<PAGE>

================================================================================

                       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, 1999

                                       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              (I.R.S. Employer Identification No.)
 of 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 is not 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. [  ]

The issuer's revenues for its most recent fiscal year were $6,852,328

The aggregate market value of the outstanding common stock held by
non-affiliates at March 27, 2000 was approximately $9.3 million (based on the
most recent trade reported on the Nasdaq SmallCap Market.SM ($10 7/16 on March
24, 2000)). Solely for purposes of this calculation, the registrant's employee
stock ownership plan, management recognition plan, stock option plan trust,
directors' retirement 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 27,
2000 was 1,382,013

Transitional small business disclosure format (check one): Yes ______ No ___x___


                       DOCUMENTS INCORPORATED BY REFERENCE

     1.   1999 Annual Report to Stockholders (the "Annual Report") (Part II).

     2.   Proxy Statement for 2000 Annual Meeting of Stockholders (the "Proxy
          Statement") (Part III).

================================================================================
<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. Accordingly, the
information set forth in this report, including the audited financial statements
and related data for periods prior to January 1, 1998, relates primarily to the
Bank.

     On November 30, 1999, the Company paid a special distribution of $4.00 per
share to stockholders of record on November 1, 1999. On the basis of a private
letter ruling by the Internal Revenue Service, the Company believes that the
distribution will be treated as a return of capital rather than a taxable
dividend.

     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, 1999, the Bank had total assets of $94.1 million, deposits of $73.8
million and stockholders' equity of $11.9 million, or 12.6% 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


                                       1
<PAGE>

noninterest expenses such as employee compensation, deposit insurance and
miscellaneous other expenses. Funds for these activities are provided
principally by deposit growth, repayments of outstanding loans and investment
securities, other operating revenues and, from time to time, advances from the
Federal Home Loan Bank ("FHLB") of Cincinnati and other borrowings.

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

Financial Modernization Legislation

     On November 12, 1999, President Clinton signed legislation which could have
a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Among the new activities that will be
permitted to bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant banking. The
Federal Reserve Board, in consultation with the Secretary of the Treasury, may
approve additional financial activities. The G-L-B Act, however, prohibits
future acquisitions of existing unitary savings and loan holding companies, like
the Company, by firms which are engaged in commercial activities and limits the
permissible activities of unitary holding companies formed after May 4, 1999.

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

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


                                       2
<PAGE>

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.

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

Market Area

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

     Cocke County is primarily rural, with a population of approximately 32,000
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 significantly above the
national rate and somewhat below the state rate (since 1990, 10.0% compared with
7.7% and 10.6%, 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 June 1998, 5.8% compared with 4.5% and 4.7%,
respectively), and income levels have been substantially lower than state and
national averages (for 1999, $20,800 compared with $26,500 and $30,200,
respectively, per person), due in part to the seasonal nature of tourism related
employment. Over the next five years, demographic trends in the county are
expected to be consistent with recent experience, with the differences between
county, state and national population growth rates decreasing and the
differences between county, state and national income levels growing.

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


                                       3
<PAGE>

Competition

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

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

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

Lending Activities

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

     With certain limited exceptions, the maximum amount that a savings
institution may lend to any borrower (including certain related entities of the
borrower) at one time may not exceed 15% of the unimpaired capital and surplus
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans fully secured by readily marketable collateral. At December 31, 1999, the
maximum amount that the Bank could have lent to any one borrower without prior
OTS approval under those regulations was approximately $2.0 million. At that
date, the largest aggregate amount of loans that the Bank had outstanding to any
one borrower was $1.8 million, a total of four lending relationships with
aggregate loan amounts over $500,000, and none of these loans were
nonperforming. For additional information, see " -- Regulation of the Bank --
Limits on Loans to One Borrower."


                                       4
<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, 1999, the Bank had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.

<TABLE>
<CAPTION>
                                                                          At December 31,
                                               -----------------------------------------------------------------
                                                        1999                    1998                   1997
                                               -------------------    --------------------    ------------------
                                               Amount        %        Amount           %      Amount         %
                                               -------   ---------    --------     -------    -------    -------
                                                                   (Dollars in thousands)

<S>                                          <C>            <C>      <C>            <C>     <C>          <C>
Real estate loans:
  One- to four-family residential...........   $48,550        76.5%   $ 41,833        76.1%   $40,482       82.0%
  Commercial................................     9,099        14.3       7,267        13.2      3,493        7.1
  Construction..............................     2,615         4.1       3,235         5.9      3,266        6.6

Consumer loans:
  Automobile................................       980         1.5         813         1.5        646        1.3
  Loans to depositors, secured by deposits..     1,114         1.8         848         1.5        634        1.3
  Home equity and second mortgage...........       208         0.3         162         0.3        243        0.5
  Other.....................................       931         1.5         838         1.5        608        1.2
                                               -------   ---------    --------     -------    -------    -------
                                                63,497       100.0%     54,996       100.0%    49,372      100.0%
                                               -------   =========    --------     =======    -------    =======

Less:
  Loans in process..........................     1,033                     748                  1,308
  Deferred fees and discounts...............       287                     261                    278
  Allowance for loan losses.................       661                     641                    628
                                               -------                --------                -------
    Total...................................   $61,516                $ 53,346                $47,158
                                               =======                ========                =======
</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, 1999. Demand loans, loans having no stated schedule of repayments
and no stated maturity and overdrafts are reported as due in one year or less.
The table does not include any estimate of prepayments which significantly
shorten the average life of all mortgage loans and may cause the repayment
experience of the Bank to differ from that shown below.

<TABLE>
<CAPTION>
                                                              Due after
                                         Due within           1 Through             Due After
                                           1 Year             5 Years                5 Years              Total
                                           ------             ---------              -------             -----
                                                                      (In thousands)

<S>                                     <C>                   <C>                   <C>                <C>
Real estate loans:
   One- to four-family residential....  $      60             $   1,157             $  47,333          $ 48,550
   Commercial.........................          3                   545                 8,551             9,099
   Construction.......................      2,615                    --                    --             2,615
Consumer loans........................      1,784                 1,431                    18             3,233
                                        ---------             ---------             ---------          --------
      Total...........................  $   4,462             $   3,133             $  55,902          $ 63,497
                                        =========             =========             =========          ========
</TABLE>


                                       5
<PAGE>

     Loan Portfolio Sensitivity. The following table sets forth information
about dollar amounts of loans due one year or more after December 31, 1999 that
had predetermined interest rates and that had adjustable interest rates at that
date.

<TABLE>
<CAPTION>
                                                          Predetermined         Floating or
                                                              Rate           Adjustable Rates
                                                          -------------      ----------------
                                                                   (In thousands)

     <S>                                                  <C>                   <C>
     Real estate loans:
       One- to four-family residential.................   $      14,460         $   34,030
       Commercial......................................           1,856              7,240
       Construction....................................              --                 --
     Consumer loans....................................           1,449                 --
                                                          -------------         ----------
         Total.........................................   $      17,765         $   41,270
                                                          =============         ==========
</TABLE>

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

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

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                 -----------------------------------------------
                                                                    1999              1998             1997
                                                                 ---------          ---------          ---------
<S>                                                              <C>                <C>                <C>
Loans originated:                                                                  (In thousands)
  Real estate loans
    One- to four-family residential............................  $  14,743          $  11,409          $   7,169
    Commercial.................................................      4,967              4,750              1,393
    Construction...............................................      3,656              3,225              3,862
  Consumer loans...............................................      1,623              1,404              1,115
                                                                 ---------          ---------          ---------
     Total loans originated....................................     24,989             20,788             13,539
Loans acquired in branch purchases.............................         --                 26                 --
                                                                 ---------          ---------          ---------
     Total loans originated and acquired.......................  $  24,989          $  20,814          $  13,539
                                                                 =========          =========          =========
</TABLE>

     One- to Four-Family Residential Lending. The Bank's principal lending
activity consists of the origination of loans secured by mortgages on existing
single-family residences in its primary market area. The Bank also originates
significant amounts of loans for the construction of such residences. The
purchase price or appraised value of most of such residences generally has been
between $40,000 and $70,000, with original loan amounts averaging approximately
$45,000. At


                                       6
<PAGE>

December 31, 1999, $48.6 million, or 76.5%, of total loans were secured by one-
to four-family residences, a substantial majority of which were existing,
owner-occupied, single-family residences in its primary market area. At December
31, 1999, $34.1 million, or 70.2%, of its one- to four- family residential loans
had adjustable interest rates, and $14.5 million, or 29.8% had fixed rates.
During the year ended December 31, 1999, the Bank originated $12.6 million of
adjustable-rate loans, which was approximately 85.7% of total mortgage loan
originations for that period, and at that date it had $473,000 of loan
commitments, 85% of which were for adjustable rate loans.

     The Bank's one- to four-family residential mortgage loans may have
adjustable or fixed rates of interest. These loans generally are for terms of up
to 25 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 with respect to mortgaged properties (for example,
in light of the Bank's experience in its market area, the Bank often does not
require homes to have air conditioning or a complete survey or independent
appraisal, and occasionally does not require contractors to be licensed).

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

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

     Adjustable-rate loans help the Bank to reduce its exposure to increases in
prevailing market interest rates. However, there are unquantifiable credit risks
resulting from potential increases in costs to borrowers in the event of upward
repricing of adjustable-rate loans. It is possible that during


                                       7
<PAGE>

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, 1999, the Bank's loan portfolio included $2.6
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, it may be required to advance funds beyond the amount originally
committed to permit completion of construction. If the estimate of value is
inaccurate, it may be confronted, at or prior to the maturity of the loan, with
a property having a value which is insufficient to assure full repayment. The
ability of a builder to sell completed residences will depend on, among other
things, demand, pricing, availability of comparable properties and economic
conditions. The Bank has tried to minimize this risk by limiting construction
lending to qualified borrowers in its market area and by limiting the aggregate
amount of outstanding construction loans.


                                       8
<PAGE>

     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, 1999, the Bank had 154
of these loans totaling $9.1 million, with a median loan balance of
approximately $60,000, none of which had a balance exceeding $800,000. None of
these loans was classified as substandard, doubtful or loss or designated as
special mention at that date. For information about its asset classification
policies and nonperforming assets, see " -- Asset Classification, Allowance for
Losses and Nonperforming Assets."

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

     The following paragraphs set forth information about the Bank's commercial
real estate loans with outstanding balances exceeding $500,000 at December 31,
1999. None of these loans was classified as substandard, doubtful or loss or
designated as special mention at that date. For information about asset
classification policies of the Bank, see "Asset Classification, Allowance for
Losses and Nonperforming Assets."

          Retail properties in Sevierville, Tennessee. In December 1998, the
          --------------------------------------------
          Bank made a $750,000 loan secured by a medical office building. The
          appraisal indicated a loan-to-value ratio of approximately 67%. The
          loan is being amortized over 15 years. In October 1999, this loan was
          refinanced at $775,000 and amortized over 20 years.

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

     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


                                       9
<PAGE>

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, 1999, the Bank would be permitted to invest up to $53.6 million in loans
secured by commercial real estate.

     Consumer Lending. The Bank's consumer loans consist of automobile loans,
demand loans secured by deposit accounts with the Bank, home equity loans
secured by second mortgages on single-family residences in the Bank's market
area and other loans. These loans totaled approximately $3.2 million at December
31, 1999. At that date, the Bank had 541 consumer loans, with a median loan
balance of approximately $5,000, none of which had a balance exceeding $75,000,
and none of the ten largest consumer loans was adversely classified or
designated.

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

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

     Asset Classification, Allowance for Losses and Nonperforming Assets.
Federal regulations require savings institutions to classify their assets on the
basis of quality on a regular basis. An asset is classified as substandard if it
is determined to be inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. An asset is
classified as


                                       10
<PAGE>

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, 1999, the Bank had no assets
classified as loss or as doubtful, $377,000 of assets classified as substandard
and no assets designated as special mention. The Bank's total adversely
classified assets represented approximately 0.4% of its total assets and 3.3% of
its tangible regulatory capital at December 31, 1999. At that date,
substantially all of its adversely classified or designated assets were one- to
four-family residences in its primary market area, and only one of such assets
was in excess of $50,000. At December 31, 1999, the Bank did not expect to incur
any loss in excess of attributable existing reserves on any of its adversely
classified or designated assets.

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

     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


                                       11

<PAGE>

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,
1999, the Bank held no properties acquired in settlement of loans for which
market values were unavailable. 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 provide 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.


                                       12
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                 -----------------------------------------------
                                                                    1999               1998               1997
                                                                 ---------          ---------          ---------
                                                                             (Dollars in thousands)

<S>                                                              <C>                <C>                <C>
Balance at beginning of period.................................  $     641          $     628          $     494
Charge-offs:
    Consumer...................................................         (4)               (15)               (18)
Recoveries:
    Consumer...................................................         --                  4                  2
                                                                 ---------          ---------          ---------
Net charge-offs................................................         (4)               (11)               (16)
Provision for loan losses......................................         24                 24                150
                                                                 ---------          ---------          ---------
Balance at end of period.......................................  $     661          $     641          $     628
                                                                 =========          =========          =========
Ratio of net charge-offs to average
  loans outstanding during the period..........................       0.01%              0.02%              0.03%
                                                                 =========          =========          =========
</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,
                                    -----------------------------------------------------------------------------------
                                               1999                        1998                            1997
                                    -------------------------    --------------------------     -----------------------
                                                 Percent of                    Percent of                   Percent of
                                                Loans in Each                 Loans in Each                Loans in Each
                                                 Category to                   Category to                  Category to
                                      Amount     Total Loans      Amount      Total Loans       Amount      Total Loans
                                    ---------    -----------     --------     ------------      ------      -----------
                                                                    (Dollars in thousands)
<S>                                 <C>             <C>          <C>              <C>          <C>              <C>
Real estate loans:
  One- to four-family residential.  $     383         76.5%      $    375          76.1%       $    400          82.0%
  Commercial......................         91         14.3             78          13.2              40           7.1
  Construction....................         32          4.1             37           5.9              38           6.6
Consumer loans....................        155          5.1            151           4.8             150           4.3
                                    ---------        -----       --------         -----        ---------         -----
  Total allowance for loan losses   $     661        100.0%      $    641         100.0%       $    628         100.0%
                                    =========        =====       ========         =====        ========         =====
</TABLE>

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


                                       13
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                                 -----------------------------------------------
                                                                 1999               1998               1997
                                                                 ---------          ---------          ---------
                                                                             (Dollars in thousands)
<S>                                                              <C>                <C>                <C>
Accruing loans which are contractually past due
  90 days or more:
  Real estate loans:
    One- to four-family residential............................  $     348          $     407          $     638
    Commercial.................................................         --                 --                 --
    Construction...............................................         --                 --                 --
  Consumer loans...............................................         29                 31                 17
                                                                 ---------          ---------          ---------
    Total non performing loans.................................  $     377          $     438          $     655
                                                                 =========          =========          =========

Percentage of total loans......................................       0.59%              0.88%              1.36%
                                                                 =========          =========          =========

Other nonperforming assets(1)..................................  $      71          $      --          $      19
                                                                 =========          =========          =========

Total nonperforming assets.....................................  $     448          $     438          $     674
                                                                 =========          =========          =========

Percentage of total assets.....................................       0.48%              0.50%              0.75%
                                                                 =========          =========          =========
</TABLE>
----------------
(1)  Other nonperforming assets includes property acquired through foreclosure
     or repossession. This property is carried at the lower of its fair value
     less estimated selling costs or the principal balance of the related loan,
     whichever is lower.


     At December 31, 1999, the Bank had no additional loans as to which known
information about possible credit problems of borrowers caused the Bank to have
doubts as to the ability of the borrowers to comply with present loan repayment
terms. At that date, the Bank did not expect to incur any loss in excess of
attributable existing reserves on any of its assets.

Investment Activities

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


                                       14
<PAGE>

to time, the OTS adjusts the percentage of liquid assets which savings
institutions are required to maintain. See " -- Regulation of the Bank --
Liquidity Requirements."

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

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

     The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The prepayment assumptions used to determine the
amortization period for premiums and discounts can significantly affect the
yield of the mortgage-backed security, and these assumptions are reviewed
periodically to reflect the actual prepayment. The actual prepayments of the
underlying mortgages depend on many factors, including the type of mortgage, the
coupon rate, the age of the mortgages, the geographical location


                                       15
<PAGE>

of the underlying real estate collateralizing the mortgages and general levels
of market interest rates. The difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates is an important
determinant in the rate of prepayments. During periods of falling mortgage
interest rates, prepayments generally increase, and, conversely, during periods
of rising mortgage interest rates, prepayments generally decrease. If the coupon
rate of the underlying mortgage significantly exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages. Prepayment experience is
more difficult to estimate for adjustable-rate mortgage-backed securities.

     All of the Company's securities issued by municipalities or comparable
governmental authorities were rated "A" or higher by a nationally recognized
credit rating agency at the time of purchase. The Company regularly monitors the
ratings of these holdings by reference to nationally published rating media and
by communication with the issuer where necessary. As of December 31, 1999, none
of these securities had been downgraded from its original rating, and these
issues were primarily obligations of Tennessee municipalities. At December 31,
1999, these securities had a weighted average coupon of 5.2% and a weighted
average term to maturity of approximately 27 months. The carrying value of these
securities was $1.3 million, or 4.6% 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,
                                                                 -----------------------------------------------
                                                                    1999               1998               1997
                                                                 ---------          ---------          ---------
                                                                                     (In thousands)
<S>                                                              <C>                <C>                <C>
Securities available for sale:
   Mortgage-backed securities..................................  $  19,235          $  24,066          $   9,439
   U.S. government and agency securities.......................      5,345              6,547              4,026
   Obligations of states and political
       subdivisions............................................      1,275                 --                 --
   FHLMC preferred stock.......................................      1,319              1,806              1,176
   FHLB stock..................................................        746                589                548
   Other.......................................................         15                 15                 15

Securities held to maturity:
   Obligations of states and political
       subdivisions............................................         --              2,431              1,077
                                                                 ---------          ---------          ---------
      Total....................................................  $  27,935          $  35,454          $  16,281
                                                                 =========          =========          =========
</TABLE>


                                       16
<PAGE>

     The following schedule analyzes the Company's investment portfolio at
December 31, 1999 by time remaining to maturity and presents the average yield
for each range of maturities.

<TABLE>
<CAPTION>
                                 Less than One Year  One to Five Years  Five to Ten Years  More than Ten Years
                                 ------------------  -----------------  -----------------  -------------------
                                 Carrying   Average  Carrying  Average  Carrying  Average  Carrying    Average
                                   Value     Yield    Value     Yield    Value     Yield     Value      Yield
                                 -------    -------  -------   -------  -------   -------  -------     -------
                                                              (Dollars in thousands)

<S>                              <C>           <C>   <C>          <C>   <C>          <C>   <C>            <C>
Securities available for sale:
   Mortgage-backed securities    $   693       5.6%  $ 1,524      6.2%  $ 2,467      6.5%  $14,551        5.8%
   U.S. government and agency
      securities .............       500       7.0     4,845      5.9        --       --        --         --
   Obligations of states and
      political subdivisions .       201       5.0       717      4.9       357      5.9        --         --
   FHLMC preferred stock .....        --        --        --       --        --       --     1,319       61.0
   FHLB stock ................        --        --        --       --        --       --       746        7.0
   Other .....................        --        --        --       --        --       --        15         --
                                 -------             -------            -------            -------

     Total ...................   $ 1,394             $ 7,086            $ 2,824            $16,631
                                 =======             =======            =======            =======

<CAPTION>

                                 Total Investment Portfolio
                                 --------------------------
                                 Carrying  Market   Average
                                  Value     Value    Yield
                                 -------   -------  ------
                                   (Dollars in thousands)

<S>                              <C>       <C>         <C>
Securities available for sale:
   Mortgage-backed securities    $19,235   $19,235     5.9%
   U.S. government and agency
      securities .............     5,345     5,345     6.0
   Obligations of states and
      political subdivisions .     1,275     1,275     5.2
   FHLMC preferred stock .....     1,319     1,319    61.0
   FHLB stock ................       746       746     7.0
   Other .....................        15        15      --
                                 -------   -------

     Total ...................   $27,935   $27,935
                                 =======   =======
</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.


                                       17
<PAGE>

     The Bank's savings deposits at December 31, 1999 were represented by the
various types of savings programs listed below.


<TABLE>
<CAPTION>
Weighted
Average
Interest   Minimum                                                    Minimum                    Percentage of
  Rate      Term                    Category                          Balance       Balance       Total Savings
  ----      ----                    --------                          -------       -------       -------------
                                                                                (In thousands)
<S>        <C>                  <C>                                   <C>           <C>               <C>
2.02%      None                 NOW accounts                          $      --     $   7,018          9.5%
3.21       None                 Money market                              2,500         3,180          4.3
3.00       None                 Savings deposits-passbook                    --        11,476         15.6
                                                                                    ---------      -------
                                      Total transaction accounts                       21,674         29.4
                                                                                    ---------      -------
<CAPTION>
                                Certificates of Deposit
                                -----------------------
<S>        <C>                  <C>                                     <C>            <C>            <C>
4.94       91 days              Fixed-term, fixed-rate                    2,500         4,882          6.6
5.00       6 months-Regular     Fixed-term, fixed-rate                    2,500         9,180         12.5
4.98       6 months-IRA         Fixed-term, fixed-rate                      100           364          0.5
5.18       12 months            Fixed-term, fixed-rate                    1,000         8,484         11.5
5.98       14 months            Fixed-term, fixed-rate                    1,000         2,612          3.5
4.98       18 months-Regular    Fixed-term, fixed-rate                    1,000         3,128          4.2
4.99       18 months-IRA        Fixed-term, fixed-rate                      100         5,632          7.6
5.32       30 months            Fixed-term, fixed-rate                    1,000         2,540          3.4
5.46       Jumbos               Fixed-term, fixed-rate                  100,000        15,314         20.8
                                                                                    ---------       ------
                                  Total certificates of deposit                        52,136         70.6
                                                                                    ---------       ------
                                   Total deposits                                   $  73,810        100.0%
                                                                                    =========        =====
</TABLE>

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

<TABLE>
<CAPTION>

                                                 Year Ended December 31,
                                 -----------------------------------------------------------------
                                        1999                   1998                   1997
                                 -------------------    -------------------    -------------------

                                 Average     Average    Average     Average    Average     Average
                                 Balance       Rate     Balance       Rate     Balance       Rate
                                 -------       ----     -------       ----     -------       ----
                                                         (Dollars in thousands)
<S>                              <C>            <C>     <C>             <C>    <C>             <C>
Escrow Accounts for Stock
  Subscriptions................  $     --        --%    $   1,968       3.0%   $    1,282      3.0%
NOW accounts...................     7,496       2.0         4,522       2.2         3,782      2.5
Money market deposits..........     3,268       3.3         2,382       3.3         2,098      3.3
Savings deposits -- passbook...    11,466       3.0         9,588       3.3        10,290      3.3
Certificates of deposit........    51,620       5.3        39,816       4.6        40,412      5.4
                                 --------               ---------              ----------
    Total......................  $ 73,850               $  58,276              $   57,864
                                 ========               =========              ==========
</TABLE>


                                       18
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       Increase                                 Increase
                                          Balance at                  (Decrease)      Balance at               (Decrease)
                                          December 31,   % of          from Dec.     December 31,   % of        from Dec.
                                             1999      Deposits        31, 1998         1998       Deposits     31, 1997
                                          ---------   ----------      ---------      ----------    --------     --------
                                                                        (Dollars in thousands)
<S>                                       <C>             <C>          <C>           <C>               <C>      <C>
Escrow accounts for stock
   subscriptions.......................   $      --           --%      $      --     $       --        0.00%    $(23,598)
NOW accounts...........................       7,018         9.50             153          6,865        9.83        3,027
Money market deposit...................       3,180         4.31            (464)         3,644        5.21          905
Savings deposits -- passbook...........      11,476        15.55             870         10,606       15.19         (285)
Certificates of deposit................      36,822        49.89           1,420         35,402       50.70        7,932
Jumbo certificates.....................      15,314        20.75           1,996         13,318       19.07          184
                                          ---------   ----------       ---------     ----------    ---------     --------
                                          $  73,810       100.00%      $   3,975     $   69,835      100.00%    $(11,835)
                                          =========       ======       =========     ==========    ========     ========
</TABLE>


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

<TABLE>
<CAPTION>
                                                                    At December 31,
                                                     --------------------------------------------
                                                       1999              1998             1997
                                                     ---------         ---------        ---------
                                                                   (In thousands)

         <S>                                         <C>               <C>              <C>
         4.00 -  5.99%.............................  $  52,136         $  47,604        $  39,714
         6.00 -  7.99%.............................         --             1,116              890
                                                     ---------         ---------        ---------
                                                     $  52,136         $  48,720        $  40,604
                                                     =========         =========        =========
</TABLE>

     The following table sets forth information about amounts and maturities of
the Bank's time deposits at December 31, 1999.

<TABLE>
<CAPTION>
                                                                 Amount Due
                                  ------------------------------------------------------------------------
                                  Less Than                                        After
Rate                              One Year        1-2 Years        2-3 Years       3 Years          Total
----                              --------        ---------        ---------       -------         --------
                                                                (In thousands)

 <S>                               <C>             <C>             <C>             <C>            <C>
 4.00 -  5.99%..................   $43,729         $  7,758        $   348         $  301         $ 52,136
 6.00 -  7.99%..................        --               --             --             --               --
                                   -------         --------        -------         ------         --------
                                   $43,729         $  7,758        $   348         $  301         $ 52,136
                                   =======         ========        =======         ======         ========
</TABLE>


                                       19
<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, 1999.

<TABLE>
<CAPTION>
                                                     Certificates
               Maturity Period                        of Deposit
               ---------------                        ----------
                                                  (In thousands)
               <S>                                   <C>
               Six months or less ..................  $10,462
               Over six through 12 months ..........    3,443
               Over 12 months ......................    1,409
                                                      -------
                   Total ...........................  $15,314
                                                      =======
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                At December 31,
                                                                -----------------------------------------------
                                                                  1999               1998               1997
                                                                ---------          ----------         ---------
                                                                                 (In thousands)
<S>                                                              <C>                <C>                <C>
Net increase (decrease) before interest credited
  and branch purchase..........................................  $     897          $ (29,297)         $  25,192
Deposits acquired in branch purchase...........................         --             14,909                 --
Interest credited..............................................      3,077              2,553              2,711
                                                                 ---------          ---------          ---------
    Net increase (decrease) in savings deposits................  $   3,974          $ (11,835)         $  27,903
                                                                 =========          =========          =========
</TABLE>


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


                                       20
<PAGE>

     The Bank has historically funded its lending and investment activities
through deposits. During 1998, the Bank began using FHLB advances to supplement
deposits. At December 31, 1999, the Company also had $3.2 million in borrowings
from a commercial bank the proceeds of which were used to finance the return of
capital distribution paid to stockholders in November 1999. This unsecured
borrowing matures in early 2000 and bears interest at 1 1/4% below Wall Street
prime. The following sets forth selected information regarding the Bank's
short-term borrowings at the dates and for the periods indicated.

<TABLE>
<CAPTION>
                                                       At of or For the Year
                                                          Ended December 31,
                                                     ---------------------------
                                                     1999      1998      1997
                                                     ----      ----      ----
                                                        (Dollars in thousands)

<S>                                                  <C>       <C>       <C>
Amount outstanding at end of period:
   FHLB advances .................................   $3,767    $5,689    $   --
   Bank debt .....................................    3,200        --        --

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

Maximum amount outstanding at any month end:
  FHLB advances ..................................   $5,689    $6,000    $   --
  Bank debt ......................................    3,200        --        --

Approximate average amount outstanding:
  FHLB advances ..................................   $4,728    $1,181    $   --
  Bank debt ......................................      267        --        --

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

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, 1999 the Bank was
authorized to invest up to approximately $2.8 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. At December 31, 1999, the Bank
did not have any subsidiaries.


                                       21
<PAGE>

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.

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

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

     The FDIC's current assessment schedule for SAIF deposit insurance sets the
assessment rate for well-capitalized institutions with the highest supervisory
ratings at zero and institutions in the worst risk assessment classification are
assessed at the rate of 0.27% of insured deposits. In addition, FDIC-insured
institutions are required to pay assessments to the FDIC to help fund interest
payments


                                       22
<PAGE>

on certain bonds issued by the Financing Corporation ("FICO"), an agency of the
federal government established to finance takeovers of insolvent thrifts. Until
December 31, 1999, SAIF-insured institutions were required to pay FICO
assessments at five times the rate at which Bank Insurance Fund ("BIF") members
were assessed. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments.

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

     Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Tier 1 or core capital is defined as common
stockholders' equity (including retained earnings), non-cumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, certain non-withdrawable accounts and pledged deposits of 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, perpetual subordinated debt, mandatory convertible
subordinated debt, intermediate-term preferred stock, the portion of the
allowance for loan losses not designated for specific loan losses, and up to 45%
of unrealized net gains on equity securities. 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.


                                       23
<PAGE>

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

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

     At December 31, 1999, 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


                                       24
<PAGE>

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.

     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>
-----------
*  3.0% if institution has a composite 1 CAMELS rating.

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


                                       25
<PAGE>

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.

     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


                                       26
<PAGE>

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, 1999, the Bank
was in compliance with its Qualified Thrift Lender requirement with
approximately 96% of its assets invested in Qualified Thrift Investments.

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

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

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


                                       27
<PAGE>

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 excepted from the lending limits.

     At December 31, 1999, the maximum amount that the Bank could have lent to
any one borrower under the 15% limit was approximately $2.0 million. At such
date, the largest aggregate amount of loans that were outstanding to any one
borrower or group of affiliated borrowers was $1.8 million.

     Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of the Bank's average daily balance of net withdrawable deposit accounts
and, if any, borrowings payable in one year or less. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. At December 31, 1999,
the Bank's required liquid asset ratio was 5% and its actual ratio was 12.8%.
Monetary penalties may be imposed upon institutions for violations of liquidity
requirements.

     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, 1999, the Bank had $746,000 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, 1999, the Bank had advances
outstanding of $3,767,000.

     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, 1999, the Bank's reserve met the minimum level required by the Federal
Reserve System.


                                       28
<PAGE>

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 acquiror 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 non-financial activities for up to ten years after the
effective date of the G-L-B Act (with provision for extension for up to five
additional years by the Federal Reserve Board) provided that the financial
holding company is predominantly engaged in financial activities.

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

     The OTS may approve acquisitions that will result in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state only if: (i) the


                                       29
<PAGE>

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 acquiror is authorized
to acquire control of the savings institution pursuant to the emergency
acquisition provisions of the FDIA; or (iii) the statutes of the state in which
the institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).

Taxation

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

     In August 1996, the Internal Revenue Code was revised to equalize the
taxation of savings institutions and banks. Savings institutions, such as the
Bank, no longer have a choice between the percentage of taxable income method
and the experience method in determining additions to bad debt reserves. Thrifts
with $500 million of assets or less may still use the experience method, which
is generally available to small banks currently. Larger thrifts may only take a
tax deduction when a loan is actually charged off. Any reserve amounts added
after 1987 will be taxed over a six year period beginning in 1996; however, bad
debt reserves set aside through 1987 are generally not taxed. A savings
institution may delay recapturing into income its post-1987 bad debt reserves
for an additional two years if it meets a residential-lending test. This law is
not expected to have a material impact on the Bank. At December 31, 1999, the
Bank had approximately $225,000 of 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


                                       30
<PAGE>

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.

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

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

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

Executive Officers Who Are Not Directors

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

<TABLE>
<CAPTION>
                          Age at
                       December 31,
     Name                 1999          Title
     ----                 ----          -----
     <S>                   <C>          <C>
     Lonnie R. Jones       56           Vice-President of Operations

     Nancy L. Bryant       56           Vice-President and Treasurer

     Peggy G. Holston      50           Branch Manager and Assistant Secretary
</TABLE>


                                       31
<PAGE>

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

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

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

Employees

     As of December 31, 1999, the Bank had 23 full-time employees and one
part-time employee, none of whom was represented by a collective bargaining
agreement. The Bank consider its relationships with its employees to be good.

Item 2.  Description of Property
--------------------------------

     The following table sets forth information about the offices of the Bank at
December 31, 1999.

<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          $ 50,548           8,000           $38,477

Branch Offices:
  263 E. Broadway
  Newport, Tennessee              1960             Owned               124           5,400            17,703

  345 Cosby Highway
  Newport, Tennessee              1998             Owned           142,333           2,400            17,630
</TABLE>

     The book value of the Bank's aggregate investment in properties, premises
and equipment totaled approximately $511,000 at December 31, 1999. See Note 4 of
the Notes to Consolidated Financial Statements in the Annual Report.


                                       32
<PAGE>

Item 3. Legal Proceedings
-------------------------

     From time to time, the Bank is a party to various legal proceedings
incident to its business. At December 31, 1999, 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 fiscal 1999.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters
----------------------------------------------------------------

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

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

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

Item 7. Financial Statements
----------------------------

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

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

     Not applicable.


                                       33
<PAGE>

                                    PART III

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

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

Item 10. Executive Compensation
-------------------------------

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


Item 11. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------

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

Item 12. Certain Relationships and Related Transactions
-------------------------------------------------------

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


                                     PART IV

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

     (a) The following exhibits either are filed or otherwise furnished as part
of this report or are incorporated herein by reference:
<TABLE>
<CAPTION>
    No.             Description
    ---             -----------
<S>                 <C>
    3.1*            Charter of United Tennessee Bankshares, Inc.
    3.2*            Bylaws of United Tennessee Bankshares, Inc.
    4*              Form of Stock Certificate of United Tennessee Bankshares,
                    Inc.
    10.1**          United Tennessee Bankshares, Inc. 1999 Stock Option Plan +
    10.2**          United Tennessee Bankshares, Inc. Management Recognition
                    Plan and Trust Agreement +
</TABLE>

                                       34
<PAGE>

<TABLE>
<S>                 <C>
    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 +
    10.5*           Newport Federal Savings and Loan Association Deferred
                    Compensation Plan +
    13              1999 Annual Report to Stockholders
    21              Subsidiaries of the Registrant
    23              Consent of Pugh & Company, P.C.
    27              Financial Data Schedule
</TABLE>
---------------

*    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.

     (b) Reports on Form 8-K. The Registrant did not file any Current Reports on
         --------------------
Form 8-K during the last quarter of the fiscal year ending December 31, 1999.


                                       35
<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 27, 2000                   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.


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

Date:   March 27, 2000                    Date:  March 27, 2000

By: /s/ Tommy C. Bible                    By: /s/ Clyde E. Driskill, Jr.
    ------------------                        --------------------------
    Tommy C. Bible                            Clyde E. Driskill, Jr.
    Director                                  Director

Date:   March 27, 2000                    Date:  March 27, 2000

By:  /s/ William B. Henry                 By: /s/ Ben W. Hooper, III
     --------------------                     ----------------------
     William B. Henry                         Ben W. Hooper, III
     Director                                 Director

Date:   March 27, 2000                    Date:  March 27, 2000

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

Date:   March 27, 2000                    Date:  March 27, 2000


                                       36