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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF
     1934.

                  For the fiscal year ended December 31, 2001
                                       OR

[ ]  TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934.

For the transition period from                to
                               --------------    --------------

                         Commission File Number: 0-23551

                        UNITED TENNESSEE BANKSHARES, INC.
--------------------------------------------------------------------------------
           (Name of Small Business Issuer as Specified in Its Charter)

         Tennessee                                       62-1710108
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

 344 W. Broadway, Newport, Tennessee                            37821-0249
---------------------------------------------                   ----------
(Address of Principal Executive Offices)                        (Zip Code)

         Issuer's Telephone Number, Including Area Code: (423) 623-6088

Securities registered under Section 12(b) of the Exchange Act:  None

Securities  registered under Section 12(g) of the Exchange Act: Common Stock, no
par value.

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days.

                       Yes       X           No
                            -----------         ------

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of the  registrant's  knowledge,  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

The issuer's revenues for its most recent fiscal year were $7,791,313.

The   aggregate   market  value  of  the   outstanding   common  stock  held  by
non-affiliates  at March 25, 2002 was  approximately  $6.9 million (based on the
most recent trade  reported on the Nasdaq  SmallCap  Market (SM) ($9.50 on March
25, 2002).  Solely for purposes of this calculation,  the registrant's  employee
stock ownership plan,  401(k) plan,  management  recognition  plan, stock option
plan trusts,  directors' incentive plan and directors and executive officers are
deemed to be affiliates.

The total number of outstanding shares of the issuer's common stock at March 25,
2002 was 1,341,012.

Transitional small business disclosure format (check one):

                        Yes                  No     X
                            ----------          ---------

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   2001 Annual Report to Stockholders (the "Annual Report") (Part II).

2.   Proxy  Statement  for 2002  Annual  Meeting  of  Stockholders  (the  "Proxy
     Statement") (Part III).

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<PAGE>


                                     PART I

Item 1.  Description of Business



General

     United Tennessee Bankshares,  Inc. United Tennessee  Bankshares,  Inc. (the
"Company") was  incorporated  under the laws of the State of Tennessee in August
1997 to serve as the  holding  company  for Newport  Federal  Bank (the  "Bank")
following  its  conversion  from  mutual to stock  form (the  "Conversion").  On
January 1, 1998, the Bank consummated the Conversion,  and the Company completed
its initial  offering of Common Stock through the sale and issuance of 1,454,750
shares of Common Stock at a price of $10.00 per share,  realizing gross proceeds
of $14.5 million and net proceeds of  approximately  $14.0 million.  The Company
purchased all of the Bank's  capital stock with $7.1 million of the net offering
proceeds and retained the  remainder.  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 $678,000 loan to the
Company's  employee stock  ownership plan and  approximately  $900,000 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  in 1934 as a  federally
chartered mutual savings  institution 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.  At
December 31, 2001, the Bank had total assets of $99.8 million, deposits of $84.8
million and stockholders' equity of $12.4 million, or 12.4% of total assets.

     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,
primarily of mortgage-backed  securities issued by the Federal National Mortgage
Association  ("FNMA"),  Federal Home Loan  Mortgage  Corporation  ("FHLMC")  and
Government National Mortgage  Association  ("GNMA"),  obligations of the federal
government and agencies and investment-grade obligations of states and political
subdivisions.

     The Bank  derives its 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,  other operating revenues and, from
time to time,  advances  from the Federal Home Loan Bank  ("FHLB") of Cincinnati
and other borrowings.

     As a  federally  chartered  savings  institution,  the Bank is  subject  to
extensive  regulation by the Office of Thrift  Supervision  ("OTS").  The Bank's
lending  activities  and other  investments  must  comply with  various  federal
regulatory  requirements,  and  the  OTS  periodically  examines  the  Bank  for
compliance with various regulatory requirements. The Bank must also file reports
with the OTS  describing  its  activities  and financial  condition.  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 is
also subject to certain monetary reserve  requirements  promulgated by the Board
of Governors of the Federal Reserve System (the "Federal Reserve Board").


                                      -1-
<PAGE>


Market Area

     The Bank's  primary  market area is Cocke  County,  Tennessee.  To a lesser
extent, the Bank accepts deposits and offer loans in surrounding areas.

     Cocke County is primarily rural, with a population of approximately  34,000
persons  and  relatively  high  unemployment   levels  and  low-income   levels.
Approximately  one-third  of the county is occupied by Douglas Lake and portions
of the Cherokee National Forest and the Great Smoky Mountains  National Park. In
recent periods,  the population growth rate has been above the national rate and
equal to the state  rate  (since  1990,  15.2%  compared  with  13.1% and 16.7%,
respectively),  partially due to increased  numbers of retirees  moving into the
area.  However,  unemployment  levels have been  slightly  higher than state and
national   levels  (for  December  2001,  6.8%  compared  with  5.0%  and  5.8%,
respectively),  and income levels have been  substantially  lower than state and
national  averages  (for  2001,  $23,408  compared  with  $32,047  and  $37,005,
respectively, per person), due in part to the seasonal nature of tourism related
employment.  Over the next five  years,  demographic  trends in the  county  are
expected to be consistent with recent experience,  with the differences  between
county,   state  and  national   population  growth  rates  decreasing  and  the
differences between county, state and national income levels growing.

     The  economy  in the  Bank's  primary  market  area  includes  a variety of
industries,  including farming,  manufacturing,  services,  retail and wholesale
trade  and  tourism.  Significant  employers  include  Hunt  Wesson  in the food
processing industry and Falcon Products in the furniture industry.

Competition

     The  Bank  experiences  substantial  competition  both  in  attracting  and
retaining savings deposits and in the making of mortgage and other loans.

     Direct   competition   for  savings   deposits  comes  from  other  savings
institutions,  credit  unions,  regional bank holding  companies and  commercial
banks.  Significant  competition  for the  Bank's  other  deposit  products  and
services  comes from money market mutual funds and brokerage  firms.  Its direct
competitors  include three banks,  one of which is a branch of a large  regional
bank  headquartered  outside its market  area,  and one branch of a credit union
headquartered  outside its market area. The Bank currently has the third largest
share of  deposits in its market area of Cocke  County.  The primary  factors in
competing for loans are interest rates and loan origination fees and the quality
and range of services offered by various financial institutions. Competition for
origination of real estate loans normally comes from other savings institutions,
commercial banks, credit unions, mortgage bankers and mortgage brokers.

     The Bank's principal primary competition comes from financial  institutions
headquartered in its primary market area and from various  non-local  commercial
banks  that have  branch  offices  located  in its  primary  market  area.  Many
competing financial institutions have financial resources  substantially greater
than the Bank's and offer a wider  variety of  deposit  and loan  products.  The
Bank's  principal  competitive  strategy has been to emphasize  quality customer
service.

Lending Activities

     The Bank principally originates loans secured by mortgages on single-family
residences  in its primary  market area.  It also makes  commercial  real estate
loans and a variety of consumer loans.

     With  certain  limited  exceptions,  the  maximum  amount  that  a  savings
institution may lend to any borrower  (including certain related entities of the
borrower) at one time may not exceed 15% of the  unimpaired  capital and surplus
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans fully secured by readily marketable collateral.  At December 31, 2001, the
maximum  amount that the Bank could have lent to any one borrower  without prior
OTS approval under those  regulations was  approximately  $2.7 million.  At that
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was  $941,000.  The Bank had a total of five lending  relationships
with  aggregate  loan  amounts over  $500,000 at December 31, 2001,  and none of
these loans were nonperforming.  For additional information, see " -- Regulation
of the Bank -- Limits on Loans to One Borrower."

                                      -2-
<PAGE>

     Loan  Portfolio  Composition.  The following  table sets forth  information
about the  composition of the Bank's loan portfolio by type of loan at the dates
indicated.  At  December  31,  2001,  the  Bank had no  concentrations  of loans
exceeding 10% of gross loans other than as disclosed below.


<TABLE>
<CAPTION>

                                                                        At December 31,
                                               --------------------------------------------------------------------
                                                      2001                     2000                    1999
                                               -----------------       -----------------       --------------------
                                               Amount        %         Amount        %         Amount          %
                                               ------      -----       ------      -----       ------        ------
                                                                     (Dollars in thousands)
<S>                                            <C>            <C>     <C>             <C>     <C>           <C>
Real estate loans:
  One- to four-family residential...........   $  57,577      76.8%   $ 53,782        75.9%   $48,550       76.5%
  Commercial................................       9,131      12.2      10,229        14.4     9,099        14.3
  Construction..............................       3,997       5.3       2,589         3.6      2,615        4.1

Consumer loans:
  Automobile................................     1,260         1.7       1,402         2.0        980        1.5
  Loans to depositors, secured by deposits..     1,380         1.8       1,250         1.8      1,114        1.8
  Home equity and second mortgage...........       157         0.2         227         0.3        208        0.3
  Other.....................................     1,506         2.0       1,415         2.0        931        1.5
                                               -------        ----    --------        ----    -------       ----
                                                75,008       100.0%     70,894       100.0%    63,497      100.0%
                                               -------       =====    --------       =====    -------      =====

Less:
  Loans in process..........................     1,737                   1,030                  1,033
  Deferred fees and discounts...............       352                     326                    287
  Allowance for loan losses.................       719                     660                    661
                                               -------                --------                -------
    Total...................................   $72,200                $ 68,878                $61,516
                                               =======                ========                =======
</TABLE>


     Loan Maturity  Schedule.  The following table sets forth  information about
dollar  amounts  of  loans  maturing  in the  Bank's  portfolio  based  on their
contractual terms to maturity,  including scheduled repayments of principal,  at
December 31, 2001.  Demand loans,  loans having no stated schedule of repayments
and no stated  maturity and  overdrafts are reported as due in one year or less.
The table does not include  any  estimate of  prepayments,  which  significantly
shorten  the  average  life of all  mortgage  loans and may cause the  repayment
experience of the Bank to differ from that shown below.
<TABLE>
<CAPTION>

                                                              Due after
                                       Due within             1 Through             Due After
                                         1 Year                5 Years               5 Years             Total
                                         ------                -------               -------             -----
                                                                  (In thousands)
<S>                                     <C>                   <C>                   <C>                <C>
Real estate loans:
   One- to four-family residential....  $   1,152             $   2,879             $  53,546          $ 55,577
   Commercial.........................        274                 4,839                 4,018             9,131
   Construction.......................      3,997                    --                    --             3,997
Consumer loans........................      2,253                 1,674                   376             4,303
                                        ---------             ---------             ---------          --------
      Total...........................  $   7,676             $   9,392             $  57,940          $ 75,008
                                        =========             =========             =========          ========
</TABLE>



                                      -3-
<PAGE>


         Loan Portfolio Sensitivity.  The following table sets forth information
about dollar  amounts of loans due one year or more after December 31, 2001 that
had predetermined  interest rates and that had adjustable interest rates at that
date.
<TABLE>
<CAPTION>

                                                           Predetermined       Floating or
                                                               Rate          Adjustable Rates
                                                           ------------      ----------------
                                                                    (In thousands)
<S>                                                       <C>                   <C>
     Real estate loans:
        One- to four-family residential................   $       8,206         $   48,219
        Commercial.....................................           1,925              6,932
        Construction...................................              --                 --
     Consumer loans....................................           2,050                 --
                                                          -------------         ----------
           Total.......................................   $      12,181         $   55,151
                                                          =============         ==========
</TABLE>


     Scheduled  contractual  principal  repayments  of loans do not  reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Bank the right to declare a loan immediately due and
payable in the event,  among  other  things,  that the  borrower  sells the real
property subject to the mortgage and the loan is not repaid. The average life of
mortgage  loans tends to increase  when current  mortgage  loan market rates are
substantially  higher than rates on  existing  mortgage  loans and,  conversely,
decrease when current  mortgage loan market rates are  substantially  lower than
rates on existing mortgage loans.

     Loan  Originations,  Purchases and Sales.  The  following  table sets forth
information about its loan originations  during the periods indicated.  The Bank
does not purchase or sell loans.

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                              -------------------------------------------
                                                              2001               2000                1999
                                                              -----             ------              -----
                                                                            (In thousands)
<S>                                                           <C>               <C>              <C>
Loans originated:
  Real estate loans:
    One- to four-family residential.........................  $  18,737         $ 13,196         $  14,743
    Commercial..............................................        815            1,596             4,967
    Construction............................................      4,800            3,831             3,656
  Consumer loans............................................      2,972            2,361             1,623
                                                              ----------        ----------       ----------
     Total loans originated ................................  $  27,324         $ 20,984         $  24,989
                                                              ==========        ==========       ==========
</TABLE>


     One- to  Four-Family  Residential  Lending.  The Bank's  principal  lending
activity  consists of the  origination of loans secured by mortgages on existing
single-family  residences in its primary market area.  The Bank also  originates
significant  amounts  of loans  for the  construction  of such  residences.  The
purchase price or appraised value of most of such residences  generally has been
between $40,000 and $80,000, with original loan amounts averaging  approximately
$50,000.  At December 31, 2001,  $57.6  million,  or 76.8%,  of total loans were
secured by one- to four-family residences,  a substantial majority of which were
existing,  owner-occupied,  single-family residences in its primary market area.
At December  31,  2001,  $49.4  million,  or 86.0%,  of its one- to  four-family
residential loans had adjustable  interest rates, and $8.2 million, or 14.0% had
fixed rates.  During the year ended December 31, 2001, the Bank originated $23.5
million  of  adjustable-rate  loans,  which  was  approximately  86.0%  of total
mortgage loan originations for that period, and at that date it had $3.7 million
of loan commitments, 85% of which were for adjustable rate loans.

     The  Bank's  one-  to  four-family  residential  mortgage  loans  may  have
adjustable or fixed rates of interest. These loans generally are for terms of up
to 30 years  for  adjustable-rate  loans  and 15  years  for  fixed-rate  loans,
amortized  on a monthly  basis,  with  principal  and  interest  due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans

                                      -4-
<PAGE>

at their option without penalty.  These loans customarily contain  "due-on-sale"
clauses,  which permit the Bank to accelerate  repayment of a loan upon transfer
of ownership of the mortgaged property.

     While  it is not the  Bank's  policy  to sell its  loans  in the  secondary
market,   one-  to  four-family   residential   mortgage  loans   generally  are
underwritten  in  accordance  with   applicable   underwriting   guidelines  and
documentation  requirements  published  by the FNMA and  FHLMC  for  loans to be
eligible for sale to them,  except, as to approximately 95% of these loans, with
respect to their requirements  related to mortgaged  properties (for example, in
light of the  Bank's  experience  in its  market  area,  the Bank often does not
require  homes to have air  conditioning  or a  complete  survey or  independent
appraisal, and occasionally does not require contractors to be licensed).

     The Bank's lending policies generally limit the maximum loan-to-value ratio
on one- to  four-family  residential  mortgage  loans secured by  owner-occupied
properties to 95% of the lesser of the appraised value or purchase  price,  with
private  mortgage  insurance  or  other  enhancement   required  on  loans  with
loan-to-value  ratios in  excess  of 85%.  The  maximum  loan-to-value  ratio on
mortgage loans secured by non-owner-occupied  properties generally is limited to
75%.

     The Bank's adjustable-rate,  one- to four-family residential mortgage loans
generally  are indexed to the weekly  average rate on U.S.  Treasury  securities
adjusted to a constant maturity of one year. The rates at which interest accrues
on these loans typically are adjustable annually,  often after an initial period
of up to five years before the first rate adjustment, generally with limitations
on  adjustments  of  two  percentage  points  per  adjustment  period,  and  six
percentage points over the life of the loan, and an interest rate floor equal to
the  initial  interest  rate  on  the  loan.  While  its  adjustable-rate  loans
frequently are originated with initially  discounted  interest rates, such loans
are underwritten and borrowers are qualified based on the fully indexed interest
rate. The Bank's adjustable-rate loans do not permit negative amortization.

     Adjustable-rate  loans help the Bank to reduce its exposure to increases in
prevailing market interest rates. However, there are unquantifiable credit risks
resulting from potential  increases in costs to borrowers in the event of upward
repricing of adjustable-rate loans. It is possible that during periods of rising
interest rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers.  Further,  adjustable-rate loans which
provide  for  initial  rates of interest  below the fully  indexed  rates may be
subject to increased risk of delinquency or default as the higher, fully indexed
rate of  interest  subsequently  replaces  the  lower,  initial  rate.  Further,
although adjustable-rate loans allow the Bank to increase the sensitivity of its
interest-earning  assets  to  changes  in  interest  rates,  the  extent of this
interest  sensitivity  is limited by the initial  fixed-rate  period  before the
first  adjustment  and  the  periodic  and  lifetime  interest  rate  adjustment
limitations and the ability of borrowers to refinance the loans. Accordingly, no
assurance  can be given  that  yields on its  adjustable-rate  loans  will fully
adjust  to   compensate   for   increases   in  its  cost  of  funds.   Finally,
adjustable-rate  loans  increase the Bank's  exposure to decreases in prevailing
market interest rates,  although decreases in its cost of funds and its interest
rate adjustment limitations and floor tend to offset this effect.

     Construction Lending. The Bank offers loans to individuals for construction
of one- to four-family  owner-occupied  residences located in its primary market
area, with such loans usually converting to permanent  financing upon completion
of construction.  At December 31, 2001, the Bank's loan portfolio  included $4.0
million of loans secured by  properties  under  construction,  all of which were
construction/permanent  loans  structured  to become  permanent  loans  upon the
completion  of  construction.  From time to time,  the Bank also offers loans to
qualified  builders  for the  construction  of one-  to  four-family  residences
located in the Bank's primary  market area.  Because such homes are intended for
resale,  the Bank  generally  does not cover such loans by  permanent  financing
commitments.  All construction loans are secured by a first lien on the property
under  construction.  Loan proceeds are disbursed in increments as  construction
progresses  and  as  inspections  warrant.   Construction/permanent   loans  are
underwritten  in accordance with the same  requirements as permanent  mortgages,
except  the  loans  generally  provide  for  disbursement  in  stages  during  a
construction period of up to six months, during which period the borrower may or
may not be required to make monthly payments.  Borrowers must satisfy all credit
requirements that would apply to its permanent  mortgage loan financing prior to
receiving construction financing for the subject property.

     Construction  financing  involves  a  higher  degree  of risk of loss  than
long-term financing on existing, improved, occupied real estate. Risk of loss on
a  construction  loan depends  upon the accuracy of the initial  estimate of the
property's value at completion of construction and the estimated cost (including
interest) of construction.

                                      -5-
<PAGE>

During the  construction  phase, a number of factors could cause delays and cost
overruns.  If the  estimate  of  construction  costs  is  inaccurate,  it may be
required  to advance  funds  beyond the amount  originally  committed  to permit
completion of  construction.  If the estimate of value is inaccurate,  it may be
confronted,  at or prior to the maturity of the loan,  with a property  having a
value which is insufficient  to assure full repayment.  The ability of a builder
to sell  completed  residences  will  depend on,  among  other  things,  demand,
pricing, availability of comparable properties and economic conditions. The Bank
has tried to minimize  this risk by limiting  construction  lending to qualified
borrowers in its market area and by limiting the aggregate amount of outstanding
construction loans.

     Commercial  Real Estate  Lending.  The Bank  originates  limited amounts of
commercial  real estate  loans in order to benefit  from the higher  origination
fees and interest  rates,  as well as shorter  terms to maturity,  than could be
obtained from  single-family  mortgage loans. The Bank's  commercial real estate
loans are  secured  by  churches,  restaurants,  offices,  apartments  and other
income-producing  commercial  properties.  At December  31,  2001,  the Bank had
approximately  180 of these  loans  totaling  $9.1  million,  with a median loan
balance  of  approximately  $60,000,  none  of  which  had a  balance  exceeding
$900,000. One of these loans was classified as substandard,  with an outstanding
balance of  $462,000 at  December  31,  2001.  For  information  about its asset
classification policies and nonperforming assets, see " -- Asset Classification,
Allowance for Losses and Nonperforming Assets."

     The Bank's  commercial  real estate loans generally are limited to original
balances not exceeding  $500,000 on properties in its primary market area,  with
terms of up to 25 years. These loans generally have annually adjustable interest
rates,  with  limitations  on  adjustments  of two percent per year, and maximum
loan-to-value ratios of 75%.

     The following  paragraphs set forth information about the Bank's commercial
real estate loans with outstanding  balances  exceeding $500,000 at December 31,
2001.  None of these loans was  classified as  substandard,  doubtful or loss or
designated  as  special  mention  at that  date.  For  information  about  asset
classification  policies of the Bank, see "Asset  Classification,  Allowance for
Losses and Nonperforming Assets."

               Retail  properties in Sevierville,  Tennessee.  In December 1998,
               the Bank made a  $750,000  loan  secured  by an  office  building
               located in  Sevierville,  Tennessee.  The  appraisal  indicated a
               loan-to-value  ratio  of  approximately  75%.  The  loan is being
               amortized  over  15  years.   In  October  1999,  this  loan  was
               refinanced at $775,000 and amortized over 20 years.

               Residential  real estate  development  property in Jefferson  and
               Cocke County,  Tennessee.  In December  2000, the Bank approved a
               line of credit for $900,000 secured by developed residential lots
               in Cocke  County,  Tennessee  and  unimproved  land in  Jefferson
               County,  Tennessee.  The bank  advanced  $275,000  on the line of
               credit  for  the  purchase  and an  additional  $625,000  for the
               development of the unimproved land in Jefferson County. The total
               outstanding  balance  on the  line  of  credit  was  $900,000  at
               December 31, 2001. The loan will mature on November 29, 2002.

     Commercial  real  estate  lending  entails  significant   additional  risks
compared with single-family  residential lending.  For example,  commercial real
estate loans typically involve large loan balances to single borrowers or groups
of  related  borrowers,  the  payment  experience  on such  loans  typically  is
dependent  on the  successful  operation of the real estate  project,  and these
risks can be  significantly  impacted  by supply  and demand  conditions  in the
market for multi-family  residential  units and commercial office space, and, as
such,  may be subject to a greater  extent to adverse  conditions in the economy
generally. In addition,  church loans may depend on the congregation's voluntary
contributions,  which  may be  affected  by local  employment  levels  and other
factors.  To minimize  the effects of these  risks,  the Bank  generally  limits
commercial  real estate lending to its primary market area and to borrowers with
which it has substantial experience or who are otherwise well known to the Bank.
It is the  Bank's  policy  to obtain  personal  guarantees  from all  principals
obtaining  commercial  real  estate  loans.  In  assessing  the  value  of  such
guarantees, the individual's personal financial statements,  credit reports, tax
returns and other financial information are reviewed.

     The  aggregate   amount  of  loans  which   federally   chartered   savings
institutions may make on the security of liens on commercial real estate may not
exceed 400% of the institution's capital. Based on its total capital at

                                      -6-
<PAGE>

December 31, 2001,  the Bank would be permitted to invest up to $49.6 million in
loans secured by commercial real estate.

     Consumer  Lending.  The Bank's consumer loans consist of automobile  loans,
demand  loans  secured by deposit  accounts  with the Bank,  home  equity  loans
secured by second  mortgages on  single-family  residences  in the Bank's market
area and other loans. These loans totaled approximately $4.3 million at December
31,  2001.  At that date,  the Bank had 574 consumer  loans,  with a median loan
balance of approximately  $5,000, none of which had a balance exceeding $75,000,
and  none  of the  ten  largest  consumer  loans  was  adversely  classified  or
designated.

     Consumer  loans  generally  involve  more risk than first  mortgage  loans.
Repossessed  collateral for a defaulted loan may not provide an adequate  source
of repayment  of the  outstanding  loan  balance as a result of damage,  loss or
depreciation,  and the  remaining  deficiency  often  does not  warrant  further
substantial   collection  efforts  against  the  borrower.  In  addition,   loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss,  divorce,  illness or
personal bankruptcy. Further, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the amount
which can be recovered. These loans may also give rise to claims and defenses by
a borrower  against the Bank,  and a borrower  may be able to assert  claims and
defenses which the Bank has against the seller of the underlying collateral.  In
underwriting  consumer loans, the Bank considers the borrower's  credit history,
an analysis of the borrower's income, expenses and ability to repay the loan and
the value of the collateral.

     Collection Policies. When a borrower fails to make a payment on a loan, the
Bank  generally  takes prompt steps to have the  delinquency  cured and the loan
restored to current  status.  Once the payment grace period has expired (in most
instances 15 days after the due date), a late charge is imposed,  if applicable.
If  payment  is not  promptly  received,  a  notice  is sent 15 days  after  the
expiration  of the grace  period.  If the loan becomes 60 days  delinquent,  the
borrower is contacted and an attempt is made to formulate an affirmative plan to
cure  the  delinquency.  If a loan  becomes  90  days  delinquent,  the  loan is
reviewed,  and, if payment is not made,  the Bank pursues  foreclosure  or other
appropriate action.

     Asset  Classification,  Allowance  for  Losses  and  Nonperforming  Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be  inadequately  protected by the current net worth and paying
capacity  of the  obligor  or of the  collateral  pledged,  if any.  An asset is
classified as doubtful if full collection is highly  questionable or improbable.
An asset is  classified  as loss if it is  considered  uncollectible,  even if a
partial  recovery could be expected in the future.  The regulations also provide
for a special  mention  designation,  described as assets which do not currently
expose an institution to a sufficient  degree of risk to warrant  classification
but do possess credit deficiencies or potential  weaknesses  deserving its close
attention.  Assets  classified as substandard or doubtful require an institution
to establish general  allowances for loan losses. If an asset or portion thereof
is classified loss, an institution  must either  establish a specific  allowance
for loss in the amount of the portion of the asset  classified  loss,  or charge
off  such  amount.   Federal   examiners  may  disagree  with  an  institution's
classifications.   If  an   institution   does  not  agree  with  an  examiner's
classification of an asset, it may appeal this determination to the OTS Regional
Director.

     The Bank regularly  reviews its assets to determine  whether assets require
classification  or  re-classification,  and the Board of  Directors  reviews and
approves all  classifications.  As of December 31, 2001,  the Bank had no assets
classified as loss or as doubtful,  $994,000 of assets classified as substandard
and no  assets  designated  as  special  mention.  The  Bank's  total  adversely
classified assets represented approximately 1.0% of its total assets and 9.3% of
its tangible  regulatory capital at December 31, 2001. At that date, $411,000 of
its  adversely   classified  or  designated  assets  were  one-  to  four-family
residences in its primary market area, and only one of such assets was in excess
of $100,000.  At December 31, 2001 the Bank had one commercial  real estate loan
with a balance of  approximately  $462,000  that was  adversely  classified.  At
December  31,  2001,  the Bank did not  expect  to incur  any loss in  excess of
attributable  existing reserves on any of its adversely classified or designated
assets.

     In extending  credit,  the Bank  recognizes that losses will occur and that
the risk of loss will vary with,  among other  things,  the type of credit being
extended,  the  creditworthiness of the obligor over the term of the obligation,
general  economic  conditions  and,  in the case of a  secured  obligation,  the
quality of the  security.  It is the Bank's  policy to maintain  allowances  for
losses based on its  assessment  of the loan  portfolio.  The Bank  increase the
allowance for losses by charging provisions for losses against its income.

                                      -7-
<PAGE>

     The Bank's methodology for establishing the allowance for losses takes into
consideration  probable  losses that have been  identified  in  connection  with
specific  assets as well as  losses  that  have not been  identified  but can be
expected to occur. The Bank conducts regular reviews of its assets and evaluates
the need to establish  allowances  on the basis of this review.  Allowances  are
established  on a regular  basis based on an assessment of risk in assets taking
into  consideration  the composition  and quality of the portfolio,  delinquency
trends,  current  charge-off and loss  experience,  the state of the real estate
market,  regulatory  reviews  conducted in the regulatory  examination  process,
general  economic  conditions  and other  factors  deemed  relevant by the Bank.
Allowances  are  provided for  individual  assets,  or portions of assets,  when
ultimate collection is considered improbable based on the current payment status
of the assets and the fair value or net realizable  value of the collateral.  At
the date of  foreclosure  or other  repossession  or at the date a  property  is
determined to be an "in-substance  foreclosed" property,  the Bank transfers the
property to real estate  acquired in settlement of loans at the lower of cost or
fair value. Fair value is defined as the amount in cash or cash-equivalent value
of other  consideration  that a property would yield in a current sale between a
willing  buyer  and  a  willing  seller.   Fair  value  is  measured  by  market
transactions.  If a market  does  not  exist,  fair  value  of the  property  is
estimated based on selling prices of similar properties in active markets or, if
there are no active markets for similar properties, by discounting a forecast of
expected cash flows at a rate  commensurate  with the risk involved.  Fair value
generally is  determined  through an appraisal  at the time of  foreclosure.  At
December 31, 2001, the Bank held no properties  acquired in settlement of loans.
Any amount of cost in excess of fair value is charged-off  against the allowance
for loan losses.  The Bank records an allowance for  estimated  selling costs of
the property  immediately  after  foreclosure.  Subsequent to  acquisition,  the
property is  periodically  evaluated,  and an  allowance is  established  if the
estimated fair value of the property,  less estimated  costs to sell,  declines.
If, upon ultimate disposition of the property, net sales proceeds exceed the net
carrying value of the property, a gain on sale of real estate is recorded.

     The banking regulatory  agencies,  including the OTS, have adopted a policy
statement  about  maintenance  of an allowance  for loan and lease losses and an
effective loan review  system.  This policy  includes an arithmetic  formula for
checking the reasonableness of an institution's allowance for loan loss estimate
compared to the average loss  experience  of the industry as a whole.  Examiners
will review an  institution's  allowance  for loan losses and compare it against
the sum of (i) 50% of the portfolio that is classified doubtful; (ii) 15% of the
portfolio that is classified as  substandard;  and (iii) for the portions of the
portfolio that have not been  classified  (including  those loans  designated as
special mention),  estimated credit losses over the upcoming 12 months given the
facts and  circumstances  as of the evaluation  date.  This amount is considered
neither a "floor" nor a "safe  harbor" of the level of allowance for loan losses
an institution should maintain,  but examiners will view a shortfall relative to
the  amount as an  indication  that they  should  review  the  Bank's  policy on
allocating these  allowances to determine  whether it is reasonable based on all
relevant factors.

     The Bank  actively  monitors  its asset  quality  and charges off loans and
properties  acquired in settlement of loans against the allowances for losses on
such loans and such  properties  when  appropriate  and provides  specific  loss
allowances  when  necessary.  Although  the  Bank  believes  it  uses  the  best
information  available to make determinations with respect to the allowances for
losses,  future  adjustments  may be  necessary  if economic  conditions  differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.


                                      -8-
<PAGE>


     The following  table sets forth  information  about  activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                              --------------------------------------------
                                                              2001               2000                1999
                                                              -----             ------              ------
                                                                        (Dollars in thousands)
<S>                                                           <C>               <C>              <C>
Balance at beginning of period..............................  $     660         $    661         $     641
Charge-offs:
    Consumer................................................        (50)             (40)               (4)

Recoveries:
    Consumer................................................          1                2                --
                                                              ---------         --------         ---------
Net charge-offs.............................................        (49)             (38)               (4)
Provision for loan losses...................................        110               37                24
                                                              ---------         --------         ---------
Balance at end of period....................................  $     719         $    660         $     661
                                                              =========         ========         =========
Ratio of net charge-offs to average
  loans outstanding during the period.......................       0.07 %           0.06 %            0.01%
                                                              =========         ========         =========
</TABLE>


     The following table sets forth  information  about the Bank's allowance for
loan losses by asset  category at the dates  indicated.  The  allocation  of the
allowance to each  category is not  necessarily  indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.

<TABLE>
<CAPTION>

                                                                        At December 31,
                                            -----------------------------------------------------------------------------
                                                      2001                     2000                    1999
                                            ------------------------    ----------------------   ------------------------
                                                         Percent of                Percent of                 Percent of
                                                        Loans in Each             Loans in Each              Loans in Each
                                                         Category to               Category to                Category to
                                               Amount    Total Loans      Amount   Total Loans      Amount    Total Loans
                                               ------    -----------      ------   -----------      ------    -----------
                                                                         (Dollars in thousands)
Loans:
<S>                                         <C>                <C>     <C>            <C>        <C>             <C>
One- to four-family residential...........  $     362          50.4%   $     365      75.9%      $     383       76.5%
  Commercial..............................        185          25.7          100      14.4              91       14.3
  Construction............................         34           4.7           35       3.6              32        4.1
Consumer loans............................        138          19.2          160       6.1             155        5.1
                                            ---------         -----    ---------     -----       ---------      -----
    Total allowance for loan losses.......  $     719         100.0%   $     660     100.0%      $     661      100.0%
                                            =========         =====    =========     =====       =========      =====
</TABLE>


     During periods of recession or other economic distress,  numerous financial
institutions  throughout the United States have incurred  substantial losses due
to significant  increases in loss provisions and charge-offs  resulting  largely
from higher levels of loan delinquencies and foreclosures. As a result of losses
experienced by many financial  institutions during these periods, there has been
a greater level of scrutiny by regulatory  authorities of the loan portfolios of
financial  institutions  undertaken as part of examinations of such institutions
by the FDIC, OTS or other federal or state  regulators.  While the Bank believes
it has  established  its existing loss  allowances in accordance  with generally
accepted accounting principles, there can be no guarantee or assurance that such
reserves  are, or in the future  will be,  adequate to absorb all loan losses or
that  regulators,  in reviewing its assets,  will not make the Bank increase its
loss allowance,  thereby negatively  affecting its reported financial  condition
and results of operations.


                                      -9-
<PAGE>


     The following table sets forth information  about the Bank's  nonperforming
assets at the dates indicated.  At these dates, the Bank did not have any assets
accounted   for  on  a  nonaccrual   basis  or  modified  in  a  troubled   debt
restructuring.  For information about the Bank's interest accrual practices, see
Note 1 of the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>

                                                                              At December 31,
                                                                  ----------------------------------------
                                                                   2001             2000              1999
                                                                  -----           ------            ------
                                                                          (Dollars in thousands)
<S>                                                           <C>               <C>              <C>
Accruing  loans which are  contractually  past due
  90 days or more:
  Real estate  loans:
    One- to four-family residential.........................  $     411         $    517         $     348
    Commercial..............................................         --               --                --
    Construction............................................         --               --                --
  Consumer loans............................................         10               41                29
                                                              ---------         --------         ---------
    Total non performing loans..............................  $     421         $    558         $     377
                                                              =========         ========         =========

Percentage of total loans...................................       0.58%            0.79%             0.59%
                                                              =========         ========         =========

Other nonperforming assets(1)...............................  $      --         $     --         $      71
                                                              =========         ========         =========

Total nonperforming assets..................................  $     421         $    558         $     448
                                                              =========         ========         =========

Percentage of total assets..................................       0.42%            0.57%             0.48%
                                                              =========         ========         =========
</TABLE>

--------------------
(1)  Other  nonperforming  assets includes property acquired through foreclosure
     or  repossession.  This  property is carried at the lower of its fair value
     less estimated  selling costs or the principal balance of the related loan,
     whichever is lower.



     At December 31, 2001,  the Bank has no  additional  loans as to which known
information  about possible credit problems of borrowers caused the Bank to have
doubts as to the ability of the borrowers to comply with present loan  repayment
terms.  At that  date,  the Bank did not  expect  to incur any loss in excess of
attributable existing reserves on any of its assets.

Investment Activities

     The  Bank is  permitted  under  federal  law to make  certain  investments,
including investments in securities issued by various federal agencies and state
and municipal governments,  deposits at the FHLB of Cincinnati,  certificates of
deposit in federally  insured  institutions,  certain  bankers'  acceptances and
federal  funds.  The Bank may also invest,  subject to certain  limitations,  in
commercial paper rated in one of the two highest investment rating categories of
a  nationally  recognized  credit  rating  agency,  and  certain  other types of
corporate debt securities and mutual funds. Federal regulations require the Bank
to maintain an investment in FHLB.

     The Bank makes investments in order to maintain the levels of liquid assets
required by regulatory  authorities and manage cash flow,  diversify its assets,
obtain  yield  and,  under  prior  federal  income  tax  law,   satisfy  certain
requirements for favorable tax treatment. These investment activities consist of
investments  in  mortgage-backed  securities  and other  investment  securities,
primarily  securities  issued or guaranteed  by the U.S.  government or agencies
thereof  and  securities  issued  by  municipalities   and  other   governmental
authorities.  Investment and aggregate investment limitations and credit quality
parameters of each class of investment are  prescribed in the investment  policy
of the Bank.  Securities purchases are authorized by the investment committee of
the Bank's Board of Directors and ratified by the Bank's Board of Directors.

                                      -10-
<PAGE>

     Securities designated as "held to maturity" are those assets which the Bank
has the ability and intent to hold to maturity.  The held to maturity investment
portfolio is carried at amortized cost.  Securities designated as "available for
sale" are those  assets  which the Bank might not hold to maturity  and thus are
carried at market  value with  unrealized  gains or losses,  net of tax  effect,
recognized in equity.

     Mortgage-backed  securities  typically  represent  an interest in a pool of
fixed-rate  or  adjustable-rate  mortgage  loans,  the  principal  and  interest
payments on which are passed from the mortgage  borrowers  to investors  such as
the  Bank.  Mortgage-backed  security  sponsors  may  be  private  companies  or
quasi-governmental  agencies such as the FHLMC,  FNMA and GNMA,  which guarantee
the payment of principal and interest to investors.  Mortgage-backed  securities
can  represent  a  proportionate  participation  interest in a pool of loans or,
alternatively,  an obligation to repay a specified  amount  secured by a pool of
loans  (commonly  referred  to as a  "collateralized  mortgage  obligation,"  or
"CMO").  Mortgage-backed securities generally increase the quality of the Bank's
assets by virtue of the credit enhancements that back them, are more liquid than
individual  mortgage loans and may be used to collateralize  borrowings or other
obligations.  The Bank's mortgage-backed securities portfolio primarily consists
of seasoned securities issued by one of the quasi-governmental agencies.

     The actual maturity of a mortgage-backed security varies, depending on when
the  mortgagors  prepay or repay the  underlying  mortgages.  Prepayments of the
underlying  mortgages may shorten the life of the investment,  thereby adversely
affecting   its  yield  to  maturity  and  the  related   market  value  of  the
mortgage-backed  security.  The yield is based upon the interest  income and the
amortization  of the  premium  or  accretion  of  the  discount  related  to the
mortgage-backed security.  Premiums and discounts on mortgage-backed  securities
are  amortized or accreted  over the estimated  term of the  securities  using a
level  yield  method.   The  prepayment   assumptions   used  to  determine  the
amortization  period for premiums and  discounts  can  significantly  affect the
yield of the  mortgage-backed  security,  and  these  assumptions  are  reviewed
periodically  to reflect the actual  prepayment.  The actual  prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon  rate,  the  age of  the  mortgages,  the  geographical  location  of the
underlying  real estate  collateralizing  the  mortgages  and general  levels of
market  interest  rates.  The  difference  between  the  interest  rates  on the
underlying  mortgages and the prevailing mortgage interest rates is an important
determinant  in the rate of  prepayments.  During  periods of  falling  mortgage
interest rates, prepayments generally increase, and, conversely,  during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying  mortgage  significantly  exceeds the  prevailing  market
interest rates offered for mortgage loans,  refinancing  generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

     All of the  Company's  securities  issued by  municipalities  or comparable
governmental  authorities  were rated "A" or higher by a  nationally  recognized
credit rating agency at the time of purchase. The Company regularly monitors the
ratings of these holdings by reference to nationally  published rating media and
by communication with the issuer where necessary.  As of December 31, 2001, none
of these  securities had been  downgraded  from its original  rating,  and these
issues were primarily obligations of Tennessee  municipalities.  At December 31,
2001,  these  securities  had a weighted  average  coupon of 4.0% and a weighted
average term to maturity of approximately 43 months. The carrying value of these
securities was $1.4 million, or 5.5% of the investment securities of the Company
at that date. None of its privately  issued  securities is insured or guaranteed
by FHLMC or FNMA.


                                      -11-
<PAGE>


     The following  table sets forth  information  about carrying  values of the
Company's investment securities at the dates indicated.
<TABLE>
<CAPTION>

                                                                               At December 31,
                                                                  ----------------------------------------
                                                                   2001             2000              1999
                                                                  -----           ------            ------
                                                                              (In thousands)
<S>                                                           <C>               <C>              <C>
Securities available for sale:
   Mortgage-backed securities...............................  $  10,335         $ 14,374         $  19,235
   U.S. government and agency securities....................      9,201            6,554             5,345
   Obligations of states and political
       subdivisions.........................................      1,351              681             1,275
   FHLMC stock..............................................      1,833            1,931             1,319
   FHLB stock...............................................        857              802               746
   Corporate debt securities................................        716               --               --
   Other....................................................        105               15                15

Securities held to maturity:
   Obligations of states and political
       subdivisions.........................................         --               --             2,431
                                                              ---------         --------         ---------
      Total.................................................  $  24,398         $ 24,357         $  35,454
                                                              =========         ========         =========
</TABLE>

     The  following  schedule  analyzes the  Company's  investment  portfolio at
December 31, 2000 by time  remaining to maturity and presents the average  yield
for each range of maturities.


<TABLE>
<CAPTION>

                             Less than One Year One to Five Years  Five to Ten Years  More than Ten Years Total Investment Portfolio
                             ------------------ -----------------  -----------------  -----------------  -------------------------
                               Carrying Average   Carrying  Average  Carrying  Average  Carrying  Average  Carrying  Market Average
                                 Value   Yield     Value    Yield     Value     Yield    Value     Yield    Value     Value   Yield
                                 -----   -----     -----    -----     -----     -----    -----     -----    -----     -----   -----
                                                                   (Dollars in thousands)
<S>                            <C>         <C>   <C>         <C>    <C>                <C>         <C> <C>         <C>         <C>
Securities available for sale:
   Mortgage-backed securities  $   165     6.5%  $ 2,276     6.5%   $    --       --%  $ 7,894     6.3%$   10,335  $  10,335   6.3 %
   U.S. government and agency
      securities..........         512     6.0     4,689     6.1      3,491      5.9       509     6.1      9,201      9,201   6.1
   Obligations of states and
      political subdivisions     1,000     3.3       195     5.2         --       --       156     6.5      1,351      1,351   3.9
   FHLMC stock............          --      --        --      --         --       --     1,833    81.7      1,833      1,833  81.7
   FHLB stock.............          --      --        --      --         --       --       857     4.5        857        857   4.5
   Corporate Debt Securities        --      --       517     7.0        199      6.5        --      --        716        716   6.9
   Other..................          --      --        --      --         --       --       105      --        105        105    --
                               -------          --------            -------            -------           --------   --------
     Total................     $ 1,677          $  7,677            $ 3,690            $11,354           $ 24,398   $ 24,398
                               =======          ========            =======            =======           ========   ========
</TABLE>



Deposit Activity and Other Sources of Funds

      General. Deposits are the primary source of funds for lending,  investment
activities and general operational purposes.  In addition to deposits,  the Bank
derives  funds  from loan  principal  and  interest  repayments,  maturities  of
investment  securities  and  mortgage-backed  securities  and interest  payments
thereon.  Although  loan  repayments  are a relatively  stable  source of funds,
deposit inflows and outflows are  significantly  influenced by general  interest
rates and money market conditions.  Borrowings may be used on a short-term basis
to compensate for reductions in the  availability  of funds, or on a longer term
basis for general operational  purposes.  The Bank has access to borrow advances
from the FHLB of Cincinnati, which it uses from time to time.

     Deposits.  The Bank attracts  deposits  principally from within its primary
market area by offering competitive rates on its deposit instruments,  including
money market accounts, negotiable order of withdrawal ("NOW") accounts, passbook
deposit accounts,  individual retirement accounts ("IRAs"),  and certificates of
deposit which range in maturity from 90 days to three years.  Deposit terms vary
according  to the minimum  balance  required,  the length of time the funds must
remain on deposit and the interest  rate.  Maturities,  terms,  service fees and
withdrawal  penalties for deposit  accounts are established on a periodic basis.
In determining the characteristics of deposit

                                      -12-
<PAGE>

accounts,  the Bank  considers  the rates  offered  by  competing  institutions,
lending and liquidity  requirements,  growth goals and federal regulations.  The
Bank does not generally  accept  brokered  deposits or pay negotiated  rates for
jumbo deposits.

      The  Bank   attempts  to  compete  for  deposits   with  other   financial
institutions  in its  market  area  by  offering  competitively  priced  deposit
instruments that are tailored to the needs of its customers.  Additionally,  the
Bank seeks to meet customers' needs by providing  convenient customer service to
the community,  efficient staff and convenient  hours of service.  Substantially
all of the Bank's  depositors  are local  residents  who  reside in its  primary
market area.

         The Bank's  savings  deposits at December 31, 2001 were  represented by
the various types of savings programs listed below.
<TABLE>
<CAPTION>

Weighted
Average
Interest       Minimum                                                    Minimum                   Percentage of
Rate(1)          Term                     Category                        Balance      Balance      Total Savings
-------          ----                     --------                        -------      -------      -------------
<S>                                                                       <C>             <C>           <C>
0.98%          None                 NOW accounts                          $      --       $8,924        10.5%
2.37           None                 Money market                              2,500        8,817        10.4
2.02           None                 Savings deposits-passbook                    --       11,412        13.5
                                                                                        --------     --------
                                         Total transaction accounts                       29,153        34.4
                                                                                        --------     --------


                                    Certificates of Deposit

2.22           91 days              Fixed-term, fixed-rate                    2,500        7,296         8.7
2.73           6 months-Regular     Fixed-term, fixed-rate                    2,500        7,786         9.3
2.70           6 months-IRA         Fixed-term, fixed-rate                      100          446         0.5
3.51           12 months            Fixed-term, fixed-rate                    1,000        5,643         6.7
4.43           14 months            Fixed-term, fixed-rate                    1,000        8,900        10.5
4.37           18 months-Regular    Fixed-term, fixed-rate                    1,000        2,760         3.3
4.80           18 months-IRA        Fixed-term, fixed-rate                      100        6,188         7.3
5.08           30 months            Fixed-term, fixed-rate                    1,000        1,228         1.5
5.51           48 months            Fixed-term, fixed-rate                    1,000          593         0.7
2.85           Jumbos               Fixed-term, fixed-rate                  100,000       14,495        17.1
                                                                                          ------        ----
                                         Total certificates of deposit                    55,657        65.6
                                                                                          ------        ----
                                            Total deposits                               $84,810       100.0%
                                                                                        ========       =====
</TABLE>


     The following tables set forth information about the Bank's average deposit
balances and rates during the periods presented.
<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                      ---------------------------------------------------------------------------
                                             2001                        2000                        1999
                                      --------------------       --------------------       ---------------------
                                      Average      Average       Average      Average       Average       Average
                                      Balance         Rate       Balance         Rate       Balance          Rate
                                      -------         ----       -------         ----       -------          ----
                                                                (Dollars in thousands)
<S>                                 <C>             <C>        <C>               <C>      <C>              <C>
NOW accounts.....................   $      9,051    1.0%       $     7,544       2.0%     $      7,496     2.0%
Money market deposits............          8,255    2.4              3,019       3.0             3,268     3.3
Savings deposits -- passbook.....         11,348    2.0             10,884       3.0            11,466     3.0
Certificates of deposit..........         56,676    3.5             55,989       6.0            51,620     5.3
                                    ------------               -----------                ------------
    Total........................   $     85,330               $    77,436                $     73,850
                                    ============               ===========                ============
</TABLE>



                                      -13-
<PAGE>


     The following table sets forth  information about changes in dollar amounts
of the Bank's deposits in various types of accounts between the dates indicated.


<TABLE>
<CAPTION>

                                                                                                                        Increase
                                                                                                                       (Decrease)
                                           Balance at                                   Balance at                         from
                                           December 31,     % of          Increase      December 31,     % of           December
                                                2001       Deposit       (Decrease)         2000       Deposits         31, 1999
                                                ----       -------       ----------         ----       --------         --------
                                                                         (Dollars in thousands)
<S>                                        <C>              <C>         <C>             <C>              <C>          <C>
NOW accounts.............................. $   8,924        10.52%      $      920      $   8,004        9.81%        $    986
Money market deposit......................     8,817        10.40            6,038          2,779        3.41             (401)
Savings deposits -- passbook..............    11,412        13.46            1,117         10,295       12.61           (1,181)
Certificates of deposit...................    41,162        48.53           (5,109)        46,271       56.69            9,449
Jumbo certificates........................    14,495        17.09              230         14,265       17.48           (1,049)
                                           ---------       ------       ----------      ---------      ------         ---------
                                           $  84,810       100.00%      $    3,196      $  81,614      100.00%        $  7,804
                                           =========       ======       ==========      =========      ======         ========
</TABLE>


     The following table sets forth  information  about the Bank's time deposits
classified by rates at the dates indicated.
<TABLE>
<CAPTION>

                                                                            At December 31,
                                                              --------------------------------------------
                                                              2001               2000                1999
                                                              -----             ------              ------
                                                                            (In thousands)
<S>      <C>     <C>                                          <C>               <C>              <C>
         2.00 -  3.99%......................................  $  37,772         $     --         $      --
         4.00 -  5.99%......................................     11,511           25,093            52,136
         6.00 -  7.99%......................................      6,374           34,443                --
                                                              ---------         --------         ---------
                                                              $  55,657         $ 60,536         $  52,136
                                                              =========         ========         =========
</TABLE>


     The following table sets forth  information about amounts and maturities of
the Bank's time deposits at December 31, 2001.
<TABLE>
<CAPTION>
                                                               Amount Due
                                  ----------------------------------------------------------------------
                                  Less Than                                        After
Rate                              One Year        1-2 Years        2-3 Years       3 Years         Total
----                              --------        ---------        ---------       -------         -----
                                                                  (In thousands)
<S>      <C>                       <C>             <C>             <C>             <C>            <C>
 2.00 -  3.99%..................   $33,516         $  4,256        $    --         $   --         $ 37,772
 4.00 -  5.99%..................    11,084               --            348             79           11,511
 6.00 -  7.99%..................     6,374               --             --             --            6,374
                                   -------         --------        -------         ------         --------
                                   $50,974         $  4,256        $   348         $   79         $ 55,657
                                   =======         ========        =======         ======         ========
</TABLE>



     The  following  table sets forth  information  about  amounts of the Bank's
certificates  of deposit of $100,000 or more by time remaining until maturity at
December 31, 2001.

                                                            Certificates
               Maturity Period                                of Deposit
               ---------------                                ----------
                                                            (In thousands)

               Six months or less.........................  $    8,697
               Over six through 12 months.................       4,059
               Over 12 months ............................       1,739
                                                            ----------
                     Total................................  $   14,495
                                                            ==========

                                      -14-
<PAGE>

     The  following  table  sets  forth  information  about the  Bank's  savings
activities for the periods indicated.
<TABLE>
<CAPTION>

                                                                          At December 31,
                                                              --------------------------------------------
                                                              2001               2000                1999
                                                              -----             ------              ------
                                                                            (In thousands)
<S>                                                           <C>               <C>              <C>
Net increase (decrease) before interest credited............  $    (512)        $  4,025         $     897
Interest credited...........................................      3,708            3,779             3,077
                                                              ---------         --------         ---------
    Net increase (decrease) in savings deposits.............  $   3,196         $  7,804         $   3,974
                                                              =========         ========         =========
</TABLE>

     Borrowings.  Savings deposits  historically have been the primary source of
funds for the Bank's lending,  investments and general operating activities. The
Bank is  authorized,  however,  to use advances  from the FHLB of  Cincinnati to
supplement  its  supply  of  lendable  funds  and  to  meet  deposit  withdrawal
requirements.  The FHLB functions as a central reserve bank providing credit for
savings  institutions  and certain  other member  financial  institutions.  As a
member of the FHLB System,  the Bank is required to own stock in the FHLB and is
authorized  to apply for  advances.  Advances are pursuant to several  different
programs,  each of which  has its own  interest  rate and  range of  maturities.
Advances from the FHLB of Cincinnati are secured by the Bank's stock in the FHLB
and first mortgage loans.

     The Bank has  historically  funded its  lending and  investment  activities
through deposits.  During 1998, the Bank began using FHLB advances to supplement
deposits.  At December 31, 1999, the Company also had $3.2 million in borrowings
from a commercial  bank the proceeds of which were used to finance the return of
capital  distribution  paid to  stockholders  in November  1999.  This unsecured
borrowing matured in early 2000, at which time the Company borrowed $3.0 million
in additional  FHLB  advances.  The following  sets forth  selected  information
regarding  the Bank's  short-term  borrowings  at the dates and for the  periods
indicated.
<TABLE>
<CAPTION>

                                                                             At December 31,
                                                              --------------------------------------------
                                                              2001               2000                1999
                                                              -----             ------              ------
                                                                        (Dollars in thousands)

Amount outstanding at end of period:
<S>                                                           <C>               <C>              <C>
   FHLB advances............................................  $      --         $  1,753         $   3,767
   Bank debt................................................         --               --             3,200

Weighted average rate paid:
  FHLB advances.............................................       5.80%            4.75%             4.75%
  Bank debt.................................................         --               --              7.25

Maximum amount outstanding at any month end:
  FHLB advances.............................................  $   1,753         $  6,438         $   5,689
  Bank debt.................................................         --            3,200             3,200

Approximate average amount outstanding:
  FHLB advances.............................................  $     658         $  4,093         $   4,728
  Bank debt.................................................         --              267               267

Approximate weighted average rate paid:
  FHLB advances.............................................       5.80%            4.88%             4.75%
  Bank debt.................................................         --             7.25              7.25
</TABLE>



                                      -15-
<PAGE>


Subsidiary Activities

     As a federally  chartered  savings  institution,  the Bank is  permitted to
invest an amount equal to 2% of its assets in  non-savings  institution  service
corporation  subsidiaries,  with an additional  investment of 1% of assets where
such investment serves primarily community inner city and community  development
purposes.  Under  such  limitations,  as of  December  31,  2001  the  Bank  was
authorized to invest up to  approximately  $2.9 million in the stock of or loans
to such subsidiaries, including the additional 1% investment for community inner
city and community development  purposes.  Institutions meeting their applicable
minimum regulatory capital requirements may invest up to 50% of their regulatory
capital in conforming  first mortgage loans to such  subsidiaries  in which they
own 10% or more of the capital stock.


Regulation of the Bank

     General. As a federally chartered and insured savings institution, the Bank
is subject to extensive  regulation by the OTS and the FDIC.  The Bank's lending
activities  and other  investments  must comply with  various  federal and state
statutory and regulatory  requirements,  and the OTS  periodically  examines the
Bank for  compliance  with various  regulatory  requirements.  The FDIC also has
authority to conduct periodic examinations.  The Bank must file reports with the
OTS describing  its  activities  and its financial  condition and it must obtain
approvals from regulatory  authorities before entering into certain transactions
such as the conversion or mergers with other financial institutions. The Bank is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board.  The  Bank's  relationship  with its  depositors  and  borrowers  is also
regulated to a great extent by federal and state law, especially in such matters
as the  ownership  of deposit  accounts and the form and content of its mortgage
documents.  This  supervision  and  regulation is primarily  intended to protect
depositors.  The  regulatory  structure  also gives the  regulatory  authorities
extensive  discretion  in  connection  with their  supervisory  and  enforcement
activities  and  examination  policies,  including  policies with respect to the
classification  of  assets  and the  establishment  of loan  loss  reserves  for
regulatory purposes. Any change in regulations,  whether by the OTS, the FDIC or
any  other  government  agency,  could  have a  material  adverse  impact on the
operations of the Bank.

Financial Modernization Legislation

     The  Gramm-Leach-Bliley  ("G-L-B")  Act was enacted in 1999 and  authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding  companies  and national  banks to engage in a variety of new  financial
activities.  Among the new  activities  that will be  permitted  to bank holding
companies are  securities  and  insurance  brokerage,  securities  underwriting,
insurance  underwriting  and merchant  banking.  The Federal  Reserve Board,  in
consultation  with  the  Secretary  of  the  Treasury,  may  approve  additional
financial activities.  The G-L-B Act, however,  prohibits future acquisitions of
existing unitary savings and loan holding companies,  like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.

     The G-L-B Act imposes  new  requirements  on  financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six months of enactment.  The privacy provisions will become
effective six months thereafter.

     The G-L-B Act contains significant  revisions to the FHLB System. The G-L-B
Act imposes new capital  requirements  on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption  requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net  earnings  formula.  The G-L-B Act expands the  permissible  uses of FHLB
advances by community financial institutions (under $500 million in assets)

                                      -16-
<PAGE>

to  include   funding  loans  to  small   businesses,   small  farms  and  small
agri-businesses.  The G-L-B  Act  makes  membership  in the FHLB  voluntary  for
federal savings associations.

     The  G-L-B  Act  contains  a  variety  of  other  provisions   including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The  Company  is  unable  to  predict  the  impact  of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
which may acquire control of the Company,  it may facilitate  affiliations  with
companies in the financial services industry.

     Deposit  Insurance.  The Bank is  required  to pay  assessments  based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act ("FDIA"),  the FDIC is required to
set semi-annual  assessments for SAIF-insured  institutions at a rate determined
by the FDIC to be necessary to maintain the designated reserve ratio of the SAIF
at 1.25% of  estimated  insured  deposits or at a higher  percentage  of insured
deposits that the FDIC determines to be justified for that year by circumstances
raising a significant risk of substantial future losses to the SAIF.

     The assessment rate for an insured depository  institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the  institution's  capital level and supervisory  evaluations.  Based on the
data  reported  to  regulators  for date  closest to the last day of the seventh
month preceding the semi-annual assessment period,  institutions are assigned to
one of three  capital  groups -- well  capitalized,  adequately  capitalized  or
undercapitalized  --  using  the  same  percentage  criteria  as in  the  prompt
corrective action  regulations.  See "-- Prompt Corrective  Regulatory  Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other  information  as the FDIC  determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund.

     The FDIC's current assessment  schedule for SAIF deposit insurance sets the
assessment rate for well capitalized  institutions with the highest  supervisory
ratings at zero and institutions in the worst risk assessment classification are
assessed at the rate of 0.27% of insured  deposits.  In  addition,  FDIC-insured
institutions  are required to pay  assessments to the FDIC to help fund interest
payments on certain  bonds  issued by the  Financing  Corporation  ("FICO"),  an
agency of the federal  government  established to finance takeovers of insolvent
thrifts. Until December 31, 1999, SAIF-insured institutions were required to pay
FICO  assessments  at five times the rate at which Bank  Insurance  Fund ("BIF")
members were assessed.  After  December 31, 1999,  both BIF and SAIF members are
assessed at the same rate for FICO payments.

     Regulatory Capital  Requirements.  OTS capital  regulations require savings
institutions,  such as the Bank, to meet three capital  standards:  (1) tangible
capital  equal to at least 1.5 % of total  adjusted  assets,  (2) Tier 1 or core
capital equal to at least 4.0% of total adjusted assets (3.0% if the institution
has a composite 1 CAMELS rating under the OTS examination  rating  system),  and
(3) total  capital  equal to at least 8.0 % of total  risk-weighted  assets.  In
addition,  the OTS may require that a savings  institution that has a risk-based
capital ratio less than 8.0%, a ratio of Tier 1 capital to risk-weighted  assets
of less than 4.0% or a ratio of Tier 1 capital to adjusted  total assets of less
than 4.0% (3.0% if the  institution  has received the highest rating on its most
recent  examination) take certain actions to increase its capital ratios. If the
institution's  capital is significantly  below the minimum required levels or if
it is unsuccessful in increasing its capital ratios,  the OTS may  significantly
restrict its activities.

     Tangible  capital is defined as core  capital  less all  intangible  assets
(including  supervisory  goodwill),  less certain mortgage  servicing rights and
less  certain  investments.  Tier  1  or  core  capital  is  defined  as  common
stockholders'  equity (including  retained earnings),  non-cumulative  perpetual
preferred  stock and minority  interests in the equity  accounts of consolidated
subsidiaries,  certain non-withdrawable  accounts and pledged deposits of

                                      -17-
<PAGE>

mutual  savings   institutions  and  qualifying   supervisory   goodwill,   less
non-qualifying   intangible   assets,   certain  servicing  rights  and  certain
investments.

     Adjusted  total  assets  are  a  savings   institution's  total  assets  as
determined under generally accepted accounting  principles  increased by certain
goodwill  amounts  and by a pro rated  portion of the  assets of  unconsolidated
includable  subsidiaries  in which  the  savings  institution  holds a  minority
interest.  Adjusted  total  assets are reduced by the amount of assets that have
been deducted from capital,  the  investments in any  unconsolidated  includable
subsidiary  in which the savings  institution  has a minority  interest and, for
purposes of the core capital requirement, qualifying supervisory goodwill.

     Total capital  equals the sum of core capital plus  supplementary  capital.
The components of supplementary capital include,  among other items,  cumulative
perpetual preferred stock and perpetual subordinated debt, mandatory convertible
subordinated  debt,  intermediate-term  preferred  stock, and the portion of the
allowance  for loan losses not  designated  for specific  loan losses.  Overall,
supplementary  capital  is  limited  to 100%  of core  capital.  The  Bank  must
calculate its  risk-weighted  assets by multiplying  each asset and  off-balance
sheet item by various risk factors as determined by the OTS, which range from 0%
for cash to 100% for delinquent loans,  property  acquired through  foreclosure,
commercial loans, and other assets.

     The OTS risk-based capital regulations have been amended to require savings
institutions  with more than a "normal"  level of interest rate risk to maintain
additional total capital. A savings institution's interest rate risk is measured
in terms of the sensitivity of its "net portfolio  value" to changes in interest
rates.  Net  portfolio  value is defined,  generally,  as the  present  value of
expected cash inflows from existing assets and off-balance  sheet contracts less
the present value of expected cash outflows from existing liabilities. A savings
institution  is  considered  to have a  "normal"  level of  interest  rate  risk
exposure if the decline in its net portfolio  value after an immediate 200 basis
point increase or decrease in market  interest rates  (whichever  results in the
greater  decline)  is less than two percent of the  current  estimated  economic
value of its assets.  A savings  institution with a greater than normal interest
rate risk would be  required  to deduct  from total  capital,  for  purposes  of
calculating its risk-based  capital  requirement,  an amount (the "interest rate
risk  component")  equal to one-half the  difference  between the  institution's
measured  interest  rate  risk and the  normal  level  of  interest  rate  risk,
multiplied  by the economic  value of its total  assets.  Implementation  of the
interest  rate risk  component  has been  delayed  and the  Company has not been
required to  determine  whether it will be  required to deduct an interest  rate
risk component from capital.

     In addition to requiring generally applicable capital standards for savings
associations,  the Director of OTS is  authorized to establish the minimum level
of  capital  for a  savings  association  at such  amount  or at such  ratio  of
capital-to-assets  as the Director determines to be necessary or appropriate for
such  association in light of the particular  circumstances  of the association.
Such  circumstances  would  include a high degree of  exposure to interest  rate
risk,  prepayment  risk,  credit risk,  concentration of credit risk and certain
risks arising from non-traditional activities. The Director of OTS may treat the
failure of any savings association to maintain capital at or above such level as
an unsafe or unsound  practice and may issue a directive  requiring  any savings
association  which  fails to  maintain  capital  at or above the  minimum  level
required by the Director to submit and adhere to a plan for increasing  capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.

     At December  31,  2001,  the Bank  substantially  exceeded  all  regulatory
capital requirements.

     Prompt Corrective  Regulatory  Action.  Under the Federal Deposit Insurance
Corporation  Improvement Act of 1991 ("FDICIA"),  the federal banking regulators
are  required  to  take  prompt  corrective  action  if  an  insured  depository
institution  fails  to  satisfy  certain  minimum  capital   requirements.   All
institutions, regardless of their capital levels, are restricted from making any
capital  distribution  or paying any management  fees if the  institution  would
thereafter   fail  to  satisfy  the  minimum  levels  for  any  of  its  capital
requirements.  An  institution  that  fails to meet the  minimum  level  for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased  monitoring by the  appropriate  federal  banking  regulator;  (ii)
required to submit an acceptable capital  restoration plan within 45 days; (iii)
subject to asset growth  limits;  and (iv)  required to obtain prior  regulatory
approval for  acquisitions,  branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the  institution's  holding company
that the  institution  will  comply  with the plan until it has been  adequately
capitalized on average for four  consecutive  quarters,  under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital

                                      -18-
<PAGE>

compliance as of the date it failed to comply with its capital restoration plan.
A "significantly  undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable  capital  restoration plan, may be
subject to  regulatory  demands for  recapitalization,  broader  application  of
restrictions on transactions with affiliates, limitations on interest rates paid
on  deposits,  asset  growth  and  other  activities,  possible  replacement  of
directors and officers,  and  restrictions on capital  distributions by any bank
holding  company  controlling  the  institution.  Any  company  controlling  the
institution  could also be required to divest the institution or the institution
could be required to divest  subsidiaries.  The senior  executive  officers of a
significantly  undercapitalized institution may not receive bonuses or increases
in  compensation  without prior approval and the  institution is prohibited from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such actions are  necessary  to carry out the purposes of the prompt  corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls  below a "critical  capital  level,"  the  institution  will be subject to
conservatorship or receivership within specified time periods.

     Under  regulations  jointly  adopted by the federal banking  regulators,  a
savings  association's  capital  adequacy  for  purposes  of the  FDICIA  prompt
corrective  action rules is determined on the basis of the  institution's  total
risk-based  capital  ratio  (the  ratio of its total  capital  to  risk-weighted
assets),  Tier 1  risk-based  capital  ratio (the  ratio of its core  capital to
risk-weighted  assets)  and  leverage  ratio  (the  ratio  of its Tier 1 or core
capital to adjusted total assets).  The following  table shows the capital ratio
requirements for each prompt corrective action category:
<TABLE>
<CAPTION>

                                                     Adequately                                     Significantly
                           Well Capitalized          Capitalized         Undercapitalized        Undercapitalized
                           ----------------          -----------         ----------------        ----------------
<S>                        <C>                       <C>                           <C>                     <C>
Total risk-based
    capital ratio          10.0% or more             8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio            6.0% or more            4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio               5.0% or more            4.0% or more *      Less than 4.0% *        Less than 3.0%
-----------
*  3.0% if institution has a composite 1 CAMELS rating.
</TABLE>

A  "critically  undercapitalized"  savings  association  is defined as a savings
association  that has a ratio of "tangible  equity" to total assets of less than
2.0%.  Tangible  equity is defined as core  capital  plus  cumulative  perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory  goodwill and certain purchased  mortgage  servicing rights. The OTS
may reclassify a well capitalized savings association as adequately  capitalized
and may require an adequately  capitalized  or  undercapitalized  association to
comply with the supervisory actions applicable to associations in the next lower
capital  category  (but  may not  reclassify  a  significantly  undercapitalized
institution as critically  undercapitalized) if the OTS determines, after notice
and an opportunity for a hearing,  that the savings  association is in an unsafe
or unsound  condition or that the  association  has received and not corrected a
less-than-satisfactory  rating for any CAMELS rating  category.  For information
regarding the position of the Bank with respect to the FDICIA prompt  corrective
action rules, see Note 9 of Notes to Consolidated  Financial Statements included
under Item 7 hereof.

     Dividend  and Other  Capital  Distribution  Limitations.  Except in limited
circumstances,  the Bank is  prohibited  from paying a dividend or other capital
distribution if the Bank would be  undercapitalized  after the distribution.  In
addition,  the Bank may not declare or pay a cash  dividend on its capital stock
if the  effect  would be to reduce  its  regulatory  capital  below  the  amount
required for the liquidation account established at the time of the Conversion.

     Savings  associations  must  submit  notice  to the OTS  prior to  making a
capital  distribution (which includes  dividends,  stock repurchases and amounts
paid to stockholders in another  institution in a cash merger) if (a) they would
not be well  capitalized  after the  distribution,  (b) the  distribution  would
result in the retirement of any of the  association's  common or preferred stock
or  debt  counted  as its  regulatory  capital,  or  (c)  the  association  is a
subsidiary of a holding company. A savings  association must make application to
the OTS to pay a  capital  distribution  if (x)  the  association  would  not be
adequately  capitalized following the distribution,  (y) the association's total
distributions  for the calendar year exceed the association's net income for the
calendar year to date plus its net

                                      -19-
<PAGE>

income (less distributions) for the preceding two years, or (z) the distribution
would  otherwise  violate  applicable  law or regulation or an agreement with or
condition imposed by the OTS.

     Qualified Thrift Lender Test.  Savings  institutions  must meet a Qualified
Thrift Lender test. The Bank must maintain at least 65% of its portfolio  assets
(total  assets  less  intangible  assets,  property  it uses in  conducting  its
business and liquid  assets in an amount not  exceeding  20% of total assets) in
Qualified Thrift  Investments to satisfy the test.  Qualified Thrift Investments
consist primarily of residential  mortgage loans and  mortgage-backed  and other
securities related to domestic, residential real estate or manufactured housing.
The  shares of stock the Bank owns in the FHLB of  Cincinnati  also  qualify  as
Qualified Thrift Investments.  Subject to an aggregate limit of 20% of portfolio
assets,  the Bank may also count the following as Qualified Thrift  Investments:
(i) 50% of the dollar amount of residential  mortgage loans originated for sale,
(ii) investments in the capital stock or obligations of any service  corporation
or operating  subsidiary as long as such subsidiary  derives at least 80% of its
revenues  from domestic  housing  related  activities,  (iii) 200% of the dollar
amount of loans and  investments  to  purchase,  construct  or develop  "starter
homes," subject to certain other restrictions, (iv) 200% of the dollar amount of
loans for the purchase,  construction  or  development  of domestic  residential
housing  or  community  centers  in  "credit  needy"  areas or loans  for  small
businesses  located in such areas,  (v) loans for the purchase,  construction or
development of community centers, (vi) loans for personal,  family, household or
educational purposes, subject to a maximum of 10% of portfolio assets, and (vii)
shares of FHLMC or FNMA stock.

     A savings  institution  that does not meet the Qualified Thrift Lender Test
must either convert to a bank charter or comply with the following  restrictions
on its  operations:  (i) the  institution  may not engage in any new activity or
make any new  investment,  directly  or  indirectly,  unless  such  activity  or
investment is permissible for a national bank; (ii) the branching  powers of the
institution  are  restricted to those of a national  bank;  and (iii) payment of
dividends by the institution  will be subject to the rules regarding  payment of
dividends by a national  bank.  Upon the expiration of three years from the date
the  institution  ceases to be a  Qualified  Thrift  Lender,  it must  cease any
activity,  and not retain any  investment  unless the activity or  investment is
permissible for a national bank and a savings  institution.  Compliance with the
Qualified  Thrift  Lender test is  determined  on a monthly basis in nine out of
every 12 months.  As of December 31, 2001,  the Bank was in compliance  with its
Qualified  Thrift  Lender  requirement  with  approximately  95% of  its  assets
invested in Qualified Thrift Investments.

     Transactions With Affiliates.  Generally, transactions between the Bank and
its affiliates are subject to certain limitations.  Such transactions must be on
terms as favorable to the Bank as comparable  transactions with  non-affiliates.
In  addition,  certain of these  transactions  are  restricted  to an  aggregate
percentage of the Bank's capital.  Collateral in specified  amounts must usually
be provided by affiliates  in order to receive  loans from the Bank.  The Bank's
affiliates  include  the Company  and any  company  which would be under  common
control  with the  Bank.  In  addition,  the Bank may not  extend  credit to any
affiliate  engaged in activities not  permissible  for a bank holding company or
acquire the  securities of any affiliate  that is not a subsidiary.  The OTS has
the discretion to treat  subsidiaries of savings  institution as affiliates on a
case-by-case basis.

     Loans to Directors, Executive Officers and Principal Stockholders. The Bank
cannot  make  loans in excess of  certain  levels  to its  directors,  executive
officers or 10% or greater  stockholders (or any of their affiliates) unless the
loan is  approved in advance by a majority  of its Board of  Directors  with any
"interested" director not voting. Loans to directors, executive officers and 10%
or greater  stockholders,  and their  related  interests,  must be made on terms
substantially  the same as offered in comparable  transactions  to other persons
unless the loan is made  pursuant to a benefit or  compensation  program that is
widely available to employees and does not give preference to insiders. The Bank
is  also  prohibited  from  paying  overdrafts  of its  directors  or  executive
officers.  The Bank is also subject to certain other  restrictions on the amount
and type of loans to executive  officers and directors and must annually  report
such loans to its regulators.

     Limits on Loans to One  Borrower.  The Bank  generally  is  subject  to the
lending limits  applicable to national banks.  With certain limited  exceptions,
loans  and  extensions  of  credit  outstanding  to a person at one time may not
exceed 15% of unimpaired  capital and surplus of the Bank.  The Bank may lend an
additional amount,  equal to 10% of unimpaired capital and surplus, if such loan
is fully  secured by readily  marketable  collateral.  The Bank is  additionally
authorized to make loans to one borrower,  for any purpose,  in an amount not to
exceed  $500,000  or, by order of the  Director  of the OTS, in an amount not to
exceed the lesser of  $30,000,000  or 30% of  unimpaired  capital and surplus to
develop  residential  housing,   provided:   (i)  the  purchase  price  of  each
single-family

                                      -20-
<PAGE>

dwelling in the development does not exceed $500,000; (ii) the institution is in
compliance with its regulatory capital requirements; (iii) the loans comply with
applicable loan-to-value  requirements,  and; (iv) the aggregate amount of loans
made under  this  authority  does not  exceed  150% of  unimpaired  capital  and
surplus.  The Bank is also  authorized  to make loans to one borrower to finance
the sale of real property  acquired in  satisfaction of debts in an amount up to
50% of unimpaired capital and surplus.  Certain types of loans are exempted from
the lending limits.

     At December 31, 2001,  the maximum  amount that the Bank could have lent to
any one borrower  under the 15% limit was  approximately  $1.6 million.  At such
date,  the largest  aggregate  amount of loans that were  outstanding to any one
borrower or group of affiliated borrowers was $941,000.

     FHLB System.  The Bank is a member of the FHLB of Cincinnati,  which is one
of 12  regional  FHLBs.  Each FHLB  serves as a reserve or central  bank for its
members within its assigned region.  It is funded primarily from funds deposited
by savings  institutions  and  proceeds  derived  from the sale of  consolidated
obligations of the FHLB System. It makes loans to members (that is, advances) in
accordance with policies and procedures established by the board of directors of
the FHLB.

     As a member,  the Bank is required to purchase  and  maintain  stock in the
FHLB of  Cincinnati  in an amount equal to at least 1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year, or 1/20 of its advances from the FHLB of Cincinnati,
whichever is greater. At December 31, 2001, the Bank had $857,000 in FHLB stock,
at cost, which was in compliance with this requirement. The FHLB imposes various
limitations  on advances  such as limiting  the amount of certain  types of real
estate  related  collateral to a percentage  of a member's  capital and limiting
total  advances to a member.  At December 31, 2001,  the Bank had no outstanding
advances.

     Federal Reserve  System.  The Federal Reserve Board requires all depository
institutions  to  maintain  noninterest-bearing  reserves  at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity  requirements  that are imposed by the OTS. At December
31,  2001,  the Bank's  reserve  met the minimum  level  required by the Federal
Reserve System.

Regulation of the Company

     General.  The Company is registered  as a savings and loan holding  company
and files reports with the OTS and is subject to regulation  and  examination by
the OTS. In addition, the OTS has enforcement authority over the Company and any
non-savings  institution  subsidiaries.  This  permits  the OTS to  restrict  or
prohibit  activities  that it determines to be a serious risk to the Bank.  This
regulation  is intended  primarily  for the  protection  of the  depositors  and
deposit  insurance fund of the Bank and not for the benefit of  stockholders  of
the Company.

     The Company is also required to file certain  reports with, and comply with
the rules and regulations of, the Securities and Exchange  Commission  under the
federal securities laws.

     Activities   Restrictions.   Since  the  Company   owns  only  one  savings
institution  and acquired the  institution  prior to May 4, 1999,  it is able to
diversify its operations  into  activities  not related to banking,  but only so
long as the Bank  satisfies  the  Qualified  Thrift  Lender test. If the Company
controls  more  than one  savings  institution,  it would  lose the  ability  to
diversify its operations into non-banking related activities,  unless such other
savings  institutions  each also qualify as a Qualified  Thrift  Lender and were
acquired  in a  supervised  acquisition.  See "  --regulation  of  the  Bank  --
Qualified Thrift Lender Test."

     Restrictions on Acquisitions. Unless the acquirer was a unitary savings and
loan  holding  company  on May 4,  1999 (or  became a unitary  savings  and loan
holding company pursuant to an application  pending as of that date), no company
may  acquire  control  of the  Company  unless the  company  is only  engaged in
activities that are permitted for multiple savings and loan holding companies or
for  financial  holding  companies  under Bank  Holding  Company  Act of 1956 as
amended by the G-L-B Act.  Financial  holding companies may engage in activities
that the Federal

                                      -21-
<PAGE>

Reserve  Board,  in  consultation  with  the  Secretary  of  the  Treasury,  has
determined to be financial in nature or  incidental  to a financial  activity or
complementary to a financial  activity provided that the complementary  activity
does not pose a risk to safety and soundness.  Financial  holding companies that
were not  previously  bank holding  companies  may continue to engage in limited
nonfinancial  activities  for up to ten years  after the  effective  date of the
G-L-B Act (with provision for extension for up to five  additional  years by the
Federal  Reserve  Board)   provided  that  the  financial   holding  company  is
predominantly engaged in financial activities.

     The Company must obtain approval from the OTS before  acquiring  control of
any other savings institution or savings and loan holding company, substantially
all the assets thereof or in excess of 5% of the  outstanding  shares of another
savings institution or savings and loan holding company. The Company's directors
and officers or persons  owning or  controlling  more than 25% of the  Company's
stock,  must also  obtain  approval of the OTS before  acquiring  control of any
savings institution or savings and loan holding company.

     The OTS may approve  acquisitions  that will result in the  formation  of a
multiple savings and loan holding company which controls savings institutions in
more than one state only if: (i) the multiple  savings and loan holding  company
involved  controls a savings  institution which operated a home or branch office
in the state of the  institution  to be acquired  as of March 5, 1987;  (ii) the
acquirer is authorized to acquire control of the savings institution pursuant to
the emergency  acquisition  provisions of the FDIA; or (iii) the statutes of the
state in which the  institution  to be acquired is located  specifically  permit
institutions to be acquired by state-chartered  institutions or savings and loan
holding companies located in the state where the acquiring entity is located (or
by a holding company that controls such state-chartered savings institutions).

Taxation

     Federal  Taxation.  The Bank is subject to the  provisions  of the Internal
Revenue Code of 1986,  as amended (the  "Internal  Revenue  Code"),  in the same
general manner as other  corporations.  However,  prior to August 1996,  savings
institutions  such as the Bank, which met certain  definitional  tests and other
conditions  prescribed  by the Internal  Revenue Code could benefit from certain
favorable  provisions  regarding their deductions from taxable income for annual
additions to their bad debt reserve. The amount of the bad debt deduction that a
qualifying  savings  institution  could claim for tax  purposes  with respect to
additions  to its reserve for bad debts for  "qualifying  real  property  loans"
could be based upon its actual loss experience (the "experience  method" or as a
percentage of its taxable income (the  "percentage  of taxable income  method").
Historically,  the Bank used the method  that would allow it to take the largest
deduction.

     In August  1996,  the  Internal  Revenue  Code was revised to equalize  the
taxation of savings  institutions and banks. Savings  institutions,  such as the
Bank, no longer have a choice  between the  percentage of taxable  income method
and the experience method in determining additions to bad debt reserves. Thrifts
with $500 million of assets or less may still use the experience  method,  which
is generally available to small banks currently.  Larger thrifts may only take a
tax  deduction  when a loan is actually  charged off. Any reserve  amounts added
after 1987 will be taxed over a six year period beginning in 1996; however,  bad
debt  reserves  set  aside  through  1987 are  generally  not  taxed.  A savings
institution  may delay  recapturing  into income its post-1987 bad debt reserves
for an additional two years if it meets a residential-lending  test. This law is
not expected to have a material  impact on the Bank.  At December 31, 2001,  the
Bank had  approximately  $113,000 of post-1987  bad debt  reserves that have not
been recaptured.

     Earnings  appropriated  to the Bank's bad debt reserve and claimed as a tax
deduction  including its supplemental  reserves for losses will not be available
for the payment of cash dividends or for distribution  (including  distributions
made on  dissolution  or  liquidation),  unless the Bank  includes the amount in
income,  along with the amount  deemed  necessary to pay the  resulting  federal
income tax. If such amount is used for any purpose  other than bad debt  losses,
including a dividend  distribution or a distribution  in  liquidation,  the Bank
will be subject to federal income tax at the then current rate.

     The  Internal  Revenue Code  imposes a tax ("AMT") on  alternative  minimum
taxable  income  ("AMTI")  at a rate  of  20%.  AMTI  is  increased  by  certain
preference  items,  including  the excess of the tax bad debt reserve  deduction
using the percentage of taxable income method over the deduction that would have
been allowable  under the experience  method.  Only 90% of AMTI can be offset by
net operating loss carryovers of which the Bank currently has none. AMTI is also
adjusted by  determining  the tax  treatment  of certain  items in a manner that
negates

                                      -22-
<PAGE>

the deferral of income  resulting from the regular tax treatment of those items.
Thus,  the Bank's AMTI is  increased  by an amount equal to 75% of the amount by
which its adjusted current earnings exceeds its AMTI (determined  without regard
to this  adjustment  and  prior  to  reduction  for net  operating  losses).  In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996,  an  environmental  tax of 0.12% of the  excess of AMTI  (with  certain
modifications) over $2 million is imposed on corporations, including us, whether
or not an AMT is paid.

     The Company may exclude from its income 100% of dividends received from the
Bank as a member of the same affiliated group of  corporations.  A 70% dividends
received  deduction  generally  applies with respect to dividends  received from
corporations that are not members of such affiliated  group,  except that an 80%
dividends  received  deduction  applies if the Company owns more than 20% of the
stock of a corporation paying a dividend.  The above exclusion amounts, with the
exception of the  affiliated  group  figure,  were reduced in years in which the
Bank used the percentage of taxable income bad debt deduction method.

     The Bank's federal income tax returns have not been audited by the Internal
Revenue Service since 1992.

     State Taxation. In addition to the Bank's federal income tax liability, the
State of  Tennessee  imposes  an excise tax on  savings  institutions  and other
corporations at the rate of 6% of net taxable income, which is computed based on
federal  taxable income subject to certain  adjustments.  The State of Tennessee
also imposes  franchise and privilege  taxes on savings  institutions  and other
corporations which, in the Bank's case, have not constituted significant expense
items.

Executive Officers Who Are Not Directors

     The following table sets forth information regarding the executive officers
of the Bank who do not serve on the Board of Directors.
<TABLE>
<CAPTION>

                                                Age at
                                              December 31,
         Name                                    2001                  Title
         ----                                    ----                  -----
<S>                                               <C>
         Lonnie R. Jones                          58                   Vice-President of Operations

         Nancy L. Bryant                          58                   Vice-President and Treasurer

         Peggy G. Holston                         52                   Branch Manager and Assistant Secretary

         Chris H. Triplett                        36                   Controller
</TABLE>



     Lonnie R. Jones joined the Bank as Vice-President of Operations on June 30,
1999. Mr. Jones began his banking career with the Merchants and Planters Bank of
Newport,  Tennessee in 1961 working his way up to President and Chief  Executive
Officer in 1993.  Mr. Jones  continued  to serve as  President of Merchants  and
Planters  Bank  after  its  acquisition  by  Dominion  Bank.  When  First  Union
Corporation  acquired  Dominion  Bank in  1994,  Mr.  Jones  became  a  Regional
President and served in that capacity until his retirement in 1999.

     Nancy L. Bryant serves as Vice  President and Treasurer of the Bank and the
Company.  Ms.  Bryant  joined the Bank in 1966.  She serves as a Director of the
Douglas Cooperative,  serves as a Director and Treasurer of Habitat for Humanity
and  received  the 1993  Citizen of the Year Award from the  Newport  Chamber of
Commerce.

     Peggy G. Holston has been  employed  with the Bank since 1971 and serves as
its Assistant Secretary and Branch Manager.  She has also served on the Board of
Directors of the Newport/Cocke County Chamber of Commerce.

                                      -23-
<PAGE>

     Chris H. Triplett  joined the bank as  Controller  on January 1, 2001.  Mr.
Triplett began his career with Union Planters Bank of Morristown in 1991. Before
leaving  Union  Planters,  Mr.  Triplett  served as Vice  President,  Compliance
Officer and Auditor.  He is also a member of the Newport Kiwanis Club and serves
on the Board of Directors of the Newport/Cocke County Chamber of Commerce.



Employees

     As of  December  31,  2001,  the  Bank  had 27  full-time  employees  and 1
part-time  employee,  none of whom were  represented by a collective  bargaining
agreement. The Bank considers its relationships with its employees to be good.

Item 2.  Description of Property

     The following table sets forth information about the offices of the Bank at
December 31, 2001.

<TABLE>
<CAPTION>

                                  Year           Owned or                           Approximate
                                Opened            Leased          Book Value      Square Footage    Deposits
                                ------            ------          ----------      --------------    --------
                                                                                                 (In thousands)
<S>                               <C>                             <C>                <C>            <C>
Main Office:
  344 W. Broadway
  Newport, Tennessee              1973             Owned          $ 23,957           8,000          $ 47,078

Branch Offices:
  263 E. Broadway
  Newport, Tennessee              1960             Owned               100           5,400            21,652

  345 Cosby Highway
  Newport, Tennessee              1998             Owned           134,826           2,400            16,080
</TABLE>

     The book value of the Bank's aggregate  investment in properties,  premises
and equipment totaled approximately $496,000 at December 31, 2001. See Note 4 of
the Notes to Consolidated Financial Statements in the Annual Report.

Item 3.  Legal Proceedings

     From  time to  time,  the  Bank is a party  to  various  legal  proceedings
incident to its business.  At December 31, 2001, there were no legal proceedings
to which the Bank was a party,  or to which  any of its  property  was  subject,
which it  expected  to result in a  material  loss,  and there  were no  pending
regulatory  proceedings  to which  the Bank was a party,  or to which any of its
properties was subject, which it expected to result in a material loss.

Item 4.  Submission of Matters to a Vote of Security Holders

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2001.


                                      -24-
<PAGE>


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

     The information set forth under the section titled "Market for Common Stock
and Related Stockholder  Matters" in the Annual Report is filed as Exhibit 13 to
this report and incorporated herein by reference.

Item 6.  Management's Discussion and Analysis or Plan of Operation

     The information set forth under the section titled "Management's Discussion
and Analysis of Financial  Condition  and Results of  Operations"  in the Annual
Report  is filed  as  Exhibit  13 to this  report  and  incorporated  herein  by
reference.

Item 7.  Financial Statements

     The Independent Auditor's Report and related financial statements and notes
in the Annual  Report are filed as  Exhibit 13 to this  report and  incorporated
herein by reference.

Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure

     Not applicable.


                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        with Section 16(a) of the Exchange Act

     Information  concerning the directors and executive officers of the Company
is incorporated  herein by reference to the sections titled "Item 1. Business --
Executive  Officers Who Are Not  Directors"  herein,  "Proposal I -- Election of
Directors",  "Voting  Securities  and  Beneficial  Ownership" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement.

Item 10.  Executive Compensation

     The information  required by this item is incorporated  herein by reference
to the  section  titled  "Proposal  I --  Election  of  Directors  --  Executive
Compensation" in the Proxy Statement.


Item 11.  Security Ownership of Certain Beneficial Owners and Management

     The information  required by this item is incorporated  herein by reference
to  the  sections  titled  "Voting  Securities  and  Beneficial  Ownership"  and
"Proposal I -- Election of Directors" in the Proxy Statement.

Item 12.  Certain Relationships and Related Transactions

     The information  required by this item is incorporated  herein by reference
to the section titled "Proposal I -- Election of Directors -- Transactions  with
Management" in the Proxy Statement.



                                      -25-
<PAGE>


Item 13.  Exhibits List and Reports on Form 8-K

     (a)  Exhibits.  The  following  exhibits  either  are  filed  or  otherwise
furnished as part of this report or are incorporated herein by reference:
<TABLE>
<CAPTION>

      No.                           Description
      ---                           -----------
<S>    <C>
       3.1*           Charter of United Tennessee Bankshares, Inc.
       3.2*           Bylaws of United Tennessee Bankshares, Inc.
         4*           Form of Stock Certificate of United Tennessee Bankshares, Inc.
      10.1**          United Tennessee Bankshares, Inc. 1999 Stock Option Plan +
      10.2**          United Tennessee Bankshares, Inc. Management Recognition Plan and Trust Agreement +
      10.3(a)*        Employment  Agreements  between Newport Federal Savings and Loan  Association and Richard G. Harwood,
                      Nancy L. Bryant and Peggy Holston +
      10.3(b)*        Guarantee  Agreements  between United  Tennessee  Bankshares,  Inc. and Richard G. Harwood,  Nancy L.
                      Bryant and Peggy Holston +
      10.4            Newport Federal Savings and Loan Association Long-Term Incentive Plan, as amended. +
      10.5*           Newport Federal Savings and Loan Association Deferred Compensation Plan +
      13              2001 Annual Report to Stockholders
      21              Subsidiaries of the Registrant
      23              Consent of Pugh & Company, P.C.
---------------
*        Incorporated by reference to the Company's Registration Statement on Form SB-2 (File No. 333-36465).
**       Incorporated by reference to the Company's Registration Statement on Form S-8 (File No. 333-82803).
+        Management contract or compensatory plan or arrangement.
</TABLE>

     (b) Reports on Form 8-K. The Registrant did not file any Current Reports on
Form 8-K during the last quarter of the fiscal year ending December 31, 2001.

                                      -26-
<PAGE>



                                   SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                    UNITED TENNESSEE BANKSHARES, INC.


Date:  March 28, 2002               By:  /s/ Richard G. Harwood
                                         ---------------------------------------
                                         Richard G. Harwood
                                         President and Chief Executive Officer
                                         (Duly Authorized Representative)



     In  accordance  with Exchange Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
<S>                                                          <C>

By: /s/ Richard G. Harwood                                    By:  /s/ J. William Myers
    -------------------------------------------------              ------------------------------------------------
       Richard G. Harwood                                            J. William Myers
       President and Chief Executive Officer                         Chairman of the Board and Director
       (Director and Principal Executive, Financial
        and Accounting Officer)

Date:   March 28, 2002                                            Date:  March 28, 2002


By: /s/ Tommy C. Bible                                        By:  /s/ Ben W. Hooper, III
    -------------------------------------------------              ------------------------------------------------
       Tommy C. Bible                                                 Ben W. Hooper, III
       Director                                                       Director

Date:   March 28, 2002                                            Date:  March 28, 2002


By: /s/ William B. Henry                                      By:  /s/ Robert D. Self
    -------------------------------------------------              ------------------------------------------------
       William B. Henry                                              Robert D. Self
       Director                                                      Director

Date:   March 28, 2002                                            Date:  March 28, 2002


By: /s/ Robert L. Overholt
    -------------------------------------------------
       Robert L. Overholt
       Director

Date:   March 28, 2002


</TABLE>


<PAGE>




                                                                      Exhibit 13


                        UNITED TENNESSEE BANKSHARES, INC.

                                  ANNUAL REPORT

                                      2001


<PAGE>


                        United Tennessee Bankshares, Inc.
                                  P.O. Box 458
                          Newport, Tennessee 37822-0458


To Our Shareholders:

We are  delighted to present this Annual  Report to our  stockholders.  The 2001
year was a tragic year for our country and the economy. We would like to express
our  appreciation  to all the brave  people in this  country that have shown the
world that we will not let the terrorist  win. The world will never be the same,
but our economy has recovered from this blow.

United Tennessee  Bankshares,  Inc., has recovered from the recession,  and grew
from $98 million at December 31, 2000 to over $100 million at December 31, 2001.
Our loan  portfolio grew $3.3 million or 4.8% and our deposits grew $3.2 million
or 3.9%.  Shareholder  equity  increased  by $838,000 or 6.28%.  The increase in
shareholder  equity was  accomplished  while  buying back and  canceling  41,001
shares of stock at a cost of $372,000.

We are also  pleased  with our results of  operations  in 2001.  Total  interest
income increased by $181,000 in 2001 while total interest  expense  decreased by
$485,000.  The increase in income and  decrease in expense  resulted in a larger
interest rate spread.  This increase was mainly due to a decrease in the cost of
funds as a result of the Federal Reserve System  lowering  interest rates eleven
times during 2001.  We increased our provision for loan losses by $73,000 due to
an increase in loans and an increase in loan  delinquencies  during the year. We
increased  noninterest income by $83,000 and noninterest expense by $197,000. We
are  pleased  to report  that the result of this was to  increase  net profit by
$310,000 or 38.6%. We  congratulate  the staff of United  Tennessee  Bankshares,
Inc., for their hard work that made these results possible.

The 2001 year was not a good year for stock  values in  general,  however,  UTBI
stock did manage to increase in value from $8.25 on December 31, 2000,  to $8.41
on  December  31,  2001.  We  continue  to strive to provide  good value for our
stockholders  and try to assess  the  impact on  stockholder  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
continued 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,  an  $678,000  loan to the  Company's  Employee  Stock
Ownership Plan ("ESOP") and approximately $900,000 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,  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  1,341,012  shares of the Company's
Common Stock  outstanding,  and approximately 559 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, 2001             $ 9.25          $ 8.25             $ 0.00
         June 30, 2001                9.25            8.25               0.30
         September 30, 2001           9.20            8.40               0.00
         December 31, 2001            9.10            8.41               0.00

         March 31, 2000             $11.00         $  9.75             $ 0.00
         June 30, 2000               10.625          10.125              0.30
         September 30, 2000          10.313           9.25               0.00
         December 31, 2000            9.75            8.00               0.00



     On November 30, 1999, the Company paid a special  distribution of $4.00 per
share.  Based on a private  letter  ruling  received  from the Internal  Revenue
Service,  the  distribution  was treated as a tax-free  return of capital rather
than as a taxable dividend. The payment of dividends is subject to determination
and  declaration  by the  Company's  Board of  Directors.  The payment of future
dividends  will  be  subject  to the  requirements  of  applicable  law  and the
determination  by the Company's Board of Directors that its net income,  capital
and financial condition,  thrift industry trends and general economic conditions
justify the payment of dividends, and it can provide no assurance that dividends
will be paid  or,  if  paid,  will  continue  to be  paid in the  future.  Under
Tennessee law,  dividends may be paid upon  determination that following payment
of the  dividend  the  Company  would be able to pay its  debts in the  ordinary
course of business and its assets would exceed its liabilities.


                                      -2-
<PAGE>


                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Selected Consolidated Financial Condition Data
                                                                              At December 31,
                                                 --------------------------------------------------------------
                                                   2001            2000         1999         1998        1997
                                                 --------        --------     --------     --------    --------
                                                                  (Dollars in thousands)
<S>                                            <C>            <C>          <C>          <C>          <C>
Total assets................................   $    100,811   $   98,553   $   94,120   $   97,070   $   90,008
Loans receivable, net.......................         72,200       68,878       61,516       53,346       47,158
Cash received for stock
  subscriptions.............................             --           --           --           --       23,598
Other cash and amounts due from
  depository institutions...................          2,123        3,067        2,387        6,131        1,892
Investment securities:
    Available for sale......................         24,398       24,357       27,935       33,022       15,204
    Held to maturity........................             --           --           --        2,431        1,077
Escrow accounts for stock
  subscriptions.............................             --           --           --           --       23,598
Other deposits..............................         84,810       81,614       73,810       69,835       58,071
Shareholders' equity........................         14,168       13,330       11,901       19,970        7,052

Number of:
   Real estate loans........................          1,483        1,495        1,416        1,433        1,427
   Deposit accounts.........................          8,434        8,719        8,115        8,488        7,532
   Offices..................................              3            3            3            3            2

Selected Consolidated Operations Data
                                                                       Year Ended December 31,
                                                 ---------------------------------------------------------------
                                                   2001            2000         1999         1998         1997
                                                 --------        --------     --------     ---------    --------
                                                     (Dollars in thousands, except per share data)

Interest income............................      $    7,432   $    7,251   $    6,719   $    5,783   $    5,120
Interest expense...........................           3,608        4,093        3,328        2,609        2,711
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income........................           3,824        3,158        3,391        3,174        2,409
Provision for loan losses..................             110           37           24           24          150
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses................           3,714        3,121        3,367        3,150        2,259
Noninterest income.........................             359          276          133          167          121
Noninterest expense........................           2,437        2,240        2,299        1,547        1,361
                                                 ----------   ----------   ----------   ----------   ----------
Income before income taxes and
  accounting change........................           1,636        1,157        1,201        1,770        1,019
Income taxes...............................             525          355          458          652          365
                                                 ----------   ----------   ----------   ----------   ----------
Income before accounting change............           1,111          802          743        1,118          654
Net effect of change in accounting
  principle................................              --           --           --          (16)          --
                                                 ----------   ----------   ----------   ----------   ----------
Net income.................................      $    1,111   $      802   $      743   $    1,102   $      654
                                                 ==========   ==========   ==========   ==========   ==========
Earnings per share:
  Basic....................................      $    0.82    $     0.58   $     0.54   $     0.77          n/a
                                                 ==========   ==========   ==========   ==========   ==========
  Fully diluted............................      $    0.82    $     0.58   $     0.53   $     0.77          n/a
                                                 ==========   ==========   ==========   ==========   ==========
</TABLE>


                                      -3-
<PAGE>

<TABLE>
<CAPTION>

                                                 Selected Ratios
                                                                     At or for the
                                                                Year Ended December 31,
                                                 ------------------------------------------------------------
                                                   2001         2000         1999         1998         1997
                                                 --------     --------     --------     --------     --------
<S>                                                 <C>         <C>          <C>           <C>          <C>
Performance Ratios:
  Return on average assets (net income
    divided by average total assets).............   1.09%       0.83%        0.78%         1.37%        1.01%
  Return on average equity (net income
    divided by average equity)...................   7.77        6.36         4.30          5.49         9.94
  Dividend Payout Ratio (dividends
    per share divided by earnings
    per share)...................................  36.59       51.72       796.30         38.96          n/a
  Interest rate spread (combined
    weighted average interest rate
    earned less combined weighted
    average interest rate cost)..................   3.30        2.70         2.90          3.00         3.30
  Net interest margin (net interest
    income divided by average
    interest-earning assets).....................   3.86        3.40         3.60          4.10         3.84
  Ratio of average interest-earning
    assets to average interest-bearing
    liabilities.................................. 115.29      114.60       121.60        130.60       109.30
  Ratio of noninterest expense to
    average total assets.........................   2.40        2.33         2.40          1.94         2.09
  Efficiency Ratio (noninterest expense
    divided by total of net interest income
    and noninterest income)......................  58.26       65.23        65.23         46.80        53.81

Asset Quality Ratios:
  Nonperforming assets to total assets
    at end of period.............................   0.99         .57         0.48          0.50         0.93
  Nonperforming loans to total loans at
    end of period................................   1.38         .79         0.59          0.88         1.70
  Allowance for loan losses to total
    loans at end of period.......................   1.00        0.95         1.06          1.18         1.31
  Allowance for loan losses to non-
    performing loans at end of
    period.......................................  72.33      118.28       175.33        132.98        76.73
  Provision for loan losses to total
    loans .......................................   0.15        0.05         0.04          0.04         0.31
  Net charge-offs to average loans
    outstanding..................................   0.07        0.06         0.01          0.02         0.03

Capital Ratios:
  Equity to total assets at end of period........  14.05       13.53        12.64         20.57         7.83
  Average equity to average assets...............  14.05       13.10        18.08         24.95        10.12
</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, 2001.

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

            +3%                                (50)%                     (32)%
            +2%                                (25)                      (21)
            +1%                                (10)                      (10)
             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 is not  considered to
significant to the yield on investment securities.


                                      -6-
<PAGE>


     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.


<TABLE>
<CAPTION>

                                                                       For the Year Ended December 31,
                                    ------------------------------------------------------------------------------------------------
                                                 2001                             2000                             1999
                                    ----------------------------    -------------------------------    -----------------------------
                                                         Average                            Average                          Average
                                    Average               Yield/    Average                  Yield/    Average                Yield/
                                    Balance     Interest   Cost     Balance     Interest      Cost     Balance     Interest    Cost
                                                                           (Dollars in thousands)
<S>              <C>                <C>        <C>         <C>      <C>        <C>           <C>       <C>        <C>          <C>
Assets
Interest-earning assets:
Loans receivable (1).............   $72,158    $ 5,962     8.3%     $  65,197  $ 5,480       8.4%      $ 57,431   $   4,768    8.3%
Investment securities............    24,388      1,362     5.6         26,146    1,603       6.1         31,694       1,735    5.5
Other interest-earning assets....     2,590        108     4.2          2,727      168       6.2          4,259         216    5.1
                                    -------    -------              ---------  -------                 --------   ---------
    Total interest-earning assets    99,136      7,432     7.5         94,070    7,251       7.7         93,384       6,719    7.2
Noninterest-earning assets.......     2,595         --                  2,267       --                    2,211          --
                                    -------    -------              ---------  -------                 --------   ---------
    Total assets.................   $101,730   $ 7,432              $  96,337  $ 7,251                 $ 95,595   $   6,719
                                    ========   =======              =========  =======                 ========   =========

Interest-bearing liabilities:
  Deposits.......................   $85,330    $ 3,570     4.2      $  77,712  $ 3,779       4.9       $ 71,822   $   3,077    4.3
  FHLB advances and note payable.       658         38     5.8          4,360      314       7.2          4,995         251    5.0
                                    -------    -------              ---------  -------                 --------   ---------
  Total interest-bearing liabilities 85,987      3,608     4.2         82,072    4,093       5.0         76,817       3,328    4.3
Noninterest-bearing liabilities..     1,452         --                  1,649       --                    1,494          --
                                    -------    -------              ---------  -------                 --------   ---------
    Total liabilities............    87,440      3,608                 83,721    4,093                   78,311       3,328

Shareholders' equity.............    14,291         --                 12,616       --                   17,284          --
                                    -------    -------              ---------  -------                 --------   ---------
    Total liabilities and equity.   $101,730   $ 3,608              $  96,337  $ 4,093                 $ 95,595   $   3,328
                                    ========   =======              =========  =======                 ========   =========

Net interest income..............              $ 3,824                         $ 3,158                            $   3,391
                                               =======                         =======                            =========
Interest rate spread.............                          3.3%                              2.7%                              2.9%
                                                          ====                              ====                              ====
Net interest margin..............                          3.9%                              3.4%                              3.6%
                                                          ====                              ====                              ====
Ratio of average interest-earning assets
  to average interest-bearing
  liabilities....................                        115.3%                            114.6%                            121.6%
                                                         =====                            ======                             =====
</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,
                                          -----------------------------------------------------------------
                                              2001         vs.      2000      2000         vs.         1999
                                          ------------------------------      -----------------------------
                                                  Increase (Decrease)             Increase (Decrease)
                                                       Due to                            Due to
                                          Volume         Rate      Total     Volume       Rate       Total
                                          ------         ----      -----     ------       ----       -----
                                                                    (In thousands)
Interest income:
<S>                                      <C>         <C>        <C>         <C>        <C>          <C>
  Loans receivable....................   $   551     $   (69)   $    482    $   654    $    58      $  712
  Investment securities...............      (108)       (133)       (241)      (315)       183        (132)
  Other interest-earning assets.......        (8)        (52)        (60)       (89)        41         (48)
                                         -------     -------    --------    -------    -------      ------
      Total interest-earning assets...       435        (254)        181        250        282         532
                                         -------     -------    --------    -------    -------      ------

Interest expense:
  Deposits............................       390        (599)       (209)       260        442         702
  FHLB advances and note payable......      (225)        (51)       (276)       (35)        98          63
                                         -------     -------    --------    -------    -------      ------
      Total interest-bearing liabilities     165        (650)       (485)       225        540         765
                                         -------     -------    --------    -------    -------      ------
Change in net interest income.........   $   270     $   396    $    666    $    25    $  (258)     $ (233)
                                         =======     =======    ========    =======    =======      ======
</TABLE>


Comparison of Financial Condition at December 31, 2000 and December 31, 1999

     Total  assets  increased  $2.2  million,  or 2.2%,  from  $98.6  million at
December 31, 2000 to $100.8  million at December 31, 2001.  The Company's  asset
increase was  attributable  principally  to an increase in loans of $3.3 million
offset by a decrease  in cash and amounts due from  depository  institutions  of
approximately $944,000.

     Investment  securities  available for sale remained unchanged from December
31, 2000 to December 31, 2001 at $24.4 million.  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  $3.3  million,  or 4.8% from $68.9 million at
December 31, 2000 to $72.2 million at December 31, 2001 as originations exceeded
repayments for the period by  approximately  $3.3 million.  Loan growth occurred
primarily in the one-to-four-family  residential loan portfolio, which increased
$3.8 million, or 7.1%.

     Total  deposits  increased  $3.2  million,  or 3.9%,  from $81.6 million at
December  31, 2000 to $84.8  million at December  31,  2001.  The  increase  was
primarily  due money  market  deposit  account  growth of $6.0 million or 217.2%
offset by a decrease in  Certificate  of deposit  balances of $4.9  million,  or
8.1%. As certificate of deposit rates fell in 2001,  customers  moved money into
the money market demand accounts anticipating rate increases in later periods.

     During 2001, the Company repaid $1.8 million in borrowings from the FHLB of
Cincinnati.

     The Company's  shareholders' equity increased $838,000,  or 6.3% from $13.3
million at December 31, 2000 to $14.2 million at December 31, 2001. The increase
was due principally to net income of $1.1 million and other comprehensive income
of $114,000 and  distribution  of stock held in trust accounts of $398,000.  The
increase in retained earnings was partially offset by $415,000 of dividends paid
to shareholders during the year and the repurchase and retirement of $372,000 of
common stock.

                                      -8-
<PAGE>

Comparison of Results of Operations for the Years Ended December 31, 2001,  2000
and 1999

     Net income was  $1,111,000 for the year ended December 31, 2001 compared to
net income of $802,000  for the year ended  December  31, 2000 and net income of
$743,000 for the year ended December 31, 1999. The increase in net income during
2001 was due to an  increase  in  interest  income  and a decrease  in  interest
expense.  Net income for 2001  resulted  in a return on average  assets of 1.09%
compared to 0.83% for 2000 and 0.78% for 1999, and a return on average equity of
7.77% for 2001 as compared to 6.36% for 2000 and 4.30% for 1999.

     Interest  Income.  Interest  income totaled $7.4 million,  $7.3 million and
$6.7 million for the years ended December 31, 2001, 2000 and 1999, 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 7.5% in 2001 from 7.7% in 2000. The average yield increased
compared to the 1999 yield of 7.2%. The decrease in 2001 was  attributable  to a
decrease in rates on loans,  investment  securities  and other  interest-earning
assets.  During 2001, the Federal  Reserve lowered its target federal funds rate
eleven  times  for  a  475  basis  point   decrease.   The  average  balance  of
interest-earning  assets  increased  $5.1 million in 2001,  $686,000 in 2000 and
$15.7  million in 1999  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, 2001 was from loans  receivable.  Interest  income from loans
receivable  was $6.0 million,  $5.5 million and $4.8 million for the years ended
December  31, 2001,  2000 and 1999,  respectively.  The average  yield earned on
loans  receivable  was 8.3% in 1999,  increased to 8.4% in 2000 and decreased to
8.3% in 2001.  The average  balances of loans  receivable  increased  during the
period with a $5.9 million increase in 1999, a $7.8 million increase in 2000 and
a $7.0 million  increase in 2001 due to strong loan demand in the Bank's  market
area. Interest income on investment securities 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,  and  increased  in 1999 by  $470,000  due to a $9.6  million
increase in average balances and a 20 basis point decrease in average rates.

     Interest Expense.  Interest expense totaled $3.6 million,  $4.1 million and
$3.3  million  for the three  years  ended  December  31,  2001,  2000 and 1999,
respectively.  The  decrease  in interest  expense  during 2001 was due to an 80
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 increase in interest expense during
2000 was due to a $5.3 million increase in average interest-bearing  liabilities
and a 70 basis point increase in average rates. The increase in interest expense
during  1999 was due to a $17.4  million  increase  in average  interest-bearing
liabilities, and a 10 basis point reduction in average rates.

     Net Interest Income. Net interest income was $3.8 million, $3.2 million and
$3.4  million for the years ended  December  31,  2001,  2000 and 1999.  The net
interest  spread  for 2001 was 3.3%  compared  to 2.7% in 2000 and 2.9% in 1999.
During 1999, the Company  significantly  increased its level of interest-bearing
liabilities  to offset the  decline in funding  from equity  resulting  from the
return of capital distribution. As a result of this change in the balance sheet,
the  ratio  of  average  interest-earning  assets  to  average  interest-bearing
liabilities  declined to 121.6% in 1999 from 130.6% in 1998,  but increased from
114.6% in 2000 to 115.3% in 2001. This change in the asset/liability mix has put
pressure on the  Company's  net interest  margin which  declined in 2000 to 3.4%
from 3.6% in 1999. However, in 2001, the Company's net interest margin increased
to 3.9%  primarily  due to the  increase in the loan  portfolio  and the general
decrease  in  the  interest  rate  environment.  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 $110,000 in
2001 and $37,000 in 2000 and $24,000 in 1999.  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 2001,  the Company  increased  its
provision to $110,000  for the year due to an increase in the Bank's  classified
assets and the increase in the loan portfolio. In 2000 the Bank's past-due loans
and classified assets increased  slightly so the Company increased its provision
to $37,000  compared to $24,000 for 1999. At December 31, 2001, the ratio of the
allowance to nonperforming loans was 72.3%.

     Noninterest  Income.  Noninterest  income for the years ended  December 31,
2001,  2000  and  1999  was  $359,000,  $276,000  and  $134,000,   respectively.
Noninterest income consists primarily of customer service fees

                                      -9-
<PAGE>

related to customers'  deposit  accounts and loan service  charges.  Noninterest
income increased from 2000 to 2001 due to increased loan volume, which increased
related fee income,  and an increase  in our deposit  fees.  Noninterest  income
increased from 1999 to 2000 due to an increase in the number of deposit accounts
and the restructuring of deposit fees.

     Noninterest  Expense.  Noninterest expense for the years ended December 31,
2001,  2000  and  1999  was  $2.4  million,   $2.2  million  and  $2.3  million,
respectively.  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 decrease in noninterest  expense in 2000 was
primarily  due  to  slight  decreases  in  compensation  and  benefits  expense,
occupancy and equipment expense, and professional 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, 2001, 2000, and 1999 was 58.3%, 65.2%
and 65.2%.  The  decrease in the ratio during 2001 was due to an increase in net
interest income and noninterest income with a corresponding  smaller increase in
noninterest  expense.  The ratios of noninterest expense to average total assets
were 2.4%,  2.3%, and 2.4% for the years ended December 31, 2001, 2000 and 1999,
respectively.













                                      -10-
<PAGE>

     Income Taxes. The Company's  effective tax rate was 32.1%, 30.7%, and 38.0%
for the years ended December 31, 2001,  2000 and 1999,  respectively.  For 1999,
the  Company's  effective tax rate  exceeded the federal  statutory  rate of 34%
primarily  because of state excise taxes.  The Company's  effective tax rate for
2001 and 2000  decreased 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,  2001,  2000 and 1999 was  14.1%,  13.1%,  and  18.1%,
respectively.  At December 31, 2001,  the Bank  exceeded all current  regulatory
capital requirements and met the definition of a "well capitalized" institution,
the highest regulatory category.

     The net  proceeds of the  Conversion  retained by the Company on January 1,
1998 have provided  sufficient funds for its initial  operations.  The Company's
primary  sources of liquidity  in the future will be dividends  paid by the Bank
and  repayment  of the ESOP loan.  The Bank is  subject  to  certain  regulatory
limitations with respect to the payment of dividends to the Company.

     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,
2001, 2000 and 1999, cash and amounts due from depository  institutions  totaled
$2.1 million, $3.1 million and $2.4 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.

     The  Company  has  also  designated  all of its  investment  securities  as
available for sale in order to meet liquidity demands.  At December 31, 2001, it
had  designated  securities  with a fair value of $24.4 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.

     At  December  31,  2001,  the Company had  outstanding  approximately  $3.7
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 $51.0 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.


                                      -11-
<PAGE>

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. 141, Business  Combinations and SFAS No. 142,
Goodwill and Other  Intangible  Assets.  SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations  initiated after June
30, 2001. SFAS No. 142 requires that goodwill and other  intangible  assets with
indefinite  useful  lives no longer be  amortized,  but  instead  be tested  for
impairment annually. SFAS No. 142 does not alter the accounting required by SFAS
No. 72.  SFAS No. 142 is  effective  on  January  1, 2002.  Since the  Company's
intangible  asset  associated  with its  branch  purchase  is  accounted  for in
accordance with SFAS No. 72, the Company will not change its amortization of its
intangible asset.

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  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. 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.


                                      -12-
<PAGE>



                        [PUGH & COMPANY, P.C. LETTERHEAD]

                          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, 2001 and
2000, and the related consolidated  statements of income,  comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
2001,  2000,  and  1999.  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,  2001 and 2000,  and the
results of their  operations  and their cash flows for the years ended  December
31, 2001,  2000, and 1999, in conformity  with accounting  principles  generally
accepted in the United States of America.

                                           Pugh & Company, P.C.
                                           Certified Public Accountants
                                           March 21, 2002

                                      -13-
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

                                                        As of December 31,             2001                 2000
                                                                                   -------------        ------------
  ASSETS
<S>                                                                                <C>                  <C>
  Cash and Amounts Due From Depository Institutions                                $  2,123,180         $ 3,066,801
  Investment Securities Available for Sale,
   at Fair Value                                                                     24,397,891          24,356,927
  Loans Receivable, Net                                                              72,200,227          68,878,103
  Premises and Equipment, Net                                                           496,373             469,780
  Accrued Interest Receivable                                                           602,659             602,934
  Excess of Cost Over Fair Value of Net Assets Acquired                                 953,233           1,033,225
  Prepaid Expenses and Other Assets                                                      37,264             145,663
                                                                                   -------------        -----------
  TOTAL ASSETS                                                                     $100,810,827         $98,553,433
                                                                                   =============        ===========
  LIABILITIES AND EQUITY
  LIABILITIES
   Deposits:
    Demand                                                                         $ 29,152,923         $21,077,763
    Term                                                                             55,656,903          60,535,928
                                                                                   -------------        -----------
     Total Deposits                                                                  84,809,826          81,613,691

   Advances From Federal Home Loan Bank                                                       0           1,753,134
   Accrued Interest Payable                                                             161,554             300,063
   Accrued Income Taxes                                                                   1,995                   0
   Deferred Income Taxes                                                                868,896             841,076
   Accrued Benefit Plan Liabilities                                                     743,177             643,268
   Other Liabilities                                                                     57,628              72,070
                                                                                   -------------        -----------
     Total Liabilities                                                               86,643,076          85,223,302
                                                                                   -------------        -----------
  SHAREHOLDERS' EQUITY
   Common Stock - No Par Value, Authorized 20,000,000
    Shares; Issued and Outstanding 1,341,012 Shares
    in 2001 (1,382,013 Shares in 2000)                                               12,719,235          13,091,119
   Unearned Compensation - Employee Stock Ownership Plan                               (678,370)           (842,967)
   Shares in Grantor Trust - Contra Account                                            (195,149)           (183,449)
   Shares in MRP Plan - Contra Account                                                 (209,770)           (389,894)
   Shares in Stock Option Plan Trusts - Contra Account                               (1,591,409)         (1,656,569)
   Retained Earnings                                                                  2,835,393           2,138,547
   Accumulated Other Comprehensive Income                                             1,287,821           1,173,344
                                                                                   -------------        -----------
     Total Shareholders' Equity                                                      14,167,751          13,330,131
                                                                                   -------------        -----------
  TOTAL LIABILITIES AND EQUITY                                                     $100,810,827         $98,553,433
                                                                                   =============        ===========
</TABLE>


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

                                      -14-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                       For the Years Ended December 31,          2001              2000              1999
                                                                              -----------       -----------       -------

INTEREST INCOME
<S>                                                                           <C>               <C>               <C>
 Loans                                                                        $5,962,213        $5,479,812        $4,767,963
 Investment Securities                                                         1,362,166         1,603,282         1,734,348
 Other Interest-Earning Assets                                                   108,078           168,082           216,285
                                                                              -----------       -----------       ----------
  Total Interest Income                                                        7,432,457         7,251,176         6,718,596
                                                                              -----------       -----------       ----------
INTEREST EXPENSE
 Deposits                                                                      3,569,976         3,778,952         3,076,826
 Advances From Federal Home Loan Bank and Note Payable                            38,393           314,370           250,986
                                                                              -----------       -----------       ----------
  Total Interest Expense                                                       3,608,369         4,093,322         3,327,812
                                                                              -----------       -----------       ----------
NET INTEREST INCOME                                                            3,824,088         3,157,854         3,390,784

PROVISION FOR LOAN LOSSES                                                        110,000            37,000            24,000
                                                                              -----------       -----------       ----------
NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                                                               3,714,088         3,120,854         3,366,784
                                                                              -----------       -----------       ----------
NONINTEREST INCOME
 Deposit Account Service Charges                                                 239,408           188,616           135,274
 Loan Service Charges and Fees                                                    76,072            70,534            58,298
 Net Gain (Loss) on Sales of Investment Securities
  Available for Sale                                                               3,200            (8,834)          (81,248)
 Other                                                                            40,176            25,552            21,408
                                                                              -----------       -----------       ----------
  Total Noninterest Income                                                       358,856           275,868           133,732
                                                                              -----------       -----------       ----------
NONINTEREST EXPENSE
 Compensation and Benefits                                                     1,251,867         1,118,375         1,133,759
 Occupancy and Equipment                                                         214,368           218,359           228,380
 Federal Deposit Insurance Premiums                                               48,000            48,000            52,396
 Data Processing Fees                                                            259,992           236,467           233,931
 Advertising and Promotion                                                        97,598            79,207            82,248
 Amortization                                                                     80,992            80,992            80,992
 Other                                                                           483,863           458,560           487,302
                                                                              -----------       -----------       ----------
  Total Noninterest Expense                                                    2,436,680         2,239,960         2,299,008
                                                                              -----------       -----------       ----------
INCOME BEFORE INCOME TAXES                                                     1,636,264         1,156,762         1,201,508

INCOME TAXES                                                                     524,814           354,851           458,142
                                                                              -----------       -----------       ----------
NET INCOME                                                                    $1,111,450        $  801,911        $  743,366
                                                                              ===========       ===========       ==========
EARNINGS PER SHARE:
 Basic                                                                        $     0.82        $     0.58        $     0.54
                                                                              ===========       ===========       ==========
 Diluted                                                                      $     0.82        $     0.58        $     0.53
                                                                              ===========       ===========       ==========
</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,           2001              2000               1999
                                                                     -----------       -----------       --------
<S>                                                                  <C>               <C>               <C>
NET INCOME                                                           $1,111,450        $  801,911        $   743,366
                                                                     -----------       -----------       -----------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 Unrealized Gains (Losses) on Investment
  Securities Available for Sale                                         187,839         1,110,758         (1,234,419)

 Reclassification Adjustment for Gains/Losses
  Included in Net Income                                                 (3,200)            8,834             81,248

 Income Taxes Related to Unrealized Gains/Losses
  on Investment Securities Available for Sale                           (70,162)         (425,445)           438,204
                                                                     -----------       -----------       -----------
   Other Comprehensive Income (Loss), Net of Tax                        114,477           694,147           (714,967)
                                                                     -----------       -----------       ------------
COMPREHENSIVE INCOME                                                 $1,225,927        $1,496,058        $    28,399
                                                                     ===========       ===========       ===========
</TABLE>

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


                                      -16-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Years Ended December 31, 2001

<TABLE>
<CAPTION>

                                                                                             Shares in
                                                                                              Grantor       Shares in
                                                                              Unearned        Trust -      MRP Plan -
                                                               Common       Compensation-     Contra         Contra
                                                                Stock           ESOP          Account       Account
                                                                -----           ----          -------       -------
<S>               <C>                                        <C>             <C>             <C>           <C>
BALANCES, JANUARY 1, 1999                                    $13,091,119     $(1,129,086)    $(137,210)    $       0

Net Income                                                            0                0             0             0

Dividends Paid                                                        0                0             0             0

Payment on ESOP Loan With ESOP Contribution                           0          124,458             0             0
 and Dividends Received

Purchase of Additional Shares of Common Stock                         0                0        (8,178)            0
 Pursuant to Grantor Trust

Return of Capital Dividend Used to Purchase
 Additional Shares of Common Stock                                    0                0       (56,244)            0

Purchase of Shares of Common Stock Pursuant to MRP Plan               0                0             0      (712,033)

Issuance of Shares of Common Stock Pursuant to MRP Plan               0                0             0       155,559

Purchase of Shares of Common Stock Pursuant
 to Stock Option Plan                                                 0                0             0             0

Other Comprehensive Loss                                              0                0             0             0
                                                            ------------     ------------    ----------    ---------
BALANCES, DECEMBER 31, 1999                                  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                           0          161,661             0             0
 and Dividends Received

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

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

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

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

Other Comprehensive Income                                            0                0             0             0
                                                            ------------     ------------    ----------    ---------
BALANCES, DECEMBER 31, 2000                                  13,091,119         (842,967)     (183,449)     (389,894)

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

Net Income                                                            0                0             0             0

Dividends Paid                                                        0                0             0             0

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

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

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

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)
                                                            ============     ============    ==========    ==========
</TABLE>

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

                                      -17-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)

For the Three Years Ended December 31, 2001

<TABLE>
<CAPTION>
                                                                     Shares in                        Accumulated
                                                                    Stock Option                        Other           Total
                                                                  Plan-Contra         Retained      Comprehensive    Shareholders'
                                                                       Account        Earnings      Income (Loss)       Equity
                                                                       -------        --------      -------------       ------
<S>               <C>                                               <C>             <C>               <C>             <C>
BALANCES, JANUARY 1, 1999                                           $         0     $ 6,950,529       $1,194,164      $19,969,516

Net Income                                                                    0         743,366                0          743,366

Dividends Paid                                                                0      (5,942,656)               0       (5,942,656)

Payment on ESOP Loan With ESOP Contribution                                   0               0                0          124,458
 and Dividends Received

Purchase of Additional Shares of Common Stock                                 0               0                0           (8,178)
 Pursuant to Grantor Trust

Return of Capital Dividend Used to Purchase
 Additional Shares of Common Stock                                            0               0                0          (56,244)

Purchase of Shares of Common Stock Pursuant to MRP Plan                       0               0                0         (712,033)

Issuance of Shares of Common Stock Pursuant to MRP Plan                       0               0                0          155,559

Purchase of Shares of Common Stock Pursuant
 to Stock Option Plan                                                (1,657,722)              0                0       (1,657,722)

Other Comprehensive Loss                                                      0               0         (714,967)        (714,967)
                                                                    ------------    ------------      -----------     ------------
BALANCES, DECEMBER 31, 1999                                          (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                                   0               0                0          161,661
 and Dividends Received

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

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

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

Decrease in Cost of Shares in Stock Option Plan                           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

Repurchase 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 on ESOP Loan With ESOP Contribution                                   0               0                0          164,597
 and Dividends Received

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

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

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, 2001                                         $(1,591,409)    $ 2,835,393       $1,287,821      $14,167,751
                                                                    ============    ============      ===========     ===========
</TABLE>

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

                                      -18-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                            For the Years Ended December 31,         2001             2000               1999
                                                                                 ------------     ------------       --------
OPERATING ACTIVITIES
<S>                                                                              <C>              <C>                <C>
Net Income                                                                       $ 1,111,450      $   801,911        $   743,366
                                                                                 ------------     ------------       -----------
 Adjustments to Reconcile Net Income to Net
  Cash Provided by Operating Activities:
   Provision for Loan Losses                                                         110,000           37,000             24,000
   Depreciation                                                                       62,521           56,339             56,743
   Amortization                                                                       80,992           80,992             80,991
   Amortization of Investment Securities Premiums and
    Discounts, Net                                                                    43,993           (3,392)            34,361
   Increase in Unearned Loan Fees                                                     24,952           39,670             26,489
   Net Loss on Sales of Foreclosed Real Estate                                        21,944           19,454                  0
   Federal Home Loan Bank Stock Dividends                                            (55,300)         (56,100)           (48,100)
   Net (Gain) Loss on Sales of Investment Securities
    Available for Sale                                                                (3,200)           8,834             81,248
   Deferred Income Taxes (Benefit)                                                   (42,343)         (41,107)            35,419
   (Increase) Decrease in:
    Accrued Interest Receivable                                                          275         (163,955)             3,544
    Prepaid Expenses and Other Assets                                                107,399            1,254           (119,441)
   Increase (Decrease) in:
    Accrued Interest Payable                                                        (138,509)          16,539             (6,214)
    Accrued Income Taxes                                                               1,995                0            (20,185)
    Accrued Benefit Plan Liabilities                                                  99,909           24,543            300,442
    Other Liabilities                                                                (14,442)         (10,978)            (6,192)
                                                                                 ------------     ------------       ------------
     Total Adjustments                                                               300,186            9,093            443,105
                                                                                 ------------     ------------       -----------
      Net Cash Provided by Operating Activities                                    1,411,636          811,004          1,186,471
                                                                                 ------------     ------------       -----------
INVESTING ACTIVITIES
 Purchase of Investment Securities Available for Sale                             (9,884,107)      (2,933,564)        (5,519,545)
 Proceeds From Sales of Investment Securities
  Available for Sale                                                                 163,200        1,456,101          2,460,469
 Proceeds From Maturities of Investment Securities
  Available for Sale                                                               4,660,000          500,000          2,000,000
 Principal Payments Received on Investment Securities
  Available for Sale                                                               5,219,089        5,725,869          6,245,777
 Purchases of Investment Securities Held to Maturity                                       0                0           (449,515)
 Proceeds From Maturities of Investment Securities
  Held to Maturity                                                                         0                0            984,354
 Principal Payments Received on Investment Securities
  Held to Maturity                                                                         0                0            576,512
 Net Increase in Loans                                                            (3,480,772)      (7,402,604)        (8,315,821)
 Purchases of Premises and Equipment, Net                                            (89,114)         (15,109)           (93,724)
 Proceeds From Sales of Foreclosed Real Estate                                         1,752           15,600             24,197
                                                                                 ------------     ------------       -----------
      Net Cash Used in Investing Activities                                       (3,409,952)      (2,653,707)        (2,087,296)
                                                                                 ------------     ------------       ------------
FINANCING ACTIVITIES
 Repurchase and Retirement of Common Stock                                          (371,884)               0                  0
 Dividends Paid                                                                     (414,604)        (414,603)        (5,942,656)
 Purchase of Common Stock for Stock Option Plan Trusts                                     0                0         (1,657,722)
 Decrease in Cost of Shares in Stock Option Plan Trusts                               65,160            1,153                  0
 Purchase of Common Stock for MRP Plan                                                     0                0           (712,033)
 Issuance of Common Stock Pursuant to MRP Plan                                       180,124          166,580            155,559
 Purchase of Common Stock for Director's  Long-Term
  Incentive Plan                                                                     (11,700)         (20,469)           (64,422)
 Issuance of Common Stock Pursuant to Director's Long-Term
  Incentive Plan                                                                           0           38,652                  0
 Payment on ESOP Loan and Release of Shares                                          164,597          161,661            124,458
 Net Increase in Deposits                                                          3,196,136        7,804,160          3,974,267
 Advances From Federal Home Loan Bank                                                      0        3,000,000                  0
 Repayment of Advances From Federal Home Loan Bank                                (1,753,134)      (5,014,355)        (1,921,090)
 Proceeds From Borrowing on Note Payable                                                   0                0          3,200,000
 Repayment of Borrowing on Note Payable                                                    0       (3,200,000)                 0
                                                                                 ------------     ------------       -----------
      Net Cash Provided by (Used in) Financing Activities                          1,054,695        2,522,779         (2,843,639)
                                                                                 ------------     ------------       ------------
</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,         2001             2000               1999
                                                                                 ------------     ------------       --------
<S>                                                                                 <C>               <C>             <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (943,621)         680,076         (3,744,464)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                       3,066,801        2,386,725          6,131,189
                                                                                 ------------     ------------       -----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                           $ 2,123,180      $ 3,066,801        $ 2,386,725
                                                                                 ============     ============       ===========
Supplementary Disclosures of Cash Flow Information:
 Cash Paid During the Year for:
  Interest                                                                       $ 3,746,878      $ 4,076,783        $ 3,334,026
  Income Taxes                                                                   $   480,280      $   466,822        $   560,547

Supplementary Disclosures of Noncash  Investing Activities:
 Sale of Foreclosed Real Estate by Origination of
  Mortgage Loans                                                                 $   150,475      $   131,900        $         0
 Acquisition of Foreclosed Real Estate                                           $   174,171      $    95,773        $    95,378
 Change in Unrealized Gain/Loss on Investment
  Securities Available for Sale                                                  $   184,639      $ 1,119,592        $(1,153,171)
 Change in Deferred Income Taxes Associated With Unrealized
  Gain/Loss on Investment Securities Available for Sale                          $    70,162      $   425,445        $  (438,204)
 Change in Net Unrealized Gain/Loss on Investment
  Securities Available for Sale                                                  $   114,477      $   694,147        $  (714,967)
</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, 2001, 2000, and 1999




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.

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

                                      -21-
<PAGE>

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:

                                                  12/31/01           12/31/00
                                              ---------------     --------------

         Unrestricted Deposits              $         310,000   $      2,299,000


Investment  Securities - In  accordance  with SFAS No. 115, the Company and Bank
have segregated their investment securities into the following category:

     Available  for Sale - 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  available
     for sale are based on the net proceeds and amortized cost of the securities
     sold, using the specific  identification  method. See Note 2 for additional
     information on investment securities.

Loan  Fees - Loan  fees,  net of  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 five 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 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.

                                      -22-
<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,
                                                                         -----------------------------------------------------
                                                                             2001               2000                1999
                                                                         --------------    ----------------    ---------------
<S>                                                                          <C>                 <C>                <C>
Average number of shares outstanding                                         1,354,724           1,382,013          1,382,013
Effect of dilutive options                                                         535               1,524             21,474
                                                                         --------------    ----------------    ---------------
Average number of shares outstanding used
 to calculate diluted earnings per share                                     1,355,259           1,383,537          1,403,487
                                                                         ==============    ================    ===============
</TABLE>


NOTE 2 - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>

                                                                     Investment Securities Available for Sale
                                                      ------------------------------------------------------------------------
                                                                            Gross               Gross            Estimated
                                                        Amortized         Unrealized         Unrealized             Fair
                                                           Cost             Gains              Losses              Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                <C>                  <C>              <C>                <C>
As of December 31, 2001
Debt Securities:
 U.S. Treasury Securities and
  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
                                                           1,351,067                 0              (182)           1,350,885
  Political Subdivisions
                                                      ---------------   ---------------     --------------     ---------------
   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>

                                      -23-
<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, 2000
Debt Securities:
 U.S. Treasury Securities and
  Obligations of  U.S. Government
  Corporations and Agencies                        $       6,479,453    $       87,574   $       (12,799)   $       6,554,228
 Mortgage-Backed Securities                               14,467,331            65,173          (157,983)          14,374,521
 Obligations of States and
  Political Subdivisions                                     673,504             7,130                 0              680,634
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  21,620,288           159,877          (170,782)          21,609,383
                                                      ---------------   ---------------     --------------     ---------------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               801,700                 0                 0              801,700
 Federal Home Loan Mortgage
  Corporation Stock                                           27,448         1,903,396                 0            1,930,844
 Intrieve, Inc. Stock,  at Cost                               15,000                 0                 0               15,000
                                                      ---------------   ---------------     --------------     ---------------
   Total Equity Securities                                   844,148         1,903,396                 0            2,747,544
                                                      ---------------   ---------------     --------------     ---------------
                                                   $      22,464,436    $    2,063,273   $      (170,782)   $      24,356,927
                                                      ===============   ===============     ==============     ===============
</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:
<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                        -----------------------------------------------------
                                                                             2001               2000               1999
                                                                        ---------------    ---------------     --------------
<S>                                                                  <C>                <C>                 <C>
Gross Realized Gains                                                 $           3,200  $              0    $         2,460
Gross Realized Losses                                                                0            (8,834)           (83,708)
                                                                        ---------------    ---------------     --------------
                                                                     $           3,200  $         (8,834)   $       (81,248)
                                                                        ===============    ===============     ==============
</TABLE>

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

                                                             December 31, 2001                      December 31, 2000
                                                      ---------------------------------     ----------------------------------
                                                                          Estimated                              Estimated
                                                        Amortized            Fair             Amortized             Fair
                                                           Cost             Value               Cost               Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                <C>                  <C>              <C>                <C>
FNMA Certificates                                  $       6,381,751    $    6,448,154   $      8,190,379   $       8,095,918
GNMA Certificates                                          1,593,323         1,632,868          2,805,877           2,849,850
FHLMC Certificates                                         2,227,864         2,253,977          3,471,075           3,428,753
                                                      ---------------   ---------------     --------------     ---------------
                                                   $      10,202,938    $   10,334,999   $     14,467,331   $      14,374,521
                                                      ===============   ===============     ==============     ===============
</TABLE>


                                      -24-
<PAGE>

The amortized  cost and estimated  fair value of debt  securities  available for
sale as of December 31, 2001, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
                                                                                                               Estimated
                                                                                          Amortized               Fair
                                                                                             Cost                Value
                                                                                       -----------------    -----------------
<S>                                                                                 <C>                  <C>
Due in One Year or Less                                                             $         1,665,045  $         1,676,577
Due After One Year  Through Five Years                                                        7,486,739            7,669,374
Due After Five Years  Through Ten Years                                                       3,722,207            3,689,605
Due After Ten Years                                                                           8,457,004            8,566,722
                                                                                       -----------------    -----------------
                                                                                    $        21,330,995  $        21,602,278
                                                                                       =================    =================
</TABLE>

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


Investments with book values of approximately  $6,650,000 and $4,550,000  (which
approximates market values) as of December 31, 2001 and 2000, 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:
<TABLE>
<CAPTION>

                                                                                                 As of December 31,
                                                                                       ---------------------------------------
                                                                                             2001                 2000
                                                                                       -----------------    ------------------
First mortgage loans (principally conventional):
<S>                                                                                 <C>                  <C>
 Secured by one-to-four family residences                                           $       57,577,242   $        53,782,332
 Secured by other properties                                                                 9,131,465            10,229,183
 Construction loans                                                                          3,996,850             2,588,600
                                                                                       -----------------    ------------------
                                                                                            70,705,557            66,600,115
Less:
 Undisbursed portion of construction loans                                                  (1,736,933)           (1,029,788)
 Net deferred loan origination fees                                                           (351,583)             (326,631)
                                                                                       -----------------    ------------------
  Net first mortgage loans                                                                  68,617,041            65,243,696
                                                                                       -----------------    ------------------

Consumer and commercial loans:
 Loans to depositors, secured by deposits                                                    1,380,199             1,250,166
 Automobile                                                                                  1,260,173             1,402,279
 Home equity and second mortgage                                                               156,624               227,304
 Other                                                                                       1,505,523             1,414,162
                                                                                       -----------------    ------------------
  Net consumer and commercial loans                                                          4,302,519             4,293,911
Less allowance for loan losses                                                                (719,333)             (659,504)
                                                                                       -----------------    ------------------
                                                                                    $       72,200,227   $        68,878,103
                                                                                       =================    ==================
</TABLE>

The Bank had  outstanding  loan  commitments  of  approximately  $3,675,000  and
$2,181,000 (in addition to undisbursed  portion of construction  loans) at rates
ranging from 6.5% to 8.5% as of December 31, 2001 and 2000, respectively.

                                      -25-
<PAGE>

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

                                                                                  For the Years Ended December 31,
                                                                        -----------------------------------------------------
                                                                             2001               2000               1999
                                                                        ---------------    ---------------     --------------
<S>                                                                  <C>                <C>                 <C>
Allowance at beginning of year                                       $        659,504   $        660,741    $       640,982
 Provision charged to expense                                                 110,000             37,000             24,000
 Recoveries of loans previously charged off                                       650              1,893                268
 Loans charged off                                                            (50,821)           (40,130)            (4,509)
                                                                        ---------------    ---------------     --------------
Allowance at end of year                                             $        719,333   $        659,504    $       660,741
                                                                        ===============    ===============     ==============
</TABLE>

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,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
<S>                                                                                     <C>                 <C>
Recorded value of all impaired loans                                                    $         994,000   $      1,026,000
Average individual loan balance                                                         $          47,000   $         43,000
Total allowance for loan losses related to impaired loans                               $         243,547   $        251,016
</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,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
<S>                                                                                     <C>                 <C>
Cash receipts applied to reduce principal balance                                       $          67,890   $         46,353
Cash receipts recognized as interest income                                                        49,225             78,530
                                                                                           ---------------     --------------
Total cash receipts                                                                     $         117,115   $        124,883
                                                                                           ===============     ==============
</TABLE>

NOTE 4 - PREMISES AND EQUIPMENT, NET


Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
<S>                                                                                     <C>                 <C>
Land                                                                                    $        168,539    $       168,539
Buildings                                                                                        753,780            753,780
Furniture and equipment                                                                          456,343            403,589
Construction in process                                                                           36,360                  0
                                                                                           ---------------     --------------
                                                                                               1,415,022          1,325,908
Less accumulated depreciation                                                                   (918,649)          (856,128)
                                                                                           ---------------     --------------
                                                                                        $        496,373    $       469,780
                                                                                           ===============     ==============
</TABLE>

Depreciation  expense for the years ended  December  31,  2001,  2000,  and 1999
totalled $62,521, $56,339, and $56,743, respectively.

                                      -26-
<PAGE>

NOTE 5 - DEPOSITS

A summary of deposits is as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
Demand Deposits:
<S>                                                                                     <C>                 <C>
 Now Accounts                                                                           $       8,924,461   $      8,004,399
 Money Market Deposit Accounts                                                                  8,816,451          2,778,955
 Passbook Savings                                                                              11,412,011         10,294,409
                                                                                           ---------------     --------------
  Total Demand Deposits                                                                        29,152,923         21,077,763
                                                                                           ---------------     --------------

Term Deposits:
 Less Than $100,000                                                                            41,161,497         46,271,078
 $100,000 or More                                                                              14,495,406         14,264,850
                                                                                           ---------------     --------------
  Total Term Deposits                                                                          55,656,903         60,535,928
                                                                                           ---------------     --------------
                                                                                        $      84,809,826   $     81,613,691
                                                                                           ===============     ==============
</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, 2001 are
as follows:

         2002                                            $      50,974,341
         2003                                                    4,255,763
         2004                                                      348,210
         2005                                                       53,589
         2006                                                       25,000
                                                            ---------------
                                                         $      55,656,903
                                                            ===============


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 is  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.  Interest  expense
associated  with the advances from the FHLB totalled  $38,393 for the year ended
December  31, 2001  ($283,437  and  $228,742 in 2000 and 1999).  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.



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 1/4%. The note was repaid
in 2000.  Interest expense associated with the note payable totalled $30,933 and
$22,244, for the years ended December 31, 2000 and 1999, respectively.


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,
                                  ------------------------------------------------------------------------------------------
                                             2001                            2000                           1999
                                  ----------------------------    ----------------------------    --------------------------
                                                    Percent                         Percent                       Percent
                                                      of                              of                         of Pretax
                                                    Pretax                          Pretax                         Income
                                    Amount          Income          Amount          Income          Amount
                                  -----------     ------------    -----------     ------------    -----------    -----------
<S>                            <C>                     <C>     <C>                     <C>     <C>                   <C>
Federal income tax
 at statutory rate             $    556,330            34.0 %  $    393,299            34.0 %  $    408,513          34.0 %
Increase (decrease)
 resulting from
 tax effects of:
  Nontaxable interest                (6,238)           (0.4)        (19,636)           (1.7)        (29,959)         (2.5)
  State excise tax
   and other, net                   (25,278)           (1.5)        (18,812)           (1.6)         79,588           6.6
                                  -----------     ------------    -----------     ------------    -----------    -----------
                               $    524,814            32.1 %  $    354,851            30.7 %  $    458,142          38.1 %
                                  ===========     ============    ===========     ============    ===========    ===========
</TABLE>


                                      -28-
<PAGE>

<TABLE>
<CAPTION>

Income taxes consist of:
                                                                               For the Years Ended December 31,
                                                                   ----------------------------------------------------------
                                                                         2001                 2000                1999
                                                                   -----------------    -----------------    ----------------
<S>                                                             <C>                  <C>                  <C>
Current                                                         $          567,157   $          395,958   $          422,723
Deferred (Benefit)                                                         (42,343)             (41,107)              35,419
                                                                   -----------------    -----------------    ----------------
                                                                $          524,814   $          354,851   $          458,142
                                                                   =================    =================    ================
</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 and nonqualified  retirement plans
and  deferred  compensation  plans.  The  net  deferred  tax  liability  in  the
accompanying   consolidated   statements  of  financial  condition  include  the
following components:

<TABLE>
<CAPTION>
                                                                                                 As of December 31,
                                                                                        -------------------------------------
                                                                                              2001                2000
                                                                                        -----------------    ----------------
<S>                                                                                  <C>                  <C>
Deferred Tax Liabilities                                                             $        1,320,299   $       1,270,397
Deferred Tax Assets                                                                            (451,403)           (429,321)
                                                                                        -----------------    ----------------
 Net Deferred Tax Liabilities                                                        $          868,896   $         841,076
                                                                                        =================    ================
</TABLE>

In  1996,   Congress  enacted  the  Small  Business  Job  Protection  Act  which
effectively  removed any recapture  provisions  related to tax bad debt reserves
accumulated by the 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, 2001 and 2000.


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,
                                                                                         -------------------------------------
                                                                                               2001                2000
                                                                                         -----------------    ----------------
<S>                                                                                   <C>                  <C>
Bank capital (total equity) per accounting principles                                 $       12,382,132   $      10,928,402
 generally accepted in the United States of America
Less goodwill, net of amortization                                                              (953,233)         (1,033,225)
Less net unrealized gain on investment securities                                             (1,262,775)         (1,155,021)
                                                                                         -----------------    ----------------
Tangible capital per the regulations                                                          10,166,124           8,740,156
Less adjustments for core capital                                                                     (0)                 (0)
                                                                                         -----------------    ----------------
Core capital per the regulations                                                              10,166,124           8,740,156
Add allowable portion of allowance for loan losses                                               708,000             604,000
                                                                                         -----------------    ----------------
Risk-based capital per the regulations                                                $       10,874,124   $       9,344,156
                                                                                         =================    ================
</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
                                                               --------------     ------------    -------------     -----------
As of December 31, 2001:
<S>                                                         <C>                      <C>       <C>                     <C>
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%

As of December 31, 2000:
Tangible Capital (To Adjusted Total Assets)                 $      8,741              9.1%     $     1,445             1.5%
Core Capital (To Adjusted Total Assets)                     $      8,741              9.1%     $     3,854             4.0%
Risk-Based Capital (To Risk-Weighted Assets)                $      9,345             19.4%     $     3,859             8.0%
</TABLE>


As of December 31, 2001, 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
institution'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
                                                               --------------     ------------    ------------      -----------
As of December 31, 2001:
<S>                                                         <C>                      <C>       <C>                    <C>
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%

As of December 31, 2000:
Total Capital (To Risk-Weighted Assets)                     $      9,345             19.4%     $     4,824            10.0%
Tier I Capital (To Risk-Weighted Assets)                    $      8,741             18.1%     $     2,894             6.0%
Tier I Capital (To Average Assets)                          $      8,741              9.1%     $     4,800             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 $66,149,  $47,548,  and $5,337, for the
years ended December 31, 2001, 2000, and 1999, 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, 2001, 2000, and 1999, are as follows:
<TABLE>
<CAPTION>

                                                                             2001               2000               1999
                                                                        ---------------    ---------------     --------------
<S>                                                                  <C>                <C>                 <C>
Liability balance at beginning of year                               $        148,027   $        218,423    $       164,727
Accrued and expensed                                                            6,197              6,197              7,552
Death benefit payment                                                               0            (38,652)                 0
Increase (decrease) in liability due to investment returns                      8,245            (37,941)            46,144
                                                                        ---------------    ---------------     --------------
Liability balance at end of year                                     $        162,469   $        148,027    $       218,423
                                                                        ===============    ===============     ==============
</TABLE>

In July 1998, the Emerging Issues Task Force (EITF) of the Financial  Accounting
Standards  Board (FASB) issued EITF 97-14  Accounting for Deferred  Compensation
Arrangements  Where Amounts  Earned are Held in a Rabbi Trust and  Invested.  In
accordance  with EITF 97-14,  the Bank has  recognized a liability  for the fair
value of all shares of Holding  Company stock (17,143  shares as of December 31,
2001 and 2000) 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 $49,092, $46,156,
and $34,935,  in dividends on its stock in 2001,  2000, and 1999,  respectively,
which was used to reduce  the ESOP  debt.  In 2001 and 2000,  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 $58,920, $73,160, and $86,005,
on the ESOP  debt,  for the years  ended  December  31,  2001,  2000,  and 1999,
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  145,475  shares  of the  Company's  common  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
provide for the purchase of stock at an exercise price of $8.60 per share. Stock
options awarded  totalled  209,299 and 205,869 as of December 31, 2001 and 2000,
respectively.

The Company has  repurchased  188,422 shares as of December 31, 2001 and 2000 of
its common  stock  which are being held in trust for when the stock  options are
exercised.  A contra-equity account has been established to reflect the costs of
such shares held in trust. The Company intends to utilize dividends  received to
continue to purchase shares of its common stock to be placed in the stock option
trusts.

The Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plan.  Accordingly,  no compensation  cost has been recognized.
Had compensation  cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan  consistent  with
the method  prescribed  by FASB  Statement No. 123, the Company's net income and
earnings per share would not have been significantly affected.


                                      -31-
<PAGE>

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,
2001 and 2000 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 is as follows:
<TABLE>
<CAPTION>

                                                                                                2001                2000
                                                                                           ---------------     ----------------
<S>                                                                                     <C>                 <C>
         Accrued Liability Balance at Beginning of Year                                 $        152,895    $         142,595
         Amount Charged to Expense                                                               169,488              176,880
         Less Cost of Shares Issued                                                             (180,124)            (166,580)
                                                                                           ---------------     ----------------
         Accrued Liability Balance at End of Year                                       $        142,259    $         152,895
                                                                                           ===============     ================
</TABLE>

The Company held 17,138  shares as of December 31, 2001 (31,854  shares in 2000)
of its common  stock in trust at a net cost of $209,770 as of December  31, 2001
($389,894 in 2000). 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 certificates of deposit.  Activity in the
plan for the years ended December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
<S>                                                                                     <C>                 <C>
         Balances, Beginning of Year                                                    $         171,346   $       131,527
         Directors Fees Deferred During Year                                                       57,300            55,900
         Income (Loss) Credited During Year                                                         9,242           (16,081)
                                                                                           ---------------     --------------
         Balances, End of Year                                                          $         237,888   $       171,346
                                                                                           ===============     ==============
</TABLE>
                                      -32-
<PAGE>


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, 2001,  the Bank had
concentrations of loans in real estate lending and consumer  lending.  Generally
these loans are secured by the underlying  real estate and consumer  goods.  The
usual risk associated with such  concentrations are generally mitigated by being
spread over several hundred unrelated  borrowers and by adequate collateral loan
to value ratios.



                                      -33-
<PAGE>



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 consolidated financial position of the Bank.



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.


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.

                                      -34-
<PAGE>

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.


                                      -35-
<PAGE>



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,  risks  characteristics,  credit quality,  and interest
rates,  all of which are subject to change.  Because the fair value is estimated
as of the dates  indicated,  the amounts which will actually be realized or paid
upon  settlement  or  maturity  of the various  financial  instruments  could be
significantly different.

The estimates of fair value are based on existing financial  instruments without
attempting to estimate the value of anticipated  future business or activity nor
the  value  of  assets  and  liabilities  that  are  not  considered   financial
instruments.  For example,  the value of mortgage loan servicing  rights and the
value of the 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.

Advances  From  Federal  Home Loan Bank - The  advance is a fixed rate and fixed
maturity liability. The fair value is estimated using a rate currently available
to the Bank for debt with similar terms and remaining maturity.


                                      -36-
<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, 2001             As of December 31, 2000
                                                           --------------------------------    --------------------------------
                                                              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                         $            2,123  $         2,123  $           3,067  $         3,067
Investment Securities-Available for Sale               $           24,398  $        24,398  $          24,357  $        24,357
Loans Receivable, Net                                  $           72,200  $        72,476  $          68,878  $        68,145

FINANCIAL LIABILITIES:
Deposits                                               $           84,810  $        85,117  $          81,614  $        82,070
Advances From Federal Home Loan Bank                   $                0  $             0  $           1,753  $         1,743
</TABLE>







                                      -37-
<PAGE>

<TABLE>
<CAPTION>

                              CORPORATE INFORMATION


<S>                                              <C>
Directors:                                        Annual Stockholder Meeting:

   J. William Myers                                  May 21, 2002; 5:00 p.m.
      Chairman of the Board & Attorney               Newport Federal Bank
      Myers & Bell, P.C., Newport, TN                344 W. Broadway
                                                     Newport, Tennessee
   Richard G. Harwood
      President and Chief Executive Officer       Main Office:
      of the Company and the Bank
                                                     344 W. Broadway
   Tommy C. Bible                                    Newport, Tennessee
      Manager, Jefferson/Cocke Co. Utilities
                                                  Branch Offices:
   William B. Henry
      Retired; Former Optometrist                    263 E. Broadway
                                                     Newport, Tennessee
    Ben W. Hooper, III
      Attorney, Campbell & Hooper,                   345 Cosby Highway
        Newport, Tennessee                           Newport, Tennessee

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

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

   Chris H. Triplett
      Controller
</TABLE>


<PAGE>


                                                                      Exhibit 21

                         Subsidiaries of the Registrant




<TABLE>
<CAPTION>


Parent
------

United Tennessee Bankshares, Inc.
                                                                       State or Other
                                                                       Jurisdiction of           Percentage
Subsidiary                                                             Incorporation             Ownership
----------                                                             -------------             ---------
<S>                                                                                                <C>
Newport Federal Bank                                                   United States               100%
</TABLE>

<PAGE>




                                                                      Exhibit 23

                        [PUGH & COMPANY, P.C. LETTERHEAD]


                          INDEPENDENT AUDITORS' CONSENT


The Board of Directors and Shareholders
United Tennessee Bankshares, Inc.
Newport, Tennessee

We consent to  incorporation  by reference in the  Registration  Statement  (No.
333-41571 and 333-82803) on Form S-8 of United Tennessee Bankshares, Inc. of our
report  dated  March  21,  2002,  relating  to the  consolidated  statements  of
financial  condition of United Tennessee  Bankshares,  Inc. and subsidiary as of
December 31, 2001 and 2000, and the related  consolidated  statements of income,
comprehensive  income,  changes in shareholders' equity, and cash flows for each
of the years in the  three-year  period ended  December  31, 2001,  which report
appears  in the  December  31,  2001  annual  report  on Form  10-KSB  of United
Tennessee Bankshares, Inc. and subsidiary.

                                             Pugh & Company, P.C.
                                             Certified Public Accountants
                                             Knoxville, Tennessee
                                             March 21, 2002