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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  FORM 10-KSB/A
                                 AMENDMENT NO. 1
(Mark One)


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

                  For the fiscal year ended December 31, 2001
                                       OR

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

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

                         Commission File Number: 0-23551

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

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

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

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

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

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

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

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

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

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

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

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

Transitional small business disclosure format (check one):

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

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

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

================================================================================
<PAGE>



     This  amendment on Form  10-KSB/A  amends the Annual  Report on Form 10-KSB
previously filed by United Tennessee Bankshares,  Inc. for the fiscal year ended
December 31, 2001 (the "Prior Report"). Except as specifically indicated herein,
no other  information  included  in the  prior  Report is  amended  by this Form
10-KSB/A.

     This  amendment  is being  filed to  provide  the city and state  where the
independent auditors' report was issued.





                                      -1-

<PAGE>


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

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


         No.            Description
         ---            -----------
         13             2001 Annual Report to Stockholders


         99.1           Certification   Pursuant  to  18  U.S.C.  Section  1350,
                        as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                        Act of 2002, signed  by  Richard  G. Harwood,  President
                        and   Chief   Executive   Officer  of  United  Tennessee
                        Bankshares, Inc. on December 2, 2002.

         99.2           Certification  Pursuant  to 18 U.S.C. Section  1350,  as
                        Adopted  Pursuant to Section 906  of  the Sarbanes-Oxley
                        Act of 2002, signed by Chris H. Triplett, Controller  on
                        December 2,  2002.












<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:  December 2, 2002             By:  /s/ Richard G. Harwood
                                         ---------------------------------------
                                         Richard G. Harwood
                                         President and Chief Executive Officer
                                         (Duly Authorized Representative)








<PAGE>




                                                                      Exhibit 13


                        UNITED TENNESSEE BANKSHARES, INC.

                                  ANNUAL REPORT

                                      2001


<PAGE>


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


To Our Shareholders:

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

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

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

The 2001 year was not a good year for stock  values in  general,  however,  UTBI
stock did manage to increase in value from $8.25 on December 31, 2000,  to $8.41
on  December  31,  2001.  We  continue  to strive to provide  good value for our
stockholders  and try to assess  the  impact on  stockholder  value in all major
decision-making. We continue to be a well-capitalized institution poised to take
advantage of the opportunities afforded to us in our competitive market place.

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


Sincerely,

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


<PAGE>



                        UNITED TENNESSEE BANKSHARES, INC.

     United Tennessee Bankshares,  Inc. United Tennessee  Bankshares,  Inc. (the
"Company") became the holding company for Newport Federal Bank (the "Bank") upon
its conversion from mutual to stock form (the "Conversion"), which was completed
on January 1, 1998. In connection with the Conversion,  the Company conducted an
initial public offering of 1,454,750 shares of Common Stock at a price of $10.00
per share,  realizing gross proceeds of $14.5 million. The Company purchased all
of the Bank's  capital stock with $7.1 million of the net offering  proceeds and
retained  the  remaining  $6.9  million in net  proceeds at the holding  company
level.  Prior to January 1, 1998, the Company had no assets or  liabilities  and
engaged in no business activities. The Company's assets currently consist of its
investment  in the  Bank,  an  $678,000  loan to the  Company's  Employee  Stock
Ownership Plan ("ESOP") and approximately $900,000 in liquid assets.

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

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

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

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





                                      -1-
<PAGE>

                             MARKET FOR COMMON STOCK
                         AND RELATED STOCKHOLDER MATTERS

     The Company's  Common Stock trades on the Nasdaq SmallCap Market (SM) under
the symbol  "UTBI." There are  approximately  1,341,012  shares of the Company's
Common Stock  outstanding,  and approximately 559 record holders.  The following
table sets forth the high and low closing  sale  prices for the Common  Stock as
reported on the Nasdaq SmallCap Market (SM) for each quarter during the last two
fiscal years along with the amount of dividends declared during each quarter.


         Quarter Ended               High             Low             Dividends
         -------------               ----             ---             ---------

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

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



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


                                      -2-
<PAGE>


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

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

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

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


                                      -3-
<PAGE>

<TABLE>
<CAPTION>

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

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

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


                                      -4-
<PAGE>


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


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

     The Bank's net income primarily  depends on its net interest income,  which
is the  difference  between  interest  income  earned  on loans  and  investment
securities and interest paid on customers'  deposits,  FHLB advances,  and other
borrowings.  The Bank's net income is also affected by noninterest  income, such
as service  charges on customers'  deposit  accounts,  loan service  charges and
other fees,  and  noninterest  expense,  primarily  consisting  of  compensation
expense, deposit insurance and other expenses incidental to its operations.

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

Asset/Liability Management

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

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

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

                                      -5-
<PAGE>

     The following table sets forth its policy limits and certain  calculations,
based  on  information  provided  to the Bank by the OTS,  with  respect  to the
sensitivity of its NPV to changes in market interest rates at December 31, 2001.

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

            +3%                                (50)%                     (32)%
            +2%                                (25)                      (21)
            +1%                                (10)                      (10)
             0%                                 --                        --
            -1%                                (10)                        *
            -2%                                (25)                        *
            -3%                                (50)                        *
------
* No loss calculated.

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

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

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

Average Balances, Interest and Average Yields

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


                                      -6-
<PAGE>


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


<TABLE>
<CAPTION>

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

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

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

Net interest income..............              $ 3,824                         $ 3,158                            $   3,391
                                               =======                         =======                            =========
Interest rate spread.............                          3.3%                              2.7%                              2.9%
                                                          ====                              ====                              ====
Net interest margin..............                          3.9%                              3.4%                              3.6%
                                                          ====                              ====                              ====
Ratio of average interest-earning assets
  to average interest-bearing
  liabilities....................                        115.3%                            114.6%                            121.6%
                                                         =====                            ======                             =====
</TABLE>
----------------
(1)  Includes nonaccrual loans.



                                      -7-
<PAGE>


Rate/Volume Analysis

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

                                                             Year Ended December 31,
                                          -----------------------------------------------------------------
                                              2001         vs.      2000      2000         vs.         1999
                                          ------------------------------      -----------------------------
                                                  Increase (Decrease)             Increase (Decrease)
                                                       Due to                            Due to
                                          Volume         Rate      Total     Volume       Rate       Total
                                          ------         ----      -----     ------       ----       -----
                                                                    (In thousands)
Interest income:
<S>                                      <C>         <C>        <C>         <C>        <C>          <C>
  Loans receivable....................   $   551     $   (69)   $    482    $   654    $    58      $  712
  Investment securities...............      (108)       (133)       (241)      (315)       183        (132)
  Other interest-earning assets.......        (8)        (52)        (60)       (89)        41         (48)
                                         -------     -------    --------    -------    -------      ------
      Total interest-earning assets...       435        (254)        181        250        282         532
                                         -------     -------    --------    -------    -------      ------

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


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

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

     Investment  securities  available for sale remained unchanged from December
31, 2000 to December 31, 2001 at $24.4 million.  The Company receives  principal
repayments on mortgage-backed  securities and proceeds from maturities and sales
of investment  securities  available for sale.  The Company has  reinvested  the
proceeds from maturities and sales of investment securities.

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

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

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

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

                                      -8-
<PAGE>

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

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

     Interest  Income.  Interest  income totaled $7.4 million,  $7.3 million and
$6.7 million for the years ended December 31, 2001, 2000 and 1999, respectively,
primarily  due to increases in the average  balance of  interest-bearing  assets
during  each of the last three  years.  The  average  yield on  interest-earning
assets  decreased to 7.5% in 2001 from 7.7% in 2000. The average yield increased
compared to the 1999 yield of 7.2%. The decrease in 2001 was  attributable  to a
decrease in rates on loans,  investment  securities  and other  interest-earning
assets.  During 2001, the Federal  Reserve lowered its target federal funds rate
eleven  times  for  a  475  basis  point   decrease.   The  average  balance  of
interest-earning  assets  increased  $5.1 million in 2001,  $686,000 in 2000 and
$15.7  million in 1999  primarily  in response  to  corresponding  increases  in
deposit accounts and borrowings.

     The Company's  primary source of interest income for the three-year  period
ended December 31, 2001 was from loans  receivable.  Interest  income from loans
receivable  was $6.0 million,  $5.5 million and $4.8 million for the years ended
December  31, 2001,  2000 and 1999,  respectively.  The average  yield earned on
loans  receivable  was 8.3% in 1999,  increased to 8.4% in 2000 and decreased to
8.3% in 2001.  The average  balances of loans  receivable  increased  during the
period with a $5.9 million increase in 1999, a $7.8 million increase in 2000 and
a $7.0 million  increase in 2001 due to strong loan demand in the Bank's  market
area. Interest income on investment securities decreased in 2001 by $241,000 due
to a 50 basis point decrease in average rates, and decreased in 2000 by $132,000
due to a $5.5 million decrease in average balances and a 60 basis point decrease
in average  rates,  and  increased  in 1999 by  $470,000  due to a $9.6  million
increase in average balances and a 20 basis point decrease in average rates.

     Interest Expense.  Interest expense totaled $3.6 million,  $4.1 million and
$3.3  million  for the three  years  ended  December  31,  2001,  2000 and 1999,
respectively.  The  decrease  in interest  expense  during 2001 was due to an 80
basis point  decrease in average  rates.  Since the average rate received on the
Bank's interest-earning assets decreased,  management reduced the interest rates
paid on  interest-bearing  liabilities.  The increase in interest expense during
2000 was due to a $5.3 million increase in average interest-bearing  liabilities
and a 70 basis point increase in average rates. The increase in interest expense
during  1999 was due to a $17.4  million  increase  in average  interest-bearing
liabilities, and a 10 basis point reduction in average rates.

     Net Interest Income. Net interest income was $3.8 million, $3.2 million and
$3.4  million for the years ended  December  31,  2001,  2000 and 1999.  The net
interest  spread  for 2001 was 3.3%  compared  to 2.7% in 2000 and 2.9% in 1999.
During 1999, the Company  significantly  increased its level of interest-bearing
liabilities  to offset the  decline in funding  from equity  resulting  from the
return of capital distribution. As a result of this change in the balance sheet,
the  ratio  of  average  interest-earning  assets  to  average  interest-bearing
liabilities  declined to 121.6% in 1999 from 130.6% in 1998,  but increased from
114.6% in 2000 to 115.3% in 2001. This change in the asset/liability mix has put
pressure on the  Company's  net interest  margin which  declined in 2000 to 3.4%
from 3.6% in 1999. However, in 2001, the Company's net interest margin increased
to 3.9%  primarily  due to the  increase in the loan  portfolio  and the general
decrease  in  the  interest  rate  environment.  Since  the  Bank  is  liability
sensitive,  it usually will have  increases in net interest  income in a falling
rate environment.

     Provision  for Loan Losses.  The  provision for loan losses was $110,000 in
2001 and $37,000 in 2000 and $24,000 in 1999.  The amount of  provision  for any
period is  determined  as of the end of the period based on a comparison  of the
amount of existing loan loss reserves with management's analysis of various risk
factors  that affect the loan  portfolio.  In 2001,  the Company  increased  its
provision to $110,000  for the year due to an increase in the Bank's  classified
assets and the increase in the loan portfolio. In 2000 the Bank's past-due loans
and classified assets increased  slightly so the Company increased its provision
to $37,000  compared to $24,000 for 1999. At December 31, 2001, the ratio of the
allowance to nonperforming loans was 72.3%.

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

                                      -9-
<PAGE>

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

     Noninterest  Expense.  Noninterest expense for the years ended December 31,
2001,  2000  and  1999  was  $2.4  million,   $2.2  million  and  $2.3  million,
respectively.  The increase in noninterest  expense in 2001 was primarily due to
increases  in  compensation  and  benefits  expense,  data  processing  fees and
advertising and promotion fees. The decrease in noninterest  expense in 2000 was
primarily  due  to  slight  decreases  in  compensation  and  benefits  expense,
occupancy and equipment expense, and professional fees.

     The  Company's  operating  efficiency,  measured by its  efficiency  ratios
(noninterest expense divided by the total of net interest income and noninterest
income),  for the years ended December 31, 2001, 2000, and 1999 was 58.3%, 65.2%
and 65.2%.  The  decrease in the ratio during 2001 was due to an increase in net
interest income and noninterest income with a corresponding  smaller increase in
noninterest  expense.  The ratios of noninterest expense to average total assets
were 2.4%,  2.3%, and 2.4% for the years ended December 31, 2001, 2000 and 1999,
respectively.













                                      -10-
<PAGE>

     Income Taxes. The Company's  effective tax rate was 32.1%, 30.7%, and 38.0%
for the years ended December 31, 2001,  2000 and 1999,  respectively.  For 1999,
the  Company's  effective tax rate  exceeded the federal  statutory  rate of 34%
primarily  because of state excise taxes.  The Company's  effective tax rate for
2001 and 2000  decreased due to adjustments  in the Bank's  deferred  income tax
liabilities in accordance with applicable  accounting  standards.  See Note 8 of
the Notes to Consolidated Financial Statements.

Sources of Capital and Liquidity

     The Bank has historically  maintained  substantial  levels of capital.  The
assessment  of capital  adequacy  depends on several  factors,  including  asset
quality,  earnings trends, liquidity and economic conditions.  The Company seeks
to  maintain  high  levels of  regulatory  capital to give the  Company  maximum
flexibility in the changing regulatory  environment and to respond to changes in
market and  economic  conditions.  These  levels of capital  have been  achieved
through  consistent  earnings enhanced by low levels of noninterest  expense and
have been  maintained at those high levels as a result of its policy of moderate
growth  generally  confined to its market area.  Average equity to average total
assets  at  December  31,  2001,  2000 and 1999 was  14.1%,  13.1%,  and  18.1%,
respectively.  At December 31, 2001,  the Bank  exceeded all current  regulatory
capital requirements and met the definition of a "well capitalized" institution,
the highest regulatory category.

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

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

     The Company's  most liquid assets are cash and amounts due from  depository
institutions,  which are  short-term  highly  liquid  investments  with original
maturities  of less than three  months  that are  readily  convertible  to known
amounts of cash.  The levels of these  assets are  dependent  on its  operating,
financing and  investing  activities  during any given  period.  At December 31,
2001, 2000 and 1999, cash and amounts due from depository  institutions  totaled
$2.1 million, $3.1 million and $2.4 million, respectively.

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

     The  Company  has  also  designated  all of its  investment  securities  as
available for sale in order to meet liquidity demands.  At December 31, 2001, it
had  designated  securities  with a fair value of $24.4 million as available for
sale. In addition to internal sources of funding, the Company as a member of the
FHLB of  Cincinnati  has  substantial  borrowing  authority  with the FHLB.  The
Company's  use of a  particular  source  of funds is based on need,  comparative
total costs and availability.

     At  December  31,  2001,  the Company had  outstanding  approximately  $3.7
million in  commitments  to originate  loans and unused lines of credit.  At the
same date, the total amount of  certificates  of deposit which were scheduled to
mature in one year or less was $51.0 million.  The Company  anticipates  that it
will have resources to meet its current  commitments  through  internal  funding
sources described above. Historically,  it has been able to retain a significant
amount of its certificates of deposit as they mature.


                                      -11-
<PAGE>

Impact of Inflation and Changing Prices

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

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

Impact of New Accounting Standards

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

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

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

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


                                      -12-
<PAGE>



                        [PUGH & COMPANY, P.C. LETTERHEAD]
                          INDEPENDENT AUDITOR'S REPORT


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

We have audited the accompanying  consolidated statements of financial condition
of United Tennessee Bankshares,  Inc. and subsidiary as of December 31, 2001 and
2000, and the related consolidated  statements of income,  comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
2001,  2000,  and  1999.  These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of United Tennessee
Bankshares,  Inc.  and  subsidiary  as of December  31,  2001 and 2000,  and the
results of their  operations  and their cash flows for the years ended  December
31, 2001,  2000, and 1999, in conformity  with accounting  principles  generally
accepted in the United States of America.


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


                                      -13-
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>

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

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


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

                                      -14-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                       For the Years Ended December 31,          2001              2000              1999
                                                                              -----------       -----------       -------

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

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

INCOME TAXES                                                                     524,814           354,851           458,142
                                                                              -----------       -----------       ----------
NET INCOME                                                                    $1,111,450        $  801,911        $  743,366
                                                                              ===========       ===========       ==========
EARNINGS PER SHARE:
 Basic                                                                        $     0.82        $     0.58        $     0.54
                                                                              ===========       ===========       ==========
 Diluted                                                                      $     0.82        $     0.58        $     0.53
                                                                              ===========       ===========       ==========
</TABLE>


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

                                      -15-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME




<TABLE>
<CAPTION>

                             For the Years Ended December 31,           2001              2000               1999
                                                                     -----------       -----------       --------
<S>                                                                  <C>               <C>               <C>
NET INCOME                                                           $1,111,450        $  801,911        $   743,366
                                                                     -----------       -----------       -----------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 Unrealized Gains (Losses) on Investment
  Securities Available for Sale                                         187,839         1,110,758         (1,234,419)

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

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

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


                                      -16-
<PAGE>


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

                  For the Three Years Ended December 31, 2001

<TABLE>
<CAPTION>

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

Net Income                                                            0                0             0             0

Dividends Paid                                                        0                0             0             0

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

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

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

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

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

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

Other Comprehensive Loss                                              0                0             0             0
                                                            ------------     ------------    ----------    ---------
BALANCES, DECEMBER 31, 1999                                  13,091,119       (1,004,628)     (201,632)     (556,474)

Net Income                                                            0                0             0             0

Dividends Paid                                                        0                0             0             0

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

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

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

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

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

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

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

Net Income                                                            0                0             0             0

Dividends Paid                                                        0                0             0             0

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

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

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

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

Other Comprehensive Income                                            0                0             0             0
                                                            ------------     ------------    ----------    ---------
BALANCES, DECEMBER 31, 2001                                 $12,719,235      $  (678,370)    $(195,149)    $(209,770)
                                                            ============     ============    ==========    ==========
</TABLE>

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

                                      -17-
<PAGE>


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

                  For the Three Years Ended December 31, 2001

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

Net Income                                                                    0         743,366                0          743,366

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

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

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

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

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

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

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

Other Comprehensive Loss                                                      0               0         (714,967)        (714,967)
                                                                    ------------    ------------      -----------     ------------
BALANCES, DECEMBER 31, 1999                                          (1,657,722)      1,751,239          479,197       11,901,099

Net Income                                                                    0         801,911                0          801,911

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

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

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

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

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

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

Other Comprehensive Income                                                    0               0          694,147          694,147
                                                                    ------------    ------------      -----------     -----------
BALANCES, DECEMBER 31, 2000                                          (1,656,569)      2,138,547        1,173,344       13,330,131

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

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

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

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

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

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

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

Other Comprehensive Income                                                    0               0          114,477          114,477
                                                                    ------------    ------------      -----------     -----------
BALANCES, DECEMBER 31, 2001                                         $(1,591,409)    $ 2,835,393       $1,287,821      $14,167,751
                                                                    ============    ============      ===========     ===========
</TABLE>

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

                                      -18-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

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

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

                                      -19-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
                                            For the Years Ended December 31,         2001             2000               1999
                                                                                 ------------     ------------       --------
<S>                                                                                 <C>               <C>             <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (943,621)         680,076         (3,744,464)

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

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


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

                                      -20-
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 2001, 2000, and 1999




NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Basis of  Consolidation  - On January 1, 1998,  Newport Federal Savings and Loan
Association  converted  from a mutual  savings  association  to a capital  stock
savings bank,  changed its name to Newport Federal Bank, and was  simultaneously
acquired by its holding company,  United Tennessee Bankshares,  Inc. See Note 16
for additional  information  concerning the Association's stock conversion.  The
consolidated  financial  statements  include the  accounts  of United  Tennessee
Bankshares,  Inc. and its  wholly-owned  subsidiary,  Newport  Federal Bank. All
intercompany accounts have been eliminated.

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

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

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

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

Real estate acquired through,  or in lieu of, loan foreclosure is carried at the
lower of cost or fair value less  estimated  costs to sell.  Cost  includes  the
balance of the loan plus acquisition

                                      -21-
<PAGE>

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

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

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

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

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


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

     Available  for Sale - These  securities  are carried at fair value based on
     quoted market prices for  securities  that are  marketable.  Fair value for
     non-marketable securities is estimated to be equivalent to historical cost.
     Securities may be sold in response to changes in interest rates,  liquidity
     needs,  or for other  purposes.  Any unrealized gain or loss is reported in
     the consolidated  statements of comprehensive  income,  net of any deferred
     tax effect.  Realized gains or losses on the sales of securities  available
     for sale are based on the net proceeds and amortized cost of the securities
     sold, using the specific  identification  method. See Note 2 for additional
     information on investment securities.

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

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

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

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

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

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

                                      -22-
<PAGE>



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

Earnings per share have been computed based on the following:
<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                         -----------------------------------------------------
                                                                             2001               2000                1999
                                                                         --------------    ----------------    ---------------
<S>                                                                          <C>                 <C>                <C>
Average number of shares outstanding                                         1,354,724           1,382,013          1,382,013
Effect of dilutive options                                                         535               1,524             21,474
                                                                         --------------    ----------------    ---------------
Average number of shares outstanding used
 to calculate diluted earnings per share                                     1,355,259           1,383,537          1,403,487
                                                                         ==============    ================    ===============
</TABLE>


NOTE 2 - INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>

                                                                     Investment Securities Available for Sale
                                                      ------------------------------------------------------------------------
                                                                            Gross               Gross            Estimated
                                                        Amortized         Unrealized         Unrealized             Fair
                                                           Cost             Gains              Losses              Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                <C>                  <C>              <C>                <C>
As of December 31, 2001
Debt Securities:
 U.S. Treasury Securities and
  Obligations of U.S. Government
  Corporations and Agencies                        $       9,057,459    $      175,663   $       (32,608)   $       9,200,514
 Mortgage-Backed Securities                               10,202,938           132,089               (28)          10,334,999
 Corporate Debt Securities                                   719,531             5,393            (9,044)             715,880
 Obligations of States and
                                                           1,351,067                 0              (182)           1,350,885
  Political Subdivisions
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  21,330,995           313,145           (41,862)          21,602,278
                                                      ---------------   ---------------     --------------     ---------------

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

                                      -23-
<PAGE>

<TABLE>
<CAPTION>

                                                                     Investment Securities Available for Sale
                                                      ------------------------------------------------------------------------
                                                                            Gross               Gross            Estimated
                                                        Amortized         Unrealized         Unrealized             Fair
                                                           Cost             Gains              Losses              Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                <C>                  <C>              <C>                <C>
As of December 31, 2000
Debt Securities:
 U.S. Treasury Securities and
  Obligations of  U.S. Government
  Corporations and Agencies                        $       6,479,453    $       87,574   $       (12,799)   $       6,554,228
 Mortgage-Backed Securities                               14,467,331            65,173          (157,983)          14,374,521
 Obligations of States and
  Political Subdivisions                                     673,504             7,130                 0              680,634
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  21,620,288           159,877          (170,782)          21,609,383
                                                      ---------------   ---------------     --------------     ---------------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               801,700                 0                 0              801,700
 Federal Home Loan Mortgage
  Corporation Stock                                           27,448         1,903,396                 0            1,930,844
 Intrieve, Inc. Stock,  at Cost                               15,000                 0                 0               15,000
                                                      ---------------   ---------------     --------------     ---------------
   Total Equity Securities                                   844,148         1,903,396                 0            2,747,544
                                                      ---------------   ---------------     --------------     ---------------
                                                   $      22,464,436    $    2,063,273   $      (170,782)   $      24,356,927
                                                      ===============   ===============     ==============     ===============
</TABLE>

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

Gross realized gains and losses from sales of investment  securities  classified
as available for sale are as follows:
<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                        -----------------------------------------------------
                                                                             2001               2000               1999
                                                                        ---------------    ---------------     --------------
<S>                                                                  <C>                <C>                 <C>
Gross Realized Gains                                                 $           3,200  $              0    $         2,460
Gross Realized Losses                                                                0            (8,834)           (83,708)
                                                                        ---------------    ---------------     --------------
                                                                     $           3,200  $         (8,834)   $       (81,248)
                                                                        ===============    ===============     ==============
</TABLE>

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

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


                                      -24-
<PAGE>

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

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


Investments with book values of approximately  $6,650,000 and $4,550,000  (which
approximates market values) as of December 31, 2001 and 2000, respectively, were
pledged to secure deposits of public funds.


NOTE 3 - LOANS RECEIVABLE

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

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

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

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

                                      -25-
<PAGE>

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

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

The Bank has  recognized  the  following  amounts  related to impaired  loans in
conformity with FASB Statements No. 114 and No. 118:

<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
<S>                                                                                     <C>                 <C>
Recorded value of all impaired loans                                                    $         994,000   $      1,026,000
Average individual loan balance                                                         $          47,000   $         43,000
Total allowance for loan losses related to impaired loans                               $         243,547   $        251,016
</TABLE>


The Bank records  payments  received on impaired loans that are well secured and
in the process of collection on the cash receipts  method,  whereby payments are
first  applied  to  accrued  interest  and then to  reduce  principal  balances.
Payments  received on impaired  loans which do not  represent a remote chance of
further loss to the Bank are credited to the loan's principal  balance under the
cost  recovery  method.  The following is a summary of cash receipts on impaired
loans and how they were applied during the periods indicated:

<TABLE>
<CAPTION>
                                                                                                     For the Years
                                                                                                  Ended December 31,
                                                                                           ----------------------------------
                                                                                                2001               2000
                                                                                           ---------------     --------------
<S>                                                                                     <C>                 <C>
Cash receipts applied to reduce principal balance                                       $          67,890   $         46,353
Cash receipts recognized as interest income                                                        49,225             78,530
                                                                                           ---------------     --------------
Total cash receipts                                                                     $         117,115   $        124,883
                                                                                           ===============     ==============
</TABLE>

NOTE 4 - PREMISES AND EQUIPMENT, NET


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

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

                                      -26-
<PAGE>

NOTE 5 - DEPOSITS

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

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

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

                                      -27-
<PAGE>


The scheduled  maturities of certificates of deposit as of December 31, 2001 are
as follows:

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


NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK


In November  1998,  the Bank obtained an advance from the Federal Home Loan Bank
of  Cincinnati  (FHLB).  The  advance is  repayable  monthly at 4.75% over three
years.  In March 2000,  the Bank obtained an  additional  advance from FHLB with
interest  at 5%. The  advance  was repaid in  November  2000.  Interest  expense
associated  with the advances from the FHLB totalled  $38,393 for the year ended
December  31, 2001  ($283,437  and  $228,742 in 2000 and 1999).  Pursuant to the
Bank's  collateral  agreement with the FHLB,  advances are secured by the Bank's
FHLB stock and  qualifying  first  mortgage  loans.  Advances from the FHLB were
repaid.



NOTE 7 - NOTE PAYABLE

At  December  31,  1999,  the  Bank  had  unsecured  indebtedness  to a bank for
$3,200,000  with interest at Wall Street prime minus 1 1/4%. The note was repaid
in 2000.  Interest expense associated with the note payable totalled $30,933 and
$22,244, for the years ended December 31, 2000 and 1999, respectively.


NOTE 8 - INCOME TAXES

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

                                                              For the Years Ended December 31,
                                  ------------------------------------------------------------------------------------------
                                             2001                            2000                           1999
                                  ----------------------------    ----------------------------    --------------------------
                                                    Percent                         Percent                       Percent
                                                      of                              of                         of Pretax
                                                    Pretax                          Pretax                         Income
                                    Amount          Income          Amount          Income          Amount
                                  -----------     ------------    -----------     ------------    -----------    -----------
<S>                            <C>                     <C>     <C>                     <C>     <C>                   <C>
Federal income tax
 at statutory rate             $    556,330            34.0 %  $    393,299            34.0 %  $    408,513          34.0 %
Increase (decrease)
 resulting from
 tax effects of:
  Nontaxable interest                (6,238)           (0.4)        (19,636)           (1.7)        (29,959)         (2.5)
  State excise tax
   and other, net                   (25,278)           (1.5)        (18,812)           (1.6)         79,588           6.6
                                  -----------     ------------    -----------     ------------    -----------    -----------
                               $    524,814            32.1 %  $    354,851            30.7 %  $    458,142          38.1 %
                                  ===========     ============    ===========     ============    ===========    ===========
</TABLE>


                                      -28-
<PAGE>
<TABLE>
<CAPTION>

Income taxes consist of:
                                                                               For the Years Ended December 31,
                                                                   ----------------------------------------------------------
                                                                         2001                 2000                1999
                                                                   -----------------    -----------------    ----------------
<S>                                                             <C>                  <C>                  <C>
Current                                                         $          567,157   $          395,958   $          422,723
Deferred (Benefit)                                                         (42,343)             (41,107)              35,419
                                                                   -----------------    -----------------    ----------------
                                                                $          524,814   $          354,851   $          458,142
                                                                   =================    =================    ================
</TABLE>
Deferred tax liabilities  have been provided for taxable  temporary  differences
related to the allowance for loan losses, accumulated depreciation, investments,
and loan fees.  Deferred tax assets have been provided for deductible  temporary
differences related to the deferred loan fees and nonqualified  retirement plans
and  deferred  compensation  plans.  The  net  deferred  tax  liability  in  the
accompanying   consolidated   statements  of  financial  condition  include  the
following components:
<TABLE>
<CAPTION>
                                                                                                 As of December 31,
                                                                                        -------------------------------------
                                                                                              2001                2000
                                                                                        -----------------    ----------------
<S>                                                                                  <C>                  <C>
Deferred Tax Liabilities                                                             $        1,320,299   $       1,270,397
Deferred Tax Assets                                                                            (451,403)           (429,321)
                                                                                        -----------------    ----------------
 Net Deferred Tax Liabilities                                                        $          868,896   $         841,076
                                                                                        =================    ================
</TABLE>
In  1996,   Congress  enacted  the  Small  Business  Job  Protection  Act  which
effectively  removed any recapture  provisions  related to tax bad debt reserves
accumulated by the Bank prior to 1988. However,  any reserves  accumulated after
1987 must be recaptured  over a six year period.  The tax  liability  associated
with  this  recapture  is  included  in the Bank 's  accrued  and  deferred  tax
liabilities as of December 31, 2001 and 2000.


NOTE 9 - REGULATORY MATTERS

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


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

<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                         -------------------------------------
                                                                                               2001                2000
                                                                                         -----------------    ----------------
<S>                                                                                   <C>                  <C>
Bank capital (total equity) per accounting principles                                 $       12,382,132   $      10,928,402
 generally accepted in the United States of America
Less goodwill, net of amortization                                                              (953,233)         (1,033,225)
Less net unrealized gain on investment securities                                             (1,262,775)         (1,155,021)
                                                                                         -----------------    ----------------
Tangible capital per the regulations                                                          10,166,124           8,740,156
Less adjustments for core capital                                                                     (0)                 (0)
                                                                                         -----------------    ----------------
Core capital per the regulations                                                              10,166,124           8,740,156
Add allowable portion of allowance for loan losses                                               708,000             604,000
                                                                                         -----------------    ----------------
Risk-based capital per the regulations                                                $       10,874,124   $       9,344,156
                                                                                         =================    ================
</TABLE>
                                      -29-
<PAGE>

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

                                                                                                         To Comply With
                                                                                                        Minimum Capital
                                                                           Actual                         Requirements
                                                               -------------------------------    -----------------------------
                                                                  Amount             Ratio           Amount           Ratio
                                                               --------------     ------------    -------------     -----------
As of December 31, 2001:
<S>                                                         <C>                      <C>       <C>                     <C>
Tangible Capital (To Adjusted Total Assets)                 $     10,166             10.4%     $     1,464             1.5%
Core Capital (To Adjusted Total Assets)                     $     10,166             10.4%     $     3,954             4.0%
Risk-Based Capital (To Risk-Weighted Assets)                $     10,874             19.2%     $     4,533             8.0%

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


As of December 31, 2001, the Bank is categorized as well  capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I  leverage  ratios  as set  forth in the  table  below.  There  are no
conditions or events since that date that  management  believes have changed the
institution's  category.  The Bank's actual capital  amounts and ratios are also
presented in the following table. All amounts are in thousands of dollars.
<TABLE>
<CAPTION>

                                                                                                           To Be Well
                                                                                                       Capitalized Under
                                                                                                       Prompt Corrective
                                                                           Actual                      Action Provisions
                                                               -------------------------------    -----------------------------
                                                                  Amount             Ratio          Amount            Ratio
                                                               --------------     ------------    ------------      -----------
As of December 31, 2001:
<S>                                                         <C>                      <C>       <C>                    <C>
Total Capital (To Risk-Weighted Assets)                     $     10,874             19.2%     $     5,666            10.0%
Tier I Capital (To Risk-Weighted Assets)                    $     10,166             17.9%     $     3,400             6.0%
Tier I Capital (To Average Assets)                          $     10,166             10.4%     $     4,984             5.0%

As of December 31, 2000:
Total Capital (To Risk-Weighted Assets)                     $      9,345             19.4%     $     4,824            10.0%
Tier I Capital (To Risk-Weighted Assets)                    $      8,741             18.1%     $     2,894             6.0%
Tier I Capital (To Average Assets)                          $      8,741              9.1%     $     4,800             5.0%

</TABLE>


NOTE 10 - RETIREMENT PLANS

401(k)  Retirement  Plan - The Bank has  established a 401(k)  retirement  plan,
which allows eligible officers and employees to contribute up to fifteen percent
of their annual  compensation on a tax-deferred  basis. The Bank has the option,
at the discretion of the board of directors,  to make contributions to the plan.
Total 401(k) retirement plan expense was $66,149,  $47,548,  and $5,337, for the
years ended December 31, 2001, 2000, and 1999, respectively.


                                      -30-
<PAGE>



Directors  Long-Term  Incentive  Plan - In June  1997,  the Bank  established  a
long-term incentive plan for the board of directors to provide target retirement
benefits of 75% of board fees for ten years for directors who retire with twenty
or more years of service.  Activity in the  directors'  retirement  plan for the
years ended December 31, 2001, 2000, and 1999, are as follows:
<TABLE>
<CAPTION>

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

In July 1998, the Emerging Issues Task Force (EITF) of the Financial  Accounting
Standards  Board (FASB) issued EITF 97-14  Accounting for Deferred  Compensation
Arrangements  Where Amounts  Earned are Held in a Rabbi Trust and  Invested.  In
accordance  with EITF 97-14,  the Bank has  recognized a liability  for the fair
value of all shares of Holding  Company stock (17,143  shares as of December 31,
2001 and 2000) and other assets held by the trustee, and a contra-equity account
Shares in Grantor Trust - Contra  Account for the cost of the shares held by the
trustee.

Employee  Stock  Ownership  Plan (ESOP) - Pursuant to the plan of  conversion to
stock form, the Bank  established its Employee Stock Ownership Plan in 1998. The
ESOP  borrowed  $1,164,000  from the Bank's  Holding  Company at 8.50%  interest
repayable  in  thirteen  years.  The ESOP  purchased  116,400  shares of Holding
Company stock in the initial stock offering. The ESOP received $49,092, $46,156,
and $34,935,  in dividends on its stock in 2001,  2000, and 1999,  respectively,
which was used to reduce  the ESOP  debt.  In 2001 and 2000,  the  accrued  ESOP
contribution of $115,505 for each year was also used to reduce the ESOP debt. An
appropriate   contra-equity  account  Unearned  Compensation  -  Employee  Stock
Ownership Plan has been  established  for the net amount still owing on the ESOP
debt.  The  Bank's  board of  directors  approved  contributions  to the ESOP of
$115,505, for each year, plus accrued interest of $58,920, $73,160, and $86,005,
on the ESOP  debt,  for the years  ended  December  31,  2001,  2000,  and 1999,
respectively.


NOTE 11 - STOCK OPTION PLAN


In January 1999,  the Company's  board of directors  approved the Company's 1999
stock option plan,  and in May 1999,  the  Company's  shareholders  ratified the
plan.  The plan  reserved  145,475  shares  of the  Company's  common  stock for
issuance  pursuant  to the options to be  granted.  These  shares will be either
newly issued shares or shares purchased on the open market.

The  Company's  board of directors  has  approved the issuance of stock  options
under  the  Plan to  certain  members  of the  board  of  directors  and  senior
management. The options vest at a rate of 25% per year, expire in ten years, and
provide for the purchase of stock at an exercise price of $8.60 per share. Stock
options awarded  totalled  209,299 and 205,869 as of December 31, 2001 and 2000,
respectively.

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

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


                                      -31-
<PAGE>

NOTE 12 - MANAGEMENT RECOGNITION PLAN


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

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

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

The Company held 17,138  shares as of December 31, 2001 (31,854  shares in 2000)
of its common  stock in trust at a net cost of $209,770 as of December  31, 2001
($389,894 in 2000). A contra-equity  account has been established to reflect the
cost of such shares held in trust.





NOTE 13 - DIRECTORS DEFERRED COMPENSATION



In 1998, the Company established a deferred compensation plan whereby directors,
at their option, can defer all or portions of fees they earn each year. Fees not
paid are  accrued  for the  benefit  of the  directors  and their  accounts  are
adjusted  quarterly for the return equivalent to the change in the fair value of
the Company's common stock. Alternatively,  each director can elect to receive a
rate equivalent to the Bank's one year certificates of deposit.  Activity in the
plan for the years ended December 31, 2001 and 2000 are as follows:

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


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





NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Bank's  business  activity  is with  customers  located  within East
Tennessee.  Investments in state and municipal  securities involve  governmental
entities  within the State of Tennessee.  As of December 31, 2001,  the Bank had
concentrations of loans in real estate lending and consumer  lending.  Generally
these loans are secured by the underlying  real estate and consumer  goods.  The
usual risk associated with such  concentrations are generally mitigated by being
spread over several hundred unrelated  borrowers and by adequate collateral loan
to value ratios.



                                      -33-
<PAGE>



NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES


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



NOTE 16 - STOCK CONVERSION


In May 1997,  the board of directors  approved a plan of  reorganization  from a
mutual  savings  association  to a capital stock savings bank and the concurrent
formation  of  a  holding  company.  In  November  1997  the  Office  of  Thrift
Supervision  approved  the plan of  conversion  subject to the  approval  of the
members,  and in December 1997 the members of the Association  also approved the
plan of conversion.  The conversion was accomplished  effective  January 1, 1998
through  amendment  of the  Association's  charter  and the sale of the  Holding
Company's (United Tennessee Bankshares, Inc.) common stock in an amount equal to
the appraised pro forma consolidated market value of the Holding Company and the
Association  after giving effect to the conversion.  A subscription  offering of
the shares of common  stock was  offered to  depositors,  borrowers,  directors,
officers,  employees,  and employee  benefit  plans of the Bank,  and to certain
other eligible subscribers.  On January 1, 1998, in accordance with its approved
plan of conversion,  the Holding  Company issued  1,454,750 of its $10 par value
stock  providing  gross  receipts of  $14,547,500.  On January 1, 1998, the Bank
changed its name to Newport Federal Bank and issued 100,000 shares of its $1 par
value stock to the Holding Company in exchange for $7,100,000.  Total conversion
costs of  $571,822  were  deducted  from the  proceeds of the shares sold in the
conversion.


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


NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

                                      -34-
<PAGE>

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


                                      -35-
<PAGE>



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

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

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

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

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

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

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

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

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


                                      -36-
<PAGE>



Off-Balance-Sheet Loan Commitments - The fair value of loan commitments is based
on fees currently charged to enter into similar agreements,  taking into account
the remaining  terms of the agreements and the present  creditworthiness  of the
counterparties.  For fixed-rate loan commitments,  fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of these items is not material to the Bank as of the dates  indicated
below.

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

                                                               As of December 31, 2001             As of December 31, 2000
                                                           --------------------------------    --------------------------------
                                                              Recorded         Estimated          Recorded         Estimated
                                                                Book              Fair              Book              Fair
                                                               Value             Value             Value             Value
                                                           ---------------    -------------    ---------------    -------------
<S>                                                    <C>                 <C>              <C>                <C>
FINANCIAL ASSETS:
 Cash and Amounts Due
  From Depository Institutions                         $            2,123  $         2,123  $           3,067  $         3,067
Investment Securities-Available for Sale               $           24,398  $        24,398  $          24,357  $        24,357
Loans Receivable, Net                                  $           72,200  $        72,476  $          68,878  $        68,145

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







                                      -37-
<PAGE>

<TABLE>
<CAPTION>

                              CORPORATE INFORMATION


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

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

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

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

   Chris H. Triplett
      Controller
</TABLE>


<PAGE>

                                                                    Exhibit 99.1
                    Certification of Chief Executive Officer
                         Pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002

          In  connection  with this  annual  report on Form  10-KSB/A  of United
     Tennessee  Bankshares,  Inc. I,  Richard G.  Harwood,  President  and Chief
     Executive Officer of United Tennessee Bankshares,  Inc., certify,  pursuant
     to Section 906 of the Sarbanes-Oxley Act of 2002, that:

2.   The report fully complies with the  requirements  of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

3.   The information  contained in this report fairly presents,  in all material
     respects,  the  financial  condition  and results of  operations  of United
     Tennessee Bankshares, Inc.

                                                  /s/ Richard G. Harwood
Date: December 2, 2002                            ------------------------------
                                                  Richard G. Harwood
                                                  President and
                                                  Chief Executive Officer













<PAGE>
                                                                    Exhibit 99.2

                           Certification of Controller
                         Pursuant to Section 906 of the
                           Sarbanes-Oxley Act of 2002

In  connection  with  this  annual  report on Form  10-KSB  of United  Tennessee
Bankshares,   Inc.  I,  Chris  H.  Triplett,   Controller  of  United  Tennessee
Bankshares,  Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:

1.   The report fully complies with the  requirements  of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

2.   The information  contained in this report fairly presents,  in all material
     respects,  the  financial  condition  and results of  operations  of United
     Tennessee Bankshares, Inc.

                                                 /s/ Chris H. Triplett
Date:  December 2, 2002                          -------------------------------
                                                 Chris H. Triplett
                                                 Controller