLE>

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

                                       14
<PAGE>
<TABLE>
<CAPTION>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                                     For the Years Ended December 31,           2002                2001               2000
                                                                           ---------------     ---------------     --------------
<S>                                                                        <C>                 <C>                 <C>
 INTEREST INCOME
 Loans                                                                     $    5,971,720      $    5,962,213      $   5,479,812
 Investment Securities                                                          1,211,497           1,362,166          1,603,282
 Other Interest-Earning Assets                                                     30,171             108,078            168,082
                                                                           ---------------     ---------------     --------------
  Total Interest Income                                                         7,213,388           7,432,457          7,251,176
                                                                           ---------------     ---------------     --------------
 INTEREST EXPENSE
 Deposits                                                                       2,122,007           3,569,976          3,778,952
 Advances From Federal Home Loan Bank and Note Payable                                452              38,393            314,370
                                                                           ---------------     ---------------     --------------
  Total Interest Expense                                                        2,122,459           3,608,369          4,093,322
                                                                           ---------------     ---------------     --------------
NET INTEREST INCOME                                                             5,090,929           3,824,088          3,157,854
PROVISION FOR LOAN LOSSES                                                         129,000             110,000             37,000
                                                                           ---------------     ---------------     --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                             4,961,929           3,714,088          3,120,854
                                                                           ---------------     ---------------     --------------
NONINTEREST INCOME
 Deposit Account Service Charges                                                  242,895             239,408            188,616
 Loan Service Charges and Fees                                                     79,729              76,072             70,534
 Net Gain (Loss) on Sales of Investment Securities Available for Sale              45,803               3,200             (8,834)
 Other                                                                             44,827              40,176             25,552
                                                                           ---------------     ---------------     --------------
   Total Noninterest Income                                                       413,254             358,856            275,868
                                                                           ---------------     ---------------     --------------
NONINTEREST EXPENSE
 Compensation and Benefits                                                      1,355,550           1,251,867          1,118,375
 Occupancy and Equipment                                                          304,407             214,368            218,359
 Federal Deposit Insurance Premiums                                                52,000              48,000             48,000
 Data Processing Fees                                                             262,254             259,992            236,467
 Advertising and Promotion                                                         85,351              97,598             79,207
 Amortization                                                                      80,992              80,992             80,992
 Other                                                                            494,918             483,863            458,560
                                                                           ---------------     ---------------     --------------
  Total Noninterest Expense                                                     2,635,472           2,436,680          2,239,960
                                                                           ---------------     ---------------     --------------
INCOME BEFORE INCOME TAXES                                                      2,739,711           1,636,264          1,156,762
INCOME TAXES                                                                      977,907             524,814            354,851
                                                                           ---------------     ---------------     --------------
NET INCOME                                                                 $    1,761,804      $    1,111,450      $     801,911
                                                                           ===============     ===============     ==============
EARNINGS PER SHARE:
Basic                                                                      $          1.33     $          0.82     $         0.58
                                                                           ===============     ===============     ==============
Diluted                                                                    $          1.33     $          0.82     $         0.58
                                                                           ===============     ===============     ==============

</TABLE>

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

                                       15
<PAGE>




                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME





<TABLE>
<CAPTION>

                            For the Years Ended December 31,             2002                  2001                   2000
                                                                  -----------------     ------------------    -------------------
<S>                                                               <C>                   <C>                   <C>
NET INCOME                                                        $      1,761,804      $       1,111,450     $          801,911
                                                                  -----------------     ------------------    -------------------

OTHER COMPREHENSIVE INCOME, NET OF TAX:
 Unrealized Gains on Investment Securities
  Available for Sale                                                       453,216                187,839              1,110,758

 Reclassification Adjustment for (Gains) Losses
  Included in Net Income                                                   (45,803)                (3,200)                  8,834

 Income Taxes Related to Unrealized Gains (Losses)
  on Investment Securities Available for Sale                             (154,817)               (70,162)               (425,445)
                                                                  -----------------     ------------------    -------------------

 Other Comprehensive Income, Net of Tax                                    252,596                114,477                694,147
                                                                  -----------------     ------------------    -------------------

COMPREHENSIVE INCOME                                              $      2,014,400      $       1,225,927             1,496,058
                                                                  =================     ==================    ===================

</TABLE>


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

                                       16
<PAGE>
                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                  CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                                     Shares in
                                                                                                      Grantor         Shares in
                                                                                   Unearned           Trust -         MRP Plan -
                                                                  Common          Compensation        Contra            Contra
                                                                  Stock             ESOP              Account          Account
                                                             --------------    ----------------    ------------     -------------
<S>                                                          <C>               <C>                <C>               <C>
BALANCES, JANUARY 1, 2000                                    $   13,091,119    $     (1,004,628)   $   (201,632)    $    (556,474)

Net Income                                                                0                   0               0                 0

Dividends Paid                                                            0                   0               0                 0

Payment on ESOP Loan With ESOP Contribution and Dividends                 0             161,661               0                 0
  Received

Purchase of Additional Shares of Common Stock Pursuant to                 0                   0         (20,469)                0
  Grantor Trust

Distribution of Shares of Common Stock Pursuant to Grantor                0                   0          38,652                 0
  Trust

Distribution of Shares of Common Stock Pursuant to MRP Plan               0                   0               0           166,580

Decrease in Cost of Shares in Stock Option Plan Trusts                    0                   0               0                 0

Other Comprehensive Income                                                0                   0               0                 0
                                                             --------------    ----------------    ------------     -------------

BALANCES, DECEMBER 31, 2000                                      13,091,119            (842,967)       (183,449)         (389,894)

Purchase and Retirement of Common Stock                            (371,884)                  0               0                 0

Net Income                                                                0                   0               0                 0

Dividends Paid                                                            0                   0               0                 0

Payment of ESOP Loan With ESOP Contribution and Dividends                 0             164,597               0                 0
  Received

Purchase of Additional Shares of Common Stock Pursuant to                 0                   0         (11,700)                0
  Grantor Trust

Distribution of Shares of Common Stock Pursuant to MRP Plan               0                   0               0           180,124

Decrease in Cost of Shares in Stock Option Plan Trusts                    0                   0               0                 0

Other Comprehensive Income                                                0                   0               0                 0
                                                             --------------    ----------------    ------------     -------------

BALANCES, DECEMBER 31, 2001                                      12,719,235            (678,370)       (195,149)         (209,770)

Purchase and Retirement of Common Stock                            (157,308)                  0               0                 0

Net Income                                                                0                   0               0                 0

Dividends Paid                                                            0                   0               0                 0

Payment on ESOP Loan With ESOP Contribution and Dividends                 0             161,797               0                 0
  Received

Purchase of Additional Shares of Common Stock Pursuant to                 0                   0          (3,846)                0
  Grantor Trust

Distribution of Shares of Common Stock Pursuant to MRP Plan               0                   0               0           153,576

Decrease in Cost of Shares in Stock Option Plan Trusts                    0                   0               0                 0

Costs Associated With Stock Options Surrendered                           0                   0               0                 0

Retirement of Shares Held in Stock Option Plan Trusts              (114,075)                  0               0                 0

Other Comprehensive Income                                                0                   0               0                 0
                                                             --------------    ----------------    ------------     -------------

BALANCES, DECEMBER 31, 2002                                  $   12,447,852    $       (516,573)   $   (198,995)    $     (56,194)
                                                             ==============    ================    ============     =============
</TABLE>

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

                                       17
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

            CONSOLIDATED CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
                                                                  Shares in
                                                                Stock Option                      Accumulated
                                                                Plan Trusts -                        Other               Total
                                                                   Contra           Retained      Comprehensive       Shareholders'
                                                                   Account          Earnings         Income              Equity
                                                                --------------     -----------    --------------    --------------
<S>                                                             <C>              <C>              <C>               <C>
BALANCES, JANUARY 1, 2000                                       $  (1,657,722)   $  1,751,239     $     479,197     $  11,901,099

Net Income                                                                  0         801,911                 0           801,911

Dividends Paid                                                              0        (414,603)                0          (414,603)

Payment on ESOP Loan With ESOP Contribution and Dividends                   0               0                 0           161,661
  Received

Purchase of Additional Shares of Common Stock Pursuant to                   0               0                 0           (20,469)
  Grantor Trust

Distribution of Shares of Common Stock Pursuant to Grantor                  0               0                 0            38,652
  Trust

Distribution of Shares of Common Stock Pursuant to MRP Plan                 0               0                 0           166,580

Decrease in Cost of Shares in Stock Option Plan Trusts                  1,153               0                 0             1,153

Other Comprehensive Income                                                  0               0           694,147           694,147
                                                                --------------     -----------    --------------    --------------

BALANCES, DECEMBER 31, 2000                                        (1,656,569)      2,138,547         1,173,344        13,330,131

Purchase and Retirement of Common Stock                                     0               0                 0          (371,884)

Net Income                                                                  0       1,111,450                 0         1,111,450

Dividends Paid                                                              0        (414,604)                0          (414,604)

Payment of ESOP Loan With ESOP Contribution and Dividends                   0               0                 0           164,597
  Received

Purchase of Additional Shares of Common Stock Pursuant to                   0               0                 0           (11,700)
  Grantor Trust

Distribution of Shares of Common Stock Pursuant to MRP Plan                 0               0                 0           180,124

Decrease in Cost of Shares in Stock Option Plan Trusts                 65,160               0                 0            65,160

Other Comprehensive Income                                                  0               0           114,477           114,477
                                                                --------------     -----------    --------------    --------------

BALANCES, DECEMBER 31, 2002                                        (1,591,409)      2,835,393         1,287,821        14,167,751

Purchase and Retirement of Common Stock                                     0               0                 0          (157,308)

Net Income                                                                  0       1,761,804                 0         1,761,804

Dividends Paid                                                              0        (397,732)                0          (397,732)

Payment on ESOP Loan With ESOP Contribution and Dividends                   0               0                 0           161,797
  Received

Purchase of Additional Shares of Common Stock Pursuant to                   0               0                 0            (3,846)
  Grantor Trust

Distribution of Shares of Common Stock Pursuant to MRP Plan                 0               0                 0           153,576

Decrease in Cost of Shares in Stock Option Plan Trusts                 56,527               0                 0            56,527

Costs Associated With Stock Options Surrendered                       (70,192)              0                 0           (70,192)

Retirement of Shares Held in Stock Option Plan Trusts                 114,075               0                 0                 0

Other Comprehensive Income                                                  0               0           252,596           252,596
                                                                --------------     -----------    --------------    --------------

BALANCES, DECEMBER 31, 2002                                     $  (1,490,999)     $4,199,465     $   1,540,417     $  15,924,973
                                                                ==============     ===========    ==============    ==============

</TABLE>
   The accompanying notes are an integral part of these financial statements.
                                       18
<PAGE>
<TABLE>
<CAPTION>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                         For the Years Ended December 31,          2002               2001                2000
                                                                               --------------     --------------     --------------
<S>                                                                            <C>                <C>                <C>
OPERATING ACTIVITIES
 Net Income                                                                    $   1,761,804      $   1,111,450      $      801,911
                                                                               --------------      -------------    ---------------
Adjustments to Reconcile Net Income to Net
   Cash Provided by Operating Activities:
     Provision for Loan Losses                                                       129,000            110,000              37,000
    Depreciation                                                                      92,766             62,521              56,339
    Amortization                                                                      80,992             80,992              80,992
    Amortization of Investment Securities Premiums and Discounts, Net                 83,750             43,993              (3,392)
    Increase in Unearned Loan Fees                                                    20,523             24,952              39,670
    Net Loss on Sales of Foreclosed Real Estate                                        8,026             21,944              19,454
    Federal Home Loan Bank Stock Dividends                                           (40,100)           (55,300)            (56,100)
    Net (Gain) Loss on Sales of Investment Securities
     Available for Sale                                                              (45,803)            (3,200)              8,834
    Deferred Income Tax Benefit                                                      (16,201)           (42,343)            (41,107)
    (Increase) Decrease in:
     Accrued Interest Receivable                                                     (66,799)               275            (163,955)
      Prepaid Expenses and Other Assets                                              (99,005)           107,399               1,254
     Increase (Decrease) in:
      Accrued Interest Payable                                                       (29,871)          (138,509)             16,539
      Accrued Income Taxes                                                            (1,995)             1,995                   0
      Accrued Benefit Plan Liabilities                                               113,289             99,909              24,543
      Other Liabilities                                                               27,646            (14,442)            (10,978)
                                                                               --------------     --------------     ---------------
       Total Adjustments                                                             256,218            300,186               9,093
                                                                               --------------     --------------     ---------------
        Net Cash Provided by Operating Activities                                  2,018,022          1,411,636             811,004
                                                                               --------------     --------------     ---------------
 INVESTING ACTIVITIES
 Purchase of Investment Securities Available for Sale                            (11,308,648)        (9,884,107)         (2,933,564)
 Proceeds From Sales of Investment Securities
 Available for Sale                                                                3,381,938            163,200           1,456,101
 Proceeds From Maturities of Investment Securities
 Available for Sale                                                                3,000,000          4,660,000             500,000
 Principal Payments Received on Investment Securities
 Available for Sale                                                                4,466,907          5,219,089           5,725,869
 Net Increase in Loans                                                            (6,478,110)        (3,480,772)         (7,402,604)
 Purchases of Premises and Equipment, Net                                           (565,467)           (89,114)            (15,109)
 Proceeds From Sales of Foreclosed Real Estate                                        32,564              1,752              15,600
                                                                               --------------     --------------     ---------------

         Net Cash Used in Investing Activities                                 $   (7,470,816)    $  (3,409,952)     $   (2,653,707)
                                                                               --------------     --------------     ---------------

</TABLE>




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

                                       19
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>

                                         For the Years Ended December 31,          2002               2001                2000
                                                                               --------------     --------------     ---------------
<S>                                                                            <C>                 <C>                <C>
FINANCING ACTIVITIES
 Purchase and Retirement of Common Stock                                       $    (157,308)      $   (371,884)      $           0
 Dividends Paid                                                                     (397,732)          (414,604)           (414,603)
 Decrease in Cost of Shares in Stock Option Plan Trusts                               56,527             65,160               1,153
 Costs Associated With Stock Options Surrendered                                     (70,192)                 0                   0
 Distribution of Common Stock Pursuant to MRP Plan                                   153,576            180,124             166,580
 Purchase of Common Stock for Director's Long-Term
  Incentive Plan                                                                      (3,846)           (11,700)            (20,469)
 Distribution of Common Stock Pursuant to Director's Long-Term
  Incentive Plan                                                                           0                  0              38,652
 Payment on ESOP Loan and Release of Shares                                          161,797            164,597             161,661
 Net Increase in Deposits                                                          8,936,789          3,196,136           7,804,160
 Advances From Federal Home Loan Bank                                                      0                  0           3,000,000
 Repayment of Advances From Federal Home Loan Bank                                         0         (1,753,134)          5,014,355)
 Repayment of Borrowing on Note Payable                                                    0                  0          (3,200,000)
                                                                               --------------     --------------     ---------------
         Net Cash Provided by Financing Activities                                 8,679,611          1,054,695           2,522,779
                                                                               --------------     --------------     ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               3,226,817           (943,621)            680,076

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                       2,123,180          3,066,801           2,386,725
                                                                               --------------     --------------     ---------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                         $   5,349,997      $   2,123,180      $    3,066,801
                                                                               ==============     ==============     ===============

Supplementary Disclosures of Cash Flow Information:
 Cash Paid During the Year for:
  Interest                                                                     $   2,152,330      $   3,746,878      $    4,076,783
  Income Taxes                                                                 $   1,033,225      $     480,280      $      466,822

Supplementary Disclosures of Noncash Investing Activities:
 Acquisition of Foreclosed Real Estate                                         $     177,996      $     174,171      $       95,773
 Sale of Foreclosed Real Estate by Origination of Mortgage Loans               $      11,000      $     150,475      $      131,900
 Change in Unrealized Gain/Loss on Investment
Securities Available for Sale                                                  $     407,413      $     184,639      $    1,119,592
 Change in Deferred Income Taxes Associated With Unrealized                    $
  Gain/Loss on Investment Securities Available for Sale                        $     154,817      $      70,162      $      425,445
 Change in Net Unrealized Gain/Loss on Investment                              $
  Securities Available for Sale                                                $     252,596      $     114,477      $      694,147


</TABLE>


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

                                       20
<PAGE>




                        UNITED TENNESSEE BANKSHARES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2002, 2001, and 2000

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Basis of  Consolidation  - On January 1, 1998,  Newport Federal Savings and Loan
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 16
for additional  information  concerning the Association's stock conversion.  The
consolidated  financial  statements  include the  accounts  of United  Tennessee
Bankshares,  Inc. and its  wholly-owned  subsidiary,  Newport  Federal Bank. All
intercompany accounts have been eliminated.

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

Consolidated  Statement  of  Comprehensive  Income  - The  Financial  Accounting
Standards Board has issued SFAS No. 130, Reporting  Comprehensive  Income.  This
statement  establishes  standards  for  reporting  comprehensive  income and its
components in the consolidated financial statements. The object of the statement
is to report a measure of all changes in equity of an  enterprise  that  results
from   transactions   and  other  economic  events  of  the  period  other  than
transactions  with  owners.  Items  included  in  comprehensive  income  include
revenues,  gains, and losses that under accounting principles generally accepted
in the United States of America are directly charged to equity. Examples include
foreign currency  translations,  pension liability  adjustments,  and unrealized
gains and losses on investment securities available for sale.

Use of Estimates - The  preparation  of  consolidated  financial  statements  in
conformity with accounting principles generally accepted in the United States of
America  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.

Reclassifications  - Certain items in the 2001 and 2000  consolidated  financial
statements  have  been  reclassified  to  conform  with  the  2002  consolidated
financial statements.

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."

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 as of December 31:

                                                    2002               2001
                                              ---------------     --------------
 Unrestricted Deposits                        $    3,020,000      $   310,000

                                       21
<PAGE>

Investment  Securities - In  accordance  with SFAS No. 115, the Company and Bank
have  segregated  all their  investment  securities  into the available for sale
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 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  comprehensive  income,  net of any  deferred tax effect.  Realized  gains or
losses on the sales of  securities  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  estimated  initial  direct  costs  related  to
initiating  and closing  long-term  mortgage  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 - Interest on 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 Bank'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 three
to thirty years.

Excess of Cost Over Fair Value of Net Assets  Acquired - During  1998,  the Bank
purchased a branch from Union  Planters Bank of the Lakeway area.  The excess of
cost over fair value of net assets  acquired is being  amortized  in  accordance
with Statement of Financial  Accounting Standards No. 72, Accounting for Certain
Acquisitions of Banking or Thrift  Institutions,  using the straight-line method
over fifteen years.

Organization  Costs -  Organization  costs of the Company  totalling  $5,000 are
included in other assets,  net of  straight-line  amortization  over a five year
period.

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 other deferred  items,  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.

Stock Option Plan - The Company has a stock  option plan that is described  more
fully in Note 11. The Company  accounts for this plan under the  recognition and
measurement  principles  of APB Opinion No. 25,  Accounting  for Stock Issued to
Employees,  and related  interpretations.  No stock-based employee  compensation
cost is reflected in consolidated  net income,  as all options granted under the
plan had an exercise  price equal to the market value of the  underlying  common
stock on the date of grant.  The following  table  illustrates the effect on net
income  and  earnings  per  share if the  Company  had  applied  the fair  value
recognition  provisions of FASB Statement No. 123,  Accounting  for  Stock-Based
Compensation, to stock-based employee compensation.


                                       22
<PAGE>
<TABLE>
<CAPTION>


                                                                                       Year Ended December 31,
                                                                      ----------------------------------------------------------
                                                                             2002                 2001                 2000
                                                                      ----------------     ----------------    -----------------
<S>                                                                   <C>                  <C>                 <C>
Net Income, as Reported                                               $      1,761,804     $      1,111,450    $         801,911
Less: Total Stock-Based Employee Compensation
 Expense Determined Under Fair Value Based Method
 for All Awards, Net of Related Tax Effects                                   (148,967)            (151,959)            (175,628)
                                                                      ----------------     ----------------    -----------------
Pro Forma Net Income                                                  $      1,612,837     $        959,491    $         626,283
                                                                      ================     ================    =================

Earnings Per Share:
 Basic - as Reported                                                  $           1.33     $           0.82    $            0.58
                                                                      ================     ================    =================
 Basic - Pro Forma                                                    $           1.22     $           0.71    $            0.45
                                                                      ================     ================    =================
 Diluted - as Reported                                                $           1.33     $           0.82    $            0.58
                                                                      ================     ================    =================
 Diluted - Pro Forma                                                  $           1.22     $           0.71    $            0.45
                                                                      ================     ================    =================
</TABLE>

                                       23
<PAGE>




Earnings Per Share - Basic  earnings per share  represents  income  available to
shareholders divided by the weighted average number of shares outstanding during
the period.  Diluted  earnings per share reflects  additional  shares that would
have been outstanding if dilutive  potential shares had been issued,  as well as
any adjustment to income that would result from the assumed issuance.  Potential
shares  that may be issued by the Company  relate  solely to  outstanding  stock
options, and are determined using the treasury stock method.


Earnings per share have been computed based on the following:

<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                         -----------------------------------------------------
                                                                               2002               2001                2000
                                                                         --------------    ----------------    ---------------
<S>                                                                          <C>                 <C>                <C>

Average number of shares outstanding                                         1,321,186           1,354,724          1,382,013
Effect of dilutive options                                                       1,458                 535              1,524
                                                                         --------------    ----------------    ---------------
Average number of shares outstanding used
 to calculate diluted earnings per share                                     1,322,644           1,355,259          1,383,537
                                                                         ==============    ================    ===============

</TABLE>


NOTE 2 - INVESTMENT SECURITIES

The amortized  cost estimated  fair value of  investment  securities  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, 2002
Debt Securities:
 Obligations of  U.S. Government
  Corporations and Agencies                           $   13,097,586    $      622,164      $          0       $   13,719,750
 Mortgage-Backed Securities                                5,868,201           145,959            (3,595)           6,010,565
 Corporate Debt Securities                                   707,060            53,456                 0              760,516
 Obligations of States and
  Political Subdivisions                                   2,080,000            49,196           (10,477)           2,118,719
                                                      --------------    --------------     --------------     ---------------
   Total Debt Securities                                  21,752,847           870,775           (14,072)          22,609,550
                                                      --------------    --------------     --------------     ---------------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               897,100                 0                 0              897,100
 Federal Home Loan Mortgage
  Corporation Stock                                           27,448         1,627,842                 0            1,655,290
 Intrieve, Inc. Stock, at Cost                               105,320                 0                 0              105,320
                                                      --------------    --------------     -------------       --------------
   Total Equity Securities                                 1,029,868         1,627,842                 0            2,657,710
                                                      --------------    --------------     -------------       --------------
                                                      $   22,782,715    $    2,498,617     $     (14,072)      $   25,267,260
                                                      ==============    ==============     ==============      ==============

</TABLE>

                                       24
<PAGE>

<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, 2001
Debt Securities:
 Obligations of  U.S. Government
  Corporations and Agencies                           $    9,057,459    $      175,663      $    (32,608)       $   9,200,514
Mortgage-Backed Securities                                10,202,938           132,089               (28)          10,334,999
 Corporate Debt Securities                                   719,531             5,393            (9,044)             715,880
 Obligations of States and
  Political Subdivisions                                   1,351,067                 0              (182)           1,350,885
                                                      --------------    ---------------     -------------       -------------
   Total Debt Securities                                  21,330,995           313,145           (41,862)          21,602,278
                                                      --------------    ---------------     -------------       -------------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               857,000                 0                 0              857,000
 Federal Home Loan Mortgage
  Corporation Stock                                           27,448         1,805,845                 0            1,833,293
 Intrieve, Inc. Stock, at Cost                               105,320                 0                 0              105,320
                                                      --------------    --------------     --------------       -------------
    Total Equity Securities                                  989,768         1,805,845                 0            2,795,613
                                                      --------------    --------------     --------------       -------------
                                                    $     22,320,763    $    2,118,990     $     (41,862)       $  24,397,891
                                                      ==============    ==============     ==============       =============
</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.

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

                                          For the Years Ended December 31,
                                    --------------------------------------------
                                         2002            2001           2000
                                    -----------       -----------    -----------
Gross Realized Gains                $   47,467        $  3,200       $      0
Gross Realized Losses                   (1,664)              0         (8,834)
                                    -----------       -----------   ------------
                                    $   45,803        $  3,200       $ (8,834)
                                    ===========       ===========   ============

Mortgage-backed securities consist of the following:

                                 December 31, 2002       December 31, 2001
                            ------------------------  --------------------------
                                          Estimated                  Estimated
                             Amortized      Fair      Amortized         Fair
                              Cost         Value         Cost          Value
                            -----------  -----------  ----------    ------------
FNMA Certificates           $ 3,767,072    3,881,644 $ 6,381,751    $  6,448,154
GNMA Certificates               600,689      613,752   1,593,323       1,632,868
FHLMC Certificates            1,500,440    1,515,169   2,227,864       2,253,977
                            -----------   ---------- -----------    ------------
                            $ 5,868,201    6,010,565 $10,202,938    $ 10,334,999
                            ===========   ========== ===========   =============


                                       25
<PAGE>

The amortized  cost and estimated  fair value of debt  securities  available for
sale as of December 31, 2002, by contractual maturity, are as follows:

                                                Amortized           Estimated
                                                   Cost            Fair Value
                                              ---------------     --------------
Due in One Year or Less                       $             0     $            0
Due After One Year  Through Five Year              10,033,822         10,507,593
Due After Five Years  Through Ten Years             4,695,836          4,881,651
Due After Ten Years                                 1,154,988          1,209,741
                                              ---------------     --------------
                                                   15,884,646         16,598,985
Mortgage-Backed Securities                          5,868,201          6,010,565
                                              ---------------     --------------
                                              $    21,752,847     $   22,609,550
                                              ===============     ==============

Expected  maturities can differ from contractual  maturities because issuers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.

Investments with book values of approximately $9,500,000 and $6,650,000 (which
approximates market values) as of December 31, 2002 and 2001, respectively, were
pledged to secure deposits of public funds.

NOTE 3 - LOANS RECEIVABLE

The  Bank  provides  mortgage  and  consumer  lending  services  to  individuals
primarily  in the East  Tennessee  area.  Loans  receivable  are  summarized  as
follows:

                                                          As of December 31,
                                                 ------------------------------
                                                       2002             2001
                                                  -------------    -------------
First mortgage loans (principally conventional):
 Secured by one-to-four family residences         $  62,772,366    $ 57,085,772
 Secured by other properti                            8,617,505       8,460,827
 Construction loans                                   3,931,900       3,996,850
                                                  -------------    -------------
                                                     75,321,771      69,543,449
Less:
 Undisbursed portion of construction loans           (1,405,429)     (1,736,933)
 Net deferred loan origination fees                    (372,106)       (351,583)
                                                  -------------    -------------
  Net first mortgage loans                            73,544,23      67,454,933
                                                  -------------    -------------


Consumer and commercial loans:
 Loans to depositors, secured by deposits             1,263,904       1,380,199
 Automobile                                           1,354,058       1,260,173
 Home equity and second mortgage                        948,371         959,204
 Other                                                2,054,286       1,865,051
                                                  -------------    -------------

 Net consumer and commercial loans                    5,620,619       5,464,267
Less allowance for loan losses                         (803,037)       (719,333)
                                                  -------------    -------------

                                                  $  78,361,818    $  72,200,227
                                                  =============    =============

The  Bank  had  outstanding  loan  commitments  of  approximately  $861,000  and
$3,675,000 (in addition to undisbursed  portion of construction  loans) at rates
ranging from 4.75 % to 8.75% as of December 31, 2002 and 2001, respectively.

Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>

                                                                                  For the Years Ended December 31,
                                                                        ----------------------------------------------------
                                                                              2002               2001               2000
                                                                        ---------------    ---------------     -------------
<S>                                                                     <C>                <C>                 <C>

Allowance at beginning of year                                          $     719,333      $     659,504       $    660,741
 Provision charged to expense                                                 129,000            110,000             37,000
 Recoveries of loans previously charged off                                     2,523                650              1,893
 Loans charged off                                                            (47,819)           (50,821)           (40,130)
                                                                        --------------     --------------      -------------
Allowance at end of year                                                $     803,037      $     719,333       $    659,504
                                                                        ==============     ==============      =============
</TABLE>

                                       26
<PAGE>
The Bank 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,
                                                                                           ----------------------------------
                                                                                                 2002               2001
                                                                                           ---------------     --------------
<S>                                                                                       <C>                  <C>

Recorded value of all impaired loans                                                       $      826,000      $      994,000
Average individual loan balance                                                            $       44,000      $       47,000
Total allowance for loan losses related to impaired loans                                  $      217,367      $      243,547
</TABLE>

The Bank 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 Bank 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,
                                                                                           ---------------------------------
                                                                                                2002               2001
                                                                                           ---------------     -------------
<S>                                                                                        <C>                 <C>
Cash receipts applied to reduce principal balance                                          $       50,008      $      67,890
Cash receipts recognized as interest income                                                        44,397             49,225
                                                                                           ---------------     -------------
Total cash receipts                                                                        $       94,405      $     117,115
                                                                                           ===============     =============
</TABLE>

NOTE 4 - PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ---------------------------------
                                                                                                 2002               2001
                                                                                           ---------------     -------------
<S>                                                                                        <C>                 <C>

Land                                                                                       $     574,490       $    168,539
Buildings                                                                                        763,102            753,780
Furniture and Equipment                                                                          589,410            456,343
Construction in Process                                                                                0             36,360
                                                                                           --------------       ------------
                                                                                               1,927,002          1,415,022
Less Accumulated Depreciation                                                                   (957,928)          (918,649)
                                                                                           --------------      -------------
                                                                                           $     969,074       $    496,373
                                                                                           ==============     ==============

Depreciation  expense for the years ended  December  31,  2002,  2001,  and 2000
totalled $92,766, $62,521, and $56,339, respectively.

NOTE 5 - DEPOSITS

A summary of deposits is as follows:
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2002               2001
                                                                                           ---------------     --------------
Demand Deposits:
 Now Accounts                                                                              $    9,652,203      $   8,924,461
 Money Market Deposit Accounts                                                                 16,497,873          8,816,451
 Passbook Savings                                                                              12,394,116         11,412,011
                                                                                           --------------      -------------
  Total Demand Deposits                                                                        38,544,192         29,152,923
                                                                                           --------------      -------------

Term Deposits:
 Less Than $100,000                                                                            36,097,442         41,161,497
 $100,000 or More                                                                              19,104,981         14,495,406
                                                                                           --------------       ------------
  Total Term Deposits                                                                          55,202,423         55,656,903
                                                                                           --------------      -------------
                                                                                           $   93,746,615      $  84,809,826
                                                                                           ==============      =============
</TABLE>
Deposits in excess of $100,000  may not be  federally  insured,  depending  upon
ownership.
                                       27
<PAGE>




The scheduled maturities of certificates of deposit as of December 31, 2002 are
as follows:

         2003                                         $  47,658,173
         2004                                             7,371,883
         2005                                               120,367
         2006                                                52,000
         2007                                                     0
                                                      -------------
                                                      $  55,202,423
                                                      =============


NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK

In November  1998,  the Bank obtained an advance from the Federal Home Loan Bank
of  Cincinnati  (FHLB).  The advance was  repayable  monthly at 4.75% over three
years.  In March 2000,  the Bank obtained an  additional  advance from FHLB with
interest at 5%. The advance was repaid in November  2000.  The Bank also obtains
short-term  advances  periodically  for operating  liquidity.  Interest  expense
associated  with the  advances  from the FHLB  totalled  $452 for the year ended
December  31, 2002  ($38,393  and  $283,437  in 2001 and 2000).  Pursuant to the
Bank's  collateral  agreement with the FHLB,  advances are secured by the Bank's
FHLB stock and  qualifying  first  mortgage  loans.  Advances from the FHLB were
repaid as of December 31, 2002 and 2001.


NOTE 7 - NOTE PAYABLE

At  December  31,  1999,  the  Bank  had  unsecured  indebtedness  to a bank for
$3,200,000  with interest at Wall Street prime minus 1.25%.  The note was repaid
in 2000. Interest expense associated with the note payable totalled $30,933, for
the year ended December 31, 2000.


NOTE 8 - 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,
                                  -----------------------------------------------------------------------------------------
                                             2002                            2001                           2000
                                  ----------------------------    ----------------------------    -------------------------
                                                    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                $  931,502         34.0 %       $  556,330         34.0 %       $  393,299        34.0%
Increase (Decrease)
 Resulting From
 tax effects of:
  Nontaxable
   interest                          (16,049)        (0.6)            (6,238)         0.4)           (19,636)       (1.7)
  State Excise Tax
   and other, net                     62,454          2.3            (25,278)        (1.5)           (18,812)       (1.6)
                                  ------------     -----------    ------------    ------------    ------------    -------
                                  $  977,907         35.7 %       $  524,814         32.1 %       $  354,851        30.7%
                                  ============     ===========    ============    ============    ============    =======
</TABLE>

                                       28
<PAGE>
Income taxes consist of:
<TABLE>
<CAPTION>
                                                   For the Years Ended December 31,
                                        ---------------------------------------------------
                                             2002               2001               2000
                                        -------------     ---------------     -------------
<S>                                     <C>               <C>                 <C>

Current                                 $     994,108     $      567,157      $    395,958
Deferred Benefit                              (16,201)           (42,343)          (41,107)
                                        --------------    ---------------     -------------
                                        $     977,907     $      524,814      $    354,851
                                        ==============    ===============     =============
</TABLE>


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

                                                 As of December 31,
                                       ----------------------------------
                                             2002               2001
                                       ---------------     --------------
Deferred Tax Liabilities               $     1,516,503     $   1,320,299
Deferred Tax Assets                           (508,991)         (451,403)
                                       ---------------     --------------
Net Deferred Tax Liabilities           $     1,007,512     $     868,896
                                       ===============     ==============

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 Bank 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  Bank's  accrued  and  deferred  tax
liabilities as of December 31, 2002 and 2001.


NOTE 9 - REGULATORY MATTERS

The Bank 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 Bank and the consolidated
financial  statements.  Under the regulatory capital adequacy guidelines and the
regulatory  framework for prompt corrective  action, the Bank must meet specific
capital  guidelines  involving  quantitative  measures  of  the  Bank's  assets,
liabilities,  and certain off-balance-sheet items as calculated under regulatory
accounting  practices.  The Bank'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 Bank meets all capital  adequacy  requirements  to which it is
subject.

Quantitative  measures established by OTS regulations to ensure capital adequacy
require the Bank 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 accounting  principles  generally accepted in the United States of
America to the capital amounts per the regulations is as follows:
<TABLE>
<CAPTION>

                                                                                                  As of December 31,
                                                                                           --------------------------------
                                                                                               2002                 2001
                                                                                           ---------------     ------------
<S>                                                                                        <C>                 <C>

Bank capital (total equity) per accounting principles generally accepted in the            $  14,573,642       $ 12,382,132
 United States of America
Less goodwill, net of amortization                                                              (873,242)          (953,233)
Less net unrealized gain on investment securities                                             (1,540,417)        (1,262,775)
                                                                                           --------------      -------------
Tangible capital per the regulations                                                          12,159,983         10,166,124
Less adjustments for core capital                                                                     (0)                (0)
                                                                                           --------------      -------------
Core capital per the regulations                                                              12,159,983         10,166,124
Add allowable portion of allowance for loan losses                                               671,000            708,000
                                                                                           --------------      -------------
Risk-based capital per the regulations                                                     $  12,830,983       $ 10,874,124
                                                                                           ==============      =============
</TABLE>
                                       29
<PAGE>




The Bank'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, 2002:
Tangible Capital (To Adjusted Total Assets)               $    12,160            11.3%         $   1,617              1.5%
Core Capital (To Adjusted Total Assets)                   $    12,160            11.3%         $   4,312              4.0%
Risk-Based Capital (To Risk-Weighted Assets)              $    12,831            24.0%         $   4,285              8.0%

As of December 31, 2001:
Tangible Capital (To Adjusted Total Assets)               $    10,166            10.4%         $   1,464              1.5%
Core Capital (To Adjusted Total Assets)                   $    10,166            10.4%         $   3,954              4.0%
Risk-Based Capital (To Risk-Weighted Assets)              $    10,874            19.2%         $   4,533              8.0%

</TABLE>

As of December 31, 2002, the Bank is categorized as well  capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank 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
Bank's category. The Bank'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, 2002:
Total Capital (To Risk-Weighted Assets)                    $       12,831         24.0%         $   5,356             10.0%
Tier I Capital (To Risk-Weighted Assets)                   $       12,160         22.7%         $   3,213              6.0%
Tier I Capital (To Average Assets)                         $       12,160         11.4%         $   5,310              5.0%

As of December 31, 2001:
Total Capital (To Risk-Weighted Assets)                    $       10,874         19.2%         $   5,666             10.0%
Tier I Capital (To Risk-Weighted Assets)                   $       10,166         17.9%         $   3,400              6.0%
Tier I Capital (To Average Assets)                         $       10,166         10.4%         $   4,984              5.0%

</TABLE>



NOTE 10 - RETIREMENT PLANS

401(k)  Retirement  Plan - The Bank 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 Bank has the option,
at the discretion of the board of directors,  to make contributions to the plan.
Total 401(k) retirement plan expense was $72,745,  $66,149,  and $47,548 for the
years ended December 31, 2002, 2001, and 2000, respectively.


                                       30
<PAGE>

Directors Long-Term Incentive Plan - In June 1997, the Bank 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
years ended December 31 are as follows:
<TABLE>
<CAPTION>

                                                                             2002               2001               2000
                                                                        ---------------    ---------------     -------------
<S>                                                                     <C>                <C>                 <C>

Liability balance at beginning of year                                  $      162,469     $     148,027       $    218,423
Accrued and expensed                                                             6,197             6,197              6,197
Death benefit payment                                                                0                 0            (38,652)
Increase (decrease) in liability due to change in fair value
 of common stock                                                                56,464             8,245            (37,941)
                                                                        --------------     -------------       -------------
Liability balance at end of year                                        $      225,130     $     162,469       $    148,027
                                                                        ==============     =============       =============

</TABLE>


In accordance with EITF 97-14,  the Bank has recognized a liability for the fair
value of all shares of Holding  Company stock (19,326  shares as of December 31,
2002 and 17,143  shares as of December  31,  2001) and other  assets held by the
trustee,  and a  contra-equity  account Shares in Grantor Trust - Contra Account
for the cost of the shares held by the trustee.

Employee  Stock  Ownership  Plan (ESOP) - Pursuant to the plan of  conversion to
stock form, the Bank  established its Employee Stock Ownership Plan in 1998. The
ESOP  borrowed  $1,164,000  from the Bank's  Holding  Company at 8.50%  interest
repayable  in  thirteen  years.  The ESOP  purchased  116,400  shares of Holding
Company stock in the initial stock offering. The ESOP received $46,292, $49,092,
and $46,156 in dividends  on its stock in 2002,  2001,  and 2000,  respectively,
which was used to reduce  the ESOP  debt.  In 2002 and 2001,  the  accrued  ESOP
contribution of $115,505 for each year was also used to reduce the ESOP debt. An
appropriate   contra-equity  account  Unearned  Compensation  -  Employee  Stock
Ownership Plan has been  established  for the net amount still owing on the ESOP
debt.  The  Bank's  board of  directors  approved  contributions  to the ESOP of
$115,505 for each year, plus accrued interest of $48,000,  $58,920,  and $73,160
on the ESOP  debt for the  years  ended  December  31,  2002,  2001,  and  2000,
respectively.


NOTE 11 - STOCK OPTION PLAN

In January 1999,  the Company's  board of directors  approved the Company's 1999
stock option plan,  and in May 1999,  the  Company's  shareholders  ratified the
plan.  The plan  reserved  209,299  shares of the  Company's  stock for issuance
pursuant to the options to be granted.  These shares will be either newly issued
shares or shares purchased on the open market.

The  Company's  board of directors  has  approved the issuance of stock  options
under  the  plan to  certain  members  of the  board  of  directors  and  senior
management. The options vest at a rate of 25% per year, expire in ten years, and
establish an exercise  price equal to the fair value of the  Company's  stock on
the date the option is granted.  Holders of the options can also  surrender  the
options and be paid cash for the  difference  between the exercise price and the
stock's  fair  value on the date  surrendered.  The board of  directors  granted
202,676  options  in 1999 and  6,623  options  in 2001.  No  options  have  been
exercised to date and 33,978 options have been surrendered to date.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions:

                                                 Years Ended December 31,
                                     -------------------------------------------
                                          2002           2001           2000
                                     -------------   -------------  -----------
Dividend Yield                            3.5%            3.5%         3.5%
Expected Life                             8.5 years       8.5 years    8.5 years
Expected Volatility                       52%             52%          52%
Risk-Free Interest Rate                   4.8%            4.8%         4.8%


                                       31
<PAGE>

A summary of the status of the Company's stock option plan is presented below:
<TABLE>
<CAPTION>


                                              2002                            2001                             2000
                                   ---------------------------    -----------------------------    -----------------------------
                                                    Weighted                        Weighted                         Weighted
                                                    Average                          Average                          Average
                                                    Exercise                        Exercise                         Exercise
                                     Shares          Price           Shares           Price          Shares            Price
                                   ------------    -----------    -------------    ------------    ------------     ------------
<S>                                   <C>          <C>                 <C>         <C>                 <C>          <C>

Outstanding at
 Beginning of Year                    209,299      $     8.59          202,676     $      8.60         202,676      $      8.60
Granted                                     0                            6,623            8.25               0
Exercised                                   0                                0                               0
Surrendered                           (33,978)           8.60                0                               0
Forfeited                                   0                                0                               0
                                   ----------                      -----------                    ------------
Outstanding at                        175,321      $     8.59          209,299     $      8.59         202,676      $      8.60
 End of Year
                                   ==========      ==========      ===========     ===========    ============      ===========
Options Exercisable                   172,010      $     8.59          157,703     $      8.59         109,419      $      8.60
 at Year-End
Weighted-Average Fair
 Value of Options Granted
 During the year                          N/A                            $3.61                             N/A

</TABLE>


Information  pertaining  to  options  outstanding  at  December  31,  2002 is as
follows:
<TABLE>
<CAPTION>

                                                       Options Outstanding                            Options Exercisable
                                       ----------------------------------------------------     --------------------------------
                                                               Weighted
                                                               Average          Weighted                             Weighted
                                                              Remaining          Average                             Average
             Range of                       Number           Contractual        Exercise           Number            Exercise
         Exercise Prices                 Outstanding            Life              Price          Exercisable          Price
-----------------------------------    -----------------    --------------     ------------     --------------     -------------
<S>                                        <C>                <C>              <C>                <C>              <C>
          $8.00 - $9.00                    175,321            6.1 years        $      8.59         172,010         $      8.59
</TABLE>


The Company has purchased 175,139 and 188,422 shares as of December 31, 2002 and
2001,  respectively,  of its common  stock that is being held in trusts for when
the stock options are exercised. A contra-equity account has been established to
reflect the costs of such shares held in the trusts.


NOTE 12 - MANAGEMENT RECOGNITION PLAN

In  January  1999,  the  Company's  board of  directors  approved  a  Management
Recognition Plan (MRP), and in May 1999, the Company's shareholders ratified the
plan. The plan authorizes the board of directors to award up to 58,190 shares of
restricted  common  stock to  members  of the  board  of  directors  and  senior
management.

The Company's  board of directors  has awarded  54,518 shares as of December 31,
2002 and 2001 of  restricted  common  stock to  certain  members of the board of
directors  and  senior  management.  The shares are  awarded  25% per year.  The
Company  and its  subsidiary  will  share  the cost of the plan and  accrue  the
estimated cost of  repurchasing  shares to be reissued as restricted  stock over
the period that such  awards are earned.  Activity in the MRP plan for the years
ended December 31 is as follows:
<TABLE>
<CAPTION>
                                                                            2002               2001                2000
                                                                        --------------    ----------------    --------------
<S>                                                                     <C>               <C>

         Accrued Liability Balance at Beginning of Year                 $    142,259      $      152,895      $      142,595
         Amount Charged to Expense                                            16,855             169,488             176,880
         Less Cost of Shares Issued                                         (153,576)           (180,124)           (166,580)
                                                                        -------------     ---------------     ---------------
         Accrued Liability Balance at End of Year                       $      5,538      $      142,259      $      152,895
                                                                        =============     ===============     ===============
</TABLE>
                                       32
<PAGE>

The Company held 4,591 shares as of December 31, 2002 (17,138 shares in 2001) of
its  common  stock in trust at a net cost of  $56,194 as of  December  31,  2002
($209,770 in 2001). A contra-equity  account has been established to reflect the
cost of such shares held in trust.


NOTE 13 - DIRECTORS DEFERRED COMPENSATION

In 1998, the Company established a deferred compensation plan whereby directors,
at their option, can defer all or portions of fees they earn each year. Fees not
paid are  accrued  for the  benefit  of the  directors  and their  accounts  are
adjusted  quarterly for the return equivalent to the change in the fair value of
the Company's common stock. Alternatively,  each director can elect to receive a
rate equivalent to the Bank's one year certificate of deposit rate.  Activity in
the plan for the years ended December 31 is as follows:

                                           2002          2001          2000
                                       ----------     ----------    ------------
Balances, Beginning of Year            $  237,888     $  171,346    $   131,527
Directors Fees Deferred During Year        69,800         57,300         55,900
Income (Loss) During Year                  44,860          9,242        (16,081)
                                       ----------     ----------    ------------
Balances, End of Year                  $  352,548     $  237,888    $   171,346
                                       ==========     ==========    ============

Amounts owed under the plan are paid to directors upon their retirement from the
board of directors.


NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Bank'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, 2002,  the Bank had
concentrations  of loans in real  estate  lending.  Generally  these  loans  are
secured by the  underlying  real estate.  The usual risks  associated  with such
concentrations  are  generally  mitigated by being  spread over several  hundred
unrelated borrowers and by adequate loan to collateral value ratios.


NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES

The Bank 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 financial position of the Bank ratios.


NOTE 16 - 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 Bank,  and to certain
other eligible subscribers.  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.  On January 1, 1998, the Bank
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.  Total conversion
costs of  $571,822  were  deducted  from the  proceeds of the shares sold in the
conversion.

At the time of the conversion,  the Bank 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 are
subject to several restrictions  concerning the repurchase of stock and dividend
payment restrictions pursuant to the applicable rules and policies of the OTS.

                                       33
<PAGE>

NOTE 17 - 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 Company and the Bank, 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
Company's  and Bank'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,  risk  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 Bank'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 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.

                                       34
<PAGE>

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 Bank as of the dates  indicated
below.

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

<TABLE>
<CAPTION>


                                                               As of December 31, 2002             As of December 31, 2001
                                                           --------------------------------    --------------------------------
                                                              Recorded         Estimated          Recorded         Estimated
                                                                Book              Fair              Book              Fair
                                                               Value             Value             Value             Value
                                                           ---------------    -------------    ---------------    -------------
<S>                                                           <C>              <C>               <C>             <C>

FINANCIAL ASSETS:
Cash and Amounts Due
 From Depository Institutions                                 $   5,350        $    5,350         $    2,123     $   2,123
Investment Securities Available for Sale                      $  25,267        $   25,267         $   24,398     $  24,398
Loans Receivable, Net                                         $  78,362        $   78,667         $   72,200     $  72,476

FINANCIAL LIABILITIES:
Deposits                                                      $  93,747        $   93,911         $   84,810     $  85,917

</TABLE>
                                       35
<PAGE>


                              CORPORATE INFORMATION


Directors:                                          Annual Stockholder Meeting
                                                    May 20, 2003; 5:00 p.m.
   J. William Myers                                 Newport Federal Bank
    Chairman of the Board & Attorney                344 W. Broadway
    Myers & Bell, P.C.,                             Newport, Tennessee
    Newport, TN

   Richard G. Harwood                               Main Office:
    President and Chief Executive Officer
    of the Company and the Bank                     344 W. Broadway
                                                    Newport, Tennessee
   Tommy C. Bible
    Manager, Jefferson/Cocke Co. Utilities          Branch Offices:

   William B. Henry                                 263 E. Broadway
    Retired; Former Optometrist                     Newport, Tennessee

   Ben W. Hooper, III                               345 Cosby Highway
    Attorney, Campbell & Hooper,                    Newport, Tennessee
    Newport, Tennessee
                                                    Independent Auditor:

   Robert L. Overholt                               Pugh & Company, P.C.
    Retired; Former Owner/Manager                   Knoxville, Tennessee
    Home Supply
                                                    General Counsel:
   Robert D. Self
    Retired; Former Owner,                          Myers & Bell, P.C.
    Bob Self Auto Parts                             Newport, Tennessee

Executive Officers:                                 Securities and Regulatory
                                                    Counsel:

   Richard G. Harwood                               Baker, Donelson, Bearman &
    President and Chief Executive Officer           Caldwell
                                                    Johnson City, Tennessee
   Lonnie R. Jones
    Vice President of Operations of the Bank        Stock Registrar & Transfer
                                                    Agent:
   Nancy L. Bryant
    Vice President and Treasurer                    Registrar and Transfer
                                                    Company
   Peggy  B. Holston                                10 Commerce Drive
    Secretary                                       Cranford, New Jersey 07016

   Chris H. Triplett
    Controller