UNITED STATES 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, 2004

                                       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 $7,386,000.

The   aggregate   market  value  of  the   outstanding   common  stock  held  by
non-affiliates at March 22, 2005 was  approximately  $14.7 million (based on the
most recent trade  reported on the Nasdaq  SmallCap  MarketSM of $20.05 on March
22, 2005).  Solely for purposes of this calculation,  the registrant's  employee
stock  ownership  plan,  401(k)  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 22,
2005 was 1,196,999.

Transitional small business disclosure format (check one):  Yes       No    X
                                                               -----      ------





<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 $180,000 loan to the
Company's  employee stock  ownership plan and  approximately  $274,000 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,  2004,  the Bank had  total  assets of $122.7  million,  deposits  of $100.9
million and stockholders' equity of $18.4 million, or 15.0% 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,  and 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").

Market Area

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

                                      -2-
<PAGE>

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  2004,  6.4%  compared  with  5.0%  and  5.1%,
respectively),  and income levels have been  substantially  lower than state and
national averages ($25,553 compared with $36,360 and $41,994,  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 ConAgra 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 come 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,  2004,  the
maximum  amount that the Bank could have lent to any one borrower  without prior
OTS approval under those  regulations was  approximately  $4.1 million.  At that
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was $1.0 million. The Bank had a total of six lending relationships
with  aggregate  loan  amounts over  $500,000 at December 31, 2004,  and none of
these loans were nonperforming.  For additional information,  see "-- Regulation
of the Bank -- Limits on Loans to One Borrower."
                                      -3-
<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, 2004, the Bank had no  concentrations  of loans exceeding 10% of
gross loans other than as disclosed below.

<TABLE>
<CAPTION>

                                             December 31, 2004             December 31, 2003          December 31, 2002
                                             -----------------             -----------------          -----------------
                                          (Dollars in Thousands)         (Dollars in Thousands)     (Dollars in Thousands)
Type of Loan                                 Amount    Percent            Amount    Percent           Amount    Percent
------------                                 -------   -------           -------    -------          -------    -------
  <S>                                        <C>        <C>              <C>          <C>            <C>         <C>
  Real estate loans:
  One-to four-family residential             $63,037    76.6%            $63,335      79.1%          $62,772      77.5%
  Commercial                                  10,227    12.4%              9,261      11.6%            8,618      10.6%
  Construction                                 4,172     5.1%              1,769       2.2%            3,932       4.9%

Consumer loans:
  Automobile                                   1,282     1.6%              1,488       1.9%            1,354       1.7%
  Loans to depositors, secured by deposits     1,224     1.5%              1,293       1.6%            1,264       1.6%
  Home equity and second mortgage                733     0.9%              1,341       1.7%              948       1.2%
  Other                                        1,568     1.9%              1,504       1.9%            2,054       2.5%
                                             -------   ------            -------    -------          -------    -------
                                              82,243   100.0%             79,991     100.0%           80,942     100.0%
                                             -------   ======            -------    =======          -------    =======

Less:
  Loans in process                             2,085                         764                       1,405
  Deferred fees and discounts                    348                         352                         372
  Allowance for loan losses                      980                         922                         803
                                             -------                     -------                     -------
    Total                                    $78,830                     $77,953                     $78,362
                                             =======                     =======                     =======
</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,
2004. 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.

  Loan Maturity Schedule
                                Due Within    Due After    Due After     Total
                                 1 Year       1 Through     5 Years
                                               5 Years
                                ----------    ---------    ---------    -------

Real estate loans:
  One-to-four-family residential   $  203      $  1,376    $ 61,458     $63,037
  Commerical                           40         1,415       8,772      10,227
  Construction                      4,172             0           0       4,172
Consumer loans                      2,943         1,499         365       4,807
                                 --------     ---------    --------     -------
   Total                           $7,358      $  4,290    $ 70,595     $82,243
                                  =======     =========    ========     =======

                                      -4-
<PAGE>

Loan Portfolio  Sensitivity.  The following table sets forth  information  about
dollar  amounts of loans due one year or more after  December  31, 2004 that had
predetermined  interest  rates and that had  adjustable  interest  rates at that
date.

        Loan Portfolio Sensitivity
                                    Predetermined         Floating or
                                         Rate           Adjustable Rates
                                    -------------       ----------------
Real estate loans:
  One-to-four-family residential    $    5,524           $       57,513
  Commercial                               932                    9,295
  Construction                               0                    4,172
Consumer loans                           4,807                        0
                                    -------------       ---------------
   Total                            $   11,263           $       70,980
                                    =============       ===============

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.

   Loans originated:                      For Year Ended December 31,
                                       2004              2003               2002
                                       -----            ------             -----
                                                     (In thousands)

  Real estate loans:
    One- to four-family residential.. $17,907         $ 17,640         $  18,706
    Commercial.......................   2,676            3,654             1,484
    Construction.....................   2,401            2,753             4,599
  Consumer loans.....................   2,404            3,971             2,985
                                      --------        --------         ---------
     Total loans originated .........$ 25,388         $ 28,018         $  27,774
                                     =========        ========         =========

                                      -5-
<PAGE>

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 $50,000 and $100,000, with original loan amounts averaging approximately
$60,000.  At December 31, 2004,  $63.0  million,  or 76.6%,  of total loans were
secured by one- to four-family residences,  a substantial majority of which were
existing,  and  owner-occupied,  single-family  residences in its primary market
area. At December 31, 2004, $57.5 million,  or 91.2%, of its one- to four-family
residential loans had adjustable  interest rates, and $5.5 million,  or 8.8% had
fixed rates.  During the year ended December 31, 2004, the Bank originated $20.3
million of adjustable-rate  loans,  which was approximately  80.0% of total loan
originations  for that  period,  and at that  date it had $3.1  million  of loan
commitments, 67.0% 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 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
80%.

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.

                                      -6-
<PAGE>

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, 2004, the Bank's loan portfolio  included $4.2
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.

During the  construction  phase, a number of factors could cause delays and cost
overruns.  If the estimate of construction costs is inaccurate,  the Bank may be
required  to advance  funds  beyond the amount  originally  committed  to permit
completion of construction. If the estimate of value is inaccurate, the Bank may
be confronted,  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,  2004,  the Bank had
approximately  167 of these loans  totaling  $10.2  million,  with a median loan
balance  of  approximately  $61,000,  none  of  which  had a  balance  exceeding
$900,000.

                                      -7-
<PAGE>

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 80%.

The following  paragraphs set forth information about the Bank's commercial real
estate loans with outstanding  balances exceeding $500,000 at December 31, 2004.
None of these  loans  was  classified  as  substandard,  doubtful  or loss.  The
commercial  property in Morristown,  Tennessee was designated as special mention
at December 31, 2004, due to  insufficient  cash flows.  For  information  about
asset classification policies of the Bank, see "Asset Classification,  Allowance
for Losses and Nonperforming Assets."

               Commercial property in Newport,  Tennessee.  In January 2001, the
               Bank  made a  $600,000  construction  loan  for  the  purpose  of
               construction/remodeling  of a local  church.  The  loan to  value
               ratio on this project is 74% and the loan is being amortized over
               25 years.

               Retail  properties in Sevierville,  Tennessee.  In February 2002,
               the Bank made an  $860,000  loan  secured  by an office  building
               located in  Sevierville,  Tennessee.  The  appraisal  indicated a
               loan-to-value  ratio  of  approximately  67%.  The  loan is being
               amortized over 20 years.

               Commercial property in Newport, Tennessee. In June 2002, the Bank
               made a $580,000  loan  secured by a mobile  home park  located in
               Newport,  Tennessee.  The loan to value ratio is 80% and the loan
               is being amortized over 20 years.

               Commercial property in Morristown,  Tennessee. In September 2003,
               the Bank made a  $909,000  loan  secured  by  personal  guaranty,
               assignment of life insurance,  commercial real estate, equipment,
               inventory and accounts receivable in Morristown,  Tennessee.  The
               loan to value ratio is 45% and the loan is being  amortized  over
               15 years.

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 December 31, 2004, the
Bank  would be  permitted  to invest up to $73.7  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 $4.8 million at December 31, 2004. At
that  date,  the Bank had 546  consumer  loans,  with a median  loan  balance of
approximately $9,000, none of which had a balance exceeding $75,000, and none of
the ten largest consumer loans were adversely classified or designated.

                                      -8-
<PAGE>

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, 2004,  the Bank had no assets
classified  as  loss  or  as  doubtful,   $1,067,000  of  assets  classified  as
substandard  and $1,286,000  assets  designated as special  mention.  The Bank's
total adversely  classified assets represented  approximately 1.92% of its total
assets and 15.19% of its tangible  regulatory  capital at December 31, 2004.  At
that date,  $753,000 of its adversely  classified or designated assets were one-
to  four-family  residences  in its primary  market  area,  and only two of such
assets  was in  excess  of  $100,000.  At  December  31,  2004  the Bank had two
commercial real estate loans with balances of approximately $1,286,000 that were
adversely classified. At December 31, 2004, the Bank did not expect to incur any
loss  in  excess  of  attributable  existing  reserves  on any of its  adversely
classified or designated assets.

                                      -9-
<PAGE>

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  increased the
allowance for losses by charging provisions for losses against its income.

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, 2004,  the Bank held two  properties  acquired in settlement in the
amount of  $128,000.  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.

                                      -10-
<PAGE>

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

<TABLE>
<CAPTION>
    Allowance for Loan Losses
                                                                        Year Ended December 31,
                                                              -------------------------------------------
                                                              2004               2003                2002
                                                              -----             ------              -----
                                                                              (Dollars in thousands)
<S>                                                           <C>               <C>              <C>
Balance at beginning of period..............................  $     922         $    803         $    719
                                                              ---------         --------         --------
Charge-offs:
    Consumer................................................        (22)             (22)             (34)
    Mortgage................................................        (22)              (4)             (14)

Recoveries:
    Consumer................................................          2                1                3
    Mortgage................................................          0                0                0
                                                              ---------         --------         ---------
Net charge-offs.............................................        (42)             (25)             (45)
Provision for loan losses...................................        100              144              129
                                                              ---------         --------         ---------
Balance at end of period....................................  $     980         $    922         $    803
                                                              =========         ========         =========
Ratio of net charge-offs to average
  loans outstanding during the period.......................      0.05%             0.03%            0.06%
                                                              =========        =========         =========

Average Loans Outstanding .................................   $ 77,922          $ 77,941         $ 77,308
                                                             ==========        =========         =========
</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,
                                            ------------------------------------------------------------------------------
                                                     2004                      2003                         2002
                                            ----------------------   ---------------------------   -----------------------
                                                         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
                                                ------  -------------   ------    -------------     ------   -------------
<S>                                         <C>            <C>         <C>           <C>         <C>            <C>
                                                                         (Dollars in thousands)
Loans:
One- to four-family residential...........  $     560       57.1%      $     162      17.6%      $     147       18.3%
  Commercial..............................        286       29.2%            697      75.6%            486       60.5%
  Construction............................         59        6.0%             15       1.6%             38        4.7%
Consumer loans............................         75        7.7%             48       5.2%            132       16.5%
                                            ---------       ----       ---------     ------      ---------      ------
    Total allowance for loan losses.......  $     980      100.0%      $     922     100.0%      $     803      100.0%
                                            =========      =====       =========     =====       =========      =====
</TABLE>

                                      -11-
<PAGE>


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.

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.


Non-Performing Loans
<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                     ------------------------------------
                                                       2004          2003         2002
                                                     ----------    ----------    --------
<S>                                                      <C>           <C>         <C>
Nonaccrual Loans                                         $   0          $  0        $   0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
   One- to four-family residential                         625           606         292
   Commercial                                                3            11          30
   Construction                                              0             0           0
Consumer loans                                              10            21          50
                                                     ----------    ----------    --------
     Total                                               $ 638         $ 638       $ 372
                                                     ==========    ==========    ========
Percentage of total Loans                                 0.81%         0.82%       0.43%
                                                     ==========    ==========    ========
Other nonperforming assets(1)                              128            48         127
                                                     ==========    ==========    ========
Total nonperforming assets                                 766           686         499
                                                     ==========    ==========    ========
Percentage of total assets                                0.52%         0.55%       0.33%
                                                     ==========    ==========    ========
</TABLE>

-------------
1    Other nonperforming assets include 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,  2004,  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.

                                      -12-
<PAGE>

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.

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.

                                      -13-
<PAGE>

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, 2004, none
of these  securities had been  downgraded  from its original  rating,  and these
issues were primarily obligations of Tennessee  municipalities.  At December 31,
2004,  these  securities  had a weighted  average  coupon of 4.4% and a weighted
average term to maturity of  approximately  104 months.  The  carrying  value of
these securities was $3.9 million, or 10.9% of the investment  securities of the
Company at that date.  None of its  privately  issued  securities  is insured or
guaranteed by FHLMC or FNMA.

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

<TABLE>
<CAPTION>
                                                                             At December 31,
                                                              ----------------------------------------------
                                                                2004               2003                2002
                                                              -------             ------              ------
                                                                             (In thousands)
<S>                                                           <C>               <C>              <C>
Securities available for sale:
   Mortgage-backed securities...............................  $ 10,579         $    8,514        $  6,011
   U.S. government and agency securities....................    16,601             15,381          13,720
   Obligations of states and political
       subdivisions.........................................     3,864              2,147           2,119
   FHLMC stock..............................................     1,941              1,379           1,655
   FHLB stock...............................................       972                933             897
   Corporate debt securities................................     1,517              1,297             760
   Other...................................................        105                105             105
                                                              --------           --------        --------
      Total.................................................  $ 35,579         $   29,756        $ 25,267
                                                              ========           ========        ========
</TABLE>

The following schedule analyzes the Company's  investment  portfolio at December
31, 2004 by time  remaining to maturity and presents the average  yield for each
range of maturities.


                                      -14-

<PAGE>

<TABLE>
<CAPTION>
                                                                                                                        Total
                                      Less than One Year    One to Five Years  Five to Ten Years  More than Ten Years   Portfolio
                                      ------------------    -----------------  -----------------  -------------------   ---------
   Maturity & Yield
   ----------------
                                     Carrying  Average    Carrying   Average   Carrying  Average  Carrying  Average Carrying Average
                                       Value     Yield      Value     Yield     Value      Yield   Value    Yield    Value    Yield
                                     --------  -------    --------  -------    --------  -------  --------  ------- -------- -------
                                                                                     (Dollars in thousands)
<S>                                   <C>         <C>     <C>          <C>     <C>          <C>    <C>      <C>     <C>       <C>

Securities available for sale:
   Mortgage-backed securities         $   111     6.5%    $ 5,305      4.3%    $  5,163     4.0%   $    --    0.0%  $ 10,579    4.2%
   U.S. government and agency
      securities..........              1,540     6.2%     11,084      4.1%       3,977     4.3%         0    0.0%    16,601    4.4%
   Obligations of states and
      political subdivisions               95     5.1%        974      4.1%       1,737     4.3%     1,058    4.8%     3,864    4.4%
   FHLMC stock............                  0     0.0%          0      0.0%           0     0.0%     1,941  122.6%     1,941  122.6%
   FHLB stock.............                  0     0.0%          0      0.0%           0     0.0%       972    4.0%       972    4.0%
   Corporate Debt Securities                0     0.0%      1,517      5.4%           0     0.0%         0    0.0%     1,517    5.4
   Other..................                  0     0.0%          0      0.0%           0     0.0%       105    0.0%       105    0.0
                                      -------             -------              --------            -------          --------
     Total................            $ 1,746             $18,880              $ 10,877            $ 4,076          $ 35,579
                                      =======             =======              ========            =======          ========
</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 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.

                                      -15-

<PAGE>

The Bank's savings deposits at December 31, 2004 were represented by the various
types of savings programs listed below.
<TABLE>
<CAPTION>
Deposit Summary:

Weighted
Average
Interest       Minimum                                                      Minimum                  Percentage of
Rate (1)       Term                 Category                             Balance      Balance      Total Deposits
--------       -------                --------                             --------   ----------     ------------
<S>            <C>                  <C>                                    <C>        <C>             <C>
0.70%          None                 NOW accounts                           $     --   $    9,554        9.5%
1.59           None                 Money market                                  0       15,347       15.2%
1.00           None                 Savings deposits-passbook                    --       13,324       13.2%
0.00%          None                 Non-interest bearing accounts                 0          852        0.8%
                                                                                      ----------     -------
                                         Total transaction accounts                   $   39,077       38.7%
                                                                                      ==========     ========


                                    Certificates of Deposit

2.08%           91 days              Fixed-term, fixed-rate                   2,500   $    4,932        4.9%
2.15%           6 months-Regular     Fixed-term, fixed-rate                   2,500        5,724        5.7%
2.25%           6 months-IRA         Fixed-term, fixed-rate                     100          699        0.7%
2.05%           12 months            Fixed-term, fixed-rate                   1,000        2,618        2.6%
2.19%           14 months            Fixed-term, fixed-rate                   1,000       11,423       11.3%
2.84%           18 months-Regular    Fixed-term, fixed-rate                   1,000        4,507        4.5%
2.35%           18 months-IRA        Fixed-term, fixed-rate                     100        6,948        6.9%
2.45%           24 months            Fixed-term, fixed-rate                   1,000        1,447        1.4%
1.93%           30 months            Fixed-term, fixed-rate                   1,000          333        0.3%
2.60%           48 months            Fixed-term, fixed-rate                   1,000          270        0.3%
2.26%           Jumbos               Fixed-term, fixed-rate                 100,000       22,941       22.7%
                                                                                      ----------      -----
                                         Total Certificates of Deposit                    61,842       61.3%
                                                                                      ----------      -----
                                            Total Deposits                            $  100,919      100.0%
                                                                                      ==========      =====


</TABLE>

                                      -16-
<PAGE>

The following tables set forth information about the Bank's deposit balances and
average rates during the periods presented.
<TABLE>
<CAPTION>
Deposit Comparison                                          For Year Ended December 31,
                                      ------------------------------------------------------------------------------
                                              2004                        2003                      2002
                                      --------------------     -----------------------     -------------------------

                                      Average      Average       Average      Average      Average      Average
                                      Balance       Rate         Balance       Rate        Balance        Rate
                                      -------      -------      --------      ------       -------     --------
                                                                  (Dollars in thousands)
<S>                                   <C>           <C>        <C>               <C>       <C>             <C>

NOW accounts.....................     $    9,554    0.7%       $     8,482       0.8%      $     8,428     1.0%
Money market deposits............         15,347    1.6%            17,924       1.6%           16,464     1.9%
Savings deposits -- passbook.....         13,324    1.0%            13,156       1.0%           12,391     1.3%
Non-interest bearing accounts....            852    0.0%             1,350       0.0%            1,261     0.0%
Certificates of deposit..........         61,842    2.3%            57,195       1.9%           55,202     2.3
                                    ------------               -----------                ------------
    Total........................   $    100,919               $    98,107                $     93,746
                                    ============               ===========                ============
</TABLE>


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 31,
                                                 2004       Deposit    (Decrease)         2003         Deposits      2002
                                           --------------   --------   ----------     ------------    --------   ----------
<S>                                        <C>             <C>          <C>             <C>            <C>         <C>
                                                                           (Dollars in thousands)
NOW accounts.............................. $   9,554         9.47%      $    1,072      $   8,482        8.65%     $    54
Money market deposit......................    15,347        15.21%          (2,577)        17,924       18.27%       1,460
Savings deposits -- passbook..............    13,324        13.20%             168         13,156       13.41%         765
Non-interest bearing......................       852         0.84%            (498)         1,350        1.38%          89
Certificates of deposit...................    38,901        38.55%           1,775         37,126       37.84%       1,029
Jumbo certificates........................    22,941        22.73%           2,872         20,069       20.46%         964
                                           ---------       ------       ----------      ---------      ------      -------
                                           $ 100,919       100.00%      $    2,812      $  98,107      100.00%     $ 4,361
                                           =========       ======       ==========      =========      ======      =======
</TABLE>

                                      -17-
<PAGE>

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


<TABLE>
<CAPTION>
 Net Increase (Decrease) in Savings Deposits:                       For the Year Ended December 31,
                                                              --------------------------------------------
                                                              2004               2003                 2002
                                                              -----             ------               -----
                                                                             (In thousands)
<S>                                                           <C>               <C>              <C>
Net increase (decrease) before interest credited............  $   1,443         $  2,850         $   7,031
Interest credited...........................................      1,369            1,511             1,905
                                                              ---------         --------         ---------
    Net increase (decrease) in savings deposits.............  $   2,812         $  4,361         $   8,936
                                                              =========         ========         =========
</TABLE>

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


<TABLE>
<CAPTION>
Time Deposit Rates:

                                                                      For the Year Ended December 31,
                                                              -------------------------------------------
                                                                2004             2003                2002
                                                              -------           ------             ------
                                                                        (Dollars in thousands)
<S>                                                           <C>               <C>              <C>

         1.00 -  1.99%..............................          $  14,218         $ 33,048         $  10,778
         2.00 -  3.99%..............................             47,563           24,026            43,935
         4.00 -  5.99%..............................                 61                0               489
         6.00 -  7.99%..............................                  0              121                 0
                                                              ---------         --------         ---------
         ...........................................          $  61,842         $ 57,195         $  55,202
                                                              =========         ========         =========
</TABLE>

The following table sets forth  information  about amounts and maturities of the
Bank's time deposits at December 31, 2004.

<TABLE>
<CAPTION>

Time Deposit Maturity and Rate Analysis:

                                                         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>
 1.00 -  1.99%..................   $13,906         $    180        $    81         $   51         $ 14,218
 2.00 -  3.99%..................    40,318            7,204             40              1           47,563
 4.00 -  5.99%..................         2               59              0              0               61
 6.00 -  7.99%..................         0                0              0              0                0
                                   -------         --------        -------         ------         --------
                                   $54,226         $  7,443        $   121         $   52         $ 61,842
                                   =======         ========        =======         ======         ========
</TABLE>

                                      -18-
<PAGE>

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, 2004.

                                                               Certificates
                  Maturity Period                                of Deposit
                  ----------------                             -------------
                                                         (Dollars in thousands)
                  Six months or less.........................   $  22,430
                  Over six through 12 months.................         511
                  Over 12 months ............................           0
                                                                ---------
                        Total................................   $  22,941
                                                                =========

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.  The following  sets forth selected  information  regarding the Bank's
short-term borrowings at the dates and for the periods indicated.


<TABLE>
<CAPTION>
FHLLB Borrowings:
                                                                     For the Year Ended December 31,
                                                              -------------------------------------------
                                                              2004               2003                2002
                                                              -----             ------              -----
                                                                        (Dollars in thousands)
<S>                                                          <C>               <C>                <C>
Amount outstanding at end of period:
   FHLB advances............................................ $1,000             $    0                  0
   Bank debt................................................      0                  0                  0

Weighted average rate paid:
  FHLB advances.............................................   2.24%               1.45%             1.40%
  Bank debt.................................................   0.00%               0.00%             0.00

Maximum amount outstanding at any month end:
  FHLB advances............................................. $1,000             $ 1,250            $  500
  Bank debt.................................................      0                   0                 0

Approximate average amount outstanding:
  FHLB advances............................................. $  242             $   134            $   88
  Bank debt.................................................      0                   0                 0

Approximate weighted average rate paid:
  FHLB advances.............................................   2.24%               1.45%             1.40%
  Bank debt.................................................   0.00%               0.00%             0.00%
</TABLE>

                                      -19-
<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,  2004  the  Bank  was
authorized to invest up to  approximately  $3.7 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  became
effective six months thereafter.

                                      -20-

<PAGE>

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) 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.

To date the  impact of the G-L-B Act on the  Company's  operations  has not been
significant.

Deposit Insurance. The Bank is required to pay assessments based on a percentage
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.

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,  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% 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.

                                      -21-
<PAGE>

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 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.

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, 2004, 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  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.

                                      -22-

<PAGE>

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%
</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 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.

                                      -23-

<PAGE>

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,  2004,  the Bank was in  compliance  with its  Qualified  Thrift
Lender requirement.

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 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, 2004,  the maximum  amount that the Bank could have lent to any
one borrower under the 15% limit was approximately  $4.1 million.  At such date,
the largest  aggregate amount of loans that were outstanding to any one borrower
or group of affiliated borrowers was $1.0 million.

                                      -24-

<PAGE>

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, 2004,  the Bank had $972,000 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, 2004,  the Bank had  $1,000,000 in
advances outstanding.

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,  2004,  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 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.

                                      -25-

<PAGE>

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 1997;  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, 2003,  the Bank
had recaptured all of its post-1987 bad debt reserves.

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 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.

                                      -26-
<PAGE>

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 6.5% 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                                      2004                Title
         --------------                     -------------              ----------------------------
         <S>                                      <C>                  <C>
         Lonnie R. Jones                          61                   Vice-President of Operations
         Nancy L. Bryant                          61                   Vice-President and Treasurer
         Peggy G. Holston                         55                   Branch Manager and Assistant Secretary
         Chris H. Triplett                        39                   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 has served as a Director of the
Douglas  Cooperative,  serves as the  President  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.

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  Kiwanis  Club,  Boys & Girls Club of  Newport/Cocke
County, Leadership Cocke County and Newport/Cocke County Chamber of Commerce.

Employees

As of December 31, 2004,  the Bank had 28  full-time  employees  and 2 part-time
employees,  none of whom were represented by a collective  bargaining agreement.
The Bank considers its relationships with its employees to be good.

                                      -27-

<PAGE>
Item 2. Description of Property

The following table sets forth information about the offices of the Bank at
December 31, 2004.

<TABLE>
<CAPTION>
                                 Year           Owned or                           Approximate
                                Opened            Leased          Book Value      Square Footage    Deposits
                                -------         --------          ----------      --------------   ----------
                                                                                                (In thousands)
<S>                               <C>              <C>            <C>                <C>            <C>
Main Office:
  344 W. Broadway
  Newport, Tennessee              1973             Owned          $ 12,489           8,000          $ 63,100
Branch Offices:
  263 E. Broadway
  Newport, Tennessee              1960             Owned               100           5,400            21,033
  345 Cosby Highway
  Newport, Tennessee              1998             Owned           140,891           2,400            16,786
</TABLE>

The book value of the Bank's  aggregate  investment in properties,  premises and
equipment totaled approximately $1.7 million at December 31, 2004. See Note 4 of
the Notes to Consolidated Financial Statements in the Annual Report.

The Bank is in the  process  of  constructing  a new  main  office  building  in
Newport,  Tennessee.  The new building will be approximately  15,000 square feet
and cost approximately $2.5 million.  The expected  completion date is September
2005.

Item 3. Legal Proceedings

From time to time, the Bank is a party to various legal proceedings  incident to
its business. At December 31, 2004, 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, 2004.

                                      -28-
<PAGE>

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

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  1,196,999 shares of the Company's Common
Stock  outstanding,  and approximately  550 record holders.  The following table
sets forth the high and low closing sale prices for the Common Stock as reported
on the NASDAQ  SmallCap  Market (SM) for each quarter during the last two fiscal
years along with the amount of dividends declared during each quarter.


Quarter Ended                  High            Low            Dividends
--------------                 ------          -------        ---------
December 31, 2004              $20.710         $18.250        0.00
September 30, 2004             20.000          16.800         0.00
June 30, 2004                  19.150          16.730         0.36
March 31, 2004                 19.620          16.180         0.00

December 31, 2003              $19.250         $14.460        0.00
September 30, 2003             14.750          13.560         0.00
June 30, 2003                  14.180          12.500         0.33
March 31, 2003                 14.050          11.660         0.00


                                      -29-
<PAGE>

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

Selected Financial Condition Data
<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                          --------------------------------------------------------------
                                                             2004        2003         2002         2001        2000
                                                             ----        ----         ----         ----        ----
                                                                             (Dollars in thousands)
<S>                                                        <C>          <C>           <C>         <C>         <C>
Total assets                                               $ 122,659    $ 116,982     $111,753    $100,811    $  98,553
Loans receivable, net                                         78,830       77,953       78,362      72,200       68,878
Cash and amounts due from depository institutions              3,444        5,196        5,350       2,123        3,067
Investments Securities:
   Available for sale                                         35,579       29,756       25,267      24,398       24,357
   Held to maturity                                                0            0            0           0            0
Other deposits                                               100,919       98,107       93,747      84,810       81,614
Shareholders' equity                                          18,419       16,893       15,925      14,168       13,330

Number of:
   Real Estate Loans                                           1,423        1,423        1,494       1,483        1,495
   Deposit Accounts                                            7,951        7,937        8,129       8,434        8,719
   Offices                                                         3            3            3           3            3


Selected Consolidated Operations Data
                                                                             Year Ended December 31,
                                                          --------------------------------------------------------------
                                                             2004        2003         2002         2001        2000
                                                             ----        ----         ----         ----        ----
                                                                  (Dollars in thousands, except per share data)

Interest income                                            $  6,864    $  6,927      $ 7,213      $ 7,432     $  7,251
Interest expense                                              1,650       1,680        2,122        3,608        4,093
                                                          ----------- ------------ ------------ ----------- ------------

Net interest income                                           5,214       5,247        5,091        3,824        3,158
Provision for loan losses                                       100         144          129          110           37
                                                          ----------- ------------ ------------ ----------- ------------

Net interest income after provision for loan losses           5,114        5,103        4,962       3,714        3,121
Noninterest income                                              522          561          413         359          276
Noninterest expense                                           3,004        2,831        2,635       2,437        2,240
                                                          ----------- ------------ ------------ ----------- ------------

Income before income taxes and accounting change              2,632        2,833        2,740       1,636        1,157
Income taxes                                                    717          827          978         525          355
                                                          ----------- ------------ ------------ ----------- ------------

Income before accounting change                               1,915        2,006        1,762       1,111          802
Net effect of change in accounting principle                      0            0            0           0            0
                                                          ----------- ------------ ------------ ----------- ------------

Net income                                                 $  1,915     $  2,006      $ 1,762     $ 1,111    $     802
                                                          =========== ============ ============ =========== ============
Earnings per share:

   Basic                                                   $   1.58    $    1.58     $   1.33     $  0.82    $    0.58
                                                          =========== ============ ============ =========== ============
   Fully diluted
                                                           $   1.58   $     1.58     $   1.33     $  0.82    $    0.58
                                                          =========== ============ ============ =========== ============
</TABLE>

                                      -30-
<PAGE>
<TABLE>
<CAPTION>

Selected Ratios
                                                                 At or for the Year Ended December 31,
                                                          --------------------------------------------------------
                                                               2004       2003        2002       2001       2000
                                                               ----       ----        ----       ----       ----
<S>                                                          <C>        <C>         <C>        <C>        <C>
Performance Ratios:
   Return on average assets (net income
     divided by average total assets)                          1.58%      1.77%       1.63%      1.09%      0.83%
   Return on average equity (net income
     divided by average equity)                               10.89%     12.45%      11.72%      7.77%      6.36%
   Dividend payout ratio (dividends per
     share divided by earnings per share)                     22.78%     20.89%      22.56%     36.59%     51.72%
   Interest rate spread (combined weighted
     average interest rate earned less combined
     weighted average interest rate cost)                      4.30%      4.59%       4.70%      3.30%      2.70%
   Net interest margin (net interest income
     divided by average interest-earning assets)               4.0%       4.77%       4.87%      3.86%      3.40%
   Ratio of average interest-earning assets to
     average interest-bearing liabilities                    114.22%    114.64%     113.31%    115.29%    114.60%
   Ratio of noninterest expense to average
     total assets                                              2.48%      2.49%       2.41%      2.40%      2.33%
   Efficiency ratio (noninterest expense divided
     by total of net interest income and noninterest
     income)                                                  52.38%     49.94%      47.51%     58.26%     65.23%

Asset Quality Ratios:
   Nonperforming assets to total assets at end
     of period                                                 0.62%      0.98%       0.74%      0.99%      0.57%
   Nonperforming loans to total loans at end
     of period                                                 0.97%      1.41%       1.06%      1.38%      0.79%
   Allowance for loan losses to total loans at
     end of period                                             1.24%      1.18%       1.02%      1.00%      0.95%
   Allowance for loan losses to nonperforming
     loans at end of period                                  127.94%    144.51%     218.87%    170.86%    118.28%
   Provision for loan losses to total loans                    0.13%      0.18%       0.16%      0.15%      0.05%
   Net charge-offs to average loans outstanding                0.05%      0.03%       0.06%      0.07%      0.06%

Capital Ratios:
   Equity to total assets at end of period                    15.02%     14.44%      14.25%     14.05%     13.53%
   Average equity to average assets                           14.52%     14.18%      13.94%     14.05%     13.10%
</TABLE>

                                      -31-
<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.

                                      -32-
<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, 2004.

         Change in                                      Change in NPV
Market Interest Rates                Policy Limit               Computation

            +3%                          (50)%                     (27)%
            +2%                          (25)                      (16)
            +1%                          (10)                       (7)
             0%                           --                        --
            -1%                          (10)                        *
            -2%                          (25)                        *
            -3%                          (50)                        *
------
*  No loss calculated.

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

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

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

Average Balances, Interest and Average Yields

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

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

                                      -33-
<PAGE>

<TABLE>
<CAPTION>

Average Yield on Average Assets:                                For the Year Ended December 31,
                               ---------------------------------------------------------------------------------------------------
                                                  2004                              2003                             2002
                                --------------------------------     ----------------------------      ---------------------------
                                                       Average                              Average                         Average
                               Average                 Yield/         Average               Yield/     Average             Yield/
                               Balance    Interest      Cost          Balance     Interest   Cost      Balance    Interest   Coast
                               -------    --------     ---------      -------     -------   -------   ---------   -------- ---------
<S>                             <C>         <C>          <C>          <C>         <C>        <C>      <C>          <C>       <C>

                                                                            (Dollars in thousands)
Assets
Interest-earning assets:
Loans Receivable(1)            $  77,722   $  5,432      7.0%         $77,941     $  5,742    7.4%    $  77,038    $5,972     7.8%
Investment securities             35,446      1,420      4.0%          28,207        1,153    4.1%       24,534     1,211     4.9%
Other interest-earning assets      2,662         12      0.5%           3,958           32    0.8%        1,463        30     2.1%
                               ---------   --------     -----         -------     --------    ----    ---------    -------   -----
Total interest-earning assets    115,830      6,864      5.9%         110,106        6,927    6.3%      103,035     7,213     7.0%
Non-interest earning assets        5,285                                3,494                             4,783
                               --------------------                  ---------------------            --------------------
Total assets                   $ 121,115   $  6,864                  $113,600     $  6,927            $ 107,818    $7,213
                               ====================                  =====================            ====================

Liabilities and Equity
Interest-bearing liabilities:
Deposits                       $ 101,168   $  1,645      1.6%        $ 95,909     $  1,678    1.7%    $  90,844    $2,122     2.3%
FHLB advances and note payable       242          5      2.1%             134            2    1.5%           88         0     0.0%
                               --------------------                  ---------------------            -------------------
Total interest-bearing
 liabilities                     101,410      1,650      1.6%          96,043        1,680    1.7%       90,932     2,122     2.3%
Non-interest bearing
 liabilities                       2,124                                1,444                            15,034
                               ---------------------                 ---------------------            --------------------

Total liabilities                103,534      1,650                    97,487        1,680               92,784     2,122
Shareholders' Equity              17,581                               16,113                            15,034
                               ---------------------                 ---------------------            --------------------
Total Liabilities and Equity   $ 121,115   $  1,660                  $113,600     $  1,680            $ 107,818    $2,122
                               =====================                 =====================            =====================
Net interest income                        $  5,214                               $  5,247                         $5,091
                                           =========                              ========                         ========
Interest rate spread                                   4.3%                                   4.6%                            4.7%
                                                      =====                                  =====                           =====
Net interest margin                                    4.5%                                   4.8%                            4.9%
                                                      =====                                  =====                           =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities                         114.2%                                 114.6%                          113.3%
                                                     ======                                 ======                          ======
</TABLE>

(1)   Includes nonaccrual loans.

                                      -34-
<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.

Rate Volume Analysis:

<TABLE>
<CAPTION>
                                                                    For Year Ended December 31
                                          -------------------------------------    -------------------------------------
                                                     2004 vs. 2003                             2003 vs. 2002
                                          -------------------------------------    -------------------------------------
                                                  Increase (Decrease)                       Increase (Decrease)
                                          -------------------------------------    -------------------------------------
                                                         Due to                                    Due to
                                           Volume         Rate          Total       Volume          Rate          Total
                                          ---------      --------      --------    ----------      --------      -------
<S>                                        <C>            <C>           <C>             <C>    <C>    <C>

                                                                          (In Thousands)
Interest Income:
   Loans receivable                        $   (15)        $(295)        $(310)      $    69        $(299)        $(230)
   Investment securities                       290           (23)          267           161         (219)          (58)
   Other interest-earning assets                (7)          (13)          (20)           26          (24)            2
                                          ---------      --------      --------    ----------      --------      -------
     Total interest-earning assets             268          (331)          (63)          256         (542)         (286)

Interest Expense:
   Deposits                                     86          (119)          (33)           95         (539)         (444)
   FHLB advances and note payable                2             1             3             1            1             2
                                          ---------      --------      --------    ----------      --------      -------
     Total interest-bearing liabilities         88          (118)          (30)           96         (538)         (442)
                                          ---------      --------      --------    ----------      --------      -------

Change in net interest income              $   180         $(213)        $ (33)      $   160        $  (4)        $ 156
                                          =========      ========      ========    ==========      ========      =======
</TABLE>

Comparison of Financial Condition at December 31, 2004 and December 31, 2003

Total assets  increased $5.7 million,  or 4.9%,  from $117.0 million at December
31, 2003 to $122.7  million at December 31, 2004.  The Company's  asset increase
was  attributable  principally  to an increase in investment  securities of $5.8
million,  an increase loans receivable of $877,000,  and an increase in premises
and  equipment  of  $718,000,  offset by a decrease in cash and amounts due from
depository  institutions of approximately $1.8 million. The increase in premises
and equipment is due to the construction of our new main office facility.

Investment  securities available for sale increased  approximately $5.8 million,
or 19.6%,  from $29.8  million at December 31, 2003 to $35.6 million at December
31,  2004.  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.
                                      -35-

<PAGE>

Loans receivable increased $877,000,  or 1.1% from $78.0 million at December 31,
2003 to $78.8 million at December 31, 2004 as originations  exceeded  repayments
for the period.

Total deposits  increased $2.8 million,  or 2.9%, from $98.1 million at December
31, 2003 to $100.9  million at December 31, 2004. The increase was primarily due
to certificate of deposit account growth of $4.6 million offset by a decrease in
money market account  deposits of $2.5 million.  As certificate of deposit rates
have  increased  over the last half of the year and our  account  balances  have
increased as customers  have moved funds from money  market  accounts  back into
certificate accounts.

The Company's  shareholders'  equity increased $1.5 million,  or 9.0% from $16.9
million at December 31, 2003 to $18.4 million at December 31, 2004. The increase
was due  principally  to net income of $1.9  million  and offset by  $443,000 of
dividends paid to shareholders during the year.

Comparison of Results of Operations for the Years Ended December 31, 2004,  2003
and 2002

Net income was $1,915,000 for the year ended December 31, 2004,  compared to net
income of  $2,006,000  for the year ended  December 31, 2003,  and net income of
$1,762,000  for the year ended  December  31,  2002.  The decrease in net income
during  2004 was  primarily  due to an  increase  in  noninterest  expense and a
decrease in noninterest  income offset by a decrease in income taxes. Net income
for 2004 resulted in a return on average  assets of 1.58%  compared to 1.77% for
2003 and 1.63% for 2002,  and a return on  average  equity of 10.89% for 2004 as
compared to 12.45% for 2003 and 11.72% for 2002.

Interest  Income.  Interest  income totaled $6.9 million,  $6.9 million and $7.2
million for the years ended  December  31,  2004,  2003 and 2002,  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 5.9% in 2004  from  6.3% in 2003  and  7.0% in  2002.  The
decrease in 2004 was  attributable  to a decrease in rates on loans,  investment
securities  and  other   interest-earning   assets.   The  average   balance  of
interest-earning assets increased $5.7 million in 2004, $7.1 million in 2003 and
$3.9 million in 2002 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,  2004  was from  loans  receivable.  Interest  income  from  loans
receivable  was $5.4 million,  $5.7 million and $6.0 million for the years ended
December  31, 2004,  2003 and 2002,  respectively.  The average  yield earned on
loans  receivable  was 7.8% in 2002,  decreased to 7.4% in 2003 and decreased to
7.0% in 2004.  The average  balances of loans  receivable  increased  during the
period  with a  $4,900,000  increase  in 2002 due to strong  loan  demand in the
Bank's market area, a $903,000 increase in 2003 and a $219,000 decrease in 2004.
Interest income on investment securities increased in 2004 by $266,000 due to an
increase in average  balances of $7.2 million,  and decreased in 2003 by $58,000
due to an 80 basis point  decrease in average  rates,  and  decreased in 2002 by
$151,000 due to a 70 basis point decrease in average rates.

Interest Expense.  Interest expense totaled $1.7 million,  $1.7 million and $2.1
million  for  the  three  years  ended   December  31,  2004,   2003  and  2002,
respectively. The decrease in interest expense of $30,000 during 2004 was due to
a 10 basis point decrease in average  rates.  Since the average rate received on
the Bank's  interest-earning  assets decreased,  management reduced the interest
rates paid on  interest-bearing  liabilities.  The decrease in interest  expense
during 2003 was due to a 60 basis  point  decrease  in average  rates  partially
offset by a $5.1 million increase in average interest-bearing  liabilities.  The
increase in interest  expense  during 2002 was due to a 190 basis point increase
in average rates.

Net Interest Income. Net interest income was $5.2 million, $5.2 million and $5.1
million for the years ended  December 31, 2004,  2003 and 2002. The net interest
spread for 2004 was 4.3% compared to 4.6% in 2003 and 4.7% in 2002. The ratio of
average   interest-earning  assets  to  average   interest-bearing   liabilities
decreased to 114.2% in 2004 from 114.6% in 2003 and decreased in 2002 to 113.3%.
The Company's net interest  margin  decreased in 2004 to 4.5% from 4.6% in 2003,
and 4.9% in 2002.  Since the Bank is liability  sensitive,  it usually will have
increases in net interest income in a falling rate  environment and decreases in
net interest income in rising rate environments.

                                      -36-
<PAGE>

Provision  for Loan Losses.  The  provision for loan losses was $100,000 in 2004
and  $144,000 in 2003 and  $129,000  in 2002.  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.  At December 31, 2004, the ratio of the
allowance to nonperforming loans was 127.94%.

Noninterest  Income.  Noninterest  income for the years ended December 31, 2004,
2003 and 2002 was  $521,000,  $561,000 and $413,000,  respectively.  Noninterest
income consists primarily of customer service fees related to customers' deposit
accounts and loan service  charges.  Noninterest  income  decreased from 2003 to
2004  primarily  due to the  reduction  in the  gain on the  sale of  investment
securities  ($26,000 in 2004 compared to $105,000 in 2003) and partially  offset
by the  increase  in the cash  surrender  value of life  insurance.  Noninterest
income increased from 2002 to 2003 primarily due to gains on sales of investment
securities  of $105,000 and an increase in deposit  account  service  charges of
$56,000.

Noninterest Expense.  Noninterest expense for the years ended December 31, 2004,
2003 and 2002 was $3.0 million, $2.8 million and $2.6 million, respectively. The
increase  in  noninterest  expense in 2004 was  primarily  due to  increases  in
compensation  and benefits  expense and data  processing  fees.  The increase in
noninterest  expense in 2003 was also primarily due to increases in compensation
and benefits expense and data processing 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,  2004,  2003,  and 2002 was 52.38%,
49.94% and 47.51%.  The increase in the ratio during 2004 was due to an increase
in  noninterest  expense.  The ratios of  noninterest  expense to average  total
assets were 2.48%,  2.49%, and 2.41% for the years ended December 31, 2004, 2003
and 2002, respectively.

Income Taxes. The Company's effective tax rate was 27.24%, 29.19%, and 35.7% for
the years ended December 31, 2004,  2003 and 2002,  respectively.  The Company's
effective tax rates for 2004 and 2003 were lower than 2002 due to adjustments in
the Bank's  deferred  income  tax  liabilities  in  accordance  with  applicable
accounting  standards and due to the surrender of stock options  during 2003 and
2004. 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,  2004,  2003 and 2002 was  14.5%,  14.2%,  and  13.9%,
respectively.  At December 31, 2004,  the Bank  exceeded all current  regulatory
capital requirements and met the definition of a "well capitalized" institution,
the highest regulatory category.

The Bank seeks to  maintain a  relatively  high level of  liquidity  in order to
retain flexibility in terms of lending and investment  opportunities and deposit
pricing,  and in  order  to meet  funding  needs of  deposit  outflows  and loan
commitments.  Historically, the Bank has been able to meet its liquidity demands
through internal sources of funding.

The  Company's  most  liquid  assets are cash and  amounts  due from  depository
institutions,  which are  short-term  highly  liquid  investments  with original
maturities  of less than three  months  that are  readily  convertible  to known
amounts of cash.  The levels of these  assets are  dependent  on its  operating,
financing and  investing  activities  during any given  period.  At December 31,
2004, 2003 and 2002, cash and amounts due from depository  institutions  totaled
$3.4 million, $5.2 million and $5.4 million, respectively.
                                      -37-
<PAGE>

The Company's primary sources of funds are deposits, proceeds from principal and
interest  payments  on loans  and  investment  securities  and  earnings.  While
scheduled  principal  repayments  on  loans  and  investment  securities  are  a
relatively  predictable  source of funds,  deposit flows and loan and investment
securities  prepayments  are  greatly  influenced  by  general  interest  rates,
economic conditions, competition and other factors. The Company does not solicit
deposits  outside  of  its  market  area  through  brokers  or  other  financial
institutions.  However, the Company has received deposit relationships  referred
to it from a broker  during  2004  which  total  approximately  $7.9  million at
December 31, 2004.

The Company has also  designated all of its  investment  securities as available
for sale in order to meet  liquidity  demands.  At  December  31,  2004,  it had
designated  securities with a fair value of $35.6 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, 2004, the Company had outstanding  approximately $3.1 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  $54.2  million.  The  Company  anticipates  that it will  have
resources  to meet its current  commitments  through  internal  funding  sources
described above.  Historically,  it has been able to retain a significant amount
of its certificates of deposit as they mature.

Impact of Inflation and Changing Prices

The financial  statements and related notes  appearing  elsewhere in this report
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of  historical  dollars  without  considering  the change in the  relative
purchasing power of money over time due to inflation.

Virtually all of the Company's assets and liabilities are monetary. As a result,
changes in interest rates have a greater impact on its  performance  than do the
effects of general levels of inflation.  Interest rates do not necessarily  move
in the same direction or to the same extent as the price of goods and services.
                                      -38-
<PAGE>
Impact of New Accounting Standards

The following are recently issued accounting pronouncements:

Derivative Instruments and Hedging Activities
---------------------------------------------

In April 2003,  the Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standard No. 149, Amendment of Statement 133 on "Derivative
Instruments and Hedging  Activities".  This statement  amends  Statement 133 for
decisions made as part of the Derivatives Implementation Group process and other
board projects and in conjunction with other implementation  issues.  Management
does not expect  this  statement  to have any  significant  impact on the Bank's
financial position or results of operations.

Accounting  for  Certain  Financial  Instruments  with  Characteristics  of Both
Liabilities and Equity
--------------------------------------------------------------------------------

In May 2003,  the  financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standard  No.  150,  "Accounting  for  Certain  Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
established  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments  with  characteristics  of both  liabilities  and equity.
Management  does not expect this  statement to have a significant  impact on the
Bank's financial position or results of operations.

Consolidation of Variable Interest Entities
-------------------------------------------

In  December  2003,  the FASB  issued  revised  Interpretation  No. 46  (FIN46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application  of ARB No. 51,  "Consolidated  Financial  Statements,"  for certain
entities  in  which  equity  investors  do not  have  the  characteristics  of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance its activities  without additional  subordinated  support from
other parties.  This  Interpretation  requires  variable interest entities to be
consolidated by the primary  beneficiary,  which  represents the enterprise that
will absorb the majority of the variable interest  entities'  expected losses if
they  occur,  receive a majority of the  variable  interest  entities'  residual
returns if they occur, or both. This Interpretation is effective for the Bank in
the first fiscal year or interim period ending after December 15, 2004. The Bank
does not presently have any related entities  considered to be variable interest
entities  and this  Standard is not  expected  to have a material  effect on the
Bank's financial statements.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer
----------------------------------------------------------------------

In December 2003, the American  Institute of Certified Public Accountants issued
Statement of Position 03-3,  "Accounting  for Certain Loans and Debt  Securities
Acquired  in a  Transfer"  ("SOP  03-3").  SOP  03-3  addresses  accounting  for
differences  between  contractual  cash flows  expected to be  collected  and an
investor's initial investment in loans or debt securities acquired in a transfer
if those differences are attributable,  at least in part, to credit quality. SOP
03-3 also prohibits  "carrying over" or creation of valuation  allowances in the
initial accounting of all loans acquired in a transfer that are within the scope
of SOP 03-3. The prohibition of the valuation allowance carryover applies to the
purchase of an  individual  loan, a pool of loans,  a group of loans,  and loans
acquired in a purchase  business  combination.  SOP 03-3 is effective  for loans
acquired in fiscal years  beginning  after  December 15, 2004. The Bank does not
anticipate  that the  adoption  of SOP 03-3 will have a  material  impact on its
financial condition or results of operations.

                                      -39-
<PAGE>

Meaning of Other-Than-Temporary Impairment
------------------------------------------

In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1,
"Meaning of Other Than  Temporary  Impairment"  ("Issue  03-1").  The Task Force
reached a consensus  on an  other-than-temporary  impairment  model for debt and
equity  securities   accounted  for  under  Statement  of  Financial  Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities"  and  cost  method  investments,  and  required  certain  additional
financial statement disclosures. The implementation of the "Other-than-Temporary
Impairment" component of this consensus has been postponed.  The adoption of the
guidance  contained in this EITF consensus did not have a material effect on the
Bank's financial statements.

Share-Based Payment
-------------------

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment,"  which is a revision  of SFAS No.  123,  "Accounting  for  Stock-Based
Compensation."  SFAS No. 123(R)  supersedes APB Opinion No. 25,  "Accounting for
Stock Issued to Employees," and amends SFAS Statement No. 95, "Statement of Cash
Flows." Generally,  the approach to accounting for share-based  payments in SFAS
No. 123(R) is similar to the approach  described in SFAS No. 123. However,  SFAS
No. 123(R) requires all share-based  payments to employees,  including grants of
employee stock options,  to be recognized in the financial  statements  based on
their  fair  values,  which  means  that pro  forma  disclosure  is no longer an
alternative to financial statement recognition. SFAS No. 123(R) is effective for
the Bank  beginning  January  1,  2006.  The Bank is  currently  evaluating  the
provisions of SFAS No.  123(R) to determine  its impact on the Bank's  financial
statements in future periods.

Exchanges of Non-Monetary Assets
--------------------------------

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an Amendment to APB opinion No. 29." This Statement  addresses the measurement
of exchanges of nonmonetary  assets.  The Statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005.  Management
does not  believe  this  Statement  will have a  material  effect on the  Bank's
financial statements.


                                      -40-
<PAGE>

Item 7. Financial Statements



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


             Report of Independent Registered Public Accounting Firm


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, 2004 and
2003, and the related consolidated  statements of income,  comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
2004,  2003,  and  2002.  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 the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits 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,  2004 and 2003,  and the
results of their  operations  and their cash flows for the years ended  December
31, 2004, 2003, and 2002, in conformity with U.S. generally accepted  accounting
principles.

                                  Pugh &Company, P.C.
                                  Certified Public Accountants
                                  Knoxville, Tennessee
                                  March 22, 2005


                                      -41-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


<TABLE>
<CAPTION>
                                                    As of December 31,          2004                  2003
                                                                        -----------------    ------------------
                                      ASSETS
<S>                                                                     <C>                  <C>

Cash and Amounts Due From Depository Institutions                       $   3,444,274        $       5,195,746
Investment Securities Available for Sale, at Fair Value                    35,579,028               29,756,283
Loans Receivable, Net                                                      78,829,531               77,952,692
Premises and Equipment, Net                                                 1,713,961                  996,014
Accrued Interest Receivable                                                   573,146                  559,217
Real Estate Acquired Through Foreclosure                                      128,085                   48,368
Intangible Assets, Net                                                        713,258                  793,250
Cash Surrender Value of Life Insurance                                      1,597,352                1,529,270
Prepaid Expenses and Other Assets                                              80,277                  151,296
                                                                        -----------------    ------------------

TOTAL ASSETS                                                            $ 122,658,912        $     116,982,136
                                                                        =================    ==================

                             LIABILITIES AND EQUITY
LIABILITIES
 Deposits:
  Demand                                                                $  39,077,645        $       40,912,082
  Term                                                                  $  61,841,807                57,195,215
                                                                        -----------------    ------------------
   Total Deposits                                                         100,919,452                98,107,297

Advances From Federal Home Loan Bank                                        1,000,000                         0
Accrued Interest Payable                                                      135,322                    79,290
Deferred Income Taxes                                                         560,974                   652,623
Accrued Benefit Plan Liabilities                                            1,530,740                 1,182,688
Other Liabilities                                                              93,697                    67,282
                                                                        -----------------    ------------------
   Total Liabilities                                                      104,240,185               100,089,180
                                                                        -----------------    ------------------

SHAREHOLDERS' EQUITY
 Common Stock - No Par Value, Authorized 20,000,000
  Shares; Issued and Outstanding 1,196,999 Shares in 2004
  (1,230,379 Shares in 2003)                                                11,098,338               11,664,690
 Unearned Compensation - Employee Stock Ownership Plan                        (179,990)                (350,526)
 Shares in Grantor Trust - Contra Account                                     (223,661)                (216,281)
 Shares in Stock Option Plan Trusts - Contra Account                          (749,754)              (1,122,198)
 Retained Earnings                                                           7,257,394                5,785,527
 Accumulated Other Comprehensive Income                                      1,216,400                1,131,744
                                                                        -----------------    ------------------
   Total Shareholders' Equity                                               18,418,727               16,892,956
                                                                        -----------------    ------------------

TOTAL LIABILITIES AND EQUITY                                            $  122,658,912      $       116,982,136
                                                                        =================    ==================
</TABLE>

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

                                      -42-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>


                                 For the Years Ended December 31,          2004                2003                 2002
                                                                     ----------------    -----------------    -----------------
<S>                                                                  <C>                 <C>                  <C>
INTEREST INCOME
 Loans                                                               $    5,432,343      $       5,741,974            5,971,720
 Investment Securities                                                    1,419,250              1,152,917            1,211,497
 Other Interest-Earning Assets                                               12,837                 31,770               30,171
                                                                     ----------------    -----------------    -----------------
  Total Interest Income                                                   6,864,430              6,926,661            7,213,388
                                                                     ----------------    -----------------    -----------------

INTEREST EXPENSE
 Deposits                                                                 1,644,581              1,677,877            2,122,007
 Advances From Federal Home Loan Bank                                         5,405                  1,949                  452
                                                                     ----------------    -----------------    -----------------
  Total Interest Expense                                                  1,649,986              1,679,826            2,122,459
                                                                     ----------------    -----------------    -----------------

NET INTEREST INCOME                                                       5,214,444              5,246,835            5,090,929

PROVISION FOR LOAN LOSSES                                                   100,000                144,000              129,000
                                                                     ----------------    -----------------    -----------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                       5,114,444              5,102,835            4,961,929
                                                                     ----------------    -----------------    -----------------

NONINTEREST INCOME
 Deposit Account Service Charges                                            300,681                299,269              242,895
 Loan Service Charges and Fees                                               74,170                 73,760               79,729
 Net Gain on Sales of Investment Securities Available for Sale               25,549                105,025               45,803
 Increase in Cash Surrender Value of Life Insurance                          68,082                 29,270                    0
 Other                                                                       53,011                 53,253               44,827
                                                                     ----------------    -----------------    -----------------
  Total Noninterest Income                                                  521,493                560,577              413,254
                                                                     ----------------    -----------------    -----------------

NONINTEREST EXPENSE
 Compensation and Benefits                                               1,693,093               1,535,181            1,355,550
 Occupancy and Equipment                                                   258,596                 259,484              304,407
 Federal Deposit Insurance Premiums                                         54,000                  60,000               52,000
 Data Processing Fees                                                      348,535                 296,592              262,254
 Advertising and Promotion                                                  75,228                  83,207               85,351
 Amortization                                                               79,992                  79,992               80,992
 Other                                                                     494,880                 516,291              494,918
                                                                     ----------------    -----------------    -----------------
   Total Noninterest Expense                                              3,004,324               2,830,747            2,635,472
                                                                     ----------------    -----------------    -----------------

INCOME BEFORE INCOME TAXES                                               2,631,613               2,832,665            2,739,711

INCOME TAXES                                                               716,811                 826,472              977,907
                                                                     ----------------    -----------------    -----------------
NET INCOME                                                           $   1,914,802       $      2,006,193     $       1,761,804
                                                                     ================    =================    =================

EARNINGS PER SHARE:
 Basic                                                               $       1.58        $           1.58    $            1.33
                                                                     ================    =================    =================

 Diluted                                                             $       1.58        $           1.58     $           1.33
                                                                     ================    =================    =================
</TABLE>

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

                                      -43-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                  For the Years Ended December 31,           2004                2003                2002
                                                                        -----------------    ---------------     ---------------
 NET INCOME                                                             $  1,914,802         $   2,006,193       $   1,761,804
                                                                        -----------------    ---------------     ---------------
<S>                                                                     <C>                  <C>                 <C>
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 Unrealized Gains (Losses) on Investment Securities
  Available for Sale                                                         162,091              (554,125)            453,216
 Reclassification Adjustment for Gains Included
  In Net Income                                                              (25,549)             (105,025)            (45,803)
 Income Taxes Related to Unrealized Gains/Losses
  on Investment Securities Available for Sale                                (51,886)              250,477            (154,817)
                                                                        -----------------    ---------------     ---------------
   Other Comprehensive Income (Loss), Net of Tax                              84,656              (408,673)            252,596
                                                                        -----------------    ---------------     ---------------
COMPREHENSIVE INCOME                                                    $  1,999,458         $   1,597,520       $   2,014,400
                                                                        =================    ===============     ===============
</TABLE>


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


                                      -44-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                   For the Three Years Ended December 31, 2004

<TABLE>
<CAPTION>
                                                                                    Unearned          Shares in          Shares in
                                                                    Common        Compensation-     Grantor Trust       MRP Plan -
                                                                    Stock             ESOP          Contra Account    Contra Account
                                                                 ------------    ---------------    --------------    --------------
<S>                                                              <C>               <C>              <C>               <C>
BALANCES, JANUARY 1, 2002                                        $12,719,235       $ (678,370)      $  (195,149)      $   (209,770)

Purchase and Retirement of Common Stock                             (157,308)               0                 0                  0
Net Income                                                                  0               0                 0                  0
Dividends Paid                                                              0               0                 0                  0
Payment of ESOP Loan With ESOP Contribution and Dividends                   0         161,797                 0                  0
Received
Purchase of Additional Shares of Common Stock Pursuant to                   0               0           (3,846)                  0
Grantor Trust
Distribution of Shares of Common Stock Pursuant to MRP Plan                 0               0                 0            153,576
Decrease in Cost of Shares in Stock Option Plan Trusts                      0               0                 0                  0
Costs Associated With Stock Options Surrendered                             0               0                 0                  0
Retirement of Shares Held in Stock Option Plan Trusts                (114,075)              0                 0                  0
Other Comprehensive Income                                                  0               0                 0                  0
                                                                  ------------   -------------     ------------       ------------
BALANCES, DECEMBER 31, 2002                                        12,447,852        (516,573)         (198,995)           (56,194)

Purchase of Common Stock                                                    0               0                 0                  0
Net Income                                                                  0               0                 0                  0
Dividends Paid                                                              0               0                 0                  0
Payment on ESOP Loan With ESOP Contribution and Dividends                   0         166,047                 0                  0
Received
Purchase of Additional Shares of Common Stock Pursuant to                   0               0          (17,286)                  0
Grantor Trust
Distribution of Shares of Common Stock Pursuant to MRP Plan                 0               0                 0             11,236
Decrease in Cost of Shares in Stock Option Plan Trusts                      0               0                 0                  0
Costs Associated With Stock Options Surrendered                             0               0                 0                  0
Proceeds From Exercise of Stock Options                                     0               0                 0                  0
Retirement of Shares Held in Stock Option Plan Trusts                (783,162)              0                 0             44,958
Other Comprehensive Loss                                                    0               0                 0                  0
                                                                 ------------    ------------      ------------       ------------
BALANCES, DECEMBER 31, 2003                                        11,664,690        (350,526)         (216,281)                 0

Purchase of Common Stock                                                    0               0                 0                  0
Net Income                                                                  0               0                 0                  0
Dividends Paid                                                              0               0                 0                  0
Payment on ESOP Loan With ESOP Contribution and Dividends                   0         170,536                 0                  0
Received
Purchase of Additional Shares of Common Stock Pursuant to
Grantor Trust
    From Stock Option Plan Trusts                                           0               0            (7,380)                 0
Decrease in Cost of Shares in Stock Option Plan Trusts                      0               0                 0                  0
Costs Associated With Stock Options Surrendered                             0               0                 0                  0
Proceeds From Exercise of Stock Options                                     0               0                 0                  0
Retirement of Shares Held in Stock Option Plan Trusts                (566,352)              0                 0                  0
Other Comprehensive Income                                                  0               0                 0                  0
                                                                 ------------    ------------    --------------    ---------------
BALANCES, DECEMBER 31, 2004                                      $ 11,098,338    $   (179,990)   $     (223,661)   $             0
                                                                 ============    ============    ==============    ===============
</TABLE>


The accompanying notes are an integral part of these financial statements.
                                      -45-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)

                   For the Three Years Ended December 31, 2004


<TABLE>
<CAPTION>
                                                                   Shares in                         Accumulated
                                                                 Stock Option                           Other              Total
                                                                  Plan Contra        Retained       Comprehensive      Shareholders'
                                                                    Account          Earnings           Income            Equity
                                                                 -------------    --------------    --------------    --------------
<S>                                                              <C>              <C>               <C>               <C>
BALANCES, JANUARY 1, 2002                                        $  (1,591,409)   $    2,835,393    $    1,287,821    $  14,167,751

Purchase and Retirement of Common Stock                                      0                 0                 0         (157,308)
Net Income                                                                   0         1,761,804                 0        1,761,804
Dividends Paid                                                               0         (397,732)                 0         (397,732)
Payment of ESOP Loan With ESOP Contribution and Dividends                    0                 0                 0          161,797
Received
Purchase of Additional Shares of Common Stock Pursuant to                    0                 0                 0           (3,846)
Grantor Trust
Distribution of Shares of Common Stock Pursuant to MRP Plan                  0                 0                 0          153,576
Decrease in Cost of Shares in Stock Option Plan Trusts                  56,527                 0                 0           56,527
Costs Associated With Stock Options Surrendered                        (70,192)                0                 0          (70,192)
Retirement of Shares Held in Stock Option Plan Trusts                  114,075                 0                 0                0
Other Comprehensive Income                                                   0                 0           252,596          252,596
                                                                 -------------    --------------    --------------    -------------

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

Purchase of Common Stock                                               (16,739)                0                 0          (16,739)
Net Income                                                                   0         2,006,193                 0        2,006,193
Dividends Paid                                                               0         (420,131)                 0         (420,131)
Payment on ESOP Loan With ESOP Contribution and Dividends                    0                 0                 0          166,047
Received
Purchase of Additional Shares of Common Stock Pursuant to                    0                 0                 0          (17,286)
Grantor Trust
Distribution of Shares of Common Stock Pursuant to MRP Plan                  0                 0                 0           11,236
Decrease in Cost of Shares in Stock Option Plan Trusts                  46,082                 0                 0           46,082
Costs Associated With Stock Options Surrendered                       (407,346)                0                 0         (407,346)
Proceeds From Exercise of Stock Options                                  8,600                 0                 0            8,600
Retirement of Shares Held in Stock Option Plan Trusts                  738,204                 0                 0                0
Other Comprehensive Loss                                                     0                 0          (408,673)        (408,673)
                                                                 -------------    --------------    --------------    --------------

BALANCES, DECEMBER 31, 2003                                         (1,122,198)        5,785,527         1,131,744       16,892,956

Purchase of Common Stock                                              (118,890)                0                 0         (118,890)
Net Income                                                                   0         1,914,802                 0        1,914,802
Dividends Paid                                                               0         (442,935)                 0         (442,935)
Payment on ESOP Loan With ESOP Contribution and Dividends                    0                 0                 0          170,536
Received
Purchase of Additional Shares of Common Stock Pursuant to
Grantor Trust
    From Stock Option Plan Trusts                                        7,380                 0                 0                0
Decrease in Cost of Shares in Stock Option Plan Trusts                  27,450                 0                 0           27,450
Costs Associated With Stock Options Surrendered                       (322,268)                0                 0         (322,268)
Proceeds From Exercise of Stock Options                                212,420                 0                 0          212,420
Retirement of Shares Held in Stock Option Plan Trusts                  566,352                 0                 0                0
Other Comprehensive Income                                                   0                 0            84,656           84,656
                                                                 -------------    --------------    --------------    -------------
BALANCES, DECEMBER 31, 2004                                      $    (749,754)   $    7,257,394  $      1,216,400    $  18,418,727
                                                                 =============    ==============    ==============    =============
</TABLE>


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

                                      -46-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                          For the Years Ended December 31,         2004              2003              2002
<S>                                                                           <C>               <C>               <C>

                                                                              --------------    --------------    --------------
OPERATING ACTIVITIES
 Net Income                                                                   $  1,914,802      $   2,006,193     $   1,761,804
                                                                              --------------    --------------    --------------

 Adjustments to Reconcile Net Income to Net
  Cash Provided by Operating Activities:
   Provision for Loan Losses                                                       100,000            144,000           129,000
   Depreciation                                                                     85,235             99,237            92,766
   Amortization                                                                     79,992             79,992            80,992
   Amortization of Investment Securities Premiums and Discounts, Net                74,558            142,721            83,750
   Increase (Decrease) in Unearned Loan Fees                                        (4,934)           (19,426)           20,523
   Net Loss (Gain) on Sales of Foreclosed Real Estate                              (10,400)             7,951             8,026
   Federal Home Loan Bank Stock Dividends                                          (38,800)           (36,423)          (40,100)
   Increase in Cash Surrender Value of Life Insurance                              (68,082)           (29,270)                0
   Net Gain on Sales of Investment Securities
    Available for Sale                                                             (25,549)          (105,025)          (45,803)
   Deferred Income Tax Benefit                                                    (143,535)          (104,412)          (16,201)
   (Increase) Decrease in:
    Accrued Interest Receivable                                                    (13,929)           110,241           (66,799)
    Prepaid Expenses and Other Assets                                               71,019            (16,028)          (99,005)
   Increase (Decrease) in:
    Accrued Interest Payable                                                        56,032            (52,393)          (29,871)
    Accrued Income Taxes                                                                 0                  0            (1,995)
    Accrued Benefit Plan Liabilities                                               348,052            326,222           113,289
    Other Liabilities                                                               26,415            (17,992)           27,646
                                                                              --------------    --------------    --------------
     Total Adjustments                                                             536,074            529,395           256,218
                                                                              --------------    --------------    --------------
      Net Cash Provided by Operating Activities                                  2,450,876          2,535,588         2,018,022
                                                                              --------------    --------------    --------------

INVESTING ACTIVITIES
 Purchase of Investment Securities Available for Sale                          (14,727,982)       (14,657,955)      (11,308,648)
 Proceeds From Sales of Investment Securities
  Available for Sale                                                               715,794          1,836,236         3,381,938
 Proceeds From Maturities of Investment Securities
  Available for Sale                                                             5,700,000          4,000,000         3,000,000
 Principal Payments Received on Investment Securities
  Available for Sale                                                             2,615,776          3,672,273         4,466,907
 Net (Increase) Decrease in Loans                                               (1,377,188)           314,196        (6,478,110)
 Purchases of Premises and Equipment, Net                                         (803,182)          (126,177)         (565,467)
 Proceeds From Sales of Foreclosed Real Estate                                     335,966             40,443            32,564
Investment in Cash Surrender Value of Life Insurance                                     0         (1,500,000)                0
                                                                              --------------    --------------    --------------
      Net Cash Used in Investing Activities                                     (7,540,816)        (6,420,984)       (7,470,816)
                                                                              --------------    --------------    --------------
</TABLE>


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

                                      -47-
<PAGE>
                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                          For the Years Ended December 31,         2004             2003              2002
                                                                              --------------    -------------     -------------
<S>                                                                             <C>               <C>              <C>

FINANCING ACTIVITIES
 Purchase and Retirement of Common Stock                                               0                   0          (157,308)
 Dividends Paid                                                                 (442,935)           (420,131)         (397,732)
 Decrease in Cost of Shares in Stock Option Plan Trusts                           27,935              46,082            56,527
 Proceeds From Exercise of Stock Options                                         212,420               8,600                 0
 Costs Associated With Stock Options Surrendered                                (322,268)           (407,346)          (70,192)
 Distribution of Common Stock Pursuant to MRP Plan                                     0              11,236           153,576
 Purchase of Common Stock for Director's Long-Term
  Incentive Plan and Stock Option Plan Trusts                                   (118,890)            (34,025)           (3,846)
Payment on ESOP Loan and Release of Shares                                       170,536             166,047           161,797
 Net Increase in Deposits                                                      2,812,155           4,360,682         8,936,789
 Advances From Federal Home Loan Bank                                          1,000,000                   0                 0
                                                                              --------------    -------------     -------------
      Net Cash Provided by Financing Activities                                3,338,468           3,731,145         8,679,611
                                                                              --------------    -------------     -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          (1,751,472)           (154,251)        3,226,817

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   5,195,746           5,349,997         2,123,180
                                                                              --------------    -------------     -------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                        $3,444,274        $  5,195,746      $  5,349,997
                                                                              ==============    =============     =============

Supplementary Disclosures of Cash Flow Information:
 Cash Paid During the Year for:
  Interest                                                                    $1,594,044        $  1,732,219      $  2,152,330
  Income Taxes                                                                $  812,361        $  1,005,820      $  1,033,225

Supplementary Disclosures of Noncash Investing Activities:
 Acquisition of Foreclosed Real Estate                                        $  490,283        $     73,856      $    177,996
 Sale of Foreclosed Real Estate by Origination of Mortgage Loans              $   85,000        $    103,500      $     11,000
 Change in Unrealized Gain/Loss on Investment
  Securities Available for Sale                                               $  135,542        $   (659,150)     $    407,413
 Change in Deferred Income Taxes Associated With Unrealized
  Gain/Loss on Investment Securities Available for Sale                       $   51,886        $   (250,477)     $    154,817
 Change in Net Unrealized Gain/Loss on Investment
  Securities Available for Sale                                               $   84,656        $   (408,673)     $    252,596
 Retirement of Common Stock Held in Trusts                                    $  566,352        $    783,162      $    114,075
</TABLE>



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

                                      -48-
<PAGE>


                        UNITED TENNESSEE BANKSHARES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2004, 2003, and 2002


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 net 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  costs and improvements  made thereafter to
facilitate sale. Costs related to the holding of the real estate are expensed.

Cash and Cash Equivalents - Cash and cash equivalents  include "Cash and Amounts
Due From Depository Institutions."

Cash and Amounts Due From Depository Institutions - Cash and amounts due from
depository institutions includes the following approximate amounts on deposit
with the Federal Home Loan Bank of Cincinnati as of December 31:

                                                 2004               2003
                                            ---------------   -----------------
        Unrestricted Deposits                  $1,371,000       $3,629,000
                                      -49-

<PAGE>

Investment  Securities - In  accordance  with SFAS No. 115, the Company and Bank
have  segregated  all their  investment  securities  into the available for sale
category.  These  securities  are carried at fair value  based on quoted  market
prices  for  securities  that are  marketable.  Fair  value  for  non-marketable
securities is estimated to be equivalent to historical  cost.  Securities may be
sold in response to changes in interest  rates,  liquidity  needs,  or for other
purposes. Any unrealized gain or loss is reported in the consolidated statements
of  comprehensive  income,  net of any  deferred tax effect.  Realized  gains or
losses on the sales of  securities  are based on the net proceeds and  amortized
cost of the securities sold, using the specific  identification method. See Note
2 for additional information on investment securities.

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

Recognition  of Interest on Loans - Interest on loans is calculated by using the
simple  interest  method on the  principal  outstanding.  Accrual of interest is
discontinued on a loan when management believes,  after considering economic and
business  conditions  and  collection  efforts,  that the  borrowers'  financial
condition  is such that the  collection  of  interest  is  doubtful.  The Bank's
nonaccrual policy conforms to regulatory requirements that generally require the
placement of loans which are ninety or more days past due on nonaccrual  status,
unless the loan is both well secured and in the process of collection.

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

Amortization of Intangible Assets - The depositor-relationship  intangible asset
is  being  amortized  in  accordance  with  Statement  of  Financial  Accounting
Standards No. 142, Goodwill and Other Intangible Assets, using the straight-line
method over fifteen years (see Note 5).

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

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

                                      -50-
<PAGE>

<TABLE>
<CAPTION>

                                                                                       Year Ended December 31,
                                                                      ----------------------------------------------------------
                                                                           2004                 2003                 2002
                                                                      ----------------     ----------------    -----------------
<S>                                                                   <C>                  <C>                 <C>
Net Income, as Reported                                               $     1,914,802      $    2,006,193      $     1,761,804
Less: Total Stock-Based Employee Compensation
 Expense Determined Under Fair Value Based Method
 for All Awards, Net of Related Tax Effects                                         0              (8,210)            (148,967)
                                                                      ----------------     ----------------    -----------------
Pro Forma Net Income                                                  $     1,914,802      $    1,997,983      $     1,612,837
                                                                      ================     ================    =================

Earnings Per Share:
 Basic - as Reported                                                  $          1.58      $         1.58      $          1.33
                                                                      ================     ================    =================
 Basic - Pro Forma                                                    $          1.58      $         1.57      $          1.22
                                                                      ================     ================    =================
 Diluted - as Reported                                                $          1.58      $         1.58      $          1.33
                                                                      ================     ================    =================
 Diluted - Pro Forma                                                  $          1.58      $         1.57      $          1.22
                                                                      ================     ================    =================
</TABLE>

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,
                                                                         -----------------------------------------------------
                                                                             2004               2003                2002
                                                                         --------------    ----------------    ---------------
<S>                                                                          <C>                 <C>                <C>

Average number of shares outstanding                                         1,213,582           1,271,232          1,321,186
Effect of dilutive options                                                           0                   0              1,458
                                                                         --------------    ----------------    ---------------
Average number of shares outstanding used                                    1,213,582           1,271,232          1,322,644
 to calculate diluted earnings per share
                                                                         ==============    ================    ===============
</TABLE>
                                      -51-
<PAGE>

NOTE 2 - INVESTMENT SECURITIES

The amortized  cost and estimated  fair value of  investment  securities  are as
follows:
<TABLE>
<CAPTION>
                                                                    Investment Securities Available for Sale
                                                      ------------------------------------------------------------------------
                                                                            Gross               Gross            Estimated
                                                        Amortized         Unrealized         Unrealized             Fair
                                                           Cost             Gains              Losses              Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                 <C>                      <C>         <C>                <C>
As of December 31, 2004
Debt Securities:
 Obligations of  U.S. Government
  Corporations and Agencies                           $   16,532,036    $      123,776      $    (54,440)      $   16,601,372
 Mortgage-Backed Securities                               10,702,666            18,167          (142,128)          10,578,705
 Corporate Debt Securities                                 1,472,992            44,022                 0            1,517,014
 Obligations of States and
  Political Subdivisions                                   3,806,094            75,901           (18,246)           3,863,749
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  32,513,788           261,866          (214,814)          32,560,840
                                                      ---------------   ---------------     --------------     ---------------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               972,200                 0                 0              972,200
 Federal Home Loan Mortgage
  Corporation Stock                                           25,783         1,914,885                 0            1,940,668
 Intrieve, Inc. Stock, at Cost                               105,320                 0                 0              105,320
                                                      ---------------   ---------------     --------------     ---------------
   Total Equity Securities                                 1,103,303         1,914,885                 0            3,018,188
                                                      ---------------   ---------------     --------------     ---------------
                                                      $   33,617,091    $    2,176,751      $   (214,814)      $   35,579,028
                                                      ===============   ===============     ==============     ===============
</TABLE>

<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, 2003
Debt Securities:
 Obligations of  U.S. Government
  Corporations and Agencies                        $      15,067,343           352,410   $      (352,410)   $      15,381,194
 Mortgage-Backed Securities                                8,496,605            70,940           (53,789)           8,513,756
 Corporate Debt Securities                                 1,226,835            70,147                 0            1,296,982
 Obligations of States and
  Political Subdivisions                                   2,075,602            71,549                 0            2,147,151
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  26,866,385           565,046           (92,348)          27,339,083
                                                      ---------------   ---------------     --------------     ---------------
Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               933,400                 0                 0              933,400
 Federal Home Loan Mortgage
  Corporation Stock                                           25,783         1,352,697                 0            1,378,480
 Intrieve, Inc. Stock, at Cost                               105,320                 0                 0              105,320
                                                      ---------------   ---------------     --------------     ---------------
    Total Equity Securities                                1,064,503         1,352,697                 0            2,417,200
                                                      ---------------   ---------------     --------------     ---------------
                                                    $     27,930,888         1,917,743      $    (92,348)          29,756,283
                                                      ===============   ===============     ==============     ===============
</TABLE>
                                      -52-
<PAGE>
The obligations of states and political  subdivisions  shown above are issued by
state and local governmental instrumentalities in the State of Tennessee and are
backed by the full faith and credit of said issuing instrumentalities.

Gross realized gains and losses from sales of investment  securities  classified
as available for sale are as follows:
                                         For the Years Ended December 31,
                           -----------------------------------------------------
                                  2004               2003               2002
                           ---------------    ---------------   ----------------
Gross Realized Gains          $    25,549       $  105,025         $    47,467
Gross Realized Losses                   0                0              (1,664)
                           ---------------    ---------------   ----------------
                              $    25,549       $  105,025         $    45,803
                           ===============    ===============   ================

Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
                                                             December 31, 2004                      December 31, 2003
                                                      ---------------------------------     ----------------------------------
                                                        Amortized         Estimated           Amortized          Estimated
                                                           Cost           Fair Value            Cost             Fair Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                   <C>                    <C>            <C>                 <C>
FNMA Certificates                                     $    6,465,886         6,421,146      $   4,576,781       $   4,616,311
FHLMC Certificates                                         4,236,780         4,157,559          3,919,824           3,897,445

                                                      ---------------   ---------------     --------------     ---------------
                                                      $   10,702,666        10,578,705      $   8,496,605       $   8,513,756
                                                      ===============   ===============     ==============     ===============
</TABLE>
<PAGE>

The amortized  cost and estimated  fair value of debt  securities  available for
sale as of December 31, 2004, by contractual maturity, are as follows:

<TABLE>
<CAPTION>
                                                          Amortized           Estimated
                                                             Cost            Fair Value
                                                      ---------------     --------------
<S>                                                   <C>                 <C>

Due in One Year or Less                               $    1,605,734      $   1,635,422
Due After One Year  Through Five Years                    13,473,350         13,574,899
Due After Five Years  Through Ten Years                    5,685,054          5,713,618
Due After Ten Years                                        1,046,984          1,058,195
                                                      ---------------     --------------
                                                          21,811,122         21,982,134
Mortgage-Backed Securities                                10,702,666         10,578,706
                                                      ---------------     --------------
                                                      $   32,513,788      $  32,560,840
                                                      ===============     ==============
</TABLE>

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

Investments with book values of approximately $14,375,000 and $11,495,000 (which
approximates market values) as of December 31, 2004 and 2003, respectively, were
pledged to secure deposits of public funds.

                                      -53-
<PAGE>

Investment  securities  with gross  unrealized  losses at December  31, 2004 and
2003,  aggregated  by  investment  category  and length of time that  individual
securities have been in a continuous loss position are as follows:
<TABLE>
<CAPTION>
                                       Less Than 12 Months              12 Months or Greater                     Total
                                   -----------------------------     ----------------------------    ------------------------------
                                                       Gross                            Gross                             Gross
                                                    Unrealized                       Unrealized                        Unrealized
                                    Fair Value        Losses         Fair Value        Losses         Fair Value         Losses
                                   -------------    ------------     ------------    ------------    --------------    ------------
<S>                                <C>             <C>              <C>             <C>             <C>               <C>


As of December 31, 2004:
Obligations of U.S.
  Government Corporations
    and Agencies                  $   4,981,225    $   (36,360)     $  1,482,190    $   (17,810)    $    6,463,415    $   (54,440)
Mortgage-Backed Securities            5,398,435        (85,606)        2,534,662        (56,522)         7,933,097       (142,128)
Obligations of States and
  Political Subdivisions                509,303         (9,870)          282,910         (8,376)           792,213        (18,246)

                                   -------------    ------------     ------------    ------------    --------------    ------------
     Total                        $  10,888,963    $  (132,106)     $  4,299,762    $    (82,708)   $   15,188,725    $  (214,814)
                                   =============    ============     ============    ============    ==============    ============

As of December 31, 2003:
Obligations of U.S.
  Government Corporations
    and Agencies                  $   2,462,495    $   (38,559)     $          0    $          0    $    2,462,495    $   (38,559)
Mortgage-Backed Securities            5,346,555        (53,789)                0               0         5,346,555        (53,789)
                                   -------------    ------------     ------------    ------------    --------------    ------------
     Total                        $   7,809,050    $   (92,348)     $          0    $          0    $    7,809,050    $   (92,348)
                                   =============    ============     ============    ============    ==============    ============
</TABLE>

Management evaluates securities for other-than-temporary  impairment at least on
a quarterly  basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time  sufficient to allow
for any anticipated recovery in fair value.

At December 31, 2004, the 28 investment  securities with unrealized  losses have
depreciated  approximately  1.4% from the Company's  amortized cost basis. These
securities are guaranteed by either U.S. government  corporations or agencies or
other state and local governments. These unrealized losses relate principally to
current interest rates for similar types of securities. In analyzing an issuer's
financial  condition,  management considers whether the securities are issued by
the  federal  government  or its  agencies,  whether  downgrades  by bond rating
agencies  have  occurred,  and the results of reviews of the issuer's  financial
condition.  Since  management  has the  ability  to hold debt  securities  until
maturity, or for the foreseeable future if classified as available-for-sale,  no
declines  in fair  value  are  deemed  to be other  than  temporary  in  nature.
Accordingly,  management  has not  recorded  any  permanent  write  downs in the
carrying values of its investment securities.

                                      -54-
<PAGE>

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,
                                                                                           ----------------------------------
                                                                                                 2004               2003
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
First mortgage loans (principally conventional):
 Secured by one-to-four family residences                                                  $   63,036,812      $ 63,335,429
 Secured by other properties                                                                   10,226,974         9,260,858
 Construction loans                                                                             4,172,422         1,768,565
                                                                                           ---------------     --------------
                                                                                               77,436,208        74,364,852
Less:
 Undisbursed portion of construction loans                                                    (2,084,955)          (764,427)
 Net deferred loan origination fees                                                             (347,746)          (352,680)
                                                                                           ---------------     --------------
  Net first mortgage loans                                                                     75,003,507        73,247,745
                                                                                           ---------------     --------------

Consumer and commercial loans:
 Loans to depositors, secured by deposits                                                       1,224,397         1,293,015
 Automobile                                                                                     1,281,757         1,488,273
 Home equity and second mortgage                                                                  733,159         1,340,969
 Other                                                                                          1,567,186         1,504,344
                                                                                           ---------------     --------------
  Net consumer and commercial loans                                                             4,806,499         5,626,601
Less allowance for loan losses                                                                  (980,475)          (921,654)
                                                                                           ---------------     --------------
                                                                                           $   78,829,531      $ 77,952,692
                                                                                           ===============     ==============
</TABLE>

The Bank had outstanding  loan  commitments of approximately $0 and $166,000 (in
addition to undisbursed  portion of construction  loans).  The rates ranged from
3.00% to 8.75% as of December 31, 2003.

                                      -55-
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   For the Years Ended December 31,
                                                                        -----------------------------------------------------
                                                                             2004               2003               2002
                                                                        ---------------    ---------------     --------------
<S>                                                                     <C>                <C>                 <C>
Allowance at beginning of year                                          $      921,654     $     803,037       $    719,333
 Provision charged to expense                                                  100,000           144,000            129,000
 Recoveries of loans previously charged off                                      3,160               900              2,523
 Loans charged off                                                             (44,339)          (26,283)           (47,819)
                                                                        ---------------    ---------------     --------------
Allowance at end of year                                                $      980,475     $     921,654       $    803,037
                                                                        ===============    ===============     ==============
</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,
                                                                                           ----------------------------------
                                                                                                 2004               2003
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Recorded value of all impaired loans                                                       $      939,000      $   1,103,000
Average individual loan balance                                                            $       55,000      $      44,000
Total allowance for loan losses related to impaired loans                                  $      140,887      $     255,000
</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,
                                                                                           ----------------------------------
                                                                                                  2004               2003
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Cash receipts applied to reduce principal balance                                          $       97,173      $      77,125
Cash receipts recognized as interest income                                                       130,084             55,733
                                                                                           ---------------     --------------
Total cash receipts                                                                        $      227,257      $     132,858
                                                                                           ===============     ==============
</TABLE>
                                      -56-
<PAGE>

NOTE 4 - PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:

                                                   As of December 31,
                                              ----------------------------------
                                                   2004               2003
                                              ---------------     --------------
Land                                          $      579,701      $    579,701
Buildings                                            787,911           787,911
Furniture and Equipment                              653,434           620,723
Construction in Process                              835,315            64,844
                                              ---------------     --------------
                                                   2,856,361         2,053,179
Less Accumulated Depreciation                     (1,142,400)       (1,057,165)
                                              ---------------     --------------
                                              $    1,713,961      $    996,014
                                              ===============     ==============

Depreciation  expense for the years ended  December  31,  2004,  2003,  and 2002
totaled $85,235, $99,237 and $92,766 respectively.

NOTE 5 - INTANGIBLE ASSETS

During 1998, the Bank purchased a branch from Union Planters Bank of the Lakeway
Area. The Bank evaluates its intangible  assets as required by SFAS No. 142 each
year. The Bank's intangible assets as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                                                                2004               2003
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Amortized Intangible Assets:
 Branch  Depositor  Relationships  (Core  Deposits)  With Definite  Useful Lives of 15
Years
  Gross Carrying Amount                                                                    $    1,199,876      $   1,199,876
  Accumulated Amortization                                                                       (486,618)          (406,626)
                                                                                           ---------------     --------------
                                                                                           ---------------     --------------
                                                                                           $      713,258      $     793,250
                                                                                           ===============     ==============
</TABLE>

Amortization  expense  related to intangible  assets totaled $79,992 for each of
the years ended December 31, 2004, 2003 and 2002.  Estimated future amortization
expense for the next five years is $79,992 for each year.

                                      -57
<PAGE>

NOTE 6 - DEPOSITS

A summary of deposits is as follows:

                                                      As of December 31,
                                              ----------------------------------
                                                     2004               2003
                                              ---------------     --------------
Demand Deposits:
 Now Accounts                                 $    10,374,899     $    9,791,419
 Money Market Deposit Accounts                     15,376,247         17,961,577
 Passbook Savings                                  13,326,499         13,159,086
                                              ---------------     --------------
  Total Demand Deposits                            39,077,645         40,912,082
                                              ---------------     --------------

Term Deposits:
 Less Than $100,000                                38,900,880         37,126,574
 $100,000 or More                                  22,940,927         20,068,641
                                              ---------------     --------------
  Total Term Deposits                              61,841,807         57,195,215
                                              ---------------     --------------
                                              $   100,919,452     $   98,107,297
                                              ===============     ==============

Deposits in excess of $100,000  may not be  federally  insured,  depending  upon
ownership.

The scheduled maturities of certificates of deposit as of December 31, 2004 are
as follows:

         2005                          $    54,285,170
         2006                                7,383,957
         2007                                  120,884
         2008                                   51,796
                                       ---------------
                                       $    61,841,807
                                       ===============

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK

The Bank obtains  short-term  advances  periodically  for  operating  liquidity.
Interest expense associated with the advances from the Federal Home Loan Bank of
Cincinnati  (FHLB)  totaled  $5,405 for the year ended December 31, 2004 ($1,949
and $452 in 2003 and 2002). 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 totaled $1,000,000 and $0 as of December
31, 2004 and 2003.

                                      -58-
<PAGE>

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,
                                     ---------------------------------------------------------------------------------------
                                                2004                           2003                          2002
                                     ---------------------------    ---------------------------    -------------------------
                                                      Percent                        Percent                       Percent
                                                     of Pretax                      of Pretax                     of Pretax
                                       Amount          Income         Amount          Income         Amount        Income
                                     ------------    -----------    -----------     -----------    -----------    ----------
<S>                                  <C>                  <C>       <C>                <C>         <C>               <C>

Federal income tax at                $   894,748          34.0%     $  963,106         34.0%       $ 931,502         34.0%
 statutory rate
Increase (decrease) resulting from tax effects of:
  Nontaxable interest
   and dividends                         (48,035)         (1.8)        (35,025)        (1.2)         (16,049)        (0.6)
  Deduction for stock
   options converted to cash            (109,571)         (4.2)       (138,497)        (4.9)         (24,021)        (0.9)
  State excise tax and
   other, net                            (20,331)          (.8)         36,888          1.3           86,475          3.2
                                     ------------    -----------    -----------     -----------    -----------    ----------
                                     $   716,811          27.2%     $  826,472         29.2%       $ 977,907         35.7%
                                     ============    ===========    ===========     ===========    ===========    ==========
</TABLE>

Income taxes consist of:

                                              For the Years Ended December 31,
                           -----------------------------------------------------
                                   2004               2003               2002
                           ---------------    ---------------     --------------
Current                    $       860,346    $       930,884     $     994,108
Deferred Benefit                  (143,535)          (104,412)          (16,201)
                           ---------------    ---------------     --------------
                           $       716,811    $       826,472     $     977,907
                           ===============    ===============     ==============

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 deferred loan fees,  nonqualified  retirement  plans and
deferred  compensation plans. The net deferred tax liability in the accompanying
consolidated statements of financial condition include the following components:

                                                    As of December 31,
                                            ----------------------------------
                                                    2004               2003
                                            ---------------     --------------
Deferred Tax Liabilities                    $     1,326,465     $    1,251,661
Deferred Tax Assets                                (765,491)          (599,038)
                                             ---------------    --------------
 Net Deferred Tax Liabilities               $       560,974     $      652,623
                                             ===============     ==============
                                      -59-

<PAGE>

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 effect 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,
                                                                                           --------------------------------
                                                                                                2004               2003
                                                                                           ---------------     ------------
<S>                                                                                        <C>                 <C>
Bank capital (total equity) per accounting principles generally accepted in the            $   17,423,341      $ 15,581,129
 United States of America
Less goodwill, net of amortization                                                              (713,258)          (793,250)
Less net unrealized gain on investment securities available for sale                          (1,218,457)        (1,131,396)
                                                                                           ---------------     ------------
Tangible capital per the regulations                                                           15,491,626        13,656,483
Less adjustments for core capital                                                                       0                (0)
                                                                                           ---------------     ------------
Core capital per the regulations                                                               15,491,626        13,656,483
Add allowable portion of unrealized gain on equity securities available for sale                  862,000                 0
Add allowable portion of allowance for loan losses                                                759,000           688,000
                                                                                           ---------------     ------------
Risk-based capital per the regulations                                                     $   17,112,626      $ 14,344,483
                                                                                           ===============     ============
</TABLE>

                                      -60-

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

<TABLE>
<CAPTION>
                                                                                                       To Comply With
                                                                                                       Minimum Capital
                                                                       Actual                           Requirements
                                                           --------------------------------    --------------------------------
                                                               Amount            Ratio             Amount            Ratio
                                                           ---------------    -------------    ---------------    -------------
<S>                                                        <C>                   <C>           <C>                    <C>

As of December 31, 2004:
Tangible Capital (To Adjusted Total Assets)                $   15,492            13.0%             1,788              1.5%
Core Capital (To Adjusted Total Assets)                    $   15,492            13.0%             4,769              4.0%
Risk-Based Capital (To Risk-Weighted Assets)               $   17,113            28.3%             4,838              8.0%

As of December 31, 2003:
Tangible Capital (To Adjusted Total Assets)                $   13,656            12.0%         $   1,702              1.5%
Core Capital (To Adjusted Total Assets)                    $   13,656            12.0%         $   4,539              4.0%
Risk-Based Capital (To Risk-Weighted Assets)               $   14,344            26.2%         $   4,388              8.0%
</TABLE>

As of December 31, 2004, the Bank is categorized as well  capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I  leverage  ratios  as set  forth in the  table  below.  There  are no
conditions or events since that date that  management  believes have changed the
Bank's category. The Bank's actual capital amounts and ratios are also presented
in the following table. All amounts are in thousands of dollars.

<TABLE>
<CAPTION>

                                                                                                         To Be Well
                                                                                                      Capitalized Under
                                                                                                      Prompt Corrective
                                                                       Actual                         Action Provisions
                                                           --------------------------------    --------------------------------
                                                               Amount            Ratio             Amount            Ratio
                                                           ---------------    -------------    ---------------    -------------
<S>                                                        <C>                   <C>           <C>                   <C>
As of December 31, 2004:
Total Capital (To Risk-Weighted Assets)                    $   17,133            28.3%             6,047             10.0%
Tier I Capital (To Risk-Weighted Assets)                   $   15,492            25.6%             3,628              6.0%
Tier I Capital (To Average Assets)                         $   15,492            13.0%             5,950              5.0%

As of December 31, 2003:
Total Capital (To Risk-Weighted Assets)                   $    14,344            26.2%         $   5,484             10.0%
Tier I Capital (To Risk-Weighted Assets)                  $    13,656            24.9%         $   3,291              6.0%
Tier I Capital (To Average Assets)                        $    13,656            12.0%         $   5,681              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 $96,638,  $95,290,  and $72,745 for the
years ended December 31, 2004, 2003, and 2002, respectively.

Directors  Long-Term  Incentive  Plan - In June  1997,  the Bank  established  a
long-term incentive plan for the board of directors to provide target retirement
benefits of 75% of board fees for ten years for directors who retire with twenty
or more years of service.  Activity in the  directors'  retirement  plan for the
years ended December 31 are as follows:

<TABLE>
<CAPTION>
                                                                             2004               2003               2002
                                                                        ---------------    ---------------     --------------
<S>                                                                     <C>                <C>                 <C>
Liability balance at beginning of year                                  $      329,109     $      225,130      $     162,469
Accrued and expensed                                                             4,648              4,648              6,197
Increase in liability due to change in fair value of
 common stock                                                                   96,208             99,331             56,464
                                                                        ---------------    ---------------     --------------
Liability balance at end of year                                        $      429,965     $      329,109      $     225,130
                                                                        ===============    ===============     ==============
</TABLE>

                                      -61-

<PAGE>

In accordance with EITF 97-14,  the Bank has recognized a liability for the fair
value of all shares of Holding  Company stock (20,747  shares as of December 31,
2004 and 20,337  shares as of December  31,  2003) 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 $55,031, $50,542,
and $46,292 in dividends  on its stock in 2004,  2003,  and 2002,  respectively,
which was used to reduce  the ESOP  debt.  In 2004 and 2003,  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 $22,386,  $36,987,  and $48,000
on the ESOP  debt for the  years  ended  December  31,  2004,  2003,  and  2002,
respectively.

NOTE 11 - STOCK OPTION PLAN

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

The  Company's  board of directors  has  approved the issuance of stock  options
under  the  plan to  certain  members  of the  board  of  directors  and  senior
management. The options vest at a rate of 25% per year, expire in ten years, and
establish an exercise  price equal to the fair value of the  Company's  stock on
the date the option is granted.  Holders of the options can also  surrender  the
options and be paid cash for the  difference  between the exercise price and the
stock's  fair  value on the date  surrendered.  The board of  directors  granted
202,676  options in 1999 and 6,623 options in 2001. To date 25,700  options have
been exercised and 136,211 options have been surrendered.

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

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                              ----------------------------------------------------------------
                                                                     2004                   2003                  2002
                                                              -------------------    -------------------    ------------------
<S>                                                               <C>                    <C>                    <C>
Dividend Yield                                                       3.5%                   3.5%                  3.5%
Expected Life                                                     8.5 years              8.5 years              8.5 years
Expected Volatility                                                  52%                    52%                    52%
Risk-Free Interest Rate                                              4.8%                   4.8%                  4.8%
</TABLE>

                                      -62-

<PAGE>

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

                                              2004                            2003                             2002
                                   ---------------------------    -----------------------------    -----------------------------
                                                    Weighted                        Weighted                         Weighted
                                                    Average                          Average                          Average
                                                    Exercise                        Exercise                         Exercise
                                     Shares          Price           Shares           Price          Shares            Price
                                   ------------    -----------    -------------    ------------    ------------     ------------
<S>                                    <C>         <C>                <C>          <C>                <C>           <C>
Outstanding at
 Beginning of Year                     104,057     $     8.59         175,321      $      8.59        209,299       $      8.59
Granted                                      0                              0                               0
Exercised                              (24,700)          8.60          (1,000)            8.60              0
Surrendered                            (31,969)          8.59         (70,264)            8.59        (33,978)             8.60
Forfeited                                    0                              0                               0
                                   ------------                   -------------                    ------------
Outstanding at                          47,388           8.59         104,057             8.59        175,321              8.59
 End of Year
                                   ============                   =============                    ============
 Options Exercisable                    47,388           8.59         102,402             8.59        172,010              8.59
 at Year-End
Weighted-Average Fair
 Value of Options Granted
 During the Year                            NA                             N/A                            N/A
</TABLE>


Information pertaining to options outstanding at December 31, 2004 is as
follows:
<TABLE>
<CAPTION>
                                                       Options Outstanding                            Options Exercisable
                                       ----------------------------------------------------     --------------------------------
                                                              Weighted
                                                               Average          Weighted                             Weighted
                                                              Remaining          Average                             Average
             Range of                       Number           Contractual        Exercise           Number            Exercise
         Exercise Prices                 Outstanding            Life              Price          Exercisable          Price
-----------------------------------    -----------------    --------------     ------------     --------------     -------------
          <S>                               <C>               <C>                <C>               <C>               <C>
          $8.25 - $8.60                     47,388            4.1 years          $  8.59           47,338            $  8.59
</TABLE>

The Company has purchased  48,560 and 100,249 shares as of December 31, 2004 and
2003,  respectively,  of its common  stock that is being held in trusts for when
the stock options are exercised. A contra-equity account has been established to
reflect the costs of such shares held in the trusts.

                                      -63-
<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,
2004 and 2003 of  restricted  common  stock to  certain  members of the board of
directors  and senior  management.  The shares were  awarded  25% per year.  The
Company  and its  subsidiary  will  share  the cost of the plan and  accrue  the
estimated cost of  repurchasing  shares to be reissued as restricted  stock over
the period that such  awards are earned.  Activity in the MRP plan for the years
ended December 31 is as follows:

<TABLE>
<CAPTION>
                                                                            2004               2003                2002
                                                                        --------------    ----------------    ----------------
         <S>                                                            <C>               <C>                 <C>
         Accrued Liability Balance at Beginning of Year                 $           0     $        5,538      $      142,259
         Amount Charged to Expense                                                  0              5,699              16,855
         Less Cost of Shares Issued                                                 0            (11,237)           (153,576)
                                                                        --------------    ----------------    ----------------
         Accrued Liability Balance at End of Year                       $           0     $            0      $        5,538
                                                                        ==============    ================    ================
</TABLE>

The Company held 4,591 shares as of December 31, 2002 (none in 2004 and 2003) of
its common  stock in trust at a net cost of $56,194 as of December  31,  2002. A
contra-equity  account has been  established  to reflect the cost of such shares
held in trust in 2002.

NOTE 13 - DIRECTORS DEFERRED COMPENSATION

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

<TABLE>
<CAPTION>
                                                                              2004               2003                2002
                                                                        --------------    ----------------    ----------------
         <S>                                                            <C>               <C>                 <C>
         Balances, Beginning of Year                                    $     542,783     $       352,548     $       237,888
         Directors Fees Deferred During Year                                   97,700              80,700              69,800
         Income During Year                                                   158,149             109,535              44,860
                                                                        --------------    ----------------    ----------------
          Balances, End of Year                                         $     798,632     $       542,783     $       352,548
                                                                        ==============    ================    ================
</TABLE>

Amounts owed under the plan are paid to directors upon their retirement from the
board of directors.
                                      -64-
<PAGE>

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, 2004,  the Bank had
concentrations  of loans in real  estate  lending.  Generally  these  loans  are
secured by the  underlying  real estate.  The usual risks  associated  with such
concentrations  are  generally  mitigated by being  spread over several  hundred
unrelated borrowers and by adequate loan to collateral value ratios.


NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES

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


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   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.

                                      -65-

<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.

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

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

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

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

Cash and  Amounts  Due  From  Depository  Institutions  - For  these  short-term
instruments, the recorded book value is a reasonable estimate of fair value.

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

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

Cash Surrender Value of Life Insurance - The recorded book value is a reasonable
estimate of fair value.

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.


                                      -66-
<PAGE>

Advances  from  Federal  Home Loan Bank - Interest  rates on these  advances are
similar to rates currently being offered for similar borrowings.  Therefore, the
recorded book value is a reasonable estimate of fair value.

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, 2004             As of December 31, 2003
                                                           --------------------------------    --------------------------------
                                                              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                              $        3,444     $      3,444     $        5,196     $      5,196
Investment Securities Available for Sale                   $       35,579     $     35,579     $       29,756     $     29,756
Loans Receivable, Net                                      $       78,830     $     78,924     $       77,953     $     78,013
Cash Surrender Value of Life Insurance                     $        1,597     $      1,597     $        1,529     $      1,529

FINANCIAL LIABILITIES:
Deposits                                                   $      100,919     $    101,081     $       98,107     $     98,227
Advances from Federal Home Loan Bank                       $        1,000     $      1,000     $            0     $          0
</TABLE>






                                      -67-

<PAGE>


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

Not applicable.

ITEM 8A. CONTROLS AND PROCEDURES

     An  evaluation   was  conducted   under  the   supervision   and  with  the
participation of our management, including the Company's Chief Executive Officer
and its Controller,  of the effectiveness of the Company's  disclosure  controls
and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)  under
the Securities Exchange Act of 1934) as of the end of the period covered by this
report.  Based  on this  evaluation,  our  Chief  Executive  Officer  and  Chief
Financial  Officer have concluded  that our  disclosure  controls and procedures
are effective.

     There were no  significant  changes in our internal  control over financial
reporting that occurred  during the last fiscal  quarter  covered by this report
that have materially  affected or are reasonably likely to materially affect our
internal control over financial reporting.









                                      -68-

<PAGE>

PART III

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

     Set forth below is information  concerning  the Board of Directors.  Unless
otherwise stated,  directors have held the positions  indicated for at least the
past five years.

     Tommy C. Bible is the  General  Manager of the  Jefferson-Cocke  County Gas
Utility District that serves natural and propane gas to the Jefferson County and
Cocke  County  areas.  Mr.  Bible  is a  member  of the  Cocke  County  Election
Commission and is the Chairman for the Newport/Cocke County Economic Development
Commission.

     Richard G. Harwood serves as President and Chief  Executive  Officer of the
Company and the Bank.  Mr.  Harwood  joined the Bank as Senior Vice President in
1984.  He is currently the Vice Chairman of the  Newport/Cocke  County  Economic
Development Commission.  He serves as Vice Chairman of the Board of Directors of
the Newport Housing Authority. Mr. Harwood also is a member of the Newport Lions
Club.

     William B. Henry retired in 2001 after having been a practicing optometrist
in Newport, Tennessee since 1961.

     Ben W.  Hooper,  III is an attorney  in general  practice  with  Campbell &
Hooper in Newport,  Tennessee.  Mr.  Hooper also serves as legal  counsel to the
Cocke County Amvets and the Cocke County  Education  Foundation.  He is the past
President of the Cocke County Bar Association.

     Tom W.  Inman is the  agency  manager  for the Cocke  County  office of the
Tennessee Farmers Insurance  Companies.  He has been an Insurance agent with the
company since 1990. Mr. Inman is a member of the Gideon's and the  Newport/Cocke
County Chamber of Commerce.

     J.  William  Myers is a partner in the law firm of Myers & Bell in Newport,
Tennessee.  He has practiced  law in Newport,  Tennessee  since 1966.  Mr. Myers
serves as the  Chairman of the Board for the Company and the Bank.  He is active
with the Habitat for Humanity.

     Robert L. Overholt  retired in 1999 after having been the  owner/manager of
Home Supply of Newport, Tennessee, Inc., a building supply establishment,  since
1966. Mr. Overholt is active with the Shriners.  Mr. Overholt is also a director
of the Jefferson-Cocke County Gas Utility District.

     Robert D. Self retired in 1999 after having been the owner of Bob Self Auto
Parts,  an auto parts supplier  located in Newport,  Tennessee,  since 1969. Mr.
Self is a member of the Newport Lions Club.

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMMITTEE

     Pursuant to regulations  promulgated  under the Securities  Exchange Act of
1934,  as amended,  the Company's  officers,  directors and persons who own more
than 10% of the outstanding  common stock are required to file reports detailing
their  ownership and changes of ownership in such common  stock,  and to furnish
the Company with copies of all such reports.  Based on the  Company's  review of
such reports which the Company  received during the last fiscal year, or written
representations  from such persons that no annual report of change in beneficial
ownership was required,  the Company believes that, during the last fiscal year,
all  persons  subject to such  reporting  requirements  have  complied  with the
reporting  requirements,  except  for one  late  Form 4  filing  for each of Mr.
Overholt and Mr. Jones.


                                      -69-
<PAGE>

Item 10. Executive Compensation

Executive Compensation

     Summary.  The following table sets forth  compensation for the fiscal years
ended  December  31, 2004,  2003 and 2002 awarded to or earned by the  Company's
Chief  Executive  Officer  for  services  rendered in all  capacities.  No other
executive  officer  received  salary and bonus in excess of $100,000  during the
fiscal years 2004, 2003 or 2002.


                                                                All other
                                  Annual Compensation (1)      Compensation
                                  -----------------------      -------------
       Name and
  Principal Position         Year         Salary         Bonus
  ------------------         ----        --------        -----
Richard G. Harwood           2004        $104,205       $20,464   $76,026   (2)
President and Chief          2003          96,540        19,482    72,566   (3)
Executive Officer            2002          91,005        12,257    57,859   (4)
----------

1    Excludes indirect compensation in the form of certain perquisites and other
     personal benefits which did not exceed 10% of salary and bonus.

2    Consists of director fees ($14,900),  allocation to ESOP account ($20,980),
     Company  contribution  to  long-term  incentive  plan  ($1,549) and gain on
     accounts in long-term  incentive and deferred  compensation plans ($38,597)
     for fiscal 2004;  excludes  appraisal fees for services to borrowers in the
     amount of $23,701 for 2004.

3    Consists of director fees ($13,400),  allocation to ESOP account ($22,020),
     Company  contribution  to  long-term  incentive  plan  ($1,549) and gain on
     accounts in long-term  incentive and deferred  compensation plans ($35,597)
     for fiscal 2003;  excludes  appraisal fees for services to borrowers in the
     amount of $24,887 for 2003.

4    Consists of director fees ($12,100),  allocation to ESOP account ($22,988),
     Company  contribution  to  long-term  incentive  plan  ($1,549) and gain on
     accounts in long-term  incentive and deferred  compensation plans ($21,222)
     for fiscal 2002;  excludes  appraisal fees for services to borrowers in the
     amount of $27,573 for 2002.

Equity Compensation Plan Information

The following table provides information about our 1999 Stock Option Plan
<TABLE>
<CAPTION>
                             Number of securities
                              to be issued upon
                                 exercise of           Weighted-average        Number of securities
                             outstanding options,     exercise price of      remaining available for
                             warrants and rights     outstanding options,     future issuance under
      Plan Category                  (1)             warrants and rights    equity compensation plans
      -------------
<S>                                <C>                     <C>                       <C>
Equity compensation plans
approved by shareholders           45,388                  $8.59                     1,655

Equity compensation plans
not approved by
shareholders                           -0-                  n/a                         -0-
                               ------------                                     -----------
          Total                    45,388                                            1,655
                                   ======                                            =====
</TABLE>

                                      -70-

<PAGE>

     Option  Year-End Value Table.  The following  table sets forth  information
concerning the value of options held by the Chief  Executive  Officer at the end
of fiscal year 2004.

<TABLE>
<CAPTION>
                                                     Number of Securities               Value of Unexercised
                                                       Underlying Unexercised           In-the-Money Options
                                                     Options at Year End                   At Year End (2)
                                                     -------------------                -------------------
                     Shares
                   Acquired on       Value
      Name        Exercise (1)     Realized      Exercisable      Unexercisable      Exercisable      Unexercisable
    ---------     ------------     --------      -----------      -------------      ------------     -------------
<S>                  <C>            <C>             <C>                 <C>            <C>                <C>
Richard G.
Harwood              32,600         $80,525         7,911               --             $94,141             --
</TABLE>

----------------------

(1)  An option to purchase 24,000 shares was exercised on March 12, 2004, and an
     option to purchase 700 shares was  exercised  on November 16, 2004,  at the
     exercise  price of $8.60.  An option to purchase  and sell 4,000 shares was
     exercised on April 16, 2004, and the underlying shares were sold at $19.00;
     an option to purchase and sell 3,000 shares was  exercised on May 10, 2004,
     and the  underlying  shares were sold at $18.38;  and an option to purchase
     and sell 900 shares was exercised on November 16, 2004,  and the underlying
     shares were sold at $19.25.

(2)  Based on the difference between the closing sale price for the common stock
     on December 31, 2004 as reported on the Nasdaq  SmallCap  Market SM ($20.50
     per share) and the exercise price per share ($8.60 per share) multiplied by
     the  number  of  shares  subject  to the  option.  Options  are  considered
     in-the-money if the fair market value of the underlying  securities exceeds
     the exercise price.

Employment Agreement

     The Bank has entered into an employment agreement pursuant to which Richard
G. Harwood serves as the Bank's President and Chief Executive  Officer.  In such
capacities,  Mr. Harwood is responsible for overseeing all of its operations and
for implementing the policies adopted by the Board of Directors. The Company has
entered into a guarantee  agreement  with Mr.  Harwood  pursuant to which it has
agreed to be jointly and  severally  liable for the payment of amounts due under
the employment agreement.

     The employment  agreement  became effective on January 1, 1998 and provided
for an initial  term of three  years  with an annual  base  salary  equal to Mr.
Harwood's  existing  base salary rate in effect on the  effective  date. On each
anniversary  date of the commencement of the employment  agreement,  the term of
Mr.  Harwood's  employment  may be extended for an  additional  one-year  period
beyond the then-effective  expiration date, upon a determination by the Board of
Directors that the  performance of Mr. Harwood has met the required  performance
standards and that such employment  agreement should be extended.  Mr. Harwood's
employment  agreement has accordingly been extended through August 19, 2008. The
employment  agreement  provides Mr. Harwood with a salary review by the Board of
Directors  not  less  often  than  annually,  as well as with  inclusion  in any
discretionary  bonus  plans,  retirement  and medical  plans,  customary  fringe
benefits, vacation and sick leave. The employment agreement shall terminate upon
Mr.  Harwood's  death,  may  terminate  upon  Mr.  Harwood's  disability  and is
terminable  by the  Company  for "just  cause"  (as  defined  in the  employment
agreement).  In the event of termination for just cause, no severance payment is
available. If the Company terminates Mr. Harwood without just cause, Mr. Harwood
will  be  entitled  to a  continuation  of his  compensation  from  the  date of
termination through the remaining term of the employment agreement. In addition,
Mr. Harwood is entitled, at his election,  to either continued  participation in
compensation  plans which he would have been eligible to  participate in through
his employment  agreement's  expiration date or the cash equivalent  thereof. If
Mr. Harwood's  employment is terminated for any reason other than just cause, he
shall be entitled to purchase  from the Company,  at his own expense which shall
not exceed applicable  statutory rates, family medical insurance under any group
health plan that the Company maintains for its employees. This right shall be in
addition to, and not in lieu of, any other rights that Mr. Harwood has under the
employment  agreement and shall  continue  until he first  becomes  eligible for
participation in Medicare.  If the employment agreement is terminated due to Mr.
Harwood's  "disability"  (as defined in the employment  agreement),  Mr. Harwood
will be entitled to a continuation of his compensation  through the date of such
termination,  including any period prior to the  establishment  of Mr. Harwood's
disability.  In  the  event  of Mr.  Harwood's  death  during  the  term  of the
employment  agreement,  Mr.  Harwood's  estate  will be  entitled to receive his
salary through the last day of the calendar month in which Mr.  Harwood's  death
occurred.  Mr. Harwood is able to voluntarily terminate the employment agreement
by providing 90 days' written  notice to the Company,  in which case Mr. Harwood
would be entitled to receive only his  compensation,  vested rights and benefits
up to the date of termination.

                                      -71-
<PAGE>

In the event of (i) Mr.  Harwood's  involuntary  termination of employment other
than for "just cause" during the 12-month  period  following a change in control
or (ii) Mr. Harwood's voluntary  termination within 90 days of the occurrence of
certain specified events occurring during that period,  Mr. Harwood will be paid
within  10 days of such  termination  (or the  date of the  change  in  control,
whichever is later) an amount equal to the difference between (a) 2.99 times his
base amount,  as defined in Section  280G(b)(3) of the Internal  Revenue Code of
1986, as amended (the "Code"),  and (b) the sum of any other parachute payments,
as defined under Section  280G(b)(2) of the Code, that he receives on account of
the  change in  control.  "Change  in  control"  means any one of the  following
events: (i) the acquisition of ownership, holding or power to vote more than 25%
of our voting stock, (ii) the acquisition of the ability to control the election
of a majority of the Company's directors, (iii) the acquisition of a controlling
influence over the Company's  management or policies by any person or by persons
acting as a "group"  (within the meaning of Section 13(d) of the Exchange  Act),
or (iv) during any period of two  consecutive  years,  individuals  ("continuing
directors") who at the beginning of such period  constituted the Company's Board
of Directors (the "existing  board") cease for any reason to constitute at least
two-thirds  thereof,  provided that any individual  whose election or nomination
for  election  as a member of the  existing  board was  approved by a vote of at
least two-thirds of the continuing  directors then in office shall be considered
a continuing  director.  For purposes of this paragraph  only, the term "person"
refers to an individual or a corporation, partnership, trust, association, joint
venture, pool, syndicate,  sole proprietorship,  unincorporated  organization or
any other form of entity not specifically listed herein. The payments that would
be  made to Mr.  Harwood  assuming  his  termination  of  employment  under  the
foregoing  circumstances  at December  31, 2004,  would have been  approximately
$372,760.  These provisions may have an  anti-takeover  effect by making it more
expensive  for a potential  acquirer to obtain  control of the  Company.  If Mr.
Harwood were to prevail over the Company, or obtain a written  settlement,  in a
legal  dispute  as to the  employment  agreement,  he  would be  entitled  to be
reimbursed for his legal and other expenses.

                                      -72-
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

     Persons and groups  owning in excess of 5% of the common stock are required
to file certain  reports  regarding  such  ownership  pursuant to the Securities
Exchange Act of 1934, as amended.  Based on these reports,  the following  table
sets  forth,  as of Marche 31, 2005,  certain  information  as to shares of the
common stock known by management to be  beneficially  owned by persons owning in
excess of 5% of the  common  stock  and by all of the  Company's  directors  and
executive officers as a group.

<TABLE>
<CAPTION>
                                                                    Amount and       Percent of
                                                                     Nature of       Shares of
Name and Address                                                    Beneficial      Common Stock
of Beneficial Owner                                                  Ownership     Outstanding (1)
-------------------                                                  ---------     -----------
<S>                                                                   <C>              <C>

Richard G. and Margaret R. Harwood
344 W. Broadway
Newport, Tennessee  37821-0249                                        114,218 (2)       9.6%

United Tennessee Bankshares, Inc.
  Employee Stock Ownership Plan ("ESOP")
344 W. Broadway
Newport, Tennessee  37821-0249                                        158,744 (3)      13.4%

Trust Agreement I under
     United Tennessee Bankshares, Inc.
     1999 Stock Option Plan
     ("Stock Option Plan Trust I")
344 W. Broadway
Newport, Tennessee  37821-0249                                         48,560 (4)       4.1%

All directors and executive officers as a group (11 persons)          352,114 (5)      29.7%
</TABLE>

-------------

1    Based on 1,185,999 shares issued and outstanding at March 31, 2005.

2    Includes  33,426  shares of which Mr.  Harwood is the sole owner and 18,936
     shares of which Mrs. Harwood is the sole owner. Also includes 10,250 shares
     in Mr.  Harwood's  IRA,  11,718 shares held in his account in the Company's
     401(k) Plan,  31,977 shares  allocated to his account in the ESOP and 7,911
     shares  which he has the right to acquire  pursuant to options  exercisable
     within 60 days of the Record Date issued under the 1999 Stock Option Plan.

3    Includes 149,968 allocated shares and 8,776 unallocated shares. Unallocated
     shares  are  held  in  a  suspense  account  for  future  allocation  among
     participating  employees as the loan used to purchase the shares is repaid.
     The ESOP trustees,  currently Directors Henry,  Overholt and Self, vote all
     allocated  shares in  accordance  with  instructions  of the  participants.
     Subject  to their  common  law and  statutory  fiduciary  duties,  the ESOP
     trustees vote unallocated  shares and shares for which no instructions have
     been  received in the same ratio as  participants  directing  the voting of
     allocated  shares or, in the absence of such direction,  as directed by the
     Board of Directors.

4    Consists of shares held in trust to satisfy  potential  obligations  of the
     Company under the United Tennessee Bankshares, Inc. 1999 Stock Option Plan.
     Voting  rights with respect to Common Stock held by Stock Option Plan Trust
     I are exercised by the trustees,  Directors  Bible and Hooper in accordance
     with the terms of the ESOP.

5    Reflects  shares over which one or more  directors and  executive  officers
     have  sole or  shared  voting  and/or  dispositive  power.  Excludes  8,776
     unallocated shares in the ESOP which are voted as described in note 3. Also
     excludes 48,560 shares held by Stock Option Plan Trusts I and II and 20,747
     shares held in a grantor trust for the Bank's  directors'  retirement plan.
     The trustees of these  trusts vote all such shares in the same  proportions
     on all matters as the ESOP trustees vote the ESOP shares.  Includes  45,388
     shares which  directors  and  executive  officers have the right to acquire
     pursuant to options exercisable within 60 days of the Record Date.

                                      -73-
<PAGE>
                                              Sares of Common
                                              Stock Beneficially      Percent
             Name                                 Owned (1)          of Class 2
             ----                                  -------           ----------

Richard G. Harwood                                  114,218             9.63
Tom W. Inman                                         1,000              0.08
William B. Henry                                    42,630              3.59
J. William Myers                                    41,632              3.51
Tommy C. Bible                                      23,000              1.94
Robert L. Overholt                                  28,438              2.40
Ben W. Hooper, III                                   1,400              0.10
Robert D. Self                                      18,308              1.54

-------------

1    Reflects shares over which the named individuals have sole or shared voting
     and/or dispositive power;  excludes unallocated shares held by the ESOP and
     certain shares held by the Company's defined  contribution  thrift plan and
     its  directors'  retirement  plan (see "Voting  Securities  and  Beneficial
     Ownership") above. Includes 16,161 shares which Messrs. Myers has the right
     to acquire  pursuant  to options  exercisable  within 60 days of the Record
     Date and 13,500 for Henry, and 6,161for Self which has the right to acquire
     pursuant to such options.

2    Based on 1,185,999 shares issued and outstanding at April 1, 2005.


Item 12. Certain Relationships and Related Transactions

Certain Transactions

     The Bank makes loans to directors,  officers and employees. These loans are
made in the ordinary course of business with the same collateral, interest rates
and underwriting criteria as those of comparable  transactions prevailing at the
time and do not involve more than the normal risk of  collectibility  or present
other  unfavorable  features,  except each  director,  officer and  employee may
obtain one mortgage loan and one consumer loan with waived  origination fees and
a 1% discount on the interest rate (on  adjustable-rate  loans,  the  discounted
rate  applies  only until the rate  adjusts).  At December  31,  2004,  loans to
directors and executive  officers  totaled  approximately  $1,053,658 or 5.7% of
shareholders'  equity and .86% of total assets at that date. Except as disclosed
below,  no director or  executive  officer had more than  $60,000 of loans as of
December 31, 2004.

<TABLE>
<CAPTION>
                                                                              Highest Balance
 Name & Relation to                                                           Since January 1,       Balance at
       Company          Type of Loan       Date Originated    Interest Rate         2004          December 31, 2004
 ------------------     ------------       ----------------   -------------   ----------------    ------------------
<S>                     <C>                   <C>                 <C>             <C>                 <C>
Chris Triplett          Residential           06/08/04            4.75%           $195,000            $193,505
Controller              Mortgage
                        Real Estate           03/31/01            5.75%           $123,420            $122,989
                        Mortgage
Lonnie R. Jones Vice    Residential           10/14/00            5.25%           $306,911            $299,941
President of            Mortgage
Operations
Ben W. Hooper, III      Residential           04/01/98            5.50%           $189,988            $181,677
Director                Mortgage
Nancy Bryant            Residential           04/26/04            4.75%           $117,000            $112,248
Vice President          Mortgage
</TABLE>

     J. William  Myers is a principal in the law firm of Myers & Bell,  Newport,
Tennessee,  which  performs  routine legal services on behalf of the Company and
its borrowers,  principally in connection with the closing of mortgage loans. In
fiscal 2004, the law firm's fees for such services totaled $73,296.

                                      -74-
<PAGE>

Item 13. Exhibits

     Exhibits.  The  following  exhibits  either  are  filed  or  otherwise
furnished as part of this report or are incorporated herein by reference:

      No.                           Description
     -----                          -----------

     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 +

     21   Subsidiaries of the Registrant

     23   Consent of Pugh & Company, P.C.

    31.1  Certification  Pursuant   to   18   U.S.C.  Section   1350, As Adopted
          Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    31.2  Certification Pursuant to 18 U.S.C. Section 1350, As  Adopted Pursuant
          to Section 302 of the Sarbanes-Oxley Act of 2002

    32.2  Certification Pursuant to 18 U.S.C. Section 1350, As  Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002

    32.3  Certification  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
          to Section 906 of the Sarbanes-Oxley Act of 2002

---------------

*    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.

                                      -75-

<PAGE>

Item 14.  Prinicpal Accountant Fees and Services


     Pugh & Company,  P.C.  ("Pugh &  Company")  was the  Company's  independent
auditor for the 2004 fiscal year and has been retained by the Board of Directors
to be its auditor for the 2005 fiscal year.

     All  services  provided by Pugh & Company  during the fiscal year 2004 were
pre-approved by the Audit  Committee.  The aggregate fees billed by Pugh in 2003
and 2004 for various services were:


Type of Fees                                           2003             2004
                                                       ----             ----

Audit Fees...........................               $49,975           $51,755

Audit-Related Fees...................                 3,025             1,535

Tax Fees.............................                11,725             8,965

All Other Fees.......................                 2,950             2,340
                                                    -------           -------

       Total.........................               $67,675           $64,595
                                                    =======           =======

In the above table, in accordance  with SEC definitions and rules,  "audit fees"
are fees billed to the Company for  professional  services  for the audit of the
Company's  consolidated financial statements included in Form 10-K and review of
financial  statements  included in Forms 10-Q, or for services that are normally
provided by the accountant in connection  with statutory and regulatory  filings
or engagements;  "audit-related  fees" are fees billed for assurance and related
services that are reasonably  related to the  performance of the audit or review
of the  Company's  financial  statements;  "tax  fees" are fees  billed  for tax
compliance,  tax advice and tax  planning;  and "all other fees" are fees billed
for any services not included in the first three categories.

                                      -76-
<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 29, 2005                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>                                                           <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 29, 2005                                                Date:  March 29, 2005


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

Date:   March 29, 2005                                                Date:  March 29, 2005



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

Date:   March 29, 2005                                               Date:  March 29, 2005



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

Date:   March 29, 2005

</TABLE>

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