UNITED TENNESSEE BANKSHARES, INC.

                                  ANNUAL REPORT

                                      2000


<PAGE>


                        UNITED TENNESSEE BANKSHARES, INC.
                                  P.O. BOX 458
                          NEWPORT, TENNESSEE 37822-0458



To Our Stockholders:



         We are delighted to present this Annual Report to our stockholders. The
2000  year  was a more  normal  year for  United  Tennessee  Bankshares  and its
subsidiary,  Newport  Federal  Bank.  After  completing  our  stock  conversion,
purchasing an additional branch, and getting used to the requirements of being a
publicly-traded  entity in 1998 and 1999,  we  enjoyed  the year 2000 as we were
able to spend more time working with and for our existing and new customers. Our
loan portfolio grew $7.4 million or 12% and our deposit portfolio increased $7.8
million or 11% in 2000. These growth rates were accomplished by the hard work of
our capable staff in all three of our offices. We are also very pleased with the
growth in stockholders equity of $1.4 million or 12% during 2000.

         We are also pleased with our results of  operations  in 2000.  Although
our  net  interest  income  decreased  by  $233,000  from  1999  amounts  due to
unfavorable  interest rate changes during 2000, our noninterest income increased
$142,000  and we reduced  noninterest  expenses by $59,000.  Our increase in net
income of $59,000 to $801,911 in 2000  reflects the hard work and  determination
of our staff to provide a good return for our stockholders.

         The 2000 year was not  necessarily a good year for bank stock values in
general.  However, during 2000 our stock traded for prices from $8.00 to $10.625
per share and most recently has been trading at approximately $9.00. 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 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  $843,000  loan to the  Company's  Employee  Stock
Ownership Plan ("ESOP") and approximately $1.5 million 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  1,382,013  shares of the Company's
Common Stock  outstanding,  and approximately 554 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.
<TABLE>
<CAPTION>
         QUARTER ENDED               HIGH             LOW             DIVIDENDS
         -------------               ----             ---             ---------

         <S>                        <C>              <C>              <C>
         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

         March 31, 1999             $12.375          $11.625          $ 0.00
         June 30, 1999               11.875           11.50             0.30
         September 30, 1999          13.75            12.00             0.00
         December 31, 1999           11.75            10.4375           4.00
</TABLE>

         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  Company  estimates  that the  distribution  will be  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

SELECTED CONSOLIDATED FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
                                                                           AT DECEMBER 31,
                                                -------------------------------------------------------------------
                                                   2000            1999         1998        1997          1996
                                                 --------        --------     --------    --------      --------
                                                                       (DOLLARS IN THOUSANDS)

<S>                                              <C>          <C>          <C>          <C>          <C>
Total assets.................................    $   98,553   $   94,120   $   97,070   $   90,008   $   60,611
Loans receivable, net........................        68,878       61,516       53,346       47,158       44,230
Cash received for stock
  subscriptions..............................            --           --           --       23,598           --
Other cash and amounts due from
  depository institutions....................         3,067        2,387        6,131        1,892        2,889
Investment securities:
    Available for sale.......................        24,357       27,935       33,022       15,204       11,689
    Held to maturity.........................            --           --        2,431        1,077        1,212
Escrow accounts for stock
  subscriptions..............................            --           --           --       23,598           --
Other deposits...............................        81,614       73,810       69,835       58,071       53,767
Shareholders' equity.........................        13,330       11,901       19,970        7,052        6,103

Number of:
   Real estate loans.........................         1,495        1,416        1,433        1,427        1,448
   Deposit accounts..........................         8,719        8,115        8,488        7,532        6,908
   Offices...................................             3            3            3            2            2
</TABLE>

SELECTED CONSOLIDATED OPERATIONS DATA
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                -------------------------------------------------------------------
                                                   2000            1999         1998         1997         1996
                                                 --------        --------     ---------    --------     --------
                                                            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                              <C>          <C>          <C>          <C>          <C>
Interest income..............................    $    7,251   $    6,719   $    5,783   $    5,120   $    4,536
Interest expense.............................         4,093        3,328        2,609        2,711        2,400
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income..........................         3,158        3,391        3,174        2,409        2,136
Provision for loan losses....................            37           24           24          150           --
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses..................         3,121        3,367        3,150        2,259        2,136
Noninterest income...........................           276          133          167          121          150
Noninterest expense..........................         2,240        2,299        1,547        1,361        1,478
                                                 ----------   ----------   ----------   ----------   ----------
Income before income taxes and
  accounting change..........................         1,157        1,201        1,770        1,019          808
Income taxes.................................           355          458          652          365          225
                                                 ----------   ----------   ----------   ----------   ----------
Income before accounting change..............           802          743        1,118          654          583
Net effect of change in accounting
  principle..................................            --           --          (16)          --           --
                                                 ----------   ----------   ----------   ----------   ----------
Net income...................................    $      802   $      743   $    1,102   $      654   $      583
                                                 ==========   ==========   ==========   ==========   ==========
Earnings per share:
  Basic......................................    $     0.58   $     0.54   $     0.77          n/a          n/a
                                                 ==========   ==========   ==========   ==========   ==========
  Fully diluted..............................    $     0.58   $     0.53   $     0.77          n/a          n/a
                                                 ==========   ==========   ==========   ==========   ==========
</TABLE>

                                       3
<PAGE>


SELECTED RATIOS
<TABLE>
<CAPTION>
                                                                        AT OR FOR THE
                                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------------------------------------------
                                                     2000         1999         1998         1997         1996
                                                    --------     --------     --------     --------     --------
<S>                                                 <C>         <C>          <C>           <C>          <C>
PERFORMANCE RATIOS:
  Return on average assets (net income
    divided by average total assets).............   0.83%       0.78%        1.37%         1.01%        1.01%
  Return on average equity (net income
    divided by average equity)...................   6.36        4.30         5.49          9.94        10.19
  Dividend Payout Ratio (dividends
    per share divided by earnings
    per share)...................................  51.72      796.30        38.96           n/a          n/a
  Interest rate spread (combined
    weighted average interest rate
    earned less combined weighted
    average interest rate cost)..................   2.70        2.90         3.00          3.30         3.40
  Net interest margin (net interest
    income divided by average
    interest-earning assets).....................   3.40        3.60         4.10          3.84         3.83
  Ratio of average interest-earning
    assets to average interest-bearing
    liabilities.................................. 114.60      121.60       130.60        109.30       109.30
  Ratio of noninterest expense to
    average total assets.........................   2.33        2.40         1.94          2.09         2.57
  Efficiency Ratio (noninterest expense
    divided by total of net interest income
    and noninterest income)......................  65.23       65.23        46.80         53.81        64.65

ASSET QUALITY RATIOS:
  Nonperforming assets to total assets
    at end of period.............................   0.57        0.48         0.50          0.93         0.63
  Nonperforming loans to total loans at
    end of period................................   0.79        0.59         0.88          1.70         0.84
  Allowance for loan losses to total
    loans at end of period.......................   0.95        1.06         1.18          1.31         1.10
  Allowance for loan losses to non-
    performing loans at end of
    period....................................... 118.28      175.33       132.98         76.73       129.93
  Provision for loan losses to total
    loans .......................................   0.05        0.04         0.04          0.31           --
  Net charge-offs to average loans
    outstanding..................................   0.06        0.01         0.02          0.03         0.01

CAPITAL RATIOS:
  Equity to total assets at end of period........  13.53       12.64        20.57          7.83        10.07
  Average equity to average assets...............  13.10       18.08        24.95         10.12         9.95

</TABLE>


                                       4
<PAGE>


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


     The Company's  principal  business  activities  are  conducted  through its
wholly owned  subsidiary,  the Bank. The Bank's principal  business  consists of
accepting  deposits from the general  public  through its main office and branch
offices  and  investing  those  funds in loans  secured  by one- to  four-family
residential  properties  located  in its  primary  market  area.  The Bank  also
maintains a portfolio of investment  securities  and originates a limited amount
of  commercial  real estate  loans and  consumer  loans.  The Bank's  investment
securities  portfolio consists of U.S. Treasury notes 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 preferred 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 and 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


                                       5
<PAGE>
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.

     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, 2000.
<TABLE>
<CAPTION>
                                                 CHANGE IN NPV
          CHANGE IN                   --------------------------------------
     MARKET INTEREST RATES            POLICY LIMIT               COMPUTATION
     ---------------------            ------------               ------------
            <S>                           <C>                         <C>
            +3%                          (50)%                       (27)%
            +2%                          (25)                        (17)
            +1%                          (10)                         (8)
             0%                           --                          --
            -1%                          (10)                          *
            -2%                          (25)                          *
            -3%                          (50)                          *
<FN>
------
* No loss calculated.
</FN>
</TABLE>

     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 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


                                       6
<PAGE>

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.  Investment  securities  include the aggregate of
securities  available  for sale and held to  maturity.  The average  balance and
average yield on investment  securities is based on the fair value of securities
available for sale and the amortized  cost of securities  held to maturity.  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.



                                       7
<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,
                                    -----------------------------------------------------------------------------------------------
                                                 2000                               1999                             1998
                                    -----------------------------    ---------------------------------  ---------------------------
                                                         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>
ASSETS
Interest-earning assets:
  Loans receivable /1/...........   $65,197    $ 5,480      8.4%     $  57,431  $ 4,768       8.3%      $ 51,562  $ 4,321    8.4%
  Investment securities..........    26,146      1,603      6.1         31,694    1,735       5.5         22,093    1,265    5.7
  Other interest-earning assets..     2,727        168      6.2          4,259      216       5.1          4,000      197    4.9
                                    -------    -------               ---------  -------                 --------  -------
    Total interest-earning
      assets.....................    94,070      7,251      7.7         93,384    6,719       7.2         77,655    5,783    7.4
Noninterest-earning assets.......     2,267         --                   2,211       --                    2,789       --
                                    -------    -------               ---------  -------                 --------  -------
    Total assets.................   $96,337    $ 7,251               $  95,595  $ 6,719                 $ 80,444  $ 5,783
                                    =======    =======               =========  =======                 ========  =======

Interest-bearing liabilities:
  Deposits.......................   $77,712    $ 3,779      4.9      $  71,822  $ 3,077       4.3       $ 58,276  $ 2,553    4.4
  FHLB advances and note
    payable......................     4,360        314      7.2          4,995      251       5.0          1,191       56    4.7
                                    -------    -------               ---------  -------                 --------  -------
    Total interest-bearing
      liabilities................    82,072      4,093      5.0         76,817    3,328       4.3         59,467    2,609    4.4
Noninterest-bearing liabilities..     1,649         --                   1,494       --                      905       --
                                    -------    -------               ---------  -------                 --------   ------
    Total liabilities............    83,721      4,093                  78,311    3,328                   60,372    2,609

Shareholders' equity.............    12,616         --                  17,284       --                   20,072       --
                                    -------    -------               ---------  -------                 --------   ------
    Total liabilities and
      equity.....................   $96,337    $ 4,093               $  95,595  $ 3,328                 $ 80,444   $ 2,609
                                    =======    =======               =========  =======                 ========   =======
Net interest income..............              $ 3,158                          $ 3,391                            $ 3,174
                                               =======                          =======                            =======
Interest rate spread.............                           2.7%                              2.9%                           3.0%
                                                           ====                            ======                          =====
Net interest margin..............                           3.4%                              3.6%                           4.1%
                                                           ====                           =======                          =====
Ratio of average interest-earning assets
  to average interest-bearing
  liabilities....................                         114.6%                            121.6%                         130.6%
                                                         ======                             =====                          =====
<FN>
___________
/1/ Includes nonaccrual loans.
</FN>
</TABLE>


                                       8
<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   asset  and  interest-bearing   liability,
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,
                                         ------------------------------------------------------------------
                                           2000       VS.       1999          1999       VS.         1998
                                         ------------------------------     -------------------------------
                                              INCREASE (DECREASE)                 INCREASE (DECREASE)
                                                     DUE TO                           DUE  TO
                                         ------------------------------     -------------------------------
                                         VOLUME        RATE      TOTAL      VOLUME      RATE         TOTAL
                                         ------      --------   -------     ------     ---------    -------
                                                                    (IN THOUSANDS)
<S>                                      <C>         <C>        <C>         <C>        <C>          <C>
Interest income:
  Loans receivable....................   $   654     $    58    $    712    $   500    $   (53)     $  447
  Investment securities...............      (315)        183        (132)       517        (47)        470
  Other interest-earning assets.......       (89)         41         (48)        12          7          19
                                         -------     -------    --------    -------    -------      ------
      Total interest-earning assets...       250         282         532      1,029        (93)        936
                                         -------     -------    --------    -------    -------      ------

Interest expense:
  Deposits............................       260         442         702        583        (59)        524
  FHLB advances and note payable......       (35)         98          63        190          5         195
                                         -------     -------    --------    -------    -------      ------
      Total interest-bearing
        liabilities...................       225         540         765        773        (54)        719
                                         -------     -------    --------    -------    -------      ------

Change in net interest income.........   $    25     $  (258)   $   (233)   $   256    $   (39)     $  217
                                         =======     =======    ========    =======    =======      ======
</TABLE>


COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND DECEMBER 31, 1999

     Total  assets  increased  $4.4  million,  or 4.7%,  from  $94.1  million at
December 31, 1999 to $98.5  million at December 31, 2000.  The  Company's  asset
increase was  attributable  principally  to an increase in loans of $7.4 million
offset by a decrease in investment securities of $3.6 million.

     Investment  securities available for sale decreased $3.6 million, or 12.8%,
from  December  31, 1999 to December 31, 2000.  The Company  received  principal
repayments on mortgage-backed  securities and proceeds from maturities and sales
of investment  securities  available for sale in excess of amounts of purchases.
The Company used proceeds from maturities and sales of investment  securities to
repay borrowings from the FHLB of Cincinnati.

     Loans  receivable  increased  $7.4 million,  or 12.0% from $61.5 million at
December 31, 1999 to $68.9 million at December 31, 2000 as originations exceeded
repayments for the period by  approximately  $7.4 million.  Loan growth occurred
primarily in the one- to four-family  residential loan portfolio which increased
$5.2 million,  or 10.8%. The Bank also saw growth in its consumer loan portfolio
which grew $1.1 million, or 32.8%.

     Total  deposits  increased  $7.8 million,  or 10.6%,  from $73.8 million at
December  31, 1999 to $81.6  million at December  31,  2000.  The  increase  was
primarily  due to  interest  credited  to  accounts  and  introduction  of a new
14-month  certificate  of deposit in 1999.  At December 31,  2000,  the Bank had
$19.1 million in 14-month CDs.


                                       9
<PAGE>

     During 2000, the Company  reduced its level of borrowings  from the FHLB of
Cincinnati  from $3.8 million to $1.8  million with the proceeds  from sales and
maturities  of  investment  securities.  In late 1999,  the  Company  obtained a
commercial  bank loan of $3.2  million  bearing  interest  at 1-1/4%  below Wall
Street Prime and  maturing in 2000.  The funds were used to pay a portion of the
special dividend to shareholders. In 2000, the Bank used an FHLB advance of $3.0
million to  finance  an  additional  dividend  to the  Company to repay the bank
borrowing. The additional advance was repaid in 2000.

     The Company's  shareholders'  equity increased $1.4 million,  or 12.0% from
$11.9  million at December 31, 1999 to $13.3  million at December 31, 2000.  The
increase was due  principally to net income of $802,000 and other  comprehensive
income  of  $694,000  and a  distribution  of stock  held in trust  accounts  of
$348,000.  The resultant  increase in retained  earnings was partially offset by
$415,000 of dividends paid to shareholders during the year.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000,  1999
AND 1998

     Net income was  $802,000 for the year ended  December 31, 2000  compared to
net income of $743,000  for the year ended  December  31, 1999 and net income of
$1.1 million for the year ended  December  31, 1998.  The increase in net income
during 2000 was due to an increase in  non-interest  income which was  partially
offset by a decrease in net interest  income.  The decrease in net income during
1999  was  caused  by an  increase  in  non-interest  expense  which  offset  an
improvement in net interest income.  Net income for 2000 resulted in a return on
average  assets of 0.83%  compared  to 0.78% for 1999 and 1.37% for 1998,  and a
return on  average  equity of 6.36% for 2000 as  compared  to 4.30% for 1999 and
5.49% for 1998.

     Interest  Income.  Interest  income totaled $7.3 million,  $6.7 million and
$5.8 million for the years ended December 31, 2000, 1999 and 1998, 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  increased  to 7.7% in 2000  from  7.2% in 1999  and  7.4% in  1998.  The
increase in 2000 was  attributable to an increase in rates on loans,  investment
securities  and  other  interest-earning   assets.  The  decrease  in  1999  was
attributable   to  a  reduction  in  rates  received  on  loans  and  investment
securities. The average balance of interest-earning assets increased $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, 2000 was from loans  receivable.  Interest  income from loans
receivable  was $5.5 million,  $4.8 million and $4.3 million for the years ended
December  31, 2000,  1999 and 1998,  respectively.  The average  yield earned on
loans  receivable  was 8.4% in 1998,  decreased to 8.3% in 1999 and increased to
8.4% in 2000.  The average  balances of loans  receivable  increased  during the
period with a $5.9 million  increase in 1999 and a $7.8 million increase in 2000
due to  strong  loan  demand  in the  Bank's  market  area.  Interest  income on
investment  securities  decreased  in 2000  by  $132,000  due to a $5.5  million
decrease in average  balances  which offset a 60 basis point increase in average
rates and  increased  in 1999 by  $470,000  due to a $9.6  million  increase  in
average balances which offset a 20 basis point decrease in average rates.


                                       10
<PAGE>

     Interest Expense.  Interest expense totaled $4.1 million,  $3.3 million and
$2.6  million  for the three  years  ended  December  31,  2000,  1999 and 1998,
respectively.  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 which offset
a 10 basis point reduction in average rates.

         Net Interest Income. Net interest income was $3.2 million, $3.4 million
and $3.2  million  for the  years  ended  December  31,  2000,  1999  and  1998,
respectively. The net interest spread for 2000 was 2.7% compared to 2.9% in 1999
and 3.0% in 1998. 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. The
ratio  of  interest-earning  assets  to  interest-bearing   liabilities  further
declined to 114.6% in 2000 as the  Company  continued  to  leverage  its balance
sheet. This change in the  asset/liability mix has put continued pressure on the
Company's  net  interest  margin  which  narrowed  to 3.6% during 1999 from 4.1%
during 1998 and further declined to 3.4% in 2000.

     Provision  for Loan Losses.  The  provision  for loan losses was $37,000 in
2000 and $24,000 in both 1999 and 1998. The amount of provision, if any, 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 2000, the Bank's  classified  assets
increased so the Company  increased  its  provision to $37,000 for the year.  In
1998 and 1999, the Bank's past-due loans and classified  assets decreased so the
Company  reduced its  provision to $24,000 for each year.  At December 31, 2000,
the ratio of the allowance to classified loans was 64.33%.

     Noninterest  Income.  Noninterest  income for the years ended  December 31,
2000,  1999  and  1998  was  $276,000,  $134,000  and  $167,000,   respectively.
Noninterest  income  consists  primarily  of customer  service  fees  related to
customers'  deposit  accounts  and  loan  service  charges.  Noninterest  income
increased  from  1999  to 2000  due to an  increase  in the  number  of  deposit
accounts,  increased  loan volume which  increased  related fee income,  and the
restructuring  of deposit fees.  Noninterest  income decreased from 1998 to 1999
due to $81,000 in losses on sales of investment securities available for sale.

     Noninterest  Expense.  Noninterest expense for the years ended December 31,
2000,  1999  and  1998  was  $2.2  million,   $2.3  million  and  $1.5  million,
respectively.  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 increase in noninterest expense in 1999 was
primarily due to a $303,000  increase in employee  benefit plan costs due to the
adoption of certain  benefit  plans during the year, a $76,000  increase in data
processing fees, goodwill  amortization  expense increase of $73,000,  occupancy
and equipment cost increases of $75,000 and general increases in other operating
costs related to being a publicly-traded  entity.  The increases in amortization
expense and occupancy and equipment costs reflect the acquisition of a branch in
late 1998.


                                       11
<PAGE>

     The  Company's  operating  efficiency,  measured by its  efficiency  ratios
(noninterest expense divided by the total of net interest income and noninterest
income),  was 65.2% for the years ended December 31, 2000 and 1999  respectively
and 46.8% for the year ended December 31, 1998. The increase in the ratio during
1999 was due to increased  employee  benefit plan costs,  goodwill  amortization
expense, data processing fees and occupancy and equipment costs. The decrease in
the ratio during 1998 was due to a significant  increase in net interest  income
without a corresponding  significant increase in noninterest expense. The ratios
of noninterest expense to average total assets ratio were 2.33%, 2.40% and 1.94%
for the years ended December 31, 2000, 1999 and 1998, respectively.

     Income Taxes. The Company's  effective tax rate was 30.7%,  38.0% and 37.0%
for the years ended December 31, 2000, 1999 and 1998, respectively. For 1998 and
1999,  the Company's  effective tax rate exceeded the federal  statutory rate of
34% primarily  because of state excise and other taxes. The Company's  effective
tax rate for 2000 declined  below the federal  statutory  rate after the Company
determined  that it was more  likely  than not that it would not be  required to
recapture  certain  reserves for state tax purposes.  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,  2000,  1999 and 1998 was  13.10%,  18.08% and  24.95%,
respectively.  At December 31, 2000,  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,


                                       12
<PAGE>


2000, 1999 and 1998, cash and amounts due from depository  institutions  totaled
$3.1 million, $2.4 million and $6.1 million, respectively.

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

     The Company has also designated certain securities as available for sale in
order to meet  liquidity  demands.  At  December  31,  2000,  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 of Cincinnati.  The
Company's  use of a  particular  source  of funds is based on need,  comparative
total costs and availability.

     At  December  31,  2000,  the Company had  outstanding  approximately  $2.2
million in  commitments  to originate  loans and unused lines of credit.  At the
same date, the total amount of  certificates  of deposit which were scheduled to
mature in one year or less was $54.6 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 deposits as they mature.

IMPACT OF INFLATION AND CHANGING PRICES

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

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

IMPACT OF NEW ACCOUNTING STANDARDS

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

     Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative  Instruments  and Hedging  Activities."  SFAS No.133  establishes
accounting  and  reporting  standards  for  derivative  instruments,   including
derivative instruments embedded in other contracts, (collectively referred to as
derivatives)  and for hedging  activities.  It requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position


                                       13
<PAGE>

and measure those  instruments at fair value.  It supersedes FASB Statements No.
80, "Accounting for Future Contracts," No. 105, "Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations  of Credit  Risk,"  and No.  119,  "Disclosure  about  Derivative
Financial  Instruments and Fair Value of Financial  Instruments." It amends FASB
Statement No. 107,  "Disclosure  About Fair Value of Financial  Investments"  to
include in Statement No. 107 the disclosure  provisions about  concentrations of
credit risk from  Statement No. 105. This  Statement is effective for all fiscal
quarters of fiscal years  beginning  June 15, 1999. On July 1, 1999, the Company
adopted SFAS No. 133. Since the Company does not hold any derivative instruments
or engage in hedging  activities,  the  adoption  of SFAS No. 133 did not have a
significant  impact  on  the  Company's   financial  condition  and  results  of
operations.  In June 2000,  the FASB issued  Statement of  Financial  Accounting
Standards No. 138,  "Accounting for Certain  Derivative  Instruments and Certain
Hedging  Activities  - an  amendment  of FASB  Statement  No. 133." SFAS No. 138
provides  several  technical  amendments to SFAS No. 133. Since the Company does
not hold any derivative  instruments or engage in hedging  activities,  SFAS No.
138 has not had a  significant  impact on the Company's  financial  position and
results of operations.

     Accounting for Mortgage-Backed  Securities After Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise.  In October 1998, the FASB
issued  Statement of Financial  Accounting  Standards No. 134,  "Accounting  for
Mortgage-Backed  Securities after Securitization of Mortgage Loans Held for Sale
by a Mortgage  Banking  Enterprise."  SFAS No. 134 amends FASB Statement No. 65,
"Accounting  for  Certain  Mortgage  Banking   Activities,"   which  establishes
accounting and reporting  standards for certain  activities of mortgage  banking
enterprises and other enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise.  The Company
is not currently  entering into any transactions  related to  securitization  of
mortgage loans, nor does the Company  anticipate  entering into any transactions
of this nature in the future.  Therefore,  SFAS No. 134 will not have any effect
on the Company's consolidated financial condition or results of operations.

     Accounting   for   Transfers   and   Servicing  of  Financial   Assets  and
Extinguishment of Liabilities.  In September 2000, the FASB issued SFAS No. 140,
"Accounting for Transfers and Servicing of Financial  Assets and  Extinguishment
of Liabilities". This Statement replaces SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities". It revises
the standards for accounting for securitization and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS No. 125's provisions.  The statement  provides  accounting and reporting
standards for transfers and servicing of financial assets and  extinguishment of
liabilities  occurring  after March 31, 2001.  This  statement is effective  for
recognition  and  reclassification  of collateral and for disclosure  related to
securitization  transactions  and  collateral  for  fiscal  years  ending  after
December 15, 2000. Since the Company does not engage in securitization and other
transfers of  financial  assets and  collateral,  SFAS No. 140 will not have any
effect on the  Company's  consolidated  statements  of  financial  condition  or
results of operations.

                                       14
<PAGE>



        [LETTERHEAD OF PUGH & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS]






                          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, 2000 and
1999, and the related consolidated  statements of income,  comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
2000,  1999,  and  1998.  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  generally   accepted  auditing
standards.  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,  2000 and 1999,  and the
results of their  operations  and their cash flows for the years ended  December
31, 2000,  1999,  and 1998, in conformity  with  generally  accepted  accounting
principles.

                                                 /s/ Pugh & Company, P.C.



                                                 Certified Public Accountants
                                                 March 16, 2001


                                       15

<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



<TABLE>
<CAPTION>
                                                               As of December 31,            2000                    1999
                                                                                      ------------------      ------------------
                              ASSETS
<S>                                                                                   <C>                     <C>
Cash and Amounts Due From Depository Institutions                                     $        3,066,801      $       2,386,725
Investment Securities Available for Sale, at Fair Value                                       24,356,927             27,935,083
Loans Receivable, Net                                                                         68,878,103             61,516,042
Premises and Equipment, Net                                                                      469,780                511,010
Foreclosed Real Estate - Held for Sale                                                                 0                 71,181
Accrued Interest Receivable                                                                      602,934                438,979
Goodwill, Net of Amortization                                                                  1,033,225              1,113,217
Prepaid Expenses and Other Assets                                                                145,663                147,917
                                                                                      --------------------    -------------------

TOTAL ASSETS                                                                          $       98,553,433      $      94,120,154
                                                                                      ====================    ===================
                              LIABILITIES AND EQUITY
LIABILITIES
 Deposits
  Demand                                                                              $       21,077,763      $      21,673,733
  Term                                                                                        60,535,928             52,135,798
                                                                                      --------------------    -------------------
   TOTAL DEPOSITS                                                                             81,613,691             73,809,531

 Note Payable                                                                                          0              3,200,000
 Advances From Federal Home Loan Bank                                                          1,753,134              3,767,489
 Accrued Interest Payable                                                                        300,063                283,524
 Deferred Income Taxes                                                                           841,076                456,738
 Accrued Benefit Plan Liabilities                                                                643,268                618,725
 Other Liabilities                                                                                72,070                 83,048
                                                                                      --------------------    -------------------
   TOTAL LIABILITIES                                                                          85,223,302             82,219,055
                                                                                      --------------------    -------------------

SHAREHOLDERS' EQUITY
 Common Stock - No Par Value, Authorized 20,000,000 Shares;
  Issued and Outstanding 1,382,013 Shares                                                     13,091,119             13,091,119
 Unearned Compensation - Employee Stock Ownership Plan                                          (842,967)            (1,004,628)
 Shares in Grantor Trust - Contra Account                                                       (183,449)              (201,632)
 Shares in MRP Plan - Contra Account                                                            (389,894)              (556,474)
 Shares in Stock Option Plan Trusts - Contra Account                                          (1,656,569)            (1,657,722)
 Retained Earnings                                                                             2,138,547              1,751,239
 Accumulated Other Comprehensive Income                                                        1,173,344                479,197
                                                                                      --------------------    -------------------
   TOTAL SHAREHOLDERS' EQUITY                                                                 13,330,131             11,901,099
                                                                                      --------------------    -------------------

TOTAL LIABILITIES AND EQUITY                                                          $       98,553,433      $      94,120,154
                                                                                      ====================    ===================

</TABLE>

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

                                       16
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                 For the Years Ended December 31,           2000                1999                 1998
                                                                       -------------      ---------------      ---------------
<S>                                                                    <C>                <C>                  <C>
INTEREST INCOME
 Loans                                                                 $   5,479,812      $     4,767,963      $     4,320,801
 Investment Securities                                                     1,603,282            1,734,348            1,265,559
 Other Interest-Earning Assets                                               168,082              216,285              196,844
                                                                       -------------      ---------------      ---------------
  TOTAL INTEREST INCOME                                                    7,251,176            6,718,596            5,783,204
                                                                       -------------      ---------------      ---------------

INTEREST EXPENSE
 Deposits                                                                  3,778,952            3,076,826            2,553,048
 Advances From Federal Home Loan Bank and Note Payable                       314,370              250,986               56,078
                                                                       -------------      ---------------      ---------------
  TOTAL INTEREST EXPENSE                                                   4,093,322            3,327,812            2,609,126
                                                                       -------------      ---------------      ---------------

NET INTEREST INCOME                                                        3,157,854            3,390,784            3,174,078

PROVISION FOR LOAN LOSSES                                                     37,000               24,000               24,000
                                                                       -------------      ---------------      ---------------

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                        3,120,854            3,366,784            3,150,078
                                                                       -------------      ---------------      ---------------

NONINTEREST INCOME
 Deposit Account Service Charges                                             188,616              135,274               91,195
 Loan Service Charges and Fees                                                70,534               58,298               62,594
 Net Gain (Loss) on Sales of Investment  Securities
   Available for Sale                                                         (8,834)             (81,248)                 312
 Other                                                                        25,552               21,408               12,800
                                                                       -------------      ---------------      ---------------
  TOTAL NONINTEREST INCOME                                                   275,868              133,732              166,901
                                                                       -------------      ---------------      ---------------

NONINTEREST EXPENSE
 Compensation and Benefits                                                 1,118,375            1,133,759              665,802
 Occupancy and Equipment                                                     218,359              228,380              153,260
 Federal Deposit Insurance Premiums                                           48,000               52,396               52,554
 Data Processing Fees                                                        236,467              233,931              157,784
 Advertising and Promotion                                                    79,207               82,248               68,456
 Amortization                                                                 80,992               80,992                7,666
 Other                                                                       458,560              487,302              441,495
                                                                       -------------      ---------------      ---------------
  TOTAL NONINTEREST EXPENSE                                                2,239,960            2,299,008            1,547,017
                                                                       -------------      ---------------      ---------------

INCOME BEFORE INCOME TAXES AND CUMULATIVE
 EFFECT OF CHANGE  IN ACCOUNTING PRINCIPLE                                 1,156,762            1,201,508            1,769,962

INCOME TAXES                                                                 354,851              458,142              651,539
                                                                       -------------      ---------------      ---------------

INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
 IN ACCOUNTING PRINCIPLE                                                     801,911              743,366            1,118,423

CUMULATIVE EFFECT ON PRIOR YEARS OF ACCOUNTING
 CHANGE PURSUANT TO EITF 97-14 (LESS APPLICABLE
 INCOME TAXES OF $10,907)                                                          0                    0              (16,610)
                                                                       -------------      ---------------      ---------------

NET INCOME                                                             $     801,911      $       743,366      $     1,101,813
                                                                       =============      ===============      ===============

EARNINGS PER SHARE:
 Basic                                                                 $        0.58      $          0.54      $          0.77
                                                                       =============      ===============      ===============

 Diluted                                                               $        0.58      $          0.53      $          0.77
                                                                       =============      ===============      ===============
</TABLE>

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

                                       17
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                               For the Years Ended December 31,           2000                 1999                1998
                                                                     --------------      ---------------      --------------

<S>                                                                  <C>                 <C>                  <C>
NET INCOME                                                           $      801,911      $       743,366      $    1,101,813
                                                                     --------------      ---------------      --------------

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 Unrealized Gains (Losses) on Investment Securities
  Available for Sale                                                      1,110,758           (1,234,419)            689,693

 Reclassification Adjustment for Gains/Losses
  Included in Net Income                                                      8,834               81,248                (312)

 Income Taxes Related to Unrealized Gains/Losses
  on Investment Securities Available for Sale                              (425,445)             438,204            (261,964)
                                                                     --------------      ---------------      --------------

   OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX                            694,147             (714,967)            427,417
                                                                     --------------      ---------------      --------------

COMPREHENSIVE INCOME                                                 $    1,496,058      $        28,399      $    1,529,230
                                                                     ==============      ===============      ==============
</TABLE>


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


                                       18
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                 Shares in
                                                                                                  Grantor       Shares in
                                                                                Unearned          Trust -       Mrp Plan -
                                                                Common        Compensation-        Contra         Contra
                                                                Stock             ESOP            Account         Account
                                                             -------------    --------------    -------------   ------------
<S>                                                          <C>              <C>               <C>             <C
BALANCES, JANUARY 1, 1998                                    $         0       $         0       $        0     $        0

Net Effect of Stock Conversion                                13,975,678        (1,164,000)               0              0

Repurchase  and  Retirement  of 72,737  Shares of Common
 Stock at Cost                                                  (884,559)                0                0              0

Net Income                                                             0                 0                0              0

Dividends Paid                                                         0                 0                0              0

Payment on ESOP Loan with Dividends Received                           0            34,914                0              0

Setup of  Contra  Account  Pursuant  to  EITF-97-14  and
 Accounting Change                                                     0                 0         (137,210)             0

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

BALANCES, DECEMBER 31, 1998                                   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   and
 Dividends Received                                                    0           124,458                0              0

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

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 Trusts                                           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   and
 Dividends Received                                                    0           161,661                0              0

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

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

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

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

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

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

                                       19
</TABLE>



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

<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
                                                               Shares in                   Accumulated
                                                              Stock Option                      Other            Total
                                                              Plan-Contra    Retained      Comprehensive     Shareholders'
                                                                Account      Earnings         Income           Equity
                                                              ------------  -----------    --------------    ------------

<S>                                                          <C>           <C>               <C>              <C>
BALANCES, JANUARY 1, 1998                                    $         0    $ 6,285,141      $    766,747     $ 7,051,888

Net Effect of Stock Conversion                                         0              0                 0      12,811,678

Repurchase  and  Retirement  of  72,737  Shares of Common
 Stock at Cost                                                         0              0                 0        (884,559)

Net Income                                                             0      1,101,813                 0       1,101,813

Dividends Paid                                                         0       (436,425)                0        (436,425)

Payment on ESOP Loan with Dividends Received                           0              0                 0          34,914

Setup  of  Contra  Account  Pursuant  to  EITF-97-14  and
 Accounting Change                                                     0              0                 0        (137,210)

Other Comprehensive Income                                             0              0           427,417         427,417
                                                             -----------    -----------      ------------    ------------

BALANCES, DECEMBER 31, 1998                                            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   and
 Dividends Received                                                    0              0                 0         124,458

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

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 Trusts                                  (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   and
 Dividends Received                                                    0              0                 0         161,661

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

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

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

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

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

BALANCES, DECEMBER 31, 2000                                  $(1,656,569)   $ 2,138,547      $  1,173,344    $ 13,330,131
                                                             ===========    ===========      ============    ============
</TABLE>


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

                                       20
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS

<TABLE>
<CAPTION>
                                        For the Years Ended December 31,          2000              1999               1998
                                                                              --------------    --------------    ----------------
<S>                                                                           <C>               <C>               <C>
OPERATING ACTIVITIES
 Net Income                                                                   $    801,911      $    743,366      $    1,101,813
                                                                              ------------      ------------      --------------

 Adjustments to Reconcile Net Income to Net
  Cash Provided by Operating Activities:
   Cumulative Effect of Change in Accounting Principle                                   0                 0              16,610
   Provision for Loan Losses                                                        37,000            24,000              24,000
   Depreciation                                                                     56,339            56,743              46,404
   Amortization of Organization Costs                                                1,000             1,000               1,000
   Amortization of Goodwill                                                         79,992            79,991               6,666
   Amortization of Investment Securities Premiums and Discounts, Net                (3,392)           34,361               3,210
   Increase (Decrease) in Unearned Loan Fees                                        39,670            26,489             (17,541)
   Net Gain On Sales of Foreclosed Real Estate                                      19,454                 0              (1,100)
   Federal Home Loan Bank Stock Dividends                                          (56,100)          (48,100)            (40,300)
   Net (Gain) Loss on Sales of Investment Securities
    Available for Sale                                                               8,834            81,248                (312)
   Deferred Income Taxes (Benefit)                                                 (41,107)           35,419              13,964
   (Increase) Decrease in:
    Accrued Interest Receivable                                                   (163,955)            3,544             (65,038)
    Prepaid Conversion Costs                                                             0                 0             466,862
    Prepaid Expenses and Other Assets                                                1,254          (119,441)             (9,921)
   Increase (Decrease) in:
    Accrued Interest Payable                                                        16,539            (6,214)            (59,940)
    Accrued Income Taxes                                                                 0           (20,185)           (171,107)
    Accrued Benefit Plan Liabilities                                                24,543           300,442             318,283
    Other Liabilities                                                              (10,978)           (6,192)           (321,185)
                                                                              ------------      ------------      --------------

     Total Adjustments                                                               9,093           443,105             210,555
                                                                              ------------      ------------      --------------

      NET CASH PROVIDED BY OPERATING ACTIVITIES                                    811,004         1,186,471           1,312,368
                                                                              ------------      ------------      --------------

INVESTING ACTIVITIES
 Cash and Cash Equivalents Received in Purchase of Branch                                0                 0          13,491,665
 Purchase of Investment Securities Available for Sale                           (2,933,564)       (5,519,545)        (25,389,392)
 Proceeds From Sales of Investment Securities
  Available for Sale                                                             1,456,101         2,460,469           1,000,312
 Proceeds From Maturities of Investment Securities
  Available for Sale                                                               500,000         2,000,000           3,500,000
 Principal Payments Received on Investment Securities
  Available for Sale                                                             5,725,869         6,245,777           3,797,388
 Purchases of Investment Securities Held To Maturity                                     0          (449,515)         (1,641,799)
 Proceed From Maturities of Investment Securities Held to Maturity                       0           984,354             240,000
 Principal Payments Received on Investment Securities
  Held to Maturity                                                                       0           576,512              47,956
 Net Increase In Loans                                                          (7,402,604)       (8,315,821)         (6,168,493)
 Purchases of Premises and Equipment, Net                                          (15,109)          (93,724)            (39,377)
 Proceeds From Sales of Foreclosed Real Estate                                      15,600            24,197              20,000
                                                                              ------------      ------------      --------------

      NET CASH USED IN INVESTING ACTIVITIES                                     (2,653,707)       (2,087,296)        (11,141,740)
                                                                              ------------      ------------      --------------
</TABLE>


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

                                       21
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

          CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (CONTINUED)


<TABLE>
<CAPTION>
                                        For the Years Ended December 31,          2000              1999               1998
                                                                              ------------      ------------        -----------
<S>                                                                             <C>             <C>                 <C>
FINANCING ACTIVITIES
 Repurchase and Retirement of Common Stock                                               0                 0            (884,559)
 Dividends Paid                                                                   (414,603)       (5,942,656)           (436,425)
 Net Decrease in Cash Received From
  Stock Subscriptions                                                                    0                 0          23,598,226
 Purchase of Common Stock for Stock Option Plan Trusts                                   0        (1,657,722)                  0
 Decrease in Cost of Shares in Stock Option Plan Trusts                              1,153                 0                   0
 Purchase of Common Stock for MRP Plan                                                   0          (712,033)                  0
 Issuance of Common Stock Pursuant to MRP Plan                                     166,580           155,559                   0
 Purchase of Common Stock for Director's  Long-Term
  Incentive Plan                                                                   (20,469)          (64,422)                  0
 Issuance of Common Stock Pursuant to Director's Long-Term
  Incentive Plan                                                                    38,652                 0                   0
 Payment on ESOP Loan and Release of Shares                                        161,661           124,458                   0
 Net Cash Proceeds From Issuance  of Common Stock                                        0                 0           7,195,365
 Net Decrease in Stock Subscription Escrow Accounts                                      0                 0         (23,598,226)
 Net Increase in Deposits                                                        7,804,160         3,974,267           2,506,057
 Advances From the Federal Home Loan Bank                                        3,000,000                 0           6,000,000
 Repayment of Advances From Federal Home Loan Bank                              (5,014,355)       (1,921,090)           (311,421)
 Proceeds From Borrowing on Note Payable                                                 0         3,200,000                   0
 Repayment of Borrowing on Note Payable                                         (3,200,000)                0                   0
                                                                              ------------      ------------      --------------

      NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                        2,522,779        (2,843,639)         14,069,017
                                                                              ------------      ------------      --------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               680,076        (3,744,464)          4,239,645

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                     2,386,725         6,131,189           1,891,544
                                                                              ------------      ------------      --------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                        $  3,066,801      $  2,386,725      $    6,131,189
                                                                              ============      ============      ==============

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
 Cash Paid During the Year For:
  Interest                                                                    $  4,076,783      $  3,334,026      $    2,574,071
  Income Taxes                                                                $    466,822      $    560,547      $      833,809

SUPPLEMENTARY DISCLOSURES OF NONCASH  INVESTING ACTIVITIES:
 Sale of Foreclosed Real Estate by Origination of Mortgage Loans              $    131,900      $          0      $            0
 Acquisition of Foreclosed Real Estate                                        $     95,773      $     95,378      $            0
 Change in Unrealized Gain/Loss on Investment
  Securities Available for Sale                                               $  1,119,592      $ (1,153,171)     $      689,381
 Change in Deferred Income Taxes Associated With Unrealized
  Gain/Loss on Investment Securities Available for Sale                       $    425,445      $   (438,204)     $      261,964
 Change in Net Unrealized Gain/Loss on Investment
  Securities Available for Sale                                               $    694,147      $   (714,967)     $      427,417

</TABLE>


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

                                       22

<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

          CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (CONTINUED)


<TABLE>
<CAPTION>
                                        For the Years Ended December 31,          2000              1999               1998
                                                                              --------------    --------------    ---------------
<S>                                                                           <C>               <C>               <C>
SUPPLEMENTARY DISCLOSURES OF NONCASH INVESTING ACTIVITIES
 (CONTINUED):
 Purchase of Branch:
  Fair Value of Assets Acquired:
   Cash and Cash Equivalents                                                  $           0     $           0     $   13,491,665
   Loans                                                                                  0                 0             25,939
   Premises and Equipment                                                                 0                 0            285,000
   Other Assets                                                                           0                 0              1,576
                                                                              --------------    --------------    ---------------

    Fair Value of Assets Acquired                                                         0                 0         13,804,180
                                                                              --------------    --------------    ---------------

 Fair Value of Liabilities Assumed:
  Deposits                                                                                0                 0         14,909,059
  Accrued Interest Payable                                                                0                 0             94,995
                                                                              --------------    --------------    ---------------

    Fair Value of Liabilities Assumed                                                     0                 0         15,004,054
                                                                              --------------    --------------    ---------------

      Excess of Cost Over Fair Value of Assets Acquired                       $           0     $           0     $    1,199,874
                                                                              ==============    ==============    ===============

SUPPLEMENTARY DISCLOSURES OF  NONCASH FINANCING ACTIVITIES:
 Issuance of Common Stock by Withdrawal From
 Subscribers' Accounts for Stock Purchase                                     $           0     $           0     $    5,651,227
 Issuance of Common Stock in Exchange for ESOP Note                           $           0     $           0     $    1,164,000
 Reduction of ESOP Note With Dividends Received                               $           0     $           0     $       34,914

 Reimbursement of Bank for Prepaid Conversion
  Costs From Stock Subscription Receipts                                      $           0     $           0     $      571,822

 Cumulative Effect of Change in Accounting Principle:
  Increase in Other Liabilities                                               $           0     $           0     $      164,727
  Decrease in Deferred Tax Liability                                          $           0     $           0     $       10,907
  Increase in Contra Equity Account                                           $           0     $           0     $      137,210

</TABLE>

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

                                       23

<PAGE>




                        UNITED TENNESSEE BANKSHARES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 2000, 1999, AND 1998





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

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

Real estate acquired through,  or in lieu of, loan foreclosure is carried at the
lower of cost or fair value less  estimated  costs to sell.  Cost  includes  the
balance of the loan plus acquisition  costs and improvements  made thereafter to
facilitate sale. Costs related to the holding of the real estate are expensed.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents  include "Cash and Amounts
Due from Depository Institutions."

                                       24
<PAGE>


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:


                                            12/31/00          12/31/99
                                         -------------     -------------

         Unrestricted Deposits           $  2,299,000      $   1,756,000



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  placed in this  category  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 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.


GOODWILL - During 1998,  the Bank purchased a branch from Union Planters Bank of
the Lakeway area, as disclosed in the consolidated statements of cash flows. 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.

                                       25
<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,
                                                                         ----------------------------------------------------
                                                                             2000               1999                1998
                                                                         --------------      -------------       ------------
<S>                                                                          <C>                 <C>                <C>
Average number of shares outstanding                                         1,382,013           1,382,013          1,438,613
Effect of dilutive options                                                       1,524              21,474                  0
                                                                         -------------       -------------       ------------
Average number of shares outstanding used
 to calculate diluted earnings per share                                     1,383,537           1,403,487          1,438,613
                                                                         =============       =============       ============

</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, 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 Preferred Stock                                 27,448         1,903,396                 0           1,930,844
 Data Services Corporation 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>

                                       26
<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, 1999:
-----------------------
DEBT SECURITIES:
 U.S. Treasury Securities and
  Obligations of  U.S. Government
  Corporations and Agencies                           $    5,463,200    $        2,848      $   (121,463)      $    5,344,585
 Mortgage-Backed Securities                               19,635,772            51,846          (452,140)          19,235,478
 Obligations of States and
  Political Subdivisions                                   1,275,164                 0                  0           1,275,164
                                                      --------------    --------------      -------------      --------------
   TOTAL DEBT SECURITIES                                  26,374,136            54,694          (573,603)          25,855,227
                                                      --------------    --------------      -------------      --------------

EQUITY SECURITIES:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               745,600                 0                  0             745,600
 Federal Home Loan Mortgage
  Corporation Preferred Stock                                 27,448         1,291,808                  0           1,319,256
 Data Services Corporation Stock,
  at Cost                                                     15,000                 0                  0              15,000
                                                      --------------    --------------      -------------      --------------
   TOTAL EQUITY SECURITIES                                   788,048         1,291,808                  0           2,079,856
                                                      --------------    --------------      -------------      --------------
                                                      $   27,162,164    $    1,346,502      $    (573,603)     $   27,935,083
                                                      ==============    ==============      =============      ==============
</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,
                                                                        ---------------------------------------------------
                                                                             2000               1999               1998
                                                                        --------------     -------------       ------------
<S>                                                                     <C>                <C>                 <C>
Gross Realized Gains                                                    $           0      $       2,460       $        312
Gross Realized Losses                                                          (8,834)           (83,708)                 0
                                                                        -------------      -------------       ------------
                                                                        $      (8,834)     $     (81,248)      $        312
                                                                        =============      =============       ============
</TABLE>

Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
                                                             December 31, 2000                      December 31, 1999
                                                      ---------------------------------     ----------------------------------
                                                                          Estimated                              Estimated
                                                        Amortized            Fair             Amortized             Fair
                                                           Cost             Value               Cost               Value
                                                      --------------    --------------      -------------      --------------
<S>                                                   <C>               <C>                 <C>                <C
FNMA Certificates                                     $    8,190,379    $    8,095,918      $  10,857,209      $   10,565,413
GNMA Certificates                                          2,805,877         2,849,850          3,570,235           3,618,077
FHLMC Certificates                                         3,471,075         3,428,753          5,208,328           5,051,988
                                                      --------------    --------------      -------------      --------------
                                                      $   14,467,331    $   14,374,521      $  19,635,772      $   19,235,478
                                                      ==============    ==============      =============      ==============

</TABLE>

                                       27
<PAGE>

The amortized  cost and estimated  fair value of debt  securities  available for
sale as of December 31, 2000, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
                                                                              Estimated
                                                          Amortized             Fair
                                                             Cost               Value
                                                        ---------------     --------------
<S>                                                     <C>                 <C>
Due in One Year or Less                                 $    1,998,840      $   1,993,057
Due After One Year
 Through Five Years                                          7,239,781          7,260,970
Due After Five Years
 Through Ten Years                                           1,071,878          1,068,050
Due After Ten Years                                         11,309,789         11,287,306
                                                        --------------      -------------
                                                        $   21,620,288      $  21,609,383
                                                        ==============      =============
</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.

In June  1998,  the  FASB  issued  SFAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging  Activities." This statement  establishes  standards for
derivative  instruments,  including certain derivative  instruments  embedded in
other contracts, and for hedging activities. This statement is effective for all
fiscal  quarters  of  fiscal  years  beginning  after  June  15,  1999.  Earlier
application  is  encouraged,  but is permitted  only as of the  beginning of any
fiscal  quarter that begins after  issuance of this  statement.  The Company and
Bank elected to apply the provisions of this statement as of July 1, 1999.

Although the Company and Bank do not hold any  derivative  instruments or engage
in hedging  activities,  the statement also provides a one-time  opportunity for
any  investments  in the held to maturity  category to be  transferred  into the
available for sale category.  On July 1, 1999, the Company and Bank  transferred
investments with an amortized cost of $2,090,063 (fair value of $2,100,160) from
their held to  maturity  category  to their  available  for sale  category.  The
Company and Bank did not transfer any investment  securities  between categories
during the year ended December 31, 2000.

Investments with book values of approximately  $4,550,000 and $2,100,000  (which
approximates market values) as of December 31, 2000 and 1999, 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,
                                                                                           ---------------------------------
                                                                                                2000               1999
                                                                                           --------------      -------------
<S>                                                                                        <C>                 <C>
First mortgage loans (principally conventional):
 Secured by one-to-four family residences                                                  $   53,782,332      $  48,550,214
 Secured by other properties                                                                   10,229,183          9,099,393
 Construction loans                                                                             2,588,600          2,615,000
                                                                                           --------------      -------------
                                                                                               66,600,115         60,264,607
Less:
 Undisbursed portion of construction loans                                                      1,029,788          1,033,726
 Net deferred loan origination fees                                                               326,631            286,961
                                                                                           --------------      -------------
  Net first mortgage loans                                                                     65,243,696         58,943,920
                                                                                           --------------      -------------
Consumer and commercial loans:
 Loans to depositors, secured by deposits                                                       1,250,166          1,114,071
 Automobile                                                                                     1,402,279            979,732
 Home equity and second mortgage                                                                  227,304            208,056
 Other                                                                                          1,414,162            931,022
                                                                                           --------------      -------------
                                                                                                4,293,911          3,232,881
Less unearned interest                                                                                  0                 18
                                                                                           --------------      -------------
  Net consumer and commercial loans                                                             4,293,911          3,232,863
Less allowance for loan losses                                                                    659,504            660,741
                                                                                           --------------      -------------
                                                                                           $   68,878,103      $  61,516,042
                                                                                           ==============      =============
</TABLE>

                                       28
<PAGE>

The Bank had  outstanding  loan  commitments  of  approximately  $2,181,000  and
$473,000 (in addition to  undisbursed  portion of  construction  loans) at rates
ranging from 8% to 10% as of December 31, 2000 and 1999, respectively.

Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                        ----------------------------------------------------
                                                                             2000               1999               1998
                                                                        --------------     --------------      -------------


<S>                                                                     <C>                <C>                  <C>
Allowance at beginning of year                                          $      660,741     $      640,982       $    627,669
 Provision charged to expense                                                   37,000             24,000             24,000
 Recoveries of loans previously charged off                                      1,893                268              4,179
 Loans charged off                                                             (40,130)            (4,509)           (14,866)
                                                                        --------------     --------------      -------------
Allowance at end of year                                                $      659,504     $      660,741      $     640,982
                                                                        ==============     ==============      =============
</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,
                                                                                           ----------------------------------
                                                                                                2000               1999
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Recorded value of all impaired loans                                                       $    1,026,000      $     377,000
Average individual loan balance                                                            $       43,000      $      19,000
Total allowance for loan losses related to impaired loans                                  $            0      $           0
</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,
                                                                                           ---------------------------------
                                                                                                2000               1999
                                                                                           --------------      -------------
<S>                                                                                        <C>                 <C>
Cash receipts applied to reduce principal balance                                          $       46,353      $      20,478
Cash receipts recognized as interest income                                                        78,530             31,228
                                                                                           --------------      -------------
Total cash receipts                                                                        $      124,883      $      51,706
                                                                                           ==============      =============

</TABLE>

NOTE 4 - PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2000               1999
                                                                                           --------------      --------------
<S>                                                                                        <C>                 <C>
Land                                                                                       $      168,539      $     168,539
Buildings                                                                                         753,780            752,830
Furniture and equipment                                                                           403,589            389,430
                                                                                           --------------      -------------
                                                                                                1,325,908          1,310,799
Less accumulated depreciation                                                                     856,128            799,789
                                                                                           --------------      -------------
                                                                                           $      469,780      $     511,010
                                                                                           ==============      =============
</TABLE>

Depreciation  expense for the years ended December 31, 2000, 1999, 1998 totalled
$56,339, $56,743, and $46,404, respectively.

                                       29

<PAGE>




NOTE 5 - DEPOSITS

A summary of deposits is as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ---------------------------------
                                                                                                2000               1999
                                                                                           --------------      -------------
<S>                                                                                        <C>                 <C>
Demand Deposits:
 Now Accounts                                                                              $    8,004,399      $   7,017,575
 Money Market Deposit Accounts                                                                  2,778,955          3,180,020
 Passbook Savings                                                                              10,294,409         11,476,138
                                                                                           --------------      -------------
  TOTAL DEMAND DEPOSITS                                                                        21,077,763         21,673,733
                                                                                           --------------      -------------

Term Deposits:
 Less than $100,000                                                                            46,271,078         36,821,432
 $100,000 or More                                                                              14,264,850         15,314,366
                                                                                           --------------      -------------
  TOTAL TERM DEPOSITS                                                                          60,535,928         52,135,798
                                                                                           --------------      -------------
                                                                                           $   81,613,691      $  73,809,531
                                                                                           ==============      =============
</TABLE>

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

The scheduled  maturities of certificates of deposit as of December 31, 2000 are
as follows:

         2001                                       $      54,608,413
         2002                                               5,207,395
         2003                                                 515,943
         2004                                                 179,177
         2005                                                  25,000
                                                       ---------------
                                                    $      60,535,928
                                                       ===============


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  $283,437 for the year ended
December  31,  2000  ($228,742  and  $56,078 in 1999 and 1998).  Pursuant to the
Bank's  collateral  agreement with the FHLB,  advances are secured by the Bank's
FHLB stock and  qualifying  first  mortgage  loans.  The  unpaid  balance of the
advances from the FHLB as of December 31, 2000 are scheduled to mature in 2001.


NOTE 7 - NOTE PAYABLE

At  December  31,  1999,  the  Bank  had  unsecured  indebtedness  to a bank for
$3,200,000  with interest at Wall Street prime minus 1 1/4%. The note was repaid
in 2000.  Interest expense  associated with the note payable  totalled  $30,933,
$22,244,  and $0 for  the  years  ended  December  31,  2000,  1999,  and  1998,
respectively.

                                       30
<PAGE>


NOTE 8 - INCOME TAXES

Income taxes as shown in the  consolidated  statements of income differ from the
amount  computed  using the statutory  federal income tax rate for the following
reasons:
<TABLE>
<CAPTION>
                                                              For the Years Ended December 31,
                                  ----------------------------------------------------------------------------------------
                                             2000                            1999                           1998
                                  ----------------------------    ----------------------------    ------------------------
                                                      Percent                        Percent                      Percent
                                                     of Pretax                      of Pretax                    of Pretax
                                     Amount           Income        Amount           Income          Amount        Income
                                    ---------        ---------    ----------       ---------      ----------    ----------
<S>                                 <C>                <C>        <C>                 <C>          <C>             <C>
Federal income tax
 at statutory rate                  $ 393,299           34.0%     $ 408,513          34.0%        $601,787        34.0%
Increase (Decrease)
 resulting from
 tax effects of:
  Nontaxable
   interest                           (19,636)          (1.7)       (29,959)         (2.5)         (31,167)       (1.8)
  State excise
   tax and other,
   net                                (18,812)          (1.6)        79,588           6.6           80,919         4.6
                                    ---------         ------      ---------        ------         --------        ----
                                    $ 354,851           30.7%     $ 458,142          38.1%        $651,539        36.8%
                                    =========         ======      =========        ======         ========        ====
</TABLE>

Income taxes consist of:
<TABLE>
<CAPTION>
                                                                                For the Years Ended December 31,
                                                                        ---------------------------------------------
                                                                             2000             1999            1998
                                                                        ------------    ------------      -----------
<S>                                                                     <C>             <C>               <C>
Current                                                                 $   395,958     $    422,723      $   637,575
Deferred (Benefit)                                                          (41,107)          35,419           13,964
                                                                        -----------     ------------      -----------
                                                                        $   354,851     $    458,142      $   651,539
                                                                        ===========     ============      ===========
</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,
                                                                                           ---------------------------
                                                                                                2000          1999
                                                                                           -----------      ----------
<S>                                                                                        <C>              <C>
Deferred Tax Liabilities                                                                   $ 1,270,397      $  838,053
Deferred Tax Assets                                                                            429,321         381,315
                                                                                           -----------      ----------
 Net Deferred Tax Liabilities                                                              $   841,076      $  456,738
                                                                                           ===========      ==========
</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, 2000 and 1999.

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.


                                       31
<PAGE>

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 generally  accepted  accounting  principles to the capital amounts
per the regulations is as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ---------------------------------
                                                                                                2000               1999
                                                                                           --------------      -------------
<S>                                                                                        <C>                 <C>
Bank capital (total equity) per generally accepted accounting principles                   $   10,928,402      $  13,410,247
Less goodwill, net of amortization                                                             (1,033,225)        (1,113,217)
Less net unrealized gain on investment securities                                              (1,155,021)          (479,197)
                                                                                           --------------      -------------
Tangible capital per the regulations                                                            8,740,156         11,817,833
Less adjustments for core capital                                                                       0                  0
                                                                                           --------------      -------------
Core capital per the regulations                                                                8,740,156         11,817,833
Add allowable portion of allowance for loan losses                                                604,000            557,000
                                                                                           --------------      -------------

Risk-based capital per the regulations                                                     $    9,344,156      $  12,374,833
                                                                                           ==============      =============
</TABLE>

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

                                                                                                      To Comply With
                                                                                                      Minimum Capital
                                                                       Actual                          Requirements
                                                           --------------------------------   -----------------------------
                                                             Amount            Ratio            Amount              Ratio
                                                           ----------         -------         -----------         ---------
<S>                                                        <C>                   <C>          <C>                    <C>
As of December 31, 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%         $   4,800              5.0%
Risk-Based Capital (To Risk-Weighted Assets)               $   9,345            19.4%         $   3,859              8.0%

As of December 31, 1999:
-----------------------
Tangible Capital (To Adjusted Total Assets)                $  11,818            12.9%         $   1,378              1.5%
Core Capital (To Adjusted Total Assets)                    $  11,818            12.9%         $   2,756              3.0%
Risk-Based Capital (To Risk-Weighted Assets)               $  12,375            27.7%         $   3,568              8.0%

</TABLE>

As of December 31, 2000, 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
                                                           ----------         -------         -----------         ---------
<S>                                                        <C>                   <C>          <C>                   <C>
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%

As of December 31, 1999:
-----------------------
Total Capital (To Risk-Weighted Assets)                     $  12,375            27.7%         $   4,460           10.0%
Tier I Capital (To Risk-Weighted Assets)                    $  11,818            26.5%         $   2,676            6.0%
Tier I Capital (To Average Assets)                          $  11,818            12.7%         $   4,643            5.0%

</TABLE>

                                       32
<PAGE>




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 $47,548,  $5,337, and $12,989,  for the
years ended December 31, 2000, 1999, and 1998, respectively.

DIRECTORS  LONG-TERM  INCENTIVE  PLAN - In June  1997,  the Bank  established  a
long-term incentive plan for the board of directors to provide target retirement
benefits of 75% of board fees for ten years for directors who retire with twenty
or more years of service.  Activity in the  directors'  retirement  plan for the
years ended December 31, 2000, 1999, and 1998 are as follows:
<TABLE>
<CAPTION>
                                                                             2000                 1999               1998
                                                                           -----------        -----------        -----------
<S>                                                                        <C>                <C>                <C>
Liability balance at beginning of year                                     $  218,423         $  164,727         $  125,181
Accrued and expensed                                                            6,197              7,552             10,824
Transfer of assets to trustee                                                       0                  0           (136,005)
Death benefit payment                                                         (38,652)                 0                  0
Increase (decrease) in liability due to investment returns                    (37,941)            46,144                  0
Effect of change in accounting principle pursuant to EITF 97-14                     0                  0            164,727
                                                                           ----------         ----------         ----------
Liability balance at end of year                                           $  148,027         $  218,423         $  164,727
                                                                           ==========         ==========         ==========
</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.  Prior
to the issuance of EITF 97-14,  the Bank had transferred the assets purchased by
the trust (12,516  shares of Holding  Company stock) to the trustee of the plan.
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 and 14,061  shares as of
December 31, 2000 and 1999,  respectively)  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.  The change in  accounting  principle in 1998
required a reduction in deferred tax  liabilities of $10,907 and a net charge to
income in 1998 of $16,610.

EMPLOYEE  STOCK  OWNERSHIP  PLAN (ESOP) - Pursuant to the plan of  conversion to
stock form, the Bank  established its Employee Stock Ownership Plan in 1998. The
ESOP  borrowed  $1,164,000  from the Bank's  Holding  Company at 8.50%  interest
repayable  in  thirteen  years.  The ESOP  purchased  116,400  shares of Holding
Company stock in the initial stock offering. The ESOP received $46,156, $34,935,
and $34,914 in dividends  on its stock in 2000,  1999,  and 1998,  respectively,
which was used to reduce  the ESOP  debt.  In 2000 and 1999,  the  accrued  ESOP
contribution  of $115,505 and $89,523  respectively  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,  $115,505, and $89,523, plus accrued interest of $73,160, $86,005, and
$97,281 on the ESOP debt, for the years ended December 31, 2000, 1999, and 1998,
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.

                                       33
<PAGE>

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  totaled  205,869 and 196,061 as of December  31, 2000 and 1999
respectively.

The Company has  repurchased  188,422  shares as of December  31, 2000  (125,835
shares in 1999) 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 trust.

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.


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,
2000 (50,845  shares in 1999) 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>
                                                                            2000                1999
                                                                         ----------          ----------
         <S>                                                             <C>                 <C>
         Accrued Liability Balance at Beginning of Year                  $  142,595          $        0
         Amount Charged to Expense                                          176,880             298,154
         Less Cost of Shares Issued                                        (166,580)           (155,559)
                                                                         ----------          ----------
         Accrued Liability Balance at End of Year                        $  152,895          $  142,595
                                                                         ==========          ==========
</TABLE>

The Company held 31,854  shares as of December 31, 2000 (45,481  shares in 1999)
of its common  stock in trust at a net cost of $389,894 as of December  31, 2000
($556,474 in 1999). 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.  Activity in the plan for the years ended  December
31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                                               As of December 31,
                                                                        ---------------------------------
                                                                             2000               1999
                                                                        --------------      -------------
         <S>                                                            <C>                 <C>
         Balances, Beginning of Year                                    $      131,527      $      53,284
         Directors Fees Deferred During Year                                    55,900             54,200
         Income (Loss) Credited During Year                                    (16,081)            24,043
                                                                        --------------      -------------
         Balances, End of Year                                          $      171,346      $     131,527
                                                                        ==============      =============
</TABLE>

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


                                       34
<PAGE>




NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Bank's  business  activity  is with  customers  located  within East
Tennessee.  Investments in state and municipal  securities involve  governmental
entities  within the State of Tennessee.  As of December 31, 2000,  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.


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.  The subscription offering opened on November 20, 1997 and
closed on December 16, 1997.  The Bank held cash receipts of  $23,598,226  as of
December  31, 1997 in escrow  accounts for stock  subscribers.  These funds were
invested in overnight  deposits at the Federal Home Loan Bank of Cincinnati.  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.  The  remainder  of the  subscription  receipts  were  returned  to
subscribers  in January 1998.  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.

Conversion costs were being deferred until  completion of the conversion.  As of
December 31, 1997, conversion costs that had been incurred and deferred totalled
$466,862.  Total  conversion  costs of  $571,822  were repaid to the Bank by the
Holding Company in January 1998, and the Holding Company  deducted them 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.


                                       35

<PAGE>




NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

For the Company and the Bank, as for most financial  institutions,  the majority
of its assets and  liabilities are considered  financial  instruments as defined
above.  However, a large majority of those assets and liabilities do not have an
active trading market nor are their  characteristics  similar to other financial
instruments  for which an active trading market exists.  In addition,  it is the
Company's  and Bank's  practice and intent to hold the majority of its financial
instruments  to  maturity  and not to engage  in  trading  or sales  activities.
Therefore,  much of the  information as well as the amounts  disclosed below are
highly  subjective and  judgmental in nature.  The  subjective  factors  include
estimates of cash flows,  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.

                                       36

<PAGE>


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.

NOTE  PAYABLE  -  This  financial  instrument  is a  variable  rate,  short-term
instrument. Therefore, its recorded book value is a fair estimate of fair value.

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

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

                                                                As of December 31, 2000             As of December 31, 1999
                                                             -----------------------------        ---------------------------
                                                              Recorded         Estimated            Recorded       Estimated
                                                                Book              Fair                Book            Fair
                                                               Value             Value               Value           Value
                                                             ------------      -----------        ----------      -----------
<S>                                                          <C>               <C>                <C>              <C>
FINANCIAL ASSETS:
 Cash and Amounts Due
  From Depository Institutions                               $      3,067      $     3,067        $     2,387      $   2,387
Investment Securities - Available for Sale                   $     24,357      $    24,357        $    27,935      $  27,935
Loans Receivable, Net                                        $     68,878      $    68,145        $    61,516      $  61,627

FINANCIAL LIABILITIES:
Deposits                                                     $     81,614      $    82,070        $    73,810      $  73,765
Note Payable                                                 $          0      $         0        $     3,200      $   3,200
Advances from Federal Home Loan Bank                         $      1,753      $     1,743        $     3,767      $   3,689

</TABLE>

                                       37
<PAGE>


<TABLE>
<CAPTION>
                              CORPORATE INFORMATION

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

   J. William Myers                                    May 15, 2001; 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                               Main Office:
      President and Chief Executive Officer
      of the Company and the Bank                      344 W. Broadway
                                                       Newport, Tennessee

   Tommy C. Bible                                   Branch Office
      Manager, Jefferson/Cocke Co. Utilities
                                                       263 E. Broadway
   William B. Henry                                    Newport, Tennessee
      Retired; Former Optometrist
                                                       345 Cosby Highway
    Ben W. Hooper, III                                 Newport, Tennessee
      Attorney, Campbell & Hooper,
        Newport, Tennessee                          Independent Auditor:

   Robert L. Overholt                                  Pugh & Company, P.C.
      Retired; Former Owner/Manager                    Knoxville, Tennessee
        Home Supply

   Robert D. Self                                   General Counsel:
      Retired; Former Owner,
        Bob Self Auto Parts                            Myers & Bell, P.C.
                                                       Newport, Tennessee
Executive Officers:
                                                    Securities and Regulatory Counsel:
   Richard G. Harwood
      President and Chief Executive Officer            Stradley, Ronon, Housley, Kantarian
                                                          & Bronstein, LLP
   Lonnie R. Jones                                     Washington, D.C.
      Vice President of Operations of the Bank
                                                    Stock Registrar & Transfer Agent:
   Nancy L. Bryant
      Vice President and Treasurer                     Registrar and Transfer Company
   Peggy  B. Holston                                   10 Commerce Drive
      Secretary                                        Cranford, New Jersey  07016
</TABLE>