<PAGE>

                        UNITED TENNESSEE BANKSHARES, INC.


                                  ANNUAL REPORT

                                      1999
<PAGE>

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



To Our Stockholders:

     We are delighted to present this Annual Report to stockholders after the
second full year of operations as a stock company. This was a good year for
U.T.B.I. with the completion of several major projects. The first project was
the completion of the branch purchase which was started in the fourth quarter of
1998. We also prepared ourselves for the Year 2000, which came and went with
very few problems. We purchased stock during the year to fund our M.R.P. plan
and shares to be held for the potential exercise of our stock options. We were
very pleased to return $4.00 to each shareholder in November. With this return
of capital we are still a well capitalized institution in good position to take
advantage of the opportunities afforded in the competitive marketplace. We
appreciate your investment in the company and invite your continued support of
the Bank, Newport's truly home-owned community bank.

     We invite you to review this Annual Report which discusses the Company's
performance during fiscal year 1999.


                                                     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, a $1.0 million loan to the Company's Employee Stock
Ownership Plan ("ESOP") and approximately $700,000 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") or the Federal National Mortgage Association
("FNMA"), obligations of the federal government and agencies and
investment-grade obligations of states and political subdivisions.

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


                                       1
<PAGE>

                             MARKET FOR COMMON STOCK
                         AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock trades on the Nasdaq SmallCap MarketSM under the
symbol "UTBI." There are approximately 1,382,013 shares of the Company's Common
Stock outstanding, and approximately 560 record holders. The following table
sets forth the high and low closing sale prices for the Common Stock as reported
on the Nasdaq SmallCap MarketSM 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, 1999                            $12.375     $11.625     $0.00
June 30, 1999                              11.875      11.50       0.30
September 30, 1999                         13.75       12.00       0.00
December 31, 1999                          11.75       10.4375     4.00

March 31, 1998                            $15.50      $13.50      $0.00
June 30, 1998                              16.125      13.625      0.30
September 30, 1998                         15.25       11.375      0.00
December 31, 1998                          12.50        9.75       0.00


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


                                       2
<PAGE>

                 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Selected Consolidated Financial Condition Data

<TABLE>
<CAPTION>

                                                                         At December 31,
                                                 --------------------------------------------------------------
                                                    1999         1998         1997         1996         1995
                                                 ----------   ----------   ----------   ----------   ----------
                                                                      (Dollars in thousands)
<S>                                              <C>          <C>          <C>          <C>          <C>
Total assets....................                    $94,120      $97,070      $90,008      $60,611      $54,019
Loans receivable, net...........                     61,516       53,346       47,158       44,230       40,365
Cash received for stock
  subscriptions.................                       --           --         23,598         --           --
Other cash and amounts due from
  depository institutions.......                      2,387        6,131        1,892        2,889        1,832
Investment securities:
    Available for sale..........                     26,660       33,022       15,204       11,689       10,286
    Held to maturity............                      1,275        2,431        1,077        1,212        1,046
Escrow accounts for stock
  subscriptions.................                       --           --         23,598         --           --
Other deposits..................                     73,810       69,835       58,071       53,767       47,954
Shareholders' equity............                     11,901       19,970        7,052        6,103        5,419

Number of:
   Real estate loans............                      1,416        1,433        1,427        1,448        1,421
   Deposit accounts.............                      8,115        8,488        7,532        6,908        6,494
   Offices......................                          3            3            2            2            2
</TABLE>

Selected Consolidated Operations Data

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                 --------------------------------------------------------------
                                                    1999         1998         1997         1996         1995
                                                 ----------   ----------   ----------   ----------   ----------
                                                          (Dollars in thousands, except per share data)
<S>                                              <C>          <C>          <C>          <C>          <C>
Interest income..............................    $    6,719   $    5,783   $    5,120   $    4,536   $    4,282
Interest expense.............................         3,328        2,609        2,711        2,400        2,218
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income..........................         3,391        3,174        2,409        2,136        2,064
Provision for loan losses....................            24           24          150           --           --
                                                 ----------   ----------   ----------   ----------   ----------
Net interest income after
  provision for loan losses..................         3,367        3,150        2,259        2,136        2,064
Noninterest income...........................           133          167          121          150          167
Noninterest expense..........................         2,299        1,547        1,361        1,478        1,082
                                                 ----------   ----------   ----------   ----------   ----------
Income before income taxes and
  accounting change..........................         1,201        1,770        1,019          808        1,149
Income taxes.................................           458          652          365          225          435
                                                 ----------   ----------   ----------   ----------   ----------
Income before accounting change..............           743        1,118          654          583          714
Net effect of change in accounting
  principle..................................            --          (16)          --           --           --
                                                 ----------   ----------   ----------   ----------   ----------
Net income...................................    $      743   $    1,102   $      654   $      583   $      714
                                                 ==========   ==========   ==========   ==========   ==========
Earnings per share:
  Basic......................................    $     0.54   $     0.77          n/a          n/a          n/a
                                                 ==========   ==========   ==========   ==========   ==========
  Fully diluted..............................    $     0.53   $     0.77          n/a          n/a          n/a
                                                 ==========   ==========   ==========   ==========   ==========
</TABLE>


                                       3
<PAGE>

Selected Ratios

<TABLE>
<CAPTION>
                                                                                  At or for the
                                                                           Year Ended December 31,
                                                            ---------------------------------------------------
                                                              1999       1998       1997       1996       1995
                                                            --------   --------   --------   --------   ------
<S>                                                           <C>        <C>        <C>        <C>        <C>
Performance Ratios:
  Return on average assets (net income
    divided by average total assets)......................    0.78%      1.37%      1.01%      1.01%      1.33%
  Return on average equity (net income
    divided by average equity)............................    4.30       5.49       9.94      10.19      14.75
  Dividend Payout Ratio (dividends per share
    divided by earnings per share)........................  796.30      38.96        n/a        n/a        n/a
  Interest rate spread (combined weighted
    average interest rate earned less combined
    weighted average interest rate cost)..................    2.90       3.00       3.30       3.40       3.60
  Net interest margin (net interest income
    divided by average interest-earning assets)...........    3.60       4.10       3.84       3.83       3.93
  Ratio of average interest-earning assets
    to average interest-bearing liabilities...............  121.60     130.60     109.30     109.30     108.70
  Ratio of noninterest expense to
    average total assets..................................    2.40       1.94       2.09       2.57       2.02
  Efficiency Ratio (noninterest expense
    divided by total of net interest income
    and noninterest income)...............................   65.23      46.80      53.81      64.65      48.50


Asset Quality Ratios:
  Nonperforming assets to total assets at
    end of period.........................................    0.48       0.50       0.93       0.63       0.54
  Nonperforming loans to total loans at
    end of period.........................................    0.59       0.88       1.70       0.84       0.72
  Allowance for loan losses to total loans
    at end of period......................................    1.06       1.18       1.31       1.10       1.21
  Allowance for loan losses to nonperforming
    loans at end of period................................  175.33     132.98      76.73     129.93     168.86
  Provision for loan losses to total loans ...............    0.04       0.04       0.31         --         --
  Net charge-offs to average loans
    outstanding...........................................    0.01       0.02       0.03       0.01       0.01


Capital Ratios:
  Equity to total assets at end of period.................   12.64      20.57       7.83      10.07      10.03
  Average equity to average assets........................   18.08      24.95      10.12       9.95       9.05
</TABLE>


                                       4
<PAGE>

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


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

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

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

Asset/Liability Management

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

     An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, its net portfolio value and net interest income would tend to
increase


                                       5
<PAGE>

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.

     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, 1999.

<TABLE>
<CAPTION>
                                                        Change in NPV
                Change in                       ----------------------------
          Market Interest Rates                 Policy Limit     Computation
          ---------------------                 ------------     -----------
<S>                                                   <C>                <C>
               +3%                                    (50)%              (27)%
               +2%                                    (25)               (17)
               +1%                                    (10)                (8)
                0%                                     --                 --
               -1%                                    (10)                 *
               -2%                                    (25)                 *
               -3%                                    (50)                 *
               ------
               * No loss calculated.

</TABLE>

                                       6
<PAGE>

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

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

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

Average Balances, Interest and Average Yields

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


                                       7
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                       ---------------------------------------------------------------------------------------------
                                                  1999                             1998                         1997
                                       ----------------------------   ----------------------------   -------------------------------
                                                            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).................  $  57,431  $   4,768     8.3%  $  51,562  $   4,321    8.4%   $  45,765   $   4,009     8.8%
  Investment securities..............     31,694      1,735     5.5      22,093      1,265    5.7       14,591         897     6.1
  Other interest-earning assets......      4,259        216     5.1       4,000        197    4.9        3,488         214     6.1
                                       ---------  ---------           ---------  ---------           ---------   ---------
    Total interest-earning assets ...     93,384      6,719     7.2      77,655      5,783    7.4       63,844       5,120     8.0
Noninterest-earning assets...........      2,211         --      --       2,789         --     --        1,144          --      --
                                       ---------  --------- -------   ---------  --------- ------    ---------   --------- -------
    Total assets.....................  $  95,595  $   6,719      --   $  80,444  $   5,783     --    $  64,988   $   5,120      --
                                       =========  ========= =======   =========  ========= ======    =========   ========= =======

Interest-bearing liabilities:
  Deposits...........................  $  71,822  $   3,077     4.3   $  58,276  $   2,553    4.4    $  57,397   $   2,711     4.7
  FHLB advances and note payable.....      4,995        251     5.0       1,191         56    4.7           --          --      --
                                       ---------  --------- -------   ---------  --------- ------    ---------   --------- -------
    Total interest-bearing liabilities    76,817      3,328     4.3      59,467      2,609    4.4       57,397       2,711     4.7
Noninterest-bearing liabilities......      1,494         --      --         905         --     --        1,014          --      --
                                       ---------  --------- -------   ---------  --------- ------    ---------   --------- -------
    Total liabilities................     78,311      3,328      --      60,372      2,609     --       58,411       2,711      --
Shareholders' equity.................     17,284         --      --      20,072         --     --        6,577          --      --
                                       ---------  --------- -------   ---------  --------- ------    ---------   --------- -------
    Total liabilities and equity.....  $  95,595  $   3,328      --   $  80,444  $   2,609     --    $  64,988       2,711      --
                                       =========  ========= =======   =========  ========= ======    =========   --------- =======
Net interest income..................             $   3,391                      $   3,174                       $   2,409
                                                  =========                      =========                       =========
Interest rate spread.................                           2.9%                          3.0%                             3.3%
                                                              =====                        ======                          =======
Net interest margin..................                           3.6%                          4.1%                             3.8%
                                                              =====                        ======                          =======
Ratio of average interest-earning assets
  to average interest-bearing liabilities                     121.6%                        130.6%                           109.3%
                                                              =====                        ======                          =======
</TABLE>

(1)  Includes nonaccrual loans.


                                       8
<PAGE>

Rate/Volume Analysis

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                         ----------------------------------------------------------------
                                            1999         vs.      1998         1998       vs.       1997
                                         -------------------------------    ------------------------------
                                                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....................   $   500     $   (53)   $    447    $   500    $  (188)     $  312
  Investment securities...............       517         (47)        470        421        (53)        368
  Other interest-earning assets.......        12           7          19         28        (45)        (17)
                                         -------     -------    --------    -------    --------     -------
      Total interest-earning assets...     1,029         (93)        936        949       (286)        663
                                         -------     -------    --------    -------    --------     ------

Interest expense:
  Deposits............................       583         (59)        524         26       (184)       (158)
  FHLB advances and note payable......       190           5         195         56         --          56
                                         -------     -------    --------    -------    -------      ------
      Total interest-bearing liabilities     773         (54)        719         82       (184)       (102)
                                         -------     -------    --------    -------    --------     -------
Change in net interest income.........   $   256     $   (39)   $    217    $   867    $  (102)     $  765
                                         =======     =======    ========    =======    ========     ======
</TABLE>


Comparison of Financial Condition at December 31, 1999 and December 31, 1998

     Total assets declined $3.0 million, or 3.1%, from $97.1 million at December
31, 1998 to $94.1 million at December 31, 1999. The Company's asset decline was
attributable principally to a reduction in cash and investment securities to
offset loan growth and fund a special dividend to shareholders.

     Investment securities available for sale decreased $6.4 million, or 19.4%,
from December 31, 1998 to December 31, 1999. The Company received principal
repayments on mortgage-backed securities and proceeds from maturities and sale
of investment securities available for sale in excess of amounts of purchases.
During 1999, the Company adopted FASB SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and transferred all of its investment
securities held to maturity to its available for sale portfolio as allowed by
SFAS No. 133.

     Loans receivable increased $8.2 million, or 15.4% from $53.3 million at
December 31, 1998 to $61.5 million at December 31, 1999 as originations exceeded
repayments for the period by approximately $8.5 million. Loan growth occurred
primarily in the one- to four-family residential loan portfolio which increased
$6.7 million, or 16.1%. The Bank also saw growth in its commercial real estate
loan portfolio which grew $1.8 million, or 25.2%.


                                       9
<PAGE>

     Total deposits increased $4.0 million, or 5.7%, from $69.8 million at
December 31, 1998 to $73.8 million at December 31, 1999. The increase was
primarily due to interest credited to accounts and introduction of a new
14-month certificate of deposit. At December 31, 1999, the Bank had $2.6 million
in 14-month CDs.

     During 1999, the Company reduced its level of borrowings from the FHLB of
Cincinnati from $5.7 million to $3.8 million as a result of the increase in
deposits. In late 1999, however, the Company obtained a commercial bank loan of
$3.2 million bearing interest at 1-1/4% below Wall Street Prime and maturing in
2000. The funds were used to pay a portion of the special dividend to
shareholders. The loan is expected to be repaid with proceeds from maturities
and principal repayments of investment securities.

     The Company's shareholders' equity decreased $8.1 million, or 40.5% from
$20.0 million at December 31, 1998 to $11.9 million at December 31, 1999. The
decrease was due principally to dividends paid to shareholders totaling $5.9
million (including the one-time return of capital dividend in November 1999) and
a net increase in stock repurchased and held in trust accounts of $2.2 million.
The resultant decrease in retained earnings was partially offset by $743,000 of
net income during the year. Also contributing to the decrease in stockholders'
equity was a decrease in accumulated other comprehensive income of $715,000.

Comparison of Results of Operations for the Years Ended December 31, 1999, 1998
and 1997

     Net income was $743,000 for the year ended December 31, 1999 compared to
net income of $1.1 million for the year ended December 31, 1998 and net income
of $654,000 for the year ended December 31, 1997. The decrease in net income
during 1999 was caused by an increase in non-interest expense which offset an
improvement in net interest income. Net income for 1999 resulted in a return on
average assets of 0.78% compared to 1.37% for 1998 and 1.0% for 1997, and a
return on average equity of 4.30% for 1999 as compared to 5.49% for 1998 and
9.94% for 1997.

     Interest Income. Interest income totaled $6.7 million, $5.8 million and
$5.1 million for the years ended December 31, 1999, 1998 and 1997, respectively,
primarily due to increases in the average balance of interest-bearing assets
during each of the last three years. The effect of these increases, however, has
been partially offset by declines in the weighted average yield on interest-
earning assets during these periods. The average yield on interest-earning
assets decreased to 7.2% in 1999 from 7.4% in 1998 and 8.0% in 1997. The
decrease in 1999 was attributable to a reduction in rates received on loans and
investment securities while the decrease in 1998 was attributable to a reduction
in rates received on loans, investment securities and other interest-earning
assets. The average balance of interest-earning assets increased $15.7 million
in 1999 and $13.8 million in 1998 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, 1999 was from loans receivable. Interest income from loans
receivable was $4.8 million, $4.3 million and $4.0 million for the years ended
December 31, 1999, 1998 and 1997, respectively. The


                                       10
<PAGE>

average yield earned on loans receivable was 8.8% and 8.4% in 1997 and 1998,
respectively, and decreased to 8.3% in 1999. The average balances of loans
receivable increased during the period with a $3.3 million increase in 1997, a
$5.8 million increase in 1998 and a $5.9 million increase in 1999 due to strong
loan demand in the Bank's market area. Interest income on investment securities
increased in 1999 by $470,000 due to a $9.6 million increase in average balances
which offset a 20 basis point decrease in average rates and increased in 1998 by
$368,000 due to a $7.5 million increase in average balances offsetting a 40
basis point decrease in average rates.

     Interest Expense. Interest expense totaled $3.3 million, $2.6 million and
$2.7 million for the three years ended December 31, 1999, 1998 and 1997,
respectively. The increase in interest expense during 1999 was due to a $17.4
million increase in average interest-bearing liabilities which offset a 10 basis
point reduction in average rates.

     Net Interest Income. Net interest income was $3.4 million, $3.2 million and
$2.4 million for the years ended December 31, 1999, 1998 and 1997. The increases
in net interest income over the past several years reflects the growth in the
Bank's interest-earning assets which has offset a narrowing of the net interest
spread over this period. The net interest spread for 1999 was 2.9% compared to
3.0% in 1998 and 3.3% in 1997. During 1999, the Company significantly increased
its level of interest-bearing liabilities to offset the decline in funding from
equity resulting from the return of capital distribution. As a result of this
change in the balance sheet, the ratio of average interest-earning assets to
average interest-bearing liabilities declined to 121.6% in 1999 from 130.6% in
1998. This change in the asset/liability mix is expected to put continued
pressure on the Company's net interest margin which narrowed to 3.6% during 1999
from 4.1% during 1998.

     Provision for Loan Losses. The provision for loan losses was $24,000 in
both 1999 and 1998, and $150,000 in 1997. The amount of provision, if any, for
any period is determined as of the end of the period based on a comparison of
the amount of existing loan loss reserves with management's analysis of various
risk factors that affect the loan portfolio. In 1997, the Bank saw an increase
in past-due loans and classified assets. The Company's analysis of the reserve
for loan losses led to the conclusion that a provision of $150,000 was
necessary, even though charge-offs still remained modest at $18,000. In 1998 and
1999, the Bank's past-due loans and classified assets decreased so the Company
reduced its provision to $24,000 for each year. At December 31, 1999, the ratio
of the allowance to non-performing loans was 175.3%.

     Noninterest Income. Noninterest income for the years ended December 31,
1999, 1998 and 1997 was $134,000, $167,000 and $121,000, respectively.
Noninterest income consists primarily of customer service fees related to
customers' deposit accounts and loan service charges. Noninterest income
decreased from 1998 to 1999 due to $81,000 in losses on sales of investment
securities available for sale. Noninterest income increased from 1997 to 1998
due to an increase in the number of deposit accounts and increased loan volume
which increased related fee income.

     Noninterest Expense. Noninterest expense for the years ended December 31,
1999, 1998 and 1997 was $2.3 million, $1.5 million and $1.4 million,
respectively. The increase in noninterest


                                       11
<PAGE>

expense in 1999 was primarily due to $303,000 increase in employee benefit plan
costs due to the adoption of certain benefit plans during the year, a $76,000
increase in data processing fees, goodwill amortization expense increase of
$73,000, occupancy and equipment cost increases of $75,000 and general increases
in other operating costs related to being a publicly-traded entity. The
increases in amortization expense and occupancy and equipment cost reflect the
acquisition of a branch in late 1998. The increase in noninterest expense in
1998 was primarily due to a $60,000 increase in retirement plan contributions, a
$47,000 increase in data processing fees, and general increases in other
operating costs related to becoming a publicly-traded entity.

     The Company's operating efficiency, measured by its efficiency ratios
(noninterest expense divided by the total of net interest income and noninterest
income), was 65.2%, 46.8% and 53.8% for the years ended December 31, 1999, 1998
and 1997, respectively. The increase in the ratio during 1999 was due to
increased employee benefit plan costs, goodwill amortization expense, data
processing fees and occupancy and equipment costs. The decrease in the ratio
during 1998 was due to a significant increase in net interest income without a
corresponding significant increase in noninterest expense. The adjusted ratios
of noninterest expense to average total assets ratio were 2.40%, 1.94% and 2.09%
for the years ended December 31, 1999, 1998 and 1997, respectively.

     Income Taxes. The Company's effective tax rate was 38%, 37% and 36% for the
years ended December 31, 1999, 1998 and 1997, respectively. 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, 1999 and 1998 was 18.08% and 24.95%, respectively. At
December 31, 1999, the Bank exceeded all current regulatory capital requirements
and met the definition of a "well-capitalized" institution, the highest
regulatory category.

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

     The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which may be varied at the discretion of
the OTS depending on economic conditions and deposit outflows, is based upon a
percentage of deposits and, if any, short-


                                       12
<PAGE>

term borrowings. At December 31, 1999, current OTS regulations required that a
savings institution maintain liquid assets of not less than 4% of its average
daily balance of net withdrawal deposit accounts and borrowings payable in one
year or less. At December 31, 1999, the Bank's liquidity, as measured for
regulatory purposes, was 12.8% or $5.6 million in excess of the minimum OTS
liquidity requirement of 4%. 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, 1999
and 1998, cash and amounts due from depository institutions totaled $2.4 million
and $6.1 million, respectively.

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

     The Company has also designated certain securities as available for sale in
order to meet liquidity demands. At December 31, 1999, it had designated
securities with a fair value of $27.9 million as available for sale. In addition
to internal sources of funding, the Company as a member of the FHLB of
Cincinnati has substantial borrowing authority with the FHLB of Cincinnati. The
Company's use of a particular source of funds is based on need, comparative
total costs and availability.

     At December 31, 1999, the Company had outstanding approximately $473,000 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 $43.7 million. The Company anticipates that it will have
resources to meet its current commitments through internal funding sources
described above. Historically, it has been able to retain a significant amount
of its deposits as they mature.

Impact of Inflation and Changing Prices

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


                                       13
<PAGE>

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

Impact of New Accounting Standards

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

     Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No.133 establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It supersedes FASB
Statements No. 80, "Accounting for Future Contracts," No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," and No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." It amends FASB Statement No. 107, "Disclosure About Fair Value of
Financial Investments" to include in Statement No. 107 the disclosure provisions
about concentrations of credit risk from Statement No. 105. This Statement is
effective for all fiscal quarters of fiscal years beginning June 15, 1999. On
July 1, 1999, the Company adopted SFAS No. 133. Since the Company does not hold
any derivative instruments or engage in hedging activities, the adoption of SFAS
No. 133 did not have a significant impact on the Company's financial position
and results of operations.

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


                                       14
<PAGE>

                      [LETTERHEAD OF PUGH & COMPANY, P.C.]

                          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, 1999 and
1998, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for the years ended December 31,
1999, 1998, and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Tennessee
Bankshares, Inc. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998, and 1997, in conformity with generally accepted accounting
principles.



                                                    /s/ Pugh & Company, P.C.
                                                    Certified Public Accountants
                                                    March 20, 2000


                                       15
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                               As of December 31,          1999            1998
                                                       ------------    ------------
                                     ASSETS
<S>                                                    <C>             <C>
Cash and Amounts Due From Depository Institutions      $  2,386,725    $  6,131,189
Investment Securities:
 Available for Sale, at Fair Value                       27,935,083      33,022,478
 Held to Maturity, at Amortized Cost                              0       2,431,337
Loans Receivable, Net                                    61,516,042      53,346,088
Premises and Equipment, Net                                 511,010         474,029
Foreclosed Real Estate - Held for Sale                       71,181               0
Accrued Interest Receivable                                 438,979         442,523
Goodwill, Net of Amortization                             1,113,217       1,193,208
Prepaid Expenses and Other Assets                           147,917          29,476
                                                       ------------    ------------

TOTAL ASSETS                                           $ 94,120,154    $ 97,070,328
                                                       ============    ============

                             LIABILITIES AND EQUITY
LIABILITIES
Deposits
 Demand                                                $ 21,673,733    $ 21,114,767
 Term                                                    52,135,798      48,720,497
                                                       ------------    ------------
  Total Deposits                                         73,809,531      69,835,264

Note Payable                                              3,200,000               0
Advances From Federal Home Loan Bank                      3,767,489       5,688,579
Accrued Interest Payable                                    283,524         289,738
Accrued Income Taxes                                              0          20,185
Deferred Income Taxes                                       456,738         859,523
Accrued Benefit Plan Liabilities                            618,725         318,283
Other Liabilities                                            83,048          89,240
                                                       ------------    ------------
  Total Liabilities                                      82,219,055      77,100,812
                                                       ------------    ------------

SHAREHOLDERS' EQUITY
Common Stock - No Par Value, Authorized
 20,000,000 Shares; Issued and Outstanding
 1,382,013 Shares in 1999 and 1998                       13,091,119      13,091,119
Unearned Compensation - Employee Stock Ownership Plan    (1,004,628)     (1,129,086)
Shares in Grantor Trust - Contra Account                   (201,632)       (137,210)
Shares in MRP Plan - Contra Account                        (556,474)              0
Shares in Stock Option Plan - Contra Account             (1,657,722)              0
Retained Earnings                                         1,751,239       6,950,529
Accumulated Other Comprehensive Income                      479,197       1,194,164
                                                       ------------    ------------
  Total Shareholders' Equity                             11,901,099      19,969,516
                                                       ------------    ------------

TOTAL LIABILITIES AND EQUITY                           $ 94,120,154    $ 97,070,328
                                                       ============    ============

</TABLE>

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


                                       16
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
           For the Years Ended December 31,          1999                  1998                   1997
                                                 -----------            -----------            -----------
<S>                                              <C>                    <C>                    <C>
INTEREST INCOME
 Loans                                           $ 4,767,963            $ 4,320,801            $ 4,009,224
 Investment Securities                             1,734,348              1,265,559                896,464
 Other Interest-Earning Assets                       216,285                196,844                214,289
                                                 -----------            -----------            -----------
  Total Interest Income                            6,718,596              5,783,204              5,119,977
                                                 -----------            -----------            -----------

INTEREST EXPENSE
 Deposits                                          3,076,826              2,553,048              2,710,757
 Advances From Federal Home Loan Bank
  and Note Payable                                   250,986                 56,078                      0
                                                 -----------            -----------            -----------
  Total Interest Expense                           3,327,812              2,609,126              2,710,757
                                                 -----------            -----------            -----------

NET INTEREST INCOME                                3,390,784              3,174,078              2,409,220

PROVISION FOR LOAN LOSSES                             24,000                 24,000                150,000
                                                 -----------            -----------            -----------

NET INTEREST INCOME AFTER PROVISION
 FOR LOAN LOSSES                                   3,366,784              3,150,078              2,259,220
                                                 -----------            -----------            -----------

NONINTEREST INCOME
 Deposit Account Service Charges                     135,274                 91,195                 50,562
 Loan Service Charges and Fees                        58,298                 62,594                 57,852
 Net Gain (Loss) on Sales of Investment
  Securities Available for Sale                      (81,248)                   312                      0
 Other                                                21,408                 12,800                 12,229
                                                 -----------            -----------            -----------
  Total Noninterest Income                           133,732                166,901                120,643
                                                 -----------            -----------            -----------

NONINTEREST EXPENSE
 Compensation and Benefits                         1,133,759                665,802                731,233
 Occupancy and Equipment                             228,380                153,260                150,446
 Federal Deposit Insurance Premiums                   52,396                 52,554                 51,000
 Data Processing Fees                                233,931                157,784                110,564
 Advertising and Promotion                            82,248                 68,456                 54,931
 Amortization                                         80,992                  7,666                      0
 Other                                               487,302                441,495                263,027
                                                 -----------            -----------            -----------
  Total Noninterest Expense                        2,299,008              1,547,017              1,361,201
                                                 -----------            -----------            -----------

INCOME BEFORE INCOME TAXES AND CUMULATIVE
 EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE          1,201,508              1,769,962              1,018,662

INCOME TAXES                                         458,142                651,539                365,008
                                                 -----------            -----------            -----------

INCOME BEFORE CUMULATIVE EFFECT
 OF CHANGE IN ACCOUNTING PRINCIPLE                   743,366              1,118,423                653,654

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

NET INCOME                                       $   743,366            $ 1,101,813            $   653,654
                                                 ===========            ===========            ===========

EARNINGS PER SHARE:
 Basic                                           $      0.54            $      0.77                    N/A
                                                 ===========            ===========            ===========
 Diluted                                         $      0.53            $      0.77                    N/A
                                                 ===========            ===========            ===========

</TABLE>

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


                                       17
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
       For the Years Ended December 31,       1999            1998           1997
                                            -----------    -----------    -----------
<S>                                         <C>            <C>            <C>
NET INCOME                                  $   743,366    $ 1,101,813    $   653,654
                                            -----------    -----------    -----------

OTHER COMPREHENSIVE INCOME (LOSS),
 NET OF TAX:
  Unrealized Gains (Losses) on Investment
   Securities Available for Sale             (1,234,419)       689,693        476,329
  Less Reclassification Adjustment for
   Gains/Losses Included in Net Income           81,248           (312)             0
  Less Income Taxes Related to Unrealized
   Gains/Losses on Investment Securities
   Available for Sale                           438,204       (261,964)      (181,005)
                                            -----------    -----------    -----------

    Other Comprehensive Income (Loss),         (714,967)       427,417        295,324
     Net of Tax
                                            -----------    -----------    -----------

COMPREHENSIVE INCOME                        $    28,399    $ 1,529,230    $   948,978
                                            ===========    ===========    ===========

</TABLE>





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


                                       18
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                   For the Three Years Ended December 31, 1999

<TABLE>
<CAPTION>
                                                                                      Shares in       Shares in
                                                                        Unearned       Grantor         MRP Plan -
                                                       Common         Compensation   Trust-Contra       Contra
                                                       Stock              ESOP          Account        Account
                                                      -----------    ------------    ------------    -------------
<S>                                                   <C>             <C>             <C>             <C>
BALANCES, JANUARY 1, 1997                             $         0    $          0    $          0    $          0

Net Income                                                      0               0               0               0

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

BALANCES, DECEMBER 31, 1997                                     0               0               0               0

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

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

Net Income                                                      0               0               0               0

Dividends Paid                                                  0               0               0               0

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

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

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

BALANCES, DECEMBER 31, 1998                            13,091,119      (1,129,086)       (137,210)              0

Net Income                                                      0               0               0               0

Dividends Paid                                                  0               0               0               0

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

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

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

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

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

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

Other Comprehensive Loss                                        0               0               0               0
                                                     ------------    ------------    ------------    ------------

BALANCES, DECEMBER 31, 1999                          $ 13,091,119    $ (1,004,628)   $   (201,632)   $   (556,474)
                                                     ============    ============    ============    ============

</TABLE>

The accompanying notes are an integral part of these financial statements


                                       19
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Continued)

                   For the Three Years Ended December 31, 1999

<TABLE>
<CAPTION>
                                        Shares in                     Accumulated
                                       Stock Option                      Other            Total
                                       Plan - Contra     Retained     Comprehensive    Shareholders'
                                        Account          Earnings        Income          Equity
                                       ------------    ------------    ------------    ------------
<S>                                    <C>             <C>             <C>             <C>
BALANCES, JANUARY 1, 1997              $          0    $  5,631,487    $    471,423    $  6,102,910

Net Income                                        0         653,654               0         653,654

Other Comprehensive Income                        0               0         295,324         295,324
                                       ------------    ------------    ------------    ------------

BALANCES, DECEMBER 31, 1997                       0       6,285,141         766,747       7,051,888

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

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

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

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

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

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

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

BALANCES, DECEMBER 31, 1998                       0       6,950,529       1,194,164      19,969,516

Net Income                                        0         743,366               0         743,366

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

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

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

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

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

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

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

Other Comprehensive Loss                          0               0        (714,967)       (714,967)
                                       ------------    ------------    ------------    ------------

BALANCES, DECEMBER 31, 1999            $ (1,657,722)   $  1,751,239    $    479,197    $ 11,901,099
                                       ============    ============    ============    ============

</TABLE>

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


                                       20
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
         For the Years Ended December 31,            1999             1998             1997
                                                 ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
OPERATING ACTIVITIES
 Net Income                                      $    743,366    $  1,101,813    $    653,654
                                                 ------------    ------------    ------------
 Adjustments to Reconcile Net Income to Net
  Cash Provided by Operating Activities:
   Cumulative Effect of Change in
    Accounting Principle                                    0          16,610               0
   Provision for Loan Losses                           24,000          24,000         150,000
   Depreciation                                        56,743          46,404          43,721
   Amortization of Organization Costs                   1,000           1,000               0
   Amortization of Goodwill                            79,991           6,666               0
   Amortization of Investment Securities
    Premiums and Discounts, Net                        34,361           3,210         (26,200)
   Increase (Decrease) in Unearned Loan Fees           26,489         (17,541)         16,058
   Net Gain on Sales of Foreclosed Real Estate              0          (1,100)         (1,858)
   Federal Home Loan Bank Stock Dividends             (48,100)        (40,300)        (37,500)
   Net (Gain) Loss on Sales of Investment
    Securities Available for Sale                      81,248            (312)              0
   Deferred Income Taxes (Benefit)                     35,419          13,964         (71,051)
   (Increase) Decrease in:
    Accrued Interest Receivable                         3,544         (65,038)        (83,128)
    Prepaid Conversion Costs                                0         466,862        (466,862)
    Prepaid Expenses and Other Assets                (119,441)         (9,921)         50,801
   Increase (Decrease) in:
    Accrued Interest Payable                           (6,214)        (59,940)         28,686
    Accrued Income Taxes                              (20,185)       (171,107)        209,292
    Accrued Benefit Plan Liabilities                  300,442         318,283               0
    Other Liabilities                                  (6,192)       (321,185)        196,723
                                                 ------------    ------------    ------------
     Total Adjustments                                443,105         210,555           8,682
                                                 ------------    ------------    ------------
      Net Cash Provided by
       Operating Activities                         1,186,471       1,312,368         662,336
                                                 ------------    ------------    ------------

INVESTING ACTIVITIES
 Cash and Cash Equivalents Received
  in Purchase of Branch                                     0      13,491,665               0
 Purchases of Investment Securities Available
  for Sale                                         (5,519,545)    (25,389,392)     (4,975,359)
 Proceeds From Sales of Investment Securities
  Available for Sale                                2,460,469       1,000,312               0
 Proceeds From Maturities of Investment
  Securities Available for Sale                     2,000,000       3,500,000         500,000
 Principal Payments Received on Investment
  Securities Available for Sale                     6,245,777       3,797,388       1,500,756
 Purchases of Investment Securities
  Held To Maturity                                   (449,515)     (1,641,799)       (157,556)
 Proceeds From Maturities of Investment
  Securities Held to Maturity                         984,354         240,000         290,000
 Principal Payments Received on Investment
  Securities Held to Maturity                         576,512          47,956           1,729
 Net Increase In Loans                             (8,315,821)     (6,168,493)     (3,204,312)
 Purchases of Premises and Equipment, Net             (93,724)        (39,377)        (12,022)
 Proceeds From Sales of Foreclosed Real Estate         24,197          20,000          93,015
                                                 ------------    ------------    ------------
     Net Cash Used in Investing Activities         (2,087,296)    (11,141,740)     (5,963,749)
                                                 ------------    ------------    ------------

</TABLE>

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


                                       21
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
         For the Years Ended December 31,                         1999            1998            1997
                                                             ------------    ------------    ------------
<S>                                                          <C>             <C>             <C>
FINANCING ACTIVITIES
 Repurchase and Retirement of Common Stock                              0        (884,559)              0
 Dividends Paid                                                (5,942,656)       (436,425)              0
 Net (Increase) Decrease in Cash Received
  From Stock Subscriptions                                              0      23,598,226     (23,598,226)
 Purchase of Common Stock for Stock Option
  Plan                                                         (1,657,722)              0               0
 Purchase of Common Stock for MRP Plan                           (712,033)              0               0
 Issuance of Common Stock Pursuant to
  MRP Plan                                                        155,559               0               0
 Increase in Grantor Trust - Contra Account                       (64,422)              0               0
 Payment on ESOP Loan and Release of Shares                       124,458               0               0
 Net Cash Proceeds From Issuance
  of Common Stock                                                       0       7,195,365               0
 Net Increase (Decrease) in Stock
  Subscription Escrow Accounts                                          0     (23,598,226)     23,598,226
 Net Increase in Deposits                                       3,974,267       2,506,057       4,304,430
 Advances From the Federal Home Loan Bank                               0       6,000,000               0
 Repayment of Advances From Federal
  Home Loan Bank                                               (1,921,090)       (311,421)              0
 Proceeds From Borrowing on Note Payable                        3,200,000               0               0
                                                             ------------    ------------    ------------
     Net Cash Provided by (Used in) Financing
      Activities                                               (2,843,639)     14,069,017       4,304,430
                                                             ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                              (3,744,464)      4,239,645        (996,983)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                    6,131,189       1,891,544       2,888,527
                                                             ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                       $  2,386,725    $  6,131,189    $  1,891,544
                                                             ============    ============    ============

Supplementary Disclosures of Cash Flow Information:
 Cash Paid During the Year For:
  Interest                                                   $  3,334,026    $  2,574,071    $  2,682,071
  Income Taxes                                               $    560,547    $    833,809    $    192,440
Supplementary Disclosures of Noncash Investing Activities:
 Sale of Foreclosed Real Estate
  by Origination of Mortgage Loans                           $          0    $          0    $     56,968
 Acquisition of Foreclosed Real Estate                       $     95,378    $          0    $    167,025
 Change in Unrealized Gain/Loss on Investment
  Securities Available for Sale                              $ (1,153,171)   $    689,381    $    476,329
 Change in Deferred Income Tax Associated
  With Unrealized Gain/Loss on Investment
  Securities Available for Sale                              $    438,204    $   (261,964)   $   (181,005)
 Change in Net Unrealized Gain/Loss on
  Investment Securities Available for Sale                   $   (714,967)   $    427,417    $    295,324
 Purchase of Branch:
  Fair Value of Assets Acquired:
   Cash and Cash Equivalents                                 $          0    $ 13,491,665    $          0
   Loans                                                                0          25,939               0
   Premises and Equipment                                               0         285,000               0
   Other Assets                                                         0           1,576               0
                                                             ------------    ------------    ------------
    Fair Value of Assets Acquired                                       0      13,804,180               0
                                                             ------------    ------------    ------------
  Fair Value of Liabilities Assumed:
   Deposits                                                             0      14,909,059               0
   Accrued Interest Payable                                             0          94,995               0
                                                             ------------    ------------    ------------
  Fair Value of Liabilities Assumed                                     0      15,004,054               0
                                                             ------------    ------------    ------------
   Excess of Cost Over Fair Value
    of Assets Acquired                                       $          0    $  1,199,874    $          0
                                                             ============    ============    ============

</TABLE>

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


                                       22
<PAGE>

                UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

<TABLE>
<CAPTION>
            For the Years Ended December 31,                    1999           1998             1997
                                                             ----------      ----------      ----------
<S>                                                          <C>             <C>             <C>
Supplementary Disclosures of Noncash Financing Activities:
 Issuance of Common Stock by Withdrawal From
  Subscribers' Accounts for Stock Purchase                   $        0      $5,651,227      $        0
 Issuance of Common Stock in Exchange for
  ESOP Note                                                  $        0      $1,164,000      $        0
 Reduction of ESOP Note With
  Dividends Received                                         $        0      $   34,914      $        0

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

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

</TABLE>





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



                                       23
<PAGE>

                        UNITED TENNESSEE BANKSHARES, INC.
                                 AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1999, 1998 and 1997


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
1999 and 1998 consolidated financial statements include the accounts of United
Tennessee Bankshares, Inc. and its wholly owned subsidiary, Newport Federal
Bank. The 1997 consolidated financial statements include the accounts of Newport
Federal Bank (formerly Newport Federal Savings and Loan Association) and its
service corporation subsidiary, NFS Service Corporation. In December 1997 the
service corporation subsidiary was dissolved and its only asset (a $15,000
investment in Data Services Corporation of Cincinnati, Ohio) was transferred to
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 Association's primary deposit products are interest-bearing
savings accounts and certificates of deposit. Its primary lending products are
one-to-four family first mortgage loans.

Reclassifications - Certain items in the 1997 and 1998 consolidated financial
statements have been reclassified to conform with the 1999 consolidated
financial statements.

Consolidated Statement of Comprehensive Income - In June 1997 the Financial
Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting comprehensive income and its
components in the consolidated financial statements. The object of the statement
is to report a measure of all changes in equity of an enterprise that results
from transactions and other economic events of the period other than
transactions with owners. Items included in comprehensive income include
revenues, gains and losses that under generally accepted accounting principles
are directly charged to equity. Examples include foreign currency translations,
pension liability adjustments and unrealized gains and losses on investment
securities available for sale. The Company has included its comprehensive income
in separate consolidated statements of comprehensive income for the years ended
December 31, 1999, 1998 and 1997.

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

The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collection of the principal is unlikely. The
allowance is an amount


                                       24
<PAGE>

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:

<TABLE>
<CAPTION>
                                              12/31/99              12/31/98
                                              --------              --------
<S>                                          <C>                   <C>
         Unrestricted Deposits               $1,756,000            $5,223,000

</TABLE>

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

(a) Held to Maturity - These debt securities are carried at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income, using a method which approximates the level
yield method. In placing securities in this category, management has expressed a
positive intent and ability to hold such securities until they mature. Prior to
July 1, 1999, management had classified all of its obligations of states and
political subdivisions in its held to maturity portfolio (see Note 2).

(b) Available for Sale - All other debt and equity securities have been placed
in this 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 placed
in this category may be sold in response to changes in interest rates, liquidity
needs, or for other purposes. Any unrealized gain or loss is reported in the
consolidated statements of comprehensive income, net of any deferred tax effect.

Realized gains or losses on the sales of securities available for sale are based
on the net proceeds and amortized cost of the securities sold, using the
specific identification method. See Note 2 for additional information on
investment securities.

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

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

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


                                       25
<PAGE>

Goodwill - During 1998, the Bank purchased a branch from Union Planters Bank of
the Lakeway area, as disclosed in the consolidated statements of cash flows. The
excess of cost over fair value of net assets acquired is being amortized in
accordance with Statement of Financial Accounting Standards No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions, using the
straight-line method over fifteen years.

Organizational Costs - Organizational costs of the holding company totalling
$5,000 are included in other assets, net of amortization over a five year
period.

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

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

</TABLE>

Earnings per share is not applicable to the year ended December 31, 1997 since
the Company did not issue stock until January 1, 1998.

NOTE 2 - INVESTMENT SECURITIES:

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

<TABLE>
<CAPTION>
                                                                    Investment Securities Available for Sale
                                                       --------------------------------------------------------------------
                                                                               Gross             Gross           Estimated
                                                        Amortized          Unrealized        Unrealized               Fair
                                                             Cost              Gains            Losses               Value
                                                       -----------         ----------        ----------         -----------
<S>                                                    <C>                 <C>               <C>                <C>
As of December 31, 1999:
------------------------
Debt Securities:
 U.S. Treasury Securities and
  Obligations of  U.S. Government
  Corporations and Agencies                            $ 5,463,200            $ 2,848        $(121,463)         $ 5,344,585
 Mortgage-Backed Securities                             19,635,772             51,846         (452,140)          19,235,478
 Obligations of States and
  Political Subdivisions                                 1,275,164                  0                0            1,275,164
                                                       -----------         ----------        ----------         -----------
  Total Debt Securities                                 26,374,136             54,694         (573,603)          25,855,227
                                                       -----------         ----------        ----------         -----------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                             745,600                  0                0              745,600
 Federal Home Loan Mortgage
  Corporation Preferred Stock                               27,448          1,291,808                0            1,319,256
 Data Services Corporation Stock,
  at Cost                                                   15,000                  0                0               15,000
                                                       -----------         ----------        ----------         -----------
   Total Equity Securities                                 788,048          1,291,808                0            2,079,856
                                                       -----------         ----------        ----------         -----------
                                                       $27,162,184         $1,346,502        $(573,603)         $27,935,083
                                                       ===========         ==========        ==========         ===========

</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                     Investment Securities Available for Sale
                                                       --------------------------------------------------------------------
                                                                               Gross             Gross           Estimated
                                                        Amortized          Unrealized        Unrealized               Fair
                                                             Cost              Gains            Losses               Value
                                                       -----------         ----------         ---------         -----------
<S>                                                    <C>                 <C>                <C>               <C>
As of December 31, 1998:
------------------------
Debt Securities:
 U.S. Treasury Securities and
  Obligations of  U.S. Government
  Corporations and Agencies                            $ 6,495,770           $ 58,729         $ (7,612)         $ 6,546,887
 Mortgage-Backed Securities                             23,969,590            130,690          (34,601)          24,065,679
                                                       -----------         ----------         ---------         -----------
  Total Debt Securities                                 30,465,360            189,419          (42,213)          30,612,566
                                                       -----------         ----------         ---------         -----------

Equity Securities:
 Federal Home Loan Bank
  of Cincinnati Stock, at Cost                             588,600                  0                0              588,600
 Federal Home Loan Mortgage
  Corporation Preferred Stock                               27,448          1,778,864                0            1,806,312
 Data Services Corporation Stock,
  at Cost                                                   15,000                  0                0               15,000
                                                       -----------         ----------         ---------         -----------
   Total Equity Securities                                 631,048          1,778,864                0            2,409,912
                                                       -----------         ----------         ---------         -----------
                                                       $31,096,408         $1,968,283         $(42,213)         $33,022,478
                                                       ===========         ==========         =========         ===========

</TABLE>

Gross realized gains and losses from sales of investment securities classified
as available for sale are as follows:

<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                         --------------------------------------------------
                                                                           1999                    1998                1997
                                                                         --------                  ----                ----
<S>                                                                      <C>                       <C>                  <C>
Gross Realized Gains                                                     $  2,460                  $312                 $0
Gross Realized Losses                                                     (83,708)                    0                  0
                                                                         --------                  ----                ---
                                                                         $(81,248)                 $312                 $0
                                                                         ========                  ====                ===

</TABLE>

Mortgage-backed securities consist of the following:

<TABLE>
<CAPTION>
                                                              December 31, 1999                     December 31, 1998
                                                      ------------------------------         -----------------------------
                                                                           Estimated                             Estimated
                                                        Amortized               Fair           Amortized              Fair
                                                            Cost               Value               Cost              Value
                                                           ------             -------             ------            -------
<S>                                                   <C>                 <C>                <C>                <C>
FNMA Certificates                                     $10,857,209         $10,565,413        $13,441,696        $13,488,158
GNMA Certificates                                       3,570,235           3,618,077          4,581,429          4,628,022
FHLMC Certificates                                      5,208,328           5,051,988          5,946,465          5,949,499
                                                       ----------          ----------         ----------         ----------
                                                      $19,635,772         $19,235,478        $23,969,590        $24,065,679
                                                      ===========         ===========        ===========        ===========

</TABLE>

     The amortized cost and estimated fair value of investment securities
     classified as held to maturity are as follows:

<TABLE>
<CAPTION>
                                                                       Investment Securities Held to Maturity
                                                   -------------------------------------------------------------------------
                                                                          Gross                Gross               Estimated
                                                   Amortized            Unrealized           Unrealized              Fair
                                                     Cost                 Gains                Losses                Value
                                                   ----------           ----------           ----------           ----------
<S>                                                <C>                  <C>                  <C>                  <C>
As of December 31, 1999:
------------------------
 Obligations of States and
  Political Subdivisions                           $        0           $        0           $        0           $        0
                                                   ==========           ==========           ==========           ==========

As of December 31, 1998:
------------------------
 Obligations of States and
  Political Subdivisions                           $2,431,337           $   21,169           $        0           $2,452,506
                                                   ==========           ==========           ==========           ==========

</TABLE>

                                       27
<PAGE>

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

The amortized cost and estimated fair value of debt securities available for
sale as of December 31, 1999, by contractual maturity, are as follows:

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

<S>                                       <C>               <C>
Due in One Year or Less                   $ 1,348,926       $ 1,393,228
Due After One Year
 Through Five Years                         7,190,959         6,546,712
Due After Five Years
 Through Ten Years                          2,862,784         2,824,521
Due After Ten Years                        14,971,467        15,090,766
                                          -----------       -----------
                                          $26,374,136       $25,855,227
                                          ===========       ===========

</TABLE>

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

The Company and Bank did not sell any investment securities classified as held
to maturity during the years ended December 31, 1999, 1998, and 1997.

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

Although the Company and Bank do not currently hold any derivative instruments
or engage in hedging activities, the statement also provides a one-time
opportunity for any investments in the held to maturity category to be
transferred into the available for sale category. On July 1, 1999, the Company
and Bank transferred investments with an amortized cost of $2,090,063 (fair
value of $2,100,160) from their held to maturity category to their available for
sale category. The Company and Bank did not transfer any investment securities
between categories during the years ended December 31, 1998 and 1997.

Investments with book values of approximately $2,100,000 and $1,900,000 (which
approximates market values) as of December 31, 1999 and 1998, respectively, were
pledged to secure deposits of public funds.


                                       28
<PAGE>

NOTE 3 - LOANS RECEIVABLE

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

<TABLE>
<CAPTION>
                                                          As of December 31,
                                                       -------------------------
                                                           1999          1998
                                                       -----------   -----------
<S>                                                    <C>           <C>
First mortgage loans (principally conventional):
 Secured by one-to-four family residences              $48,550,214   $41,833,451
 Secured by other properties                             9,099,393     7,266,548
 Construction loans                                      2,615,000     3,235,450
                                                       -----------   -----------
                                                        60,264,607    52,335,449
Less:
 Undisbursed portion of construction loans               1,033,726       748,375
 Net deferred loan origination fees                        286,961       260,472
                                                       -----------   -----------
  Net first mortgage loans                              58,943,920    51,326,602
                                                       -----------   -----------

Consumer and commercial loans:
 Loans to depositors, secured by deposits                1,114,071       847,663
 Automobile                                                979,732       812,992
 Home equity and second mortgage                           208,056       161,872
 Other                                                     931,022       838,222
                                                       -----------   -----------
                                                         3,232,881     2,660,749
Less unearned interest                                          18           281
                                                       -----------   -----------
  Net consumer and commercial loans                      3,232,863     2,660,468
                                                       -----------   -----------
Less allowance for loan losses                             660,741       640,982
                                                       -----------   -----------
                                                       $61,516,042   $53,346,088
                                                       ===========   ===========

</TABLE>

The Bank had outstanding loan commitments of approximately $473,000 and
$1,490,000 (in addition to undisbursed portion of construction loans) at rates
ranging from 8% to 10% as of December 31, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                                                For the Years Ended December 31,
                                              -----------------------------------
                                                 1999        1998          1997
                                              ---------    ---------    ---------
<S>                                           <C>          <C>          <C>
Allowance at beginning of year                $ 640,982    $ 627,669    $ 493,718
 Provision charged to expense                    24,000       24,000      150,000
 Recoveries of loans previously charged off         268        4,179        1,567
 Loans charged off                               (4,509)     (14,866)     (17,616)
                                              ---------    ---------    ---------
Allowance at end of year                      $ 660,741    $ 640,982    $ 627,669
                                              =========    =========    =========

</TABLE>

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

<TABLE>
<CAPTION>
                                                             As of December 31,
                                                             -------------------
                                                               1999        1998
                                                             --------   --------
<S>                                                          <C>        <C>
Recorded value of all impaired loans                         $377,000   $482,000
Average individual loan balance                              $ 19,000   $ 28,000
Total allowance for loan losses related to impaired loans    $      0   $      0

</TABLE>

The Bank records payments received on impaired loans that are well secured and
in the process of collection on the cash receipts method, whereby payments are
first applied to accrued interest and then to reduce principal balances.
Payments received on impaired


                                       29
<PAGE>

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,
                                                             -------------------
                                                               1999        1998
                                                             -------     -------

<S>                                                          <C>         <C>
Cash receipts applied to reduce principal balance            $20,478     $14,793
Cash receipts recognized as interest income                   31,228      41,641
                                                             -------     -------
Total cash receipts                                          $51,706     $56,434
                                                             =======     =======

</TABLE>

NOTE 4 - PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:
<TABLE>
<CAPTION>
                                                         As of December 31,
                                                    ----------------------------
                                                       1999               1998
                                                    ----------        ----------
<S>                                                 <C>               <C>
Land                                                $  168,539        $  148,100
Buildings                                              752,830           752,830
Furniture and equipment                                389,430           323,778
                                                    ----------        ----------
                                                     1,310,799         1,224,708
Less accumulated depreciation                          799,789           750,679
                                                    ----------        ----------
                                                    $  511,010        $  474,029
                                                    ==========        ==========

</TABLE>

Depreciation expense for the years ended December 31, 1999, 1998 and 1997
totalled $56,743, $46,404, and $43,721, respectively.


NOTE 5 - DEPOSITS

A summary of deposits is as follows:
<TABLE>
<CAPTION>
                                                         As of December 31,
                                                   -----------------------------
                                                      1999               1998
                                                   -----------       -----------
<S>                                                <C>               <C>
Demand Deposits:
 Now Accounts                                      $ 7,017,575       $ 6,864,925
 Money Market Deposit Accounts                       3,180,020         3,643,861
 Passbook Savings                                   11,476,138        10,605,981
                                                   -----------       -----------
   Total Demand Deposits                            21,673,733        21,114,767
                                                   -----------       -----------

Term Deposits:
 Less than $100,000                                 36,821,432        35,402,038
 $100,000 or More                                   15,314,366        13,318,459
                                                   -----------       -----------
  Total Term Deposits                               52,135,798        48,720,497
                                                   -----------       -----------
                                                   $73,809,531       $69,835,264
                                                   ===========       ===========
</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, 1999 are
as follows:

<TABLE>
          <S>                   <C>
            2000                  $43,729,482
            2001                    7,757,861
            2002                      348,450
            2003                      300,005
                                  -----------
                                  $52,135,798
                                  ===========
</TABLE>

                                       30
<PAGE>

NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK

In November 1998, the Bank obtained an advance from the Federal Home Loan Bank
of Cincinnati (FHLB). The advance is repayable monthly at 4.75% over three
years. Interest expense associated with the advance from the FHLB totalled
$228,742 for the year ended December 31, 1999 ($56,078 in 1998). Pursuant to the
Bank's collateral agreement with the FHLB, advances are secured by the Bank's
FHLB stock and qualifying first mortgage loans. The scheduled maturities of the
advances from the FHLB as of December 31, 1999 are as follows:

<TABLE>
<S>                               <C>
            2000                  $2,014,355
            2001                   1,753,134
                                  ----------
                                  $3,767,489
                                  ==========
</TABLE>

NOTE 7 - NOTE PAYABLE

At December 31, 1999, the Bank had indebtedness to a bank for $3,200,000. This
note bears interest at Wall Street prime minus 1 1/4% (7.25% at December 31,
1999), matures February 28, 2000, and is unsecured. Interest expense associated
with the note payable totalled $22,244 for the year ended December 31, 1999.

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,
                                   ---------------------------------------------------------------------------------------
                                             1999                           1998                           1997
                                   --------------------------      -------------------------       -----------------------
                                                    Percent                        Percent                        Percent
                                                   of Pretax                      of Pretax                      of Pretax
                                    Amount           Income         Amount          Income          Amount         Income
                                   --------         --------       --------        --------        --------       --------
<S>                                <C>                 <C>         <C>                <C>          <C>               <C>
Federal income tax
 at statutory rate                 $408,513            34.0%       $601,787           34.0%        $346,345          34.0%
Increase (Decrease)
 resulting from
  tax effects of:
   Nontaxable
    interest                        (29,959)           (2.5)        (31,167)          (1.8)         (19,195)         (1.9)
   State excise
    tax and other,
    net                              79,588             6.6          80,919            4.6           37,858           3.7
                                   --------          ------        --------        -------         --------       -------
                                   $458,142            38.1%       $651,539           36.8%        $365,008          35.8%
                                   ========          ======        ========        =======         ========       =======

</TABLE>

Income taxes consist of:

<TABLE>
<CAPTION>
                                             For the Years Ended December 31,
                                      -----------------------------------------
                                         1999            1998            1997
                                      ---------       ---------       ---------
<S>                                   <C>             <C>             <C>
Current                               $ 422,723       $ 637,575       $ 436,059
Deferred (Benefit)                       35,419          13,964         (71,051)
                                      ---------       ---------       ---------
                                      $ 458,142       $ 651,539       $ 365,008
                                      =========       =========       =========

</TABLE>

Deferred tax liabilities have been provided for taxable temporary differences
related to the allowance for loan losses, accumulated depreciation, investments
and loan fees. Deferred tax assets have been provided for deductible temporary
differences related to the deferred loan fees and nonqualified retirement plans
and deferred compensation plans. The net deferred tax liability in the
accompanying consolidated statements of financial condition include the
following components:

<TABLE>
<CAPTION>
                                                       As of December 31,
                                                ----------------------------
                                                  1999               1998
                                                --------          ----------
<S>                                             <C>               <C>
Deferred Tax Liabilities                        $838,053          $1,033,143
Deferred Tax Assets                              381,315             173,620
                                                --------          ----------
 Net Deferred Tax Liabilities                   $456,738          $  859,523
                                                ========          ==========

</TABLE>


                                       31
<PAGE>

In 1996, Congress enacted the Small Business Job Protection Act which
effectively removed any recapture provisions related to tax bad debt reserves
accumulated by the Bank prior to 1988. However, any reserves accumulated after
1987 must be recaptured over a six year period. The tax liability associated
with this recapture is included in the Bank 's accrued and deferred tax
liabilities as of December 31, 1999 and 1998.

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 generally accepted accounting principles to the capital amounts
per the regulations is as follows:
<TABLE>
<CAPTION>

                                                                            As of December 31,
                                                                     -------------------------------
                                                                         1999                1998
                                                                     -----------         -----------
<S>                                                                  <C>                 <C>
Bank capital (total equity) per generally accepted
 accounting principles                                               $13,410,247         $13,948,064
Less goodwill, net of amortization                                    (1,113,217)         (1,193,208)
Less net unrealized gain on investment securities                       (479,197)         (1,196,007)
                                                                     -----------         -----------
Tangible capital per the regulations                                  11,817,833          11,558,849
Less adjustments for core capital                                              0                   0
                                                                     -----------         -----------
Core capital per the regulations                                      11,817,833          11,558,849
Add allowable portion of allowance for loan losses                       557,000             512,000
                                                                     -----------         -----------

Risk-based capital per the regulations                               $12,374,833         $12,070,849
                                                                     ===========         ===========

</TABLE>

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

<TABLE>
<CAPTION>
                                                                                        To Comply With
                                                                                       Minimum Capital
                                                                 Actual                  Requirements
                                                          -------------------       --------------------
                                                           Amount       Ratio       Amount         Ratio
                                                          -------       -----       ------         -----
<S>                                                       <C>           <C>         <C>             <C>
As of December 31, 1999:
------------------------
Tangible Capital (To Adjusted Total Assets)               $11,818       12.9%       $1,378          1.5%
Core Capital (To Adjusted Total Assets)                   $11,818       12.9%       $2,756          3.0%
Risk-Based Capital (To Risk-Weighted Assets)              $12,375       27.7%       $3,568          8.0%

As of December 31, 1998:
------------------------
Tangible Capital (To Adjusted Total Assets)               $11,559       12.9%       $1,348          1.5%
Core Capital (To Adjusted Total Assets)                   $11,559       12.9%       $2,695          3.0%
Risk-Based Capital (To Risk-Weighted Assets)              $12,071       29.5%       $3,276          8.0%

</TABLE>


                                       32
<PAGE>

As of December 31, 1999, the Bank is categorized as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table below. There are no
conditions or events since that date that management believes have changed the
institution's category. The Bank's actual capital amounts and ratios are also
presented in the following table. All amounts are in thousands of dollars.

<TABLE>
<CAPTION>
                                                                                      To Be Well
                                                                                  Capitalized Under
                                                                                  Prompt Corrective
                                                             Actual               Action Provisions
                                                      -------------------       --------------------
                                                       Amount       Ratio       Amount         Ratio
                                                      -------       -----       ------         -----
<S>                                                   <C>           <C>         <C>            <C>
As of December 31, 1999:
------------------------
Total Capital (To Risk-Weighted Assets)               $12,375       27.7%       $4,460         10.0%
Tier I Capital (To Risk-Weighted Assets)              $11,818       26.5%       $2,676          6.0%
Tier I Capital (To Average Assets)                    $11,818       12.7%       $4,643          5.0%

As of December 31, 1998:
------------------------
Total Capital (To Risk-Weighted Assets)               $12,071       29.5%       $4,094         10.0%
Tier I Capital (To Risk-Weighted Assets)              $11,559       28.2%       $2,457          6.0%
Tier I Capital (To Average Assets)                    $11,559       12.7%       $4,556          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 $5,337, $12,989, and $42,038 for the
years ended December 31, 1999, 1998, and 1997, respectively.

Directors Long-Term Incentive Plan - In June 1997, the Bank established a
long-term incentive plan for the board of directors to provide target retirement
benefits of 75% of board fees for ten years for directors who retire with twenty
or more years of service. Activity in the directors' retirement plan for the
years ended December 31, 1999, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                        1999              1998             1997
                                                      --------         ---------         --------
<S>                                                   <C>              <C>               <C>
Liability balance at beginning of year                $164,727         $ 125,181         $      0
Accrued and expensed                                     7,552            10,824          150,991
Transfer of assets to trustee                                0          (136,005)               0
Death benefit payment                                        0                 0          (25,810)
Increase in liability due to
 investment returns                                     46,144                 0                0
Effect of change in accounting
 principle pursuant to EITF 97-14                            0           164,727                0
                                                      --------         ---------         --------
Liability balance at end of year                      $218,423         $ 164,727         $125,181
                                                      ========         =========         ========

</TABLE>

In July 1998, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) issued EITF 97-14 Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested. Prior
to the issuance of EITF 97-14, the Bank had transferred the assets purchased by
the trust (12,516 shares of Holding Company stock) to the trustee of the plan.
In accordance with EITF 97-14, the Bank has recognized a liability for the fair
value of all shares of Holding Company stock (14,061 and 13,721 shares as of
December 31, 1999 and 1998, respectively) and other assets held by the trustee
and a contra-equity account Shares in Grantor Trust-Contra Account for the cost
of the shares held by the trustee. The change in accounting principle in 1998
required a reduction in deferred tax liabilities of $10,907 and a net charge to
income in 1998 of $16,610.


                                       33
<PAGE>

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 $34,935 and
$34,914 in dividends on its stock in 1999 and 1998, respectively, which was used
to reduce the ESOP debt. In 1999, the 1998 accrued ESOP contribution of $89,523
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 and $89,523, plus accrued
interest of $86,005 and $97,281 on the ESOP debt, for the years ended December
31, 1999 and 1998, respectively.

NOTE 11 - STOCK OPTION PLAN

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

During 1999, the Company's board of directors approved the issuance of stock
options under the Plan to certain members of the board of directors and senior
management. The options stipulated that, in the event of a return of capital
dividend being paid on the Company's common stock, the number of shares to be
purchased and the option price would be adjusted to maintain the same "option
spread" after the effect of any such dividend. Presented below is information
concerning the stock options awarded in 1999:

<TABLE>
<CAPTION>

                  Prior to Return of Capital                                       Subsequent to Return of
                     Dividend on 11-30-99                                        Capital Dividend on 11-30-99
      ------------------------------------------------------        -----------------------------------------------------
                     Option                           Option                      Option                           Option
      Number of      Price                              Life        Number of      Price                             Life
       Options         Per                                in         Options         Per                               in
       Awarded       Share       Vesting Schedule      Years         Awarded       Share       Vesting Schedule     Years
      ---------      ------      ----------------      -----        ---------      ------      ----------------     -----
<S>                  <C>         <C>                      <C>         <C>          <C>         <C>                     <C>
      132,237        $12.75      25% immediately;         10          196,061      $8.60       25% immediately;        10
                                   25% each year                                                 25% each year
                                 for next 3 years                                              for next 3 years

</TABLE>

During 1999, the Company repurchased, at a total cost of $1,657,722, 125,835
shares of its common stock which are being held in trust for when the stock
options are exercised. A contra-equity account has been established to reflect
the costs of such shares held in trust. The Company intends to utilize dividends
received in 1999 and future years to continue to purchase shares of its common
stock to be placed in the stock option trust.

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

NOTE 12 - MANAGEMENT RECOGNITION PLAN

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


                                       34
<PAGE>

During 1999, the Company's board of directors awarded 50,845 shares of
restricted common stock to certain members of the board of directors and senior
management. The shares were awarded as follows: 25% immediately, and 25% per
year for the next 3 years. 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 1999 is as follows:

<TABLE>
<S>                                                                   <C>
     Accrued Liability Charged to Expense                             $ 298,154
     Cost of 12,709 Shares Issued                                      (155,559)
                                                                      ---------
     Accrued Liability Balance at December 31, 1999                   $ 142,595
                                                                      =========

</TABLE>

During 1999, the Company repurchased 58,190 shares of its common stock at a
total cost of $712,033, reissued 12,709 shares of restricted stock at a cost of
$155,559 and held 45,481 shares of its common stock in trust as of December 31,
1999 at a net cost of $556,474. A contra-equity account has been established to
reflect the cost of such shares held in trust.


NOTE 13 - DIRECTORS DEFERRED COMPENSATION

In 1998, the Company established a deferred compensation plan whereby directors,
at their option, can defer all or portions of fees they earn each year. Fees not
paid are accrued for the benefit of the directors and their accounts are
adjusted quarterly for the return equivalent to the change in the fair value of
the Company's common stock. Activity in the plan for the years ended December
31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                        1999              1998
                                                      --------          -------
<S>                                                   <C>               <C>
     Balances, Beginning of Year                      $ 53,284          $     0
     Directors Fees Deferred During Year                54,200           55,690
     Income Credited During Year                        24,043           (2,406)
                                                      --------          -------
     Balances, End of Year                            $131,527          $53,284
                                                      ========          =======

</TABLE>

Amounts owned 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, 1999, the Bank had
concentrations of loans in real estate lending and consumer lending. Generally
these loans are secured by the underlying real estate and consumer goods. The
usual risk associated with such concentrations are generally mitigated by being
spread over several hundred unrelated borrowers and by adequate collateral loan
to value ratios.


NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES

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


                                       35
<PAGE>

NOTE 16 - STOCK CONVERSION

In May 1997, the board of directors approved a plan of reorganization from a
mutual savings association to a capital stock savings bank and the concurrent
formation of a holding company. In November 1997 the Office of Thrift
Supervision approved the plan of conversion subject to the approval of the
members, and in December 1997 the members of the Association also approved the
plan of conversion. The conversion was accomplished effective January 1, 1998
through amendment of the Association's charter and the sale of the Holding
Company's (United Tennessee Bankshares, Inc.) common stock in an amount equal to
the appraised pro forma consolidated market value of the Holding Company and the
Association after giving effect to the conversion. A subscription offering of
the shares of common stock was offered to depositors, borrowers, directors,
officers, employees and employee benefit plans of the Bank and to certain other
eligible subscribers. The subscription offering opened on November 20, 1997 and
closed on December 16, 1997. The Bank held cash receipts of $23,598,226 as of
December 31, 1997 in escrow accounts for stock subscribers. These funds were
invested in overnight deposits at the Federal Home Loan Bank of Cincinnati. On
January 1, 1998, in accordance with its approved plan of conversion, the Holding
Company issued 1,454,750 of its $10 par value stock providing gross receipts of
$14,547,500. The remainder of the subscription receipts were returned to
subscribers in January 1998. On January 1, 1998, the Bank changed its name to
Newport Federal Bank and issued 100,000 shares of its $1 par value stock to the
Holding Company in exchange for $7,100,000.

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

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

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.


                                       36
<PAGE>

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

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

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

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

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

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

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

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


                                       37
<PAGE>

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

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

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

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

<TABLE>
<CAPTION>

                                                         As of December 31, 1999             As of December 31, 1998
                                                         -----------------------             -----------------------
                                                    Recorded            Estimated         Recorded         Estimated
                                                     Book                 Fair              Book              Fair
                                                     Value                Value             Value             Value
                                                    -------              -------           -------           -------
<S>                                                 <C>                  <C>               <C>               <C>
FINANCIAL ASSETS:
 Cash and Amounts Due
  From Depository Institutions                      $ 2,387              $ 2,387           $ 6,131           $ 6,131
 Investment Securities -
  Available for Sale                                $27,935              $27,935           $33,022           $33,022
 Investment Securities - Held
  to Maturity                                       $     0              $     0           $ 2,431           $ 2,453
 Loans Receivable, Net                              $61,516              $61,627           $53,346           $54,158


FINANCIAL LIABILITIES:
 Deposits                                           $73,810              $73,765           $69,835           $70,081
 Note Payble                                        $ 3,200              $ 3,200           $     0           $     0
 Advances from Federal Home
  Loan Bank                                         $ 3,767              $ 3,689           $ 5,689           $ 5,627

</TABLE>


                                       38
<PAGE>

                                               CORPORATE INFORMATION

Directors:

   J. William Myers
      Chairman of the Board & Attorney
      Myers & Bell, P.C., Newport, TN

   Richard G. Harwood
      President and Chief Executive Officer
      of the Company and the Bank

   Tommy C. Bible
      Manager, Jefferson/Cocke Co. Utilities

   Clyde E. Driskill, Jr.
      Retired; Former Owner,
        Driskill's Furniture, Inc.

   William B. Henry
      Retired; Former Optometrist

    Ben W. Hooper, III
      Attorney, Campbell & Hooper,
        Newport, Tennessee

   Robert L. Overholt
      Retired; Former Owner/Manager
        Home Supply

   Robert D. Self
      Retired; Former Owner,
        Bob Self Auto Parts

Executive Officers:

   Richard G. Harwood
      President and Chief Executive Officer

   Lonnie R. Jones
      Vice President of Operations of the Bank

   Nancy L. Bryant
      Vice President and Treasurer

   Peggy  B. Holston
      Secretary

Annual Stockholder Meeting:

   May 16, 2000; 5:00 p.m.
   Newport Federal Bank
   344 W. Broadway
   Newport, Tennessee

Main Office:

   344 W. Broadway
   Newport, Tennessee

Branch Offices:

   263 E. Broadway
   Newport, Tennessee

    345 Cosby Highway
    Newport, Tennessee

Independent Auditor:

   Pugh & Company, P.C.
   Knoxville, Tennessee

General Counsel:

   Myers & Bell, P.C.
   Newport, Tennessee

Securities and Regulatory Counsel:

   Stradley, Ronon, Housley, Kantarian
      & Bronstein, LLP
   Washington, D.C.

Stock Registrar & Transfer Agent:

   Registrar and Transfer Company
   10 Commerce Drive
   Cranford, New Jersey  07016