Exhibit 13

                        UNITED TENNESSEE BANKSHARES, INC.

                                  ANNUAL REPORT

                                      2003




<PAGE>

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


To Our Shareholders:

We are  delighted to present this Annual Report to our  shareholders.  This past
year was the most profitable year in the history of United Tennessee  Bankshares
and we look forward to the present year being a very good year.

United  Tennessee  Bankshares,  Inc.  grew from $111  million in total assets at
December  31, 2002 to $116  million at December  31,  2003.  Our loan  portfolio
remained  essentially  the same with a decrease  of  $409,000 or one-half of one
percent.  The loans did not grow due to an  unusually  high rate of payoffs from
refinancing activity. The deposits grew $4 million or 1.6%.  Shareholders equity
increased by $968,000 or 6%.

We are very  pleased  with our results of  operations  in 2003.  Total  interest
income decreased by $287,000 in 2003 while total interest  expense  decreased by
$443,000.  We increased our  provision for loan losses by $15,000.  We increased
non-interest income by $147,000 and non-interest  expense increased by $195,000.
We are  pleased  to report  this  resulted  in the most  profitable  year in the
history of United Tennessee  Bankshares,  Inc. Earnings per share increased from
$1.33  per  share to $1.58 per  share,  with  dividends  increasing  by 10%.  We
congratulate the staff for their hard work that made these results possible.

The market  value of our stock  increased  from $11.64 on  December  31, 2002 to
$16.18 on December 31, 2003,  making this a 39% increase.  We continue to strive
to  provide   good  value  in  all  major   decisions.   We  continue  to  be  a
well-capitalized   institution   poised  to  take   advantage  of  any  and  all
opportunities afforded to us in our competitive market place.

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

Sincerely,

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


<PAGE>


                        UNITED TENNESSEE BANKSHARES, INC.

United  Tennessee  Bankshares,  Inc.  United  Tennessee  Bankshares,  Inc.  (the
"Company") became the holding company for Newport Federal Bank (the "Bank") upon
its conversion from mutual to stock form (the "Conversion"), which was completed
on January 1, 1998. In connection with the Conversion,  the Company conducted an
initial public offering of 1,454,750 shares of Common Stock at a price of $10.00
per share,  realizing gross proceeds of $14.5 million. The Company purchased all
of the Bank's  capital stock with $7.1 million of the net offering  proceeds and
retained  the  remaining  $6.9  million in net  proceeds at the holding  company
level.  Prior to January 1, 1998, the Company had no assets or  liabilities  and
engaged in no business activities. The Company's assets currently consist of its
investment   in  the  Bank,   investment   securities   available  for  sale  of
approximately  $508,000,  a  $350,000  loan  to  the  Company's  Employee  Stock
Ownership Plan ("ESOP") and approximately $386,000 in liquid assets.

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

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

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

The Bank derives income  principally  from interest earned on loans,  investment
securities and other interest-earning  assets. The Bank's principal expenses are
interest  expense  on  deposits  and  noninterest   expenses  such  as  employee
compensation,  deposit  insurance and  miscellaneous  other expenses.  Funds for
these  activities  are provided  principally  by deposit  growth,  repayments of
outstanding loans and investment  securities,  and 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  1,230,379 shares of the Company's Common
Stock  outstanding,  and approximately  550 record holders.  The following table
sets forth the high and low closing sale prices for the Common Stock as reported
on the NASDAQ  SmallCap  Market (SM) for each quarter during the last two fiscal
years along with the amount of dividends declared during each quarter.



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

         March 31, 2002            $  9.75          $  8.41            $ 0.00
         June 30, 2002               11.75             9.50              0.30
         September 30, 2002          11.65            10.50              0.00
         December 31, 2002           14.02            11.64              0.00

         March 31, 2003             $14.05           $11.66            $ 0.00
         June 30, 2003               14.18            12.50              0.33
         September 30, 2003          14.75            13.56              0.00
         December 31, 2003           19.25            14.46              0.00

















                                       2

<PAGE>


                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Selected Consolidated Financial Condition Data
<TABLE>
<CAPTION>
                                                                         At December   31,
                                                 -------------------------------------------------------------
                                                   2003            2002         2001         2000        1999
                                                 -------         -------      -------      -------     -------
                                                                  (Dollars in thousands)
<S>                                              <C>          <C>          <C>          <C>          <C>

Total assets................................     $  116,982   $  111,753   $  100,811   $   98,553   $   94,120
Loans receivable, net.......................         77,953       78,362       72,200       68,878       61,516
Cash and amounts due from
  depository institutions...................          5,196        5,350        2,123        3,067        2,387
Investment securities:
    Available for sale......................         29,756       25,267       24,398       24,357       27,935
    Held to maturity........................             --           --           --           --            0
Deposits....................................         98,107       93,747       84,810       81,614       73,810
Shareholders' equity........................         16,893       15,925       14,168       13,330       11,901

Number of:
   Real estate loans........................          1,423        1,494        1,483        1,495        1,416
   Deposit accounts.........................          7,937        8,129        8,434        8,719        8,115
   Offices..................................              3            3            3            3            3

Selected Consolidated Operations Data
                                                                      Year Ended December 31,
                                                 ---------------------------------------------------------------
                                                    2003            2002         2001         2000         1999
                                                 --------        --------     --------     --------     --------
                                                     (Dollars in thousands, except per share data)

Interest income............................      $    6,927   $    7,213   $    7,432   $    7,251   $    6,719
Interest expense...........................           1,680        2,122        3,608        4,093        3,328
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income........................           5,247        5,091        3,824        3,158        3,391
Provision for loan losses..................             144          129          110           37           24
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses................           5,103        4,962        3,714        3,121        3,367
Noninterest income.........................             561          413          359          276          133
Noninterest expense........................           2,831        2,635        2,437        2,240        2,299
                                                 ----------   ----------   ----------   ----------   ----------
Income before income taxes.................           2,833        2,740        1,636        1,157        1,201
Income taxes...............................             827          978          525          355          458
                                                 ----------   ----------   ----------   ----------   ----------
Net income.................................      $    2,006   $    1,762   $    1,111   $      802   $      743
                                                 ==========   ==========   ==========   ==========   ==========
Earnings per share:
  Basic....................................      $     1.58   $     1.33   $     0.82   $     0.58   $      .54
                                                 ==========   ==========   ==========   ==========   ==========
  Fully diluted............................      $     1.58   $     1.33   $     0.82   $     0.58   $     0.53
                                                 ==========   ==========   ==========   ==========   ==========
</TABLE>

                                       3
<PAGE>

                                Selected Ratios
<TABLE>
<CAPTION>
                                                                          At or for the
                                                                      Year Ended December 31,
                                                 --------------------------------------------------------------
                                                   2003         2002         2001         2000         1999
                                                 --------     --------     --------     --------     --------
<S>                                                <C>         <C>          <C>           <C>         <C>

Performance Ratios:
  Return on average assets (net income
    divided by average total assets).............   1.77%       1.63%        1.09%         0.83%        0.78%
  Return on average equity (net income
    divided by average equity)...................  12.45       11.72         7.77          6.36         4.30
  Dividend Payout Ratio (dividends
    per share divided by earnings
    per share)...................................  20.89       22.56        36.59         51.72       796.30
  Interest rate spread (combined
    weighted average interest rate
    earned less combined weighted
    average interest rate cost)..................   4.59        4.70         3.30          2.70         2.90
  Net interest margin (net interest
    income divided by average
    interest-earning assets).....................   4.77        4.87         3.86          3.40         3.60
  Ratio of average interest-earning
    assets to average interest-bearing
    liabilities.................................. 114.64      113.31       115.29        114.60       121.60
  Ratio of noninterest expense to
    average total assets.........................   2.49        2.41         2.40          2.33         2.40
  Efficiency Ratio (noninterest expense
    divided by total of net interest income
    and noninterest income)......................  49.94       47.51        58.26         65.23        65.23

Asset Quality Ratios:
  Nonperforming assets to total assets
    at end of period.............................   0.98        0.74         0.99          0.57         0.48
  Nonperforming loans to total loans at
    end of period................................   1.41        1.06         1.38          0.79         0.59
  Allowance for loan losses to total
    loans at end of period.......................   1.18        1.02         1.00          0.95         1.06
  Allowance for loan losses to non-
    performing loans at end of
    period....................................... 144.51      218.87       170.86        118.28       175.33
  Provision for loan losses to total
    loans .......................................   0.18        0.16         0.15          0.05         0.04
  Net charge-offs to average loans
    outstanding..................................   0.03        0.06         0.07          0.06         0.01

Capital Ratios:
  Equity to total assets at end of period........  14.44       14.25        14.05         13.53        12.64
  Average equity to average assets...............  14.18       13.94        14.05         13.10        18.08

</TABLE>








                                        4

<PAGE>




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


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

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

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

Asset/Liability Management

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

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

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










                                       5

<PAGE>

The following table sets forth its policy limits and certain calculations, based
on information  provided to the Bank by the OTS, with respect to the sensitivity
of its NPV to changes in market interest rates at December 31, 2003.

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

            +3%                            (50)%                     (21)%
            +2%                            (25)                      (12)
            +1%                            (10)                       (6)
             0%                             --                        --
            -1%                            (10)                        *
            -2%                            (25)                        *
            -3%                            (50)                        *
------
*  No loss calculated.

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

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

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

Average Balances, Interest and Average Yields

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

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

                                       6

<PAGE>
<TABLE>
<CAPTION>
                                                                       For the Year Ended December 31,
                                     -----------------------------------------------------------------------------------------------
                                                            2003                          2002                           2001
                                     -----------------------------------------------------------------------------------------------
                                                            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..............     $ 77,941  $ 5,742        7.4%     $  77,038  $ 5,972       7.8%   $ 72,158   $   5,962    8.3%
Investment securities...........       28,207    1,153        4.1         24,534    1,211       4.9      24,388       1,362    5.6
Other interest-earning assets...        3,958       32        0.8          1,463       30       2.1       2,590         108    4.2
                                     --------  -------                 ---------  -------              --------   ---------
    Total interest-earning assets     110,106    6,927        6.3        103,035    7,213       7.0      99,136       7,432    7.5
Noninterest-earning assets......        3,494       --                     4,783       --                 2,595          --
                                     --------  -------                 ---------  -------              --------   ---------
    Total assets................     $113,600  $ 6,927                 $ 107,818  $ 7,213              $101,731   $   7,432
                                     ========  =======                 =========  =======              ========   =========
Interest-bearing liabilities:
  Deposits......................     $ 95,909  $ 1,678        1.7      $  90,844  $ 2,122       2.3    $ 85,330   $   3,570    4.2
  FHLB advances and note payable          134        2        1.5             88       --       0.0         658          38    5.8
                                      -------  -------       ----      ---------  -------      -----   --------   ---------
    Total interest-bearing liabilities 96,043    1,680        1.7         90,932    2,122       2.3      85,988       3,608    4.2
  Noninterest-bearing liabilities.      1,444       --                     1,852       --                 1,452          --
                                     --------  -------                 ---------  -------              --------   ---------
    Total liabilities...........       97,487    1,680                    92,784    2,122                87,440       3,608
Shareholders' equity............       16,113       --                    15,034       --                14,291          --
                                     --------  -------                 ---------  -------              --------   ---------
    Total liabilities and equity     $113,600  $ 1,680                 $ 107,818  $ 2,122              $101,731   $   3,608
                                     ========  =======                 =========  =======              ========   =========
Net interest income.............               $ 5,247                            $ 5,091                         $   3,824
                                               =======                            =======                         =========
Interest rate spread............                              4.6%                              4.7%                           3.3%
                                                            =====                             =====                          ======
Net interest margin.............                              4.8%                              4.9%                           3.9%
                                                            =====                             =====                          ======
Ratio of average interest-earning assets
  to average interest-bearing
  liabilities...................                            114.6%                            113.3%                         115.3%
                                                            =====                             =====                          ======
</TABLE>

-----------------------
1        Includes nonaccrual loans.

Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                                        Year  Ended  December 31,
                                         ------------------------------------------------------------------------------------
                                              2003         vs.         2002                    2002          vs.     2001
                                         --------------------------------------------   -------------------------------------
                                                        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....................         $    69     $  (299)   $   (230)              $   376    $  (398)     $  (22)
  Investment securities...............             161        (219)        (58)                    7       (157)       (150)
  Other interest-earning assets.......              26         (24)          2                   (23)       (55)        (78)
                                               -------     --------   --------               --------   --------     -------
      Total interest-earning assets...             256        (542)       (286)                  360       (610)       (250)
                                               -------     --------   ---------              --------   --------     -------
Interest expense:
  Deposits............................             95        (539)       (444)                   132     (1,535)     (1,403)
  FHLB advances and note payable......              1           1           2                     --        (38)        (38)
                                               -------     -------    --------               -------    --------     -------
      Total interest-bearing liabilities           96         (538)       (442)                  132     (1,573)     (1,441)
                                               -------     ---------   ---------             -------    --------     -------
Change in net interest income.........         $   160     $    (4)   $    156               $   228    $   963      $1,191
                                               =======     ========   ========               =======    ========     =======
</TABLE>
                                       7

<PAGE>

Comparison of Financial Condition at December 31, 2003 and December 31, 2002

Total assets  increased $5.2 million,  or 4.7%,  from $111.8 million at December
31, 2002 to $117.0  million at December 31, 2003.  The Company's  asset increase
was  attributable  principally to an increase in investments of $4.5 million and
the  purchase  of bank owned life  insurance  with a cash value of 1.5  million,
offset by a decrease in loans receivable of $400,000.

Investment  securities available for sale increased  approximately $4.5 million,
or 17.8%,  from $25.3  million at December 31, 2002 to $29.8 million at December
31,  2003.  The  Company  receives   principal   repayments  on  mortgage-backed
securities  and proceeds  from  maturities  and sales of  investment  securities
available for sale. The Company has reinvested the proceeds from  maturities and
sales of investment securities.

Loans receivable decreased $400,000,  or 0.5% from $78.4 million at December 31,
2002 to $78.0 million at December 31, 2003 as repayments  exceeded  originations
for the period.

Total deposits  increased $4.4 million,  or 4.7%, from $93.7 million at December
31, 2002 to $98.1  million at December 31,  2003.  The increase was due to money
market  deposit and savings  account  growth of $2.2 million and  certificate of
deposit growth of 2.0 million.

The Company's  shareholders'  equity increased $1.0 million,  or 6.1% from $15.9
million at December 31, 2002 to $16.9 million at December 31, 2003. The increase
was due  principally  to net income of $2.0 million  offset by the surrender and
payment for stock options of $407,000,  dividends  paid of $420,000 and an other
comprehensive loss of $409,000.

Comparison of Results of Operations for the Years Ended December 31, 2003,  2002
and 2001

Net income was  $2,006,000  for the year ended December 31, 2003 compared to net
income of  $1,762,000  for the year ended  December  31,  2002 and net income of
$1,111,000  for the year ended  December  31,  2001.  The increase in net income
during 2003 was  primarily  due to a decrease in  interest  expense  offset by a
slight decrease in interest income and an increase in noninterest  expense.  Net
income for 2003  resulted  in a return on average  assets of 1.77%  compared  to
1.63% for 2002 and 1.09% for 2001,  and a return on average equity of 12.45% for
2003 as compared to 11.72% for 2002 and 7.77% for 2001.

Interest  Income.  Interest  income totaled $6.9 million,  $7.2 million and $7.4
million for the years ended December 31, 2003,  2002 and 2001. The average yield
on interest-earning  assets decreased to 6.3% in 2003 from 7.0% in 2002 and 7.5%
in 2001. The decrease in 2003 was  attributable to a decrease in rates on loans,
investment securities and other interest-earning  assets. The average balance of
interest-earning assets increased $5.8 million in 2003, $6.1 million in 2002 and
$5.4 million in 2001 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,  2003  was from  loans  receivable.  Interest  income  from  loans
receivable  was $5.7 million,  $6.0 million and $6.0 million for the years ended
December  31, 2003,  2002 and 2001,  respectively.  The average  yield earned on
loans  receivable  was 8.3% in 2001,  decreased to 7.8% in 2002 and decreased to
7.4% in 2003.  The average  balances of loans  receivable  increased  during the
period with a $7.0 million increase in 2001, a $4.9 million increase in 2002 and
a $900,000  increase in 2003 due to strong loan demand in the Bank's market area
during 2001 and 2002.  New loan demand  decreased  in 2003.  Interest  income on
investment  securities  decreased  in 2003 by  $58,000  due to a 80 basis  point
decrease  in average  rates  offset by an  increase  in the  average  balance of
investment  securities  of $3.7  million,  and  decreased  in  2002 by  $151,000
primarily due to a 70 basis point  decrease in average  rates,  and decreased in
2001 by $241,000 due to a 50 basis point decrease in average rates.

Interest Expense.  Interest expense totaled $1.7 million,  $2.1 million and $3.6
million  for  the  three  years  ended   December  31,  2003,   2002  and  2001,
respectively. The decrease in interest expense during 2003 was due to a 60 basis
point decrease in average rates offset by an increase in the average  balance of
interest bearing liabilities of $5.1 million. Since the average rate received on
the Bank's  interest-earning  assets decreased,  management reduced the interest
rates paid on  interest-bearing  liabilities.  The decrease in interest  expense
during 2002 was due to a 190 basis point  decrease in average rates offset by an
increase in average  interest bearing  liabilities of $4.9 million,  and in 2001
interest  expense  decreased  due to a 70 basis point  decrease in average rates
offset by an increase in average interest bearing liabilities of $3.9 million.

Net Interest Income. Net interest income was $5.2 million, $5.1 million and $3.8
million for the years ended  December 31, 2003,  2002 and 2001. The net interest
spread for 2003 was 4.6% compared to 4.7% in 2002 and 3.3% in 2001. The ratio of
average   interest-earning  assets  to  average   interest-bearing   liabilities
decreased from 115.3% in 2001 to 113.3% in 2002 and increased in 2003 to 114.6%.
The Company's net interest  margin  increased in 2002 to 4.9% from 3.9% in 2001.
In 2003, the Company's net interest margin  decreased to 4.8% from 4.9% in 2002,
primarily  due to loans and  investments  repricing  in 2003.  Since the Bank is
liability sensitive,  it usually will have increases in net interest income in a
falling rate environment.

Provision  for Loan Losses.  The  provision for loan losses was $144,000 in 2003
and  $129,000 in 2002 and  $110,000  in 2001.  The amount of  provision  for any
period is  determined  as of the end of the period based on a comparison  of the
amount of existing loan loss reserves with management's analysis of various risk
factors that affect the loan  portfolio.  At December 31, 2003, the ratio of the
allowance to nonperforming loans was 144.51%.

                                       8

<PAGE>


Noninterest  Income.  Noninterest  income for the years ended December 31, 2003,
2002 and 2001 was  $561,000,  $413,000 and $359,000,  respectively.  Noninterest
income consists primarily of customer service fees related to customers' deposit
accounts and loan service  charges.  Noninterest  income  increased from 2002 to
2003  primarily  due to gains on sales of  investment  securities  of  $105,000.
Noninterest  income  increased from 2001 to 2002 primarily due to gains on sales
of investment securities of $46,000.

Noninterest Expense.  Noninterest expense for the years ended December 31, 2003,
2002 and 2001 was $2.8 million, $2.6 million and $2.4 million, respectively. The
increase  in  noninterest  expense in 2003 was  primarily  due to  increases  in
compensation  and benefits  expense and data  processing  fees.  The increase in
noninterest  expense in 2002 was primarily due to increases in compensation  and
benefits expense, and occupancy and equipment expense.

The  Company's   operating   efficiency,   measured  by  its  efficiency  ratios
(noninterest expense divided by the total of net interest income and noninterest
income),  for the years ended  December  31,  2003,  2002,  and 2001 was 49.98%,
47.51% and 58.26%.  The increase in the ratio during 2003 was due to an increase
in  noninterest  expense.  The ratios of  noninterest  expense to average  total
assets were 2.5%, 2.4%, and 2.4% for the years ended December 31, 2003, 2002 and
2001, respectively.

Income Taxes. The Company's effective tax rate was 29.19%,  35.7%, and 32.1% for
the years ended December 31, 2003,  2002 and 2001,  respectively.  The Company's
effective tax rate for 2003 was lower than 2002 and 2001 due to  adjustments  in
the Bank's  deferred  income  tax  liabilities  in  accordance  with  applicable
accounting  standards and due to the surrender of stock options during 2003. 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,  2003,  2002 and 2001 was  14.2%,  13.9%,  and  14.1%,
respectively.  At December 31, 2003,  the Bank  exceeded all current  regulatory
capital requirements and met the definition of a "well capitalized" institution,
the highest regulatory category.

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

The  Company's  most  liquid  assets are cash and  amounts  due from  depository
institutions,  which are  short-term  highly  liquid  investments  with original
maturities  of less than three  months  that are  readily  convertible  to known
amounts of cash.  The levels of these  assets are  dependent  on its  operating,
financing and  investing  activities  during any given  period.  At December 31,
2003, 2002 and 2001, cash and amounts due from depository  institutions  totaled
$5.2 million, $5.4 million and $2.1 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.  However, the Company has received deposit relationships  referred
to it from a broker  during  2003  which  total  approximately  $8.1  million at
December 31, 2003.

The Company has also  designated all of its  investment  securities as available
for sale in order to meet  liquidity  demands.  At  December  31,  2003,  it had
designated  securities with a fair value of $29.8 million as available for sale.
In addition to internal sources of funding,  the Company as a member of the FHLB
of Cincinnati has substantial  borrowing  authority with the FHLB. The Company's
use of a particular  source of funds is based on need,  comparative  total costs
and availability.

At December  31, 2003,  the Company had  outstanding  approximately  $764,000 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  $52.5  million.  The  Company  anticipates  that it will  have
resources  to meet its current  commitments  through  internal  funding  sources
described above.  Historically,  it has been able to retain a significant amount
of its certificates of deposit as they mature.


Impact of Inflation and Changing Prices

The financial  statements and related notes  appearing  elsewhere in this report
have been prepared in accordance with generally accepted accounting  principles,
which require the  measurement  of financial  position and operating  results in
terms of historical dollars

                                       9

<PAGE>

without  considering the change in the relative  purchasing  power of money over
time due to inflation.

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

Impact of New Accounting Standards

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

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

In May 2003,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial   Accounting  Standard  No.  150,  Accounting  for  Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity. This statement
establishes  standards  for  how  an  issuer  classifies  and  measures  certain
financial instruments with characteristics of both liabilities and equity. Since
the  Company has not yet issued any  instruments  of the type  discussed  in the
statement,  management  does not expect  this  statement  to have a  significant
impact  on  the  Company's   consolidated   financial  position  or  results  of
operations.





                                       10

<PAGE>


                        UNITED TENNESSEE BANKSHARES, INC.
                                 AND SUBSIDIARY

                               Newport, Tennessee

                        CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002, and 2001





















                                       11
<PAGE>


                          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, 2003 and
2002, and the related consolidated  statements of income,  comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
2003,  2002,  and  2001.  These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of United Tennessee
Bankshares,  Inc.  and  subsidiary  as of December  31,  2003 and 2002,  and the
results of their  operations  and their cash flows for the years ended  December
31, 2003,  2002, and 2001, in conformity  with accounting  principles  generally
accepted in the United States of America.


                                    /s/ Pugh & Company, P.C.

                                    Certified Public Accountants
                                    Knoxville, Tennessee
                                    February 27, 2004




                                       12
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



<TABLE>
<CAPTION>
                                                                   As of December 31,            2003                   2002
                                                                                          ------------------     -------------------
<S>                                                                                       <C>                    <C>
                                       ASSETS
Cash and Amounts Due From Depository Institutions                                         $       5,195,746      $        5,349,997
Investment Securities Available for Sale, at Fair Value                                          29,756,283              25,267,260
Loans Receivable, Net                                                                            77,952,692              78,361,818
Premises and Equipment, Net                                                                         996,014                 969,074
Accrued Interest Receivable                                                                         559,217                 669,458
Real Estate Acquired Through Foreclosure                                                             48,368                 126,406
Intangible Assets, Net                                                                              793,250                 873,242
Cash Surrender Value of Life Insurance                                                            1,529,270                       0
Prepaid Expenses and Other Assets                                                                   151,296                 135,268
                                                                                          ------------------     -------------------
TOTAL ASSETS                                                                            $       116,982,136    $        111,752,523
                                                                                          ==================     ===================

                               LIABILITIES AND EQUITY
LIABILITIES
 Deposits:
  Demand                                                                                $        40,912,082    $         38,544,192
  Term                                                                                           57,195,215              55,202,423
                                                                                          ------------------     -------------------
   Total Deposits                                                                                98,107,297              93,746,615

Accrued Interest Payable                                                                             79,290                 131,683
Deferred Income Taxes                                                                               652,623               1,007,512
Accrued Benefit Plan Liabilities                                                                  1,182,688                 856,466
Other Liabilities                                                                                    67,282                  85,274
                                                                                          ------------------     -------------------
   Total Liabilities                                                                            100,089,180              95,827,550
                                                                                          ------------------     -------------------

SHAREHOLDERS' EQUITY
 Common Stock - No Par Value, Authorized 20,000,000
  Shares; Issued and Outstanding 1,230,379 Shares in 2003
  (1,311,124 Shares in 2002)                                                                     11,664,690              12,447,852
 Unearned Compensation - Employee Stock Ownership Plan                                             (350,526)               (516,573)
 Shares in Grantor Trust - Contra Account)                                                         (216,281)               (198,995)
 Shares in MRP Plan - Contra Account)                                                                     0                 (56,194)
 Shares in Stock Option Plan Trusts - Contra Account                                             (1,122,198)             (1,490,999)
 Retained Earnings                                                                                5,785,527               4,199,465
 Accumulated Other Comprehensive Income                                                           1,131,744               1,540,417
                                                                                          ------------------     -------------------
   Total Shareholders' Equity                                                                    16,892,956              15,924,973
                                                                                          ------------------     -------------------

TOTAL LIABILITIES AND EQUITY                                                            $       116,982,136    $        111,752,523
                                                                                          ==================     ===================
</TABLE>




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

                                       13
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                    For the Years Ended December 31,        2003                   2002                  2001
                                                                      -----------------     ------------------    ------------------
<S>                                                                   <C>                   <C>                   <C>

INTEREST INCOME
 Loans                                                                $       5,741,974     $        5,971,720    $        5,962,213
 Investment Securities                                                        1,152,917              1,211,497             1,362,166
 Other Interest-Earning Assets                                                   31,770                 30,171               108,078
                                                                      -----------------     ------------------    ------------------
  Total Interest Income                                                       6,926,661              7,213,388             7,432,457
                                                                      -----------------     ------------------    ------------------
INTEREST EXPENSE
 Deposits                                                                     1,677,877              2,122,007             3,569,976
 Advances From Federal Home Loan Bank                                             1,949                    452                38,393
                                                                      -----------------     ------------------    ------------------
  Total Interest Expense                                                      1,679,826              2,122,459             3,608,369
                                                                      -----------------     ------------------    ------------------
NET INTEREST INCOME                                                           5,246,835              5,090,929             3,824,088

PROVISION FOR LOAN LOSSES                                                       144,000                129,000               110,000
                                                                      -----------------     ------------------    ------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                           5,102,835              4,961,929             3,714,088
                                                                      -----------------     ------------------    ------------------
NONINTEREST INCOME
 Deposit Account Service Charges                                                299,269                242,895               239,408
 Loan Service Charges and Fees                                                   73,760                 79,729                76,072
 Net Gain on Sales of Investment Securities Available for Sale                  105,025                 45,803                 3,200
 Increase in Cash Surrender Value of Life Insurance                              29,270                      0                     0
 Other                                                                           53,253                 44,827                40,176
                                                                      -----------------     ------------------    ------------------
   Total Noninterest Income                                                     560,577                413,254               358,856
                                                                      -----------------     ------------------    ------------------
NONINTEREST EXPENSE
 Compensation and Benefits                                                    1,535,181              1,355,550             1,251,867
 Occupancy and Equipment                                                        259,484                304,407               214,368
 Federal Deposit Insurance Premiums                                              60,000                 52,000                48,000
 Data Processing Fees                                                           296,592                262,254               259,992
 Advertising and Promotion                                                       83,207                 85,351                97,598
 Amortization                                                                    79,992                 80,992                80,992
 Other                                                                          516,291                494,918               483,863
                                                                      -----------------     ------------------    ------------------
  Total Noninterest Expense                                                   2,830,747              2,635,472             2,436,680
                                                                      -----------------     ------------------    ------------------
INCOME BEFORE INCOME TAXES                                                    2,832,665              2,739,711             1,636,264

INCOME TAXES                                                                    826,472                977,907               524,814
                                                                      -----------------     ------------------    ------------------
NET INCOME                                                            $       2,006,193   $          1,761,804  $          1,111,450
                                                                      =================     ==================    ==================
EARNINGS PER SHARE:
 Basic                                                                $            1.58   $               1.33  $               0.82
                                                                      =================     ==================    ==================
  Diluted                                                             $            1.58   $               1.33  $               0.82
                                                                      =================     ==================    ==================
</TABLE>

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

                                       14
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME






<TABLE>
<CAPTION>

                 For the Years Ended December 31,                            2003                  2002                  2001
                                                                    -------------------    ------------------    ------------------
<S>                                                                 <C>                    <C>                   <C>
NET INCOME                                                          $        2,006,193     $       1,761,804     $       1,111,450
                                                                    -------------------    ------------------    ------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 Unrealized Gains (Losses) on Investment Securities
 Available for Sale                                                           (554,125)              453,216               187,839

 Reclassification Adjustment for Gains Included
  In Net Income                                                               (105,025)              (45,803)               (3,200)

 Income Taxes Related to Unrealized Gains/Losses
  on Investment Securities Available for Sale                                  250,477              (154,817)              (70,162)
                                                                    -------------------    ------------------    ------------------
   Other Comprehensive Income (Loss), Net of Tax                              (408,673)              252,596               114,477
                                                                    -------------------    ------------------    ------------------


COMPREHENSIVE INCOME                                                $        1,597,520     $       2,014,400     $       1,225,927
                                                                    ===================    ==================    ==================
</TABLE>















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


                                       15
<PAGE>
                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                   for the Three Years Ended December 31, 2003

<TABLE>
<CAPTION>
                                                                                   Unearned          Shares in         Shares in
                                                                   Common         Compensation-      Grantor Trust      MRP Plan -
                                                                    Stock             ESOP           Contra Account   Contra Account
                                                                  ------------    ---------------    --------------   --------------
<S>                                                               <C>             <C>                <C>               <C>
BALANCES, JANUARY 1, 2001                                         $ 13,091,119    $     (842,967)    $    (183,449)    $  (389,894)

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

Net Income                                                                   0                 0                 0               0

Dividends Paid                                                               0                 0                 0               0

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

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

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

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

Other Comprehensive Income                                                   0                 0                 0               0
                                                                  ------------    ---------------    --------------    -------------
BALANCES, DECEMBER 31, 2001                                         12,719,235          (678,370)         (195,149)       (209,770)

Purchase and Retirement of Common Stock                               (157,308)                0                 0               0

Net Income                                                                   0                 0                 0               0

Dividends Paid                                                               0                 0                 0               0

Payment on ESOP Loan With ESOP Contribution and Dividends
 Received                                                                    0           161,797                 0               0

Purchase of Additional Shares of Common Stock Pursuant to
 Grantor Trust                                                               0                 0            (3,846)              0

Distribution of Shares of Common Stock Pursuant to MRP Plan                  0                 0                 0         153,576

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

Costs Associated With Stock Options Surrendered                              0                 0                 0               0

Retirement of Shares Held in Stock Option Plan Trusts                 (114,075)                0                 0               0

Other Comprehensive Income                                                   0                 0                 0               0
                                                                  --------------  --------------    --------------    ------------
BALANCES, DECEMBER 31, 2002                                         12,447,852          (516,573)         (198,995)        (56,194)

Purchase of Common Stock                                                     0                 0                 0               0

Net Income                                                                   0                 0                 0               0

Dividends Paid                                                               0                 0                 0               0

Payment on ESOP Loan With ESOP Contribution and Dividends
 Received                                                                    0           166,047                 0               0

Purchase of Additional Shares of Common Stock Pursuant to
 Grantor Trust                                                               0                 0           (17,286)              0

Distribution of Shares of Common Stock Pursuant to MRP Plan                  0                 0                 0          11,236

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

Costs Associated With Stock Options Surrendered                              0                 0                 0               0

Proceeds From Exercise of Stock Options                                      0                 0                 0               0

Retirement of Shares Held in Trusts                                   (783,162)                0                 0          44,958

Other Comprehensive Loss                                                     0                 0                 0               0
                                                                  --------------  --------------    --------------    ------------
BALANCES, DECEMBER 31, 2003                                       $ 11,664,690    $     (350,526)   $     (216,281)   $          0
                                                                  ==============  ===============   ==============    ============
</TABLE>

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

                                       16
<PAGE>
                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                   for the Three Years Ended December 31, 2003
<TABLE>
<CAPTION>
                                                               Shares in Stock
                                                                 Option Plan                       Accumulated Other     Total
                                                                   Trusts -          Retained       Comprehensive    Shareholders'
                                                              Contra Account        Earnings          Income           Equity
                                                             ------------------  --------------    ----------------  -------------
<S>                                                          <C>                 <C>               <C>               <C>
BALANCES, JANUARY 1, 2001                                  $       (1,656,569)   $   2,138,547     $     1,173,344   $  13,330,131

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

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

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

Payment of ESOP Loan With ESOP Contribution and Dividend
 Received                                                                   0                0                   0         164,597

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

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

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

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

Purchase and Retirement of Common Stock                                     0                0                   0        (157,308)

Net Income                                                                  0        1,761,804                   0       1,761,804

Dividends Paid                                                              0         (397,732)                  0        (397,732)

Payment on ESOP Loan With ESOP Contribution and Dividends
 Received                                                                   0                0                   0         161,797

Purchase of Additional Shares of Common Stock Pursuant to
 Grantor Trust                                                              0                0                   0          (3,846)

Distribution of Shares of Common Stock Pursuant to MRP Plan                 0                0                   0         153,576

Decrease in Cost of Shares in Stock Option Plan Trusts                 56,527                0                   0          56,527

Costs Associated With Stock Options Surrendered                       (70,192)               0                   0         (70,192)

Retirement of Shares Held in Stock Option Plan Trusts                 114,075                0                   0               0

Other Comprehensive Income                                                  0                0             252,596         252,596
                                                             ------------------    -----------        --------------  -------------
BALANCES, DECEMBER 31, 2002                                        (1,490,999)       4,199,465           1,540,417      15,924,973

Purchase of Common Stock                                              (16,739)               0                   0         (16,739)

Net Income                                                                  0        2,006,193                   0       2,006,193

Dividends Paid                                                              0         (420,131)                  0        (420,131)

Payment on ESOP Loan With ESOP Contribution and Dividends
 Received                                                                   0                0                   0         166,047

Purchase of Additional Shares of Common Stock Pursuant to
 Grantor Trust                                                              0                0                   0         (17,286)

Distribution of Shares of Common Stock Pursuant to MRP Plan                 0                0                   0          11,236

Decrease in Cost of Shares in Stock Option Plan Trusts                 46,082                0                   0          46,082

Costs Associated With Stock Options Surrendered                      (407,346)               0                   0        (407,346)

Proceeds From Exercise of Stock Options                                 8,600                0                   0           8,600

Retirement of Shares Held in Trusts                                   738,204                0                   0               0

Other Comprehensive Loss                                                    0                0            (408,673)       (408,673)
                                                                   ----------      -----------         ------------   -------------
BALANCES, DECEMBER 31, 2003                                      $ (1,122,198)     $ 5,785,527         $ 1,131,744    $ 16,892,956
                                                                   ==========      ===========         ============   =============
</TABLE>

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

                                       17
<PAGE>



                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>


                                          For the Years Ended December 31,        2003                2002                2001
                                                                            ----------------    ----------------    ----------------
<S>                                                                         <C>                 <C>                 <C>

OPERATING ACTIVITIES
 Net Income                                                                 $     2,006,193     $     1,761,804     $     1,111,450
                                                                            ----------------    ----------------    ----------------
 Adjustments to Reconcile Net Income to Net
  Cash Provided by Operating Activities:
   Provision for Loan Losses                                                        144,000             129,000             110,000
   Depreciation                                                                      99,237              92,766              62,521
   Amortization                                                                      79,992              80,992              80,992
   Amortization of Investment Securities Premiums and Discounts, Net                142,721              83,750              43,993
   Increase (Decrease) in Unearned Loan Fees                                        (19,426)             20,523              24,952
   Net Loss on Sales of Foreclosed Real Estate                                        7,951               8,026              21,944
   Federal Home Loan Bank Stock Dividends                                           (36,423)            (40,100)            (55,300)
   Increase in Cash Surrender Value of Life Insurance                               (29,270)                  0                   0
   Net Gain on Sales of Investment Securities
   Available for Sale                                                              (105,025)            (45,803)             (3,200)
   Deferred Income Tax Benefit                                                     (104,412)            (16,201)            (42,343)
   (Increase) Decrease in:
    Accrued Interest Receivable                                                     110,241             (66,799)                275
    Prepaid Expenses and Other Assets                                               (16,028)            (99,005)            107,399
   Increase (Decrease) in:
    Accrued Interest Payable                                                        (52,393)            (29,871)           (138,509)
    Accrued Income Taxes                                                                  0              (1,995)              1,995
    Accrued Benefit Plan Liabilities                                                326,222             113,289              99,909
    Other Liabilities                                                               (17,992)             27,646             (14,442)
                                                                            ----------------    ----------------    ----------------
     Total Adjustments                                                              529,395             256,218             300,186
                                                                            ----------------    ----------------    ----------------
      Net Cash Provided by Operating Activities                                   2,535,588           2,018,022           1,411,636
                                                                            ----------------    ----------------    ----------------
 INVESTING ACTIVITIES
 Purchase of Investment Securities Available for Sale                           (14,657,955)        (11,308,648)         (9,884,107)
 Proceeds From Sales of Investment Securities
 Available for Sale                                                               1,836,236           3,381,938             163,200
 Proceeds From Maturities of Investment Securities
 Available for Sale                                                               4,000,000           3,000,000           4,660,000
 Principal Payments Received on Investment Securities
 Available for Sale                                                               3,672,273           4,466,907           5,219,089
 Net (Increase) Decrease in Loans                                                   314,196          (6,478,110)         (3,480,772)
 Purchases of Premises and Equipment, Net                                          (126,177)           (565,467)            (89,114)
 Proceeds From Sales of Foreclosed Real Estate                                       40,443              32,564               1,752
Investment in Cash Surrender Value of Life Insurance                             (1,500,000)                  0                   0
                                                                            ----------------    ----------------    ----------------
      Net Cash Used in Investing Activities                                      (6,420,984)         (7,470,816)         (3,409,952)
                                                                            ----------------    ----------------    ----------------

</TABLE>







                                       18
<PAGE>


                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)


<TABLE>
<CAPTION>

                                          For the Years Ended December 31,          2003                2002                2001
                                                                            ------------------    ----------------    --------------
<S>                                                                         <C>                   <C>                 <C>

FINANCING ACTIVITIES
 Purchase and Retirement of Common Stock                                                  0            (157,308)           (371,884)
 Dividends Paid                                                                    (420,131)           (397,732)           (414,604)
 Decrease in Cost of Shares in Stock Option Plan Trusts                              46,082              56,527              65,160
 Proceeds From Exercise of Stock Options                                              8,600                   0                   0
 Costs Associated With Stock Options Surrendered                                   (407,346)            (70,192)                  0
 Distribution of Common Stock Pursuant to MRP Plan                                   11,236             153,576             180,124
 Purchase of Common Stock for Director's Long-Term
 Incentive Plan and Stock Option Plan Trusts                                        (34,025)             (3,846)            (11,700)
 Payment on ESOP Loan and Release of Shares                                         166,047             161,797             164,597
 Net Increase in Deposits                                                         4,360,682           8,936,789           3,196,136
 Decrease in Advances From Federal Home Loan Bank                                         0                   0          (1,753,134)
                                                                            ----------------    ----------------    ----------------
      Net Cash Provided by Financing Activities                                   3,731,145           8,679,611           1,054,695
                                                                            ----------------    ----------------    ----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               (154,251)          3,226,817            (943,621)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                      5,349,997           2,123,180           3,066,801
                                                                            ----------------    ----------------    ----------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                      $     5,195,746     $     5,349,997     $     2,123,180
                                                                            ================    ================    ================
Supplementary Disclosures of Cash Flow Information:
 Cash Paid During the Year for:
  Interest                                                                  $     1,732,219     $     2,152,330     $     3,746,878
  Income Taxes                                                              $     1,005,820     $     1,033,225     $       480,280

Supplementary Disclosures of Noncash Investing Activities:
 Acquisition of Foreclosed Real Estate                                      $        73,856     $       177,996     $       174,171
 Sale of Foreclosed Real Estate by Origination of Mortgage Loans            $       103,500     $        11,000     $       150,475
 Change in Unrealized Gain/Loss on Investment
  Securities Available for Sale                                             $      (659,150)    $       407,413     $       184,639
 Change in Deferred Income Taxes Associated With Unrealized
  Gain/Loss on Investment Securities Available for Sale                     $      (250,477)    $       154,817     $        70,162
 Change in Net Unrealized Gain/Loss on Investment
  Securities Available for Sale                                             $      (408,673)    $       252,596     $       114,477
 Retirement of Common Stock Held in Trusts                                  $       783,162     $       114,075     $             0
</TABLE>




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

                                       19
<PAGE>



                        UNITED TENNESSEE BANKSHARES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2003, 2002, and 2001



NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

                                                  2003               2002
                                              --------------     --------------
     Unrestricted Deposits                    $   3,629,000      $   3,020,000


                                       20
<PAGE>

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

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

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

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

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

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

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

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                      ----------------------------------------------------------
                                                                           2003                 2002                 2001
                                                                      ----------------     ----------------    -----------------
<S>                                                                   <C>                  <C>                 <C>
 Net Income, as Reported                                              $     2,006,193      $     1,761,804     $      1,111,450
 Less: Total Stock-Based Employee Compensation
 Expense Determined Under Fair Value Based Method
 for All Awards, Net of Related Tax Effects                                   (8,210)            (148,967)            (151,959)
                                                                      ----------------     ----------------    -----------------
 Pro Forma Net Income                                                 $    1,997,983       $    1,612,837      $       959,491
                                                                      ================     ================    =================
 Earnings Per Share:
 Basic - as Reported                                                  $         1.58       $         1.33      $          0.82
                                                                      ================     ================    =================
 Basic - Pro Forma                                                    $         1.57       $         1.22      $          0.71
                                                                      ================     ================    =================
 Diluted - as Reported                                                $         1.58       $         1.33      $          0.82
                                                                      ================     ================    =================
 Diluted - Pro Forma                                                  $         1.57       $         1.22      $          0.71
                                                                      ================     ================    =================
</TABLE>

                                       21
<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,
                                                                         -----------------------------------------------------

                                                                               2003               2002                2001
                                                                         --------------    ----------------    ---------------
<S>                                                                          <C>                 <C>                <C>
Average number of shares outstanding                                         1,271,232           1,321,186          1,354,724
Effect of dilutive options                                                           0               1,458                535
                                                                         --------------    ----------------    ---------------
Average number of shares outstanding used
  to calculate diluted earnings per share                                    1,271,232           1,322,644          1,355,259
                                                                         ==============    ================    ===============
</TABLE>



NOTE 2 - INVESTMENT SECURITIES

The amortized  cost and estimated  fair value of  investment  securities  are as
follows:
<TABLE>
<CAPTION>
                                                                    Investment Securities Available for Sale
                                                      ------------------------------------------------------------------------
                                                                            Gross               Gross            Estimated
                                                        Amortized         Unrealized         Unrealized             Fair
                                                           Cost             Gains              Losses              Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                 <C>                      <C>         <C>                <C>
As of December 31, 2003
Debt Securities:
 Obligations of  U.S. Government
  Corporations and Agencies                        $      15,067,343           352,410   $       (38,559)   $      15,381,194
 Mortgage-Backed Securities                                8,496,605            70,940           (53,789)           8,513,756
 Corporate Debt Securities                                 1,226,835            70,147                 0            1,296,982
 Obligations of States and
  Political Subdivisions                                   2,075,602            71,549                 0            2,147,151
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  26,866,385           565,046           (92,348)          27,339,083
                                                      ---------------   ---------------     --------------     ---------------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               933,400                 0                 0              933,400
 Federal Home Loan Mortgage
  Corporation Stock                                           25,783         1,352,697                 0            1,378,480
 Intrieve, Inc. Stock, at Cost                               105,320                 0                 0              105,320
                                                      ---------------   ---------------     --------------     ---------------
   Total Equity Securities                                 1,064,503         1,352,697                 0            2,417,200
                                                      ---------------   ---------------     --------------     ---------------
                                                   $      27,930,888         1,917,743   $       (92,348)   $      29,756,283
                                                      ===============   ===============     ==============     ===============
</TABLE>



                                       22

<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, 2002
Debt Securities:
 Obligations of  U.S. Government
  Corporations and Agencies                        $      13,097,586           622,164   $             0    $      13,719,750
 Mortgage-Backed Securities                                5,868,201           145,959            (3,595)           6,010,565
 Corporate Debt Securities                                   707,060            53,456                 0              760,516
 Obligations of States and
  Political Subdivisions                                   2,080,000            49,196           (10,477)           2,118,719
                                                      ---------------   ---------------     --------------     ---------------
   Total Debt Securities                                  21,752,847           870,775           (14,072)          22,609,550
                                                      ---------------   ---------------     --------------     ---------------
Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                               897,100                 0                 0              897,100
 Federal Home Loan Mortgage
  Corporation Stock                                           27,448         1,627,842                 0            1,655,290
 Intrieve, Inc. Stock, at Cost                               105,320                 0                 0              105,320
                                                      ---------------   ---------------     --------------     ---------------
    Total Equity Securities                                 1,029,868         1,627,842                 0            2,657,710
                                                      ---------------   ---------------     --------------     ---------------
                                                    $      22,782,715         2,498,617   $       (14,072)   $      25,267,260
                                                      ===============   ===============     ==============     ===============
</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:
                                         For the Years Ended December 31,
                           -----------------------------------------------------
                                  2003               2002               2001
                           ---------------    ---------------   ----------------
Gross Realized Gains       $      105,025     $      47,467     $        3,200
Gross Realized Losses                   0            (1,664)                 0
                           ---------------    ---------------   ----------------
                           $      105,025     $      45,803     $        3,200
                           ===============    ===============   ================

Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
                                                             December 31, 2003                      December 31, 2002
                                                      ---------------------------------     ----------------------------------
                                                        Amortized         Estimated           Amortized          Estimated
                                                           Cost           Fair Value            Cost             Fair Value
                                                      ---------------   ---------------     --------------     ---------------
<S>                                                   <C>                    <C>            <C>                 <C>
FNMA Certificates                                     $    4,576,781         4,616,311      $   3,767,072       $   3,881,644
GNMA Certificates                                                  0                 0            600,689             613,752
FHLMC Certificates                                         3,919,824         3,897,445          1,500,440           1,515,169
                                                      ---------------   ---------------     --------------     ---------------
                                                      $    8,496,605         8,513,756      $   5,868,201       $   6,010,565
                                                      ===============   ===============     ==============     ===============
</TABLE>

The amortized  cost and estimated  fair value of debt  securities  available for
sale as of December 31, 2003, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
                                                                                             Amortized           Estimated
                                                                                                Cost            Fair Value
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Due in One Year or Less                                                                    $      499,429      $     512,030
Due After One Year  Through Five Years                                                         11,496,746         11,865,266
Due After Five Years  Through Ten Years                                                         5,824,168          5,870,701
Due After Ten Years                                                                               549,437            577,330
                                                                                           ---------------     --------------
                                                                                               18,369,780         18,825,327
Mortgage-Backed Securities                                                                      8,496,605          8,513,756
                                                                                           ---------------     --------------
                                                                                           $   26,866,385      $  27,339,083
                                                                                           ===============     ==============
</TABLE>
                                       23
<PAGE>
Expected  maturities can differ from contractual  maturities because issuers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.

Investments with book values of approximately  $11,495,000 and $9,500,000 (which
approximates market values) as of December 31, 2003 and 2002, respectively, were
pledged to secure deposits of public funds.

The following table shows the Bank's  investments'  gross unrealized  losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous loss position as of December 31, 2003:
<TABLE>
<CAPTION>
                                                                                    Less Than One Year
                                                     --------------------------------------------------------------------------
                                                      Number of             Fair             Unrealized         Percent of
                                                      Investments            Value              Losses             Losses

                                                     ---------------    ----------------     --------------    ----------------
<S>                                                        <C>          <C>                  <C>                    <C>
Description of Securities
-------------------------------------------------
Available for Sale
 U.S. Government Corporations and Agencies                  4           $     2,462,495      $      38,559          1.54%
 Mortgage-Backed Securities                                 7                 5,346,555             53,789          1.00%
                                                     ---------------    ----------------     --------------
                                                           11           $     7,809,050      $      92,348          1.17%
                                                     ===============    ================     ==============
</TABLE>
Management  believes  that all of the Bank's  unrealized  losses are a result of
recent, normal market fluctuations.  Therefore, the Bank's unrealized losses are
considered  temporary in nature and no permanent write-down has been made to the
carrying values of its investment securities.

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,
                                                                                           ----------------------------------
                                                                                                2003               2002
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
First mortgage loans (principally conventional):
 Secured by one-to-four family residences                                                  $  63,335,429       $ 62,772,366
 Secured by other properties                                                                   9,260,858          8,617,505
 Construction loans                                                                            1,768,565          3,931,900
                                                                                           ---------------     -------------
                                                                                              74,364,852         75,321,771
Less:
 Undisbursed portion of construction loans                                                      (764,427)        (1,405,429)
 Net deferred loan origination fees                                                             (352,680)          (372,106)
                                                                                           --------------      -------------
  Net first mortgage loans                                                                    73,247,745         73,544,236
                                                                                           ---------------     -------------
Consumer and commercial loans:
 Loans to depositors, secured by deposits                                                      1,293,015          1,263,904
 Automobile                                                                                    1,488,273          1,354,058
 Home equity and second mortgage                                                               1,340,969            948,371
 Other                                                                                         1,504,344          2,054,286
                                                                                           ---------------     -------------
Net Consumer and commercial loans                                                              5,626,601          5,620,619
Less allowance for loan losses                                                                  (921,654)          (803,037)
                                                                                           ---------------     -------------
                                                                                           $  77,952,692       $ 78,361,818
                                                                                           ===============     =============
</TABLE>
The Bank had outstanding loan commitments of approximately $166,000 and $861,000
(in addition to undisbursed portion of construction loans) at rates ranging from
3.00% to 8.75% as of December 31, 2003 and 2002, respectively.

Activity in the allowance for loan losses consists of the following:
<TABLE>
<CAPTION>
                                                                                For the Years Ended December 31,
                                                                        -----------------------------------------------------
                                                                             2003               2002               2001
                                                                        ---------------    ---------------     --------------
<S>                                                                     <C>                <C>                 <C>
Allowance at beginning of year                                          $     803,037      $     719,333       $    659,504
 Provision charged to expense                                                 144,000            129,000            110,000
 Recoveries of loans previously charged off                                       900              2,523                650
 Loans charged off                                                            (26,283)           (47,819)           (50,821)
                                                                        ---------------    ---------------     --------------
Allowance at end of year                                                $     921,654      $     803,037       $    719,333
                                                                        ===============    ===============     ==============
</TABLE>
                                       23


<PAGE>
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,
                                                            ----------------------------------
                                                                   2003               2002
                                                            ---------------     --------------
<S>                                                         <C>                 <C>
Recorded value of all impaired loans                        $    1,103,000      $     826,000
Average individual loan balance                             $       44,000      $      44,000
Total allowance for loan losses related to impaired loans   $      255,000      $     217,000
</TABLE>

The Bank records  payments  received on impaired loans that are well secured and
in the process of collection on the cash receipts  method,  whereby payments are
first  applied  to  accrued  interest  and then to  reduce  principal  balances.
Payments  received on impaired  loans which do not  represent a remote chance of
further loss to the Bank are credited to the loan's principal  balance under the
cost  recovery  method.  The following is a summary of cash receipts on impaired
loans and how they were applied during the periods indicated:
<TABLE>
<CAPTION>
                                                                                                     For the Years
                                                                                                  Ended December 31,
                                                                                           ----------------------------------
                                                                                                2003               2002
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Cash receipts applied to reduce principal balance                                          $       77,125      $      50,008
Cash receipts recognized as interest income                                                        55,733             44,397
                                                                                           ---------------     --------------
Total cash receipts                                                                        $      132,858      $      94,405
                                                                                           ===============     ==============
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
                                                                                                  As of December 31,
                                                                                           ----------------------------------
                                                                                                2003               2002
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Land                                                                                       $     579,701       $    574,490
Buildings                                                                                        787,911            763,102
Furniture and Equipment                                                                          620,723            589,410
Construction in Process                                                                           64,844                  0
                                                                                           ---------------     --------------
                                                                                               2,053,179          1,927,002
Less Accumulated Depreciation                                                                 (1,057,165)          (957,928)
                                                                                           ---------------     --------------
                                                                                           $     996,014       $    969,074
                                                                                           ===============     ==============
</TABLE>
Depreciation  expense for the years ended  December  31,  2003,  2002,  and 2001
totalled $99,237, $92,766, and $62,521, respectively.

NOTE 5 - INTANGIBLE ASSETS

During 1998, the Bank purchased a branch from Union Planters Bank of the Lakeway
Area. In 2002, the Bank evaluated its intangible  assets as required by SFAS No.
142. The Bank's intangible assets as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                                                                2003               2002
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Amortized Intangible Assets:
 Branch  Depositor  Relationships  (Core  Deposits)  With Definite  Useful Lives
  of 15 Years
  Gross Carrying Amount                                                                    $   1,199,876       $  1,199,876
  Accumulated Amortization                                                                      (406,626)          (326,634)
                                                                                           ---------------     --------------
                                                                                           $     793,250       $    873,242
                                                                                           ===============     ==============
</TABLE>
Amortization  expense related to intangible  assets totalled $79,992 for each of
the years ended December 31, 2003, 2002 and 2001.  Estimated future amortization
expense for the next five years is $79,992 for each year.

                                       24

<PAGE>
NOTE 6 - DEPOSITS

A summary of deposits is as follows:
<TABLE>
<CAPTION>
                                                                                                 As of December 31,
                                                                                           ----------------------------------
                                                                                                2003               2002
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Demand Deposits:
 Now Accounts                                                                              $    9,791,419      $   9,652,203
 Money Market Deposit Accounts                                                                 17,961,577         16,497,873
 Passbook Savings                                                                              13,159,086         12,394,116
                                                                                           ---------------     --------------
  Total Demand Deposits                                                                        40,912,082         38,544,192
                                                                                           ---------------     --------------
Term Deposits:
 Less Than $100,000                                                                            37,126,574         36,097,442
 $100,000 or More                                                                              20,068,641         19,104,981
                                                                                           ---------------     --------------
  Total Term Deposits                                                                          57,195,215         55,202,423
                                                                                           ---------------     --------------
                                                                                           $   98,107,297      $  93,746,615
                                                                                           ===============     ==============
</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, 2003 are
as follows:

         2004                                              $    52,533,494
         2005                                                    4,400,795
         2006                                                      143,032
         2007                                                      117,894
                                                           ---------------
                                                           $    57,195,215
                                                           ===============

NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK

The Bank obtains  short-term  advances  periodically  for  operating  liquidity.
Interest expense associated with the advances from the Federal Home Loan Bank of
Cincinnati (FHLB) totalled $1,949 for the year ended December 31, 2003 ($452 and
$38,393 in 2002 and 2001).  Pursuant to the Bank's collateral agreement with the
FHLB,  advances  are  secured by the  Bank's  FHLB  stock and  qualifying  first
mortgage  loans.  Advances from the FHLB were repaid as of December 31, 2003 and
2002.

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,
                                     ---------------------------------------------------------------------------------------
                                                2003                           2002                          2001
                                     ---------------------------    ---------------------------    -------------------------
                                                       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               $  963,106        34.0 %       $ 931,502         34.0 %       $ 556,330         34.0 %
 statutory rate
Increase (decrease) resulting
  from tax effects of:
  Nontaxable interest
   and dividends                        (35,025)       (1.2)          (16,049)        (0.6)           (6,238)        (0.4)
  Deduction for stock
   options converted to cash           (138,497)       (4.9)          (24,021)        (0.9)                0          0.0
  State excise tax and
   other, net                            36,888         1.3            86,475          3.2           (25,278)        (1.5)
                                     ------------    -----------    -----------     -----------    -----------    ----------
                                     $  826,472        29.2 %       $ 977,907         35.7 %       $ 524,814         32.1 %
                                     ============    ===========    ===========     ===========    ===========    ==========
</TABLE>

                                       25

<PAGE>



Income taxes consist of:

<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                        -----------------------------------------------------
                                                                            2003               2002               2001
                                                                        ---------------    ---------------     --------------
<S>                                                                     <C>                <C>                 <C>
Current                                                                 $     930,884      $     994,108       $    567,157
Deferred Benefit                                                             (104,412)           (16,201)           (42,343)
                                                                        ---------------    ---------------     --------------
                                                                        $     826,472      $     977,907       $    524,814
                                                                        ===============    ===============     ==============
</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 deferred loan fees,  nonqualified  retirement  plans and
deferred  compensation plans. The net deferred tax liability in the accompanying
consolidated statements of financial condition include the following components:

                                                  As of December 31,
                                         ----------------------------------
                                               2003               2002
                                         ---------------     --------------
Deferred Tax Liabilities                 $    1,251,661      $   1,516,503
Deferred Tax Assets                            (599,038)          (508,991)
                                         ---------------     --------------
 Net Deferred Tax Liabilities            $      652,623      $   1,007,512
                                         ===============     ==============


NOTE 9 - REGULATORY MATTERS

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

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

<TABLE>
<CAPTION>
                                                                                                 As of December 31,
                                                                                           ----------------------------------
                                                                                                2003               2002
                                                                                           ---------------     --------------
<S>                                                                                        <C>                 <C>
Bank capital (total equity) per accounting principles generally accepted in the            $  15,581,129       $ 14,573,642
 United States of America
Less goodwill, net of amortization                                                              (793,250)          (873,242)
Less net unrealized gain on investment securities available for sale                          (1,131,396)        (1,540,417)
                                                                                           ---------------     --------------
Tangible capital per the regulations                                                          13,656,483         12,159,983
Less adjustments for core capital                                                                     (0)                (0)
                                                                                           ---------------     --------------
Core capital per the regulations                                                              13,656,483         12,159,983
Add allowable portion of allowance for loan losses                                               688,000            671,000
                                                                                           ---------------     --------------
Risk-based capital per the regulations                                                     $  14,344,483       $ 12,830,983
                                                                                           ===============     ==============
</TABLE>

                                       26
<PAGE>

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

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

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

As of December 31, 2002:
Tangible Capital (To Adjusted Total Assets)                $   12,160            11.3%         $   1,617              1.5%
Core Capital (To Adjusted Total Assets)                    $   12,160            11.3%         $   4,312              4.0%
Risk-Based Capital (To Risk-Weighted Assets)               $   12,831            24.0%         $   4,285              8.0%

</TABLE>

As of December 31, 2003, the Bank is categorized as well  capitalized  under the
regulatory  framework for prompt  corrective  action.  To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I  leverage  ratios  as set  forth in the  table  below.  There  are no
conditions or events since that date that  management  believes have changed the
Bank's category. The Bank's actual capital amounts and ratios are also presented
in the following table. All amounts are in thousands of dollars.
<TABLE>
<CAPTION>
                                                                                                         To Be Well
                                                                                                      Capitalized Under
                                                                                                      Prompt Corrective
                                                                       Actual                         Action Provisions
                                                           --------------------------------    --------------------------------
                                                               Amount            Ratio             Amount            Ratio
                                                           ---------------    -------------    ---------------    -------------
<S>                                                        <C>                   <C>           <C>                   <C>
As of December 31, 2003:
Total Capital (To Risk-Weighted Assets)                    $   14,344            26.2%         $   5,484             10.0%
Tier I Capital (To Risk-Weighted Assets)                   $   13,656            24.9%         $   3,291              6.0%
Tier I Capital (To Average Assets)                         $   13,656            12.0%         $   5,681              5.0%

As of December 31, 2002:
Total Capital (To Risk-Weighted Assets)                    $   12,831            24.0%         $   5,356             10.0%
Tier I Capital (To Risk-Weighted Assets)                   $   12,160            22.7%         $   3,213              6.0%
Tier I Capital (To Average Assets)                         $   12,160            11.4%         $   5,310              5.0%

</TABLE>



NOTE 10 - RETIREMENT PLANS

401(k)  Retirement  Plan - The Bank has  established a 401(k)  retirement  plan,
which allows eligible officers and employees to contribute up to fifteen percent
of their annual  compensation on a tax-deferred  basis. The Bank has the option,
at the discretion of the board of directors,  to make contributions to the plan.
Total 401(k) retirement plan expense was $95,290,  $72,745,  and $66,149 for the
years ended December 31, 2003, 2002, and 2001, respectively.

                                       27


<PAGE>

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

<TABLE>
<CAPTION>
                                                                             2003               2002               2001
                                                                        ---------------    ---------------     --------------
<S>                                                                     <C>                <C>                 <C>
Liability balance at beginning of year                                  $      225,130     $      162,469      $    148,027
Accrued and expensed                                                             4,648              6,197             6,197
Increase in liability due to change in fair value of
 common stock                                                                   99,331             56,464             8,245
                                                                        ---------------    ---------------     --------------
Liability balance at end of year                                        $      329,109     $      225,130      $    162,469
                                                                        ===============    ===============     ==============
</TABLE>

In accordance with EITF 97-14,  the Bank has recognized a liability for the fair
value of all shares of Holding  Company stock (20,337 shares  as of December 31,
2003 and 19,326  shares as of December  31,  2002) and other  assets held by the
trustee,  and a  contra-equity  account Shares in Grantor Trust - Contra Account
for the cost of the shares held by the trustee.

Employee  Stock  Ownership  Plan (ESOP) - Pursuant to the plan of  conversion to
stock form, the Bank  established its Employee Stock Ownership Plan in 1998. The
ESOP  borrowed  $1,164,000  from the Bank's  Holding  Company at 8.50%  interest
repayable  in  thirteen  years.  The ESOP  purchased  116,400  shares of Holding
Company stock in the initial stock offering. The ESOP received $50,542, $46,292,
and $49,092 in dividends  on its stock in 2003,  2002,  and 2001,  respectively,
which was used to reduce  the ESOP  debt.  In 2003 and 2002,  the  accrued  ESOP
contribution of $115,505 for each year was also used to reduce the ESOP debt. An
appropriate   contra-equity  account  Unearned  Compensation  -  Employee  Stock
Ownership Plan has been  established  for the net amount still owing on the ESOP
debt.  The  Bank's  board of  directors  approved  contributions  to the ESOP of
$115,505 for each year, plus accrued interest of $36,987,  $48,000,  and $58,920
on the ESOP  debt for the  years  ended  December  31,  2003,  2002,  and  2001,
respectively.

NOTE 11 - STOCK OPTION PLAN

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

The  Company's  board of directors  has  approved the issuance of stock  options
under  the  plan to  certain  members  of the  board  of  directors  and  senior
management. The options vest at a rate of 25% per year, expire in ten years, and
establish an exercise  price equal to the fair value of the  Company's  stock on
the date the option is granted.  Holders of the options can also  surrender  the
options and be paid cash for the  difference  between the exercise price and the
stock's  fair  value on the date  surrendered.  The board of  directors  granted
202,676  options in 1999 and 6,623  options in 2001.  To date 1,000 options have
been exercised and 104,242 options have been surrendered.

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

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                              ----------------------------------------------------------------
                                                                     2003                   2002                  2001
                                                              -------------------    -------------------    ------------------
<S>                                                               <C>                    <C>                    <C>

Dividend Yield                                                       3.5%                   3.5%                  3.5%
Expected Life                                                     8.5 years              8.5 years              8.5 years
Expected Volatility                                                  52%                    52%                    52%
Risk-Free Interest Rate                                              4.8%                   4.8%                  4.8%
</TABLE>


                                       28

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

<TABLE>
<CAPTION>
                                              2003                            2002                             2001
                                   ---------------------------    -----------------------------    -----------------------------
                                                    Weighted                        Weighted                         Weighted
                                                    Average                          Average                          Average
                                                    Exercise                        Exercise                         Exercise
                                     Shares          Price           Shares           Price          Shares            Price
                                   ------------    -----------    -------------    ------------    ------------     ------------
<S>                                   <C>          <C>            <C>              <C>                 <C>          <C>
Outstanding at
 Beginning of Year                    175,321      $     8.59         209,299      $      8.59         202,676      $      8.60
Granted                                     0                               0                            6,623             8.25
Exercised                              (1,000)           8.60               0                                0
Surrendered                           (70,264)           8.59         (33,978)            8.60               0
Forfeited                                   0                               0                                0
                                   ------------                   -------------                    ------------
 Outstanding at                       104,057            8.59         175,321             8.59         209,299             8.59
 End of Year
                                   ============                   =============                    ============
 Options Exercisable                  102,402            8.59         172,010             8.59         157,703             8.59
 at Year-End
Weighted-Average Fair
 Value of Options Granted
 During the Year                          N/A                             N/A                            $3.61
</TABLE>

Information  pertaining  to  options  outstanding  at  December  31,  2003 is as
follows:

<TABLE>
<CAPTION>
                                                       Options Outstanding                            Options Exercisable
                                       ----------------------------------------------------     --------------------------------
                                                               Weighted
                                                               Average          Weighted                             Weighted
                                                              Remaining          Average                             Average
             Range of                       Number           Contractual        Exercise           Number            Exercise
         Exercise Prices                 Outstanding            Life              Price          Exercisable          Price
-----------------------------------    -----------------    --------------     ------------     --------------     -------------
          <S>                              <C>                <C>                <C>               <C>               <C>
          $8.25 - $8.60                    104,057            5.1 years          $  8.59           102,402           $  8.59

</TABLE>

The Company has purchased 100,249 and 175,139 shares as of December 31, 2003 and
2002, respectively, of its common stock that is being held in trusts for when
the stock options are exercised. A contra-equity account has been established to
reflect the costs of such shares held in the trusts.


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,
2003 and 2002 of  restricted  common  stock to  certain  members of the board of
directors  and senior  management.  The shares were  awarded  25% per year.  The
Company  and its  subsidiary  will  share  the cost of the plan and  accrue  the
estimated cost of  repurchasing  shares to be reissued as restricted  stock over
the period that such  awards are earned.  Activity in the MRP plan for the years
ended December 31 is as follows:

<TABLE>
<CAPTION>
                                                                            2003               2002                2001
                                                                        --------------    ----------------    ----------------
<S>                                                                     <C>               <C>                 <C>
         Accrued Liability Balance at Beginning of Year                 $      5,538      $      142,259      $      152,895
         Amount Charged to Expense                                             5,699              16,855             169,488
         Less Cost of Shares Issued                                          (11,237)           (153,576)           (180,124)
                                                                        --------------    ----------------    ----------------
         Accrued Liability Balance at End of Year                       $          0      $        5,538      $      142,259
                                                                        ==============    ================    ================
</TABLE>

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

                                       29
<PAGE>

NOTE 13 - DIRECTORS DEFERRED COMPENSATION

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

<TABLE>
<CAPTION>
                                                                            2003               2002                2001
                                                                        --------------    ----------------    ----------------
<S>                                                                     <C>               <C>                 <C>
         Balances, Beginning of Year                                    $     352,548     $       237,888     $       171,346
         Directors Fees Deferred During Year                                   80,700              69,800              57,300
         Income During Year                                                   109,535              44,860               9,242
                                                                        --------------    ----------------    ----------------
         Balances, End of Year                                          $     542,783     $       352,548     $       237,888
                                                                        ==============    ================    ================
</TABLE>


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

NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the Bank's business activity is with customers located within East
Tennessee. Investments in state and municipal securities involve governmental
entities within the State of Tennessee. As of December 31, 2003, the Bank had
concentrations of loans in real estate lending. Generally these loans are
secured by the underlying real estate. The usual risks associated with such
concentrations are generally mitigated by being spread over several hundred
unrelated borrowers and by adequate loan to collateral value ratios.

NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES

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

NOTE 16 - STOCK CONVERSION

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

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


                                       30
<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,  risk  characteristics,  credit  quality,  and interest
rates,  all of which are subject to change.  Because the fair value is estimated
as of the dates  indicated,  the amounts which will actually be realized or paid
upon  settlement  or  maturity  of the various  financial  instruments  could be
significantly different.

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

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

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

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

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

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

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

                                       31
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                               As of December 31, 2003             As of December 31, 2002
                                                           --------------------------------    --------------------------------
                                                               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                              $        5,196     $      5,196     $        5,350     $      5,350
Investment Securities Available for Sale                   $       29,756     $     29,756     $       25,267     $     25,267
Loans Receivable, Net                                      $       77,953     $     78,013     $       78,362     $     78,667
Cash Surrender Value of Life Insurance                     $        1,529     $      1,529     $            0     $          0

FINANCIAL LIABILITIES:
Deposits                                                   $       98,107     $     98,227     $       93,747     $     93,911
</TABLE>













                                       32


<PAGE>

                               CORPORATE INFORMATION

Directors:

   J. William Myers                               Annual Stockholder Meeting:
      Chairman of the Board & Attorney
      Myers & Bell, P.C.,                           May 18, 2004; 5:00 p.m.
      Newport, TN                                   Newport Federal Bank
                                                    344 W. Broadway
   Richard G. Harwood                               Newport, Tennessee
      President and Chief Executive Officer
      of the Company and the Bank
                                                  Main Orrice:
   Tommy C. Bible
      Manager, Jefferson/Cocke Co. Utilities        344 W. Broadway
                                                    Newport, Tennessee
   William B. Henry
      Retired; Former Optometrist                 Branch Offices:

    Ben W. Hooper, III                              263 E. Broadway
      Attorney, Campbell & Hooper,                  Newport, Tennessee
        Newport, Tennessee
                                                    345 Cosby Highway
   Robert L. Overholt                               Newport, Tennessee
      Retired; Former Owner/Manager
        Home Supply                               Independent Auditor:

   Robert D. Self                                   Pugh & Company, P.C.
      Retired; Former Owner,                        Knoxville, Tennessee
        Bob Self Auto Parts
                                                  General Counsel:
Executive Officers:
                                                    Myers & Bell, P.C.
   Richard G. Harwood                               Newport, Tennessee
      President and Chief Executive Officer
                                                  Securities and Regulatory
   Lonnie R. Jones                                 Counsel:
      Vice President of Operations of the Bank      Baker, Donelson, Bearman,
                                                    Caldwell & Berkowitz
   Nancy L. Bryant                                  Johnson City, Tennessee
      Vice President and Treasurer
                                                  Stock Registrar and Transfer
   Peggy  B. Holston                               Agent:
      Secretary                                     Registrar and Transfer
                                                    Company
   Chris H. Triplett                                10 Commerce Drive
      Controller                                    Cranford, New Jersey  07016



                                       33