United States Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X] Annual Report Pursuant To Section 13 or 15(d) of The Securities Exchange Act
    of 1934

                   For the Fiscal Year ended December 31, 2004

[ ] Transition  Report  Pursuant to Section 13 or 15(d) of the  Securities  and
    Exchange Act of 1934

                        For the Transition Period From To
                        Commission File Number 000-49863

                    Tennessee Valley Financial Holdings, Inc.
          (Exact name of small business issue as specified in charter)

Tennessee                                                     45-0471419
(State or other jurisdiction of         (I.R.S. Employer Identification No.)
 incorporation or organization)

401 South Illinois Avenue Oak Ridge, TN                       37830
(Address of Principal Executive Offices)                    (Zip Code)

        Registrant's telephone number, including area code: 865-483-9444

Securities  registered  pursuant to Section 12(g) of the Act:  Common Stock (par
value $1.00 per share)

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

Disclosures  of delinquent  filers in response to items 405 of Regulation S-B is
not contained in this form, and no disclosure will be contained,  to the best of
the  registrant's  knowledge,  in  definitive  proxy or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X] Yes [ ] No

The registrant's revenues for the most recent fiscal year were $7,739,497.

At March  25,  2005 the  aggregate  market  value of the  voting  stock  held by
non-affiliates of the registrant was approximately $8,657,844.

As of March 25, 2005 registrant had 533,618 shares of its $1.00 par value common
stock outstanding.

Documents  Incorporated  by Reference:  Proxy  Statement  related to 2005 Annual
Meeting of Shareholders.

<PAGE>


                                Table of Contents


Part I:
 Item 1: Description of Business.............................................3-9

 Item 2: Description of Property...............................................9

 Item 3: Legal Proceedings.....................................................9

 Item 4: Submission of Matters to a Vote of Security Holders...................9

Part II:
Item 5:  Market for Common Stock and Related Stockholder Matters....10

Item 6:  Management's Discussion and Analysis or Plan of Operation.........10-22

Item 7:  Financial Statements..............................................23-45

Item 8:  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure..................................46

Item 8A: Controls and Procedures..............................................46

Part III:
Item 9:  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act....................46

Item 10: Executive Compensation...............................................46

Item 11: Security Ownership of Certain Beneficial Owners and
         Management...........................................................46

Item 12: Certain Relationships and Related Transactions.......................46

Item 13: Exhibits ............................................................47

Item 14: Principal Accountant Fees and Services...............................48

Signatures....................................................................49

                                      -2-

<PAGE>

                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS


General

     Tennessee  Valley  Financial   Holdings,   Inc.  is  a  Tennessee  business
corporation  formed for the purpose of  acquiring  TNBank,  a Tennessee  banking
corporation,  which  we  refer to as the  "Bank,"  by means of a share  exchange
thereby  becoming a registered  bank holding  company under the Federal  Reserve
Act. On April 30, 2002,  the  shareholders  of the Bank approved a plan of share
exchange under which they  exchanged  their shares of the Bank, on a one for one
basis, for our common shares.  The exchange became effective on May 9, 2002. Our
only activity is owning the Bank.

     The Bank  commenced  operations as a state  chartered bank on May 30, 1995.
The Bank's deposit accounts are insured under the Federal Deposit Insurance Act,
which we refer to as FDIA, up to the maximum applicable limits thereof. The Bank
is not currently a member of the Federal Reserve  System.  The Bank has its main
office and two branch locations,  one in Oak Ridge and one located in Knoxville.
A fourth branch site located in Knoxville is  anticipated to be completed by the
fourth-quarter of 2005.

     Our  customer  base  consists  of  small  to  medium  sized  businesses  in
industries like retail, manufacturing, distribution, and residential real estate
construction as well as professionals like doctors, lawyers and accountants.  We
also serve  consumers with our various  banking  services and products,  such as
residential  real estate  mortgages.  Our lending  activities  consist mainly of
residential  real estate loans,  commercial  loans and loans to  consumers.  The
majority of our loans are collateralized by real estate.  Additionally,  we will
secure  loans  with  automobiles,   commercial  equipment,  inventory,  accounts
receivable and other types of collateral. We will also make unsecured loans, but
typically  only on a limited  basis.  To mitigate the inherent  risk involved in
lending  activities,  we employ a risk management  program aimed at identifying,
recognizing and reducing these risks where possible.

     We offer long term,  fixed rate mortgage  loans to our  customers.  Through
relationships we have with secondary  market  investors,  we originate  mortgage
loans and  subsequently  sell them to secondary  market  investors  for which we
receive fee income. We do not retain any servicing rights on these loans sold.

     We offer a wide  variety  of  competitive  retail  and  commercial  banking
services.  We offer  deposit  services  including  various  types  of  checking,
savings,  money  market,   certificate  of  deposit  and  individual  retirement
accounts. Our lending services include consumer installment loans, various types
of mortgage  loans,  personal  lines of credit,  home equity  loans and lines of
credit,  real estate  construction  and various types of  customized  commercial
loans to small and medium sized businesses and professionals. We also offer safe
deposit box, drive-thru and automated teller machine (ATM) services.  We provide
VISA and MasterCard  credit cards and are a merchant  depository for credit card
drafts under both types of credit cards. We also offer banking  services for our
customers  on the  internet  at our  World  Wide  Web  address,  www.tnbank.net.
Customers  enrolled  in the  internet  banking  product can check  balances  and
activity for their deposit and loan accounts,  transfer funds between  accounts,
pay bills electronically, and access other typical internet banking services. We
have has trust  powers but do not have a trust  department  presently.  We offer
retail   investment   services   through  a  broker/dealer   relationship   with
Linsco/Private Ledger Corporation. These services include brokerage transactions
in  common  stocks,  mutual  funds  and  bonds,  as well as  financial  planning
services.

     The Bank is subject to the regulatory authority of the Tennessee Department
of  Financial  Institutions  , which we refer to as the "TDFI"  and the  Federal
Deposit Insurance Corporation, which we refer to as the "FDIC."

                                      -3-
<PAGE>

Market Area

     Our primary service area  encompassing  Anderson,  Roane and Knox Counties,
includes  the cities of Oak Ridge in  Anderson  and Roane  Counties,  Clinton in
Anderson  County and Knoxville  and Farragut in Knox County.  Oak Ridge has long
been known for its intellectual  resources and strong  educational  system.  The
city has been long recognized as a research  center,  in a large part due to the
Oak  Ridge  National  Laboratory  and the  United  States  Department  of Energy
facilities that began during the Manhattan  Project.  Oak Ridge's population has
remained  at around  28,000  people  for  several  years.  Much of the Oak Ridge
economy is related to the federal  facilities  located here  associated with the
United States  Department of Energy.  This makes the Oak Ridge economy  somewhat
more  reliant  upon  federal  budget  appropriations,  political  decisions  and
international  events than typical  economic  factors.  During the early 1990's,
these  facilities  saw  reductions  in their  workforce  but  recently  have had
steadier levels of employment.  The Spellation Neutron Source project, currently
under way in Oak Ridge, is anticipated to add significant employment to the area
in future years.

Employees

     At December 31, 2004 we had 48 full-time  employees.  Our employees are not
represented by any union or other collective bargaining agreement and we believe
our employee relations are satisfactory.

Loan Activities

     General.  Our primary business emphasis is on making  commercial  business,
commercial real estate and consumer loans. As of December 31, 2004, the net loan
portfolio totaled $101.2 million, or 81% of total assets.

     Loan  Underwriting.  Loan activities are subject to underwriting  standards
and  loan  origination  procedures  prescribed  by the  board of  directors  and
management.  We obtain loan applications to determine the borrower's  ability to
repay, and we verify the more significant  items on these  applications  through
the use of credit  reports,  financial  statements and  confirmations.  Our loan
policy for real estate loans generally  requires that collateral be appraised by
an independent, outside appraiser approved by the board of directors.

     Loans are approved at various  management  levels up to and  including  the
board of directors, depending on the amount of the loan. Loan approvals are made
in  accordance  with  delegated  authority  approved by the board of  directors.
Generally, loans less than $200,000 are approved by certain authorized officers.
The President has  individual  loan authority up to $200,000.  Generally,  loans
over $200,000 require approval by a committee of the board of directors.

     General Loan Policies. For real estate loans, our policy is to have a valid
mortgage  lien on real  estate  securing a loan and to obtain a title  insurance
policy on loans in excess of $100,000,  which  insures the validity and priority
of the lien.  Borrowers  must also obtain  hazard  insurance  policies  prior to
closing,  and when the  property  is in a flood  prone  area,  we require  flood
insurance.  Some real estate loans also require the borrower to advance funds on
a monthly  basis,  together with each payment of principal  and  interest,  to a
mortgage  escrow  account from which we make  disbursements  for items like real
estate taxes and property insurance.

     It is our  policy  to lend up to 90% of the  appraised  value  of the  real
property  securing a mortgage loan.  However,  we  periodically  originate loans
exceeding this level based on mitigating circumstances and other credit factors.
These credits are approved as loan-to-value exceptions and reported to the Board
accordingly.  The  loan-to-value  ratio  on a  home  secured  by a  junior  lien
generally  does not exceed 80% of the  collateral,  including  the amount of the
first  mortgage.  With  respect  to  home  loans  granted  for  construction  or
combination  construction/permanent  financing,  we  will  lend up to 80% of the
appraised value of the property on an "as completed"  basis.  The  loan-to-value
ratio on multi-family  residential and commercial real estate loans is generally
limited to 80% of value.  Consumer  loans are  considered to be loans to natural
persons  for  personal,  family or  household  purposes,  and these loans may be
unsecured or secured by real or personal property.

     The maximum  amount,  as defined by TDFI's Legal Lending  Limit  standards,
which we could have loaned directly to any one borrower as of December 31, 2004,
was approximately  $2.3 million.  Our largest loan relationship is approximately
$2.0 million  consisting of several loans secured by commercial  real estate and
residential real estate, which were made prior to December 31, 2004.

                                      -4-
<PAGE>

     Interest  rates charged on loans are affected  principally  by  competitive
factors,  the  demand for loans and the supply of funds  available  for  lending
purposes.  These factors are, in turn, affected by general economic  conditions,
monetary  policies  of the federal  government,  including  the Federal  Reserve
Board, legislative tax policies and government budgetary matters.

     Residential   Real  Estate  Loans.   We  currently   originate   fixed-rate
residential mortgage loans and adjustable rate mortgage loans for terms of up to
30 years.  As of  December  31,  2004,  $38.5  million  or 37% of the total loan
portfolio  consisted of one-to-four  family residential real estate loans. As of
this date,  approximately  $5.5 million,  or 14% of these loans were  adjustable
rate mortgage loans.

     Consumer  Loans.  We  make  various  types  of  consumer  loans,  including
automobile  and boat loans,  but  primarily  home  equity  loans.  We  originate
consumer loans to provide a range of financial  services to customers and create
stronger  ties to our  customers.  In  addition,  the shorter  term and normally
higher  interest rates on these loans help maintain a profitable  spread between
our  average  loan  yield and our cost of funds.  The  terms of  consumer  loans
generally  range from one to five years.  Underwriting  standards  for  consumer
loans include an assessment of the applicant's  repayment history on other debts
and ability to meet  existing  obligations  and payments on the proposed  loans.
Although  the  applicant's  creditworthiness  is a  primary  consideration,  the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount.  Consumer loans generally  involve more credit
risks than mortgage  loans  because of the type and nature of the  collateral or
absence of collateral.  Consumer loan repayments are dependent on the borrower's
continuing financial  stability,  and are likely to be adversely affected by job
loss, divorce and illness.  Furthermore,  the application of various federal and
state laws,  including  federal and state  bankruptcy and  insolvency  laws, may
limit the amount  which can be  recovered  on such  loans.  In most  cases,  any
repossessed  collateral  will not provide an adequate source of repayment of the
outstanding  loan balance.  As of December 31, 2004,  consumer loans amounted to
$11.6 million or 11% of the total loan portfolio.

     Commercial Business Loans. Commercial loans are business loans that are not
secured by real estate and are dependent on business  cash flows for  repayment.
At December 31, 2004, the largest  commercial  relationship was $709,000 secured
by inventory  and  accounts  receivable.  As of December 31, 2004,  we had $14.8
million in commercial loans or 14% of the total loan portfolio.

     Commercial  Real Estate  Loans.  Commercial  real estate  loans are secured
primarily by office, medical and retail business properties located in Anderson,
Knox and Roane  Counties.  These types of loans amounted to $14.4 million or 14%
of the total loan  portfolio  as of December 31,  2004.  Commercial  real estate
loans may be amortized for up to 25 years, but frequently mature in three to six
years.  We offer balloon  mortgages on commercial  real estate and  multi-family
real estate loans with a fixed rate for up to five years.

     Income  from  Loan  Activities.  We  earn  fees  in  connection  with  loan
commitments and  originations,  loan  modifications,  late payments,  changes of
property ownership and for miscellaneous  services related to loans. Income from
these activities  varies from period to period with the volume and type of loans
originated,  sold and  purchased,  which in turn is  dependent  upon  prevailing
interest  rates and their effect on the demand for loans in our primary  service
area.

     We typically charge loan fees at the time of loan origination  which may be
a flat fee or a percentage of the amount of the loan.  Under current  accounting
standards,  the  total  amount of fees for long  term  mortgage  loans we retain
cannot typically be recognized as income immediately; rather, we defer a portion
of the fees and take these fees into  income  over the  contractual  life of the
loan,  using a level yield method.  If loans are prepaid or refinanced,  we take
all remaining deferred fees into income at that time.

     Nonperforming  Loans and Real Estate Owned. When a borrower fails to make a
required payment on a loan, our loan officers and collection  department attempt
to collect the payment by contacting  the  borrower.  If a payment on a loan has
not been received by the end of a grace period (usually 10 days from the payment
due  date),  notices  are  sent at  that  time,  with  follow-up  contacts  made
thereafter. In most cases,  delinquencies are cured promptly. If the delinquency
exceeds 29 days and is not cured  through  normal  collection  procedures,  more
formal  measures are  instituted to remedy the default.  We will then attempt to
negotiate  with the  delinquent  borrower to  establish a  satisfactory  payment
schedule.  We take steps ranging from working out a reasonable payment agreement
to foreclosure.

                                      -5-
<PAGE>

     We generally place a loan on nonaccrual  status and cease accruing interest
when we deem loan payment performance is unsatisfactory. We place all loans past
due 90 days,  however,  on  nonaccrual  status,  unless  the  loan is both  well
collateralized and in the process of collection.  Cash payments received while a
loan is  classified  as  nonaccrual  are recorded as a reduction of principal as
long as doubt exists as to collection.

     If  foreclosure  is  required,  when  completed,  the property is sold at a
public auction in which we will generally participate as a bidder. If we are the
successful  bidder,  we then  include the acquired  real estate  property in the
other real  estate  owned  "OREO"  account  until we sell the  property.  We are
permitted  under  federal  regulations  to finance sales of real estate owned by
"loans to facilitate," which may involve more favorable interest rates and terms
than generally would be granted under normal underwriting guidelines.

Competition

     We compete with six commercial  banks and four credit unions in our primary
market area of Oak Ridge.  In addition  to these local  competitors,  banks from
other market areas also  compete with us. In addition to  traditional  providers
(i.e. banks,  credit unions,  thrifts),  other financial services companies like
insurance  companies,  brokerages  and  finance  companies  compete  with us. We
anticipate that competition from providers of financial  services over the World
Wide  Web  will  intensify  in the  future.  One of the  results  of  increasing
competition is the lowering of our net interest  margin,  as consumers have more
choices for deposits (thus increasing the cost) and loans (lowering the income).
We attempt to mitigate these factors by emphasizing our service and relationship
style of banking services.

     We  contemplate  that we may seek to enter  businesses  closely  related to
banking or to acquire existing  businesses  already engaged in these activities.
Some of the activities  that the Federal Reserve has determined by regulation to
be so closely  related to the  business of banking  include  making or servicing
loans and certain  types of leases,  engaging in certain  insurance and discount
brokerage  activities,  performing certain data processing  services,  acting in
certain circumstances as a fiduciary or investment or financial advisor,  owning
savings  associations and making investments in certain corporations for project
designed  primarily to promote  community  welfare.  Any  acquisition by us will
require  prior  approval of the Federal  Reserve  Board and, in some  instances,
other  regulatory  agencies.  In addition,  we will be competing with other bank
holding companies, many of which have far greater assets and financial resources
than we and whose common stock may be more widely traded than ours in attempting
to acquire  other  permissible  entities,  and  engaging in  activities  closely
related  to  banking.  Currently,  there are no  definitive  agreements  for the
acquisition  of any entities  and we cannot  assure you that we will acquire any
entity in the future.

Supervision and Regulation

     As mentioned  previously,  the Bank is regulated  primarily by the TDFI and
FDIC. The Bank is also subject to various  requirements and  restrictions  under
federal  and state law,  including  requirements  to maintain  reserves  against
deposits, restrictions on the types and amounts of loans that may be granted and
the  interest  that may be  charged  thereon  and  limitations  on the  types of
investment  securities  that  may  be  purchased.   Various  consumer  laws  and
regulations also affect the operations of the Bank. In addition to the impact of
regulation,  commercial banks are also affected  significantly by the actions of
the  Federal  Open  Market  Committee,  which we refer to as the  "FOMC," of the
Federal  Reserve as a  differentiating  factor.  The FOMC's  actions on interest
rates  significantly  impacts the net  interest  margin and  interest  rate risk
management activities of the Bank.

     We, as a bank holding  company,  are regulated by the Federal Reserve Board
under the Bank Holding  Company Act of 1956,  which  requires every bank holding
company to obtain the prior  approval of the Federal  Reserve  Board  before:

     o    acquiring more than 5% of the voting shares of any bank, or

     o    acquiring all or substantially all of the assets of a bank, and

     o    before merging or consolidating with another bank holding company.

                                      -6-

<PAGE>

     The Federal  Reserve Board has maintained  that a bank holding company must
serve as a source of financial  strength to its subsidiary banks. In adhering to
the Federal  Reserve  Board  policy,  we may be  required  to provide  financial
support for a subsidiary  bank, such as the Bank, at a time when, in the absence
of such Federal  Reserve Board  policy,  we may not deem it advisable to provide
such assistance.

     A bank holding company is generally  prohibited  from acquiring  control of
any company which is not a bank and from engaging in any business other than the
business  of banking or  managing  and  controlling  banks.  However,  there are
certain activities which have been identified by the Federal Reserve Board to be
so  closely  related  to banking  as to be a proper  incident  thereto  and thus
permissible for bank holding companies.

     As a bank holding company, we are required to file with the Federal Reserve
Board an annual report of our  operations at the end of each fiscal year and any
additional  information as the Federal Reserve Board may require pursuant to the
Bank Holding Company Act. The Federal  Reserve Board may also make  examinations
of us and each of our subsidiaries.

     From  time  to  time,  legislation  is  enacted  which  has the  effect  of
increasing  the  cost of  doing  business,  limiting  or  expanding  permissible
activities  or  affecting  the  competitive  balance  between  banks  and  other
financial  services  providers.  Proposals  to change  the laws and  regulations
governing the operations and taxation of banks, bank holding companies and other
financial  service  providers  are  frequently  made  in  Congress,  before  the
Tennessee  legislature  and the other  various  bank  regulatory  agencies.  The
likelihood of these changes occurring and the effect they may have on the Bank's
and our operations are difficult to predict.

Financial Modernization Legislation

     The  Gramm-Leach-Bliley   ("G-L-B")  Act  authorizes  affiliations  between
banking,  securities and insurance firms and authorizes  bank holding  companies
and national banks to engage in a variety of new financial activities. Among the
new activities  that will be permitted to bank holding  companies are securities
and insurance brokerage,  securities  underwriting,  insurance  underwriting and
merchant   banking.   The  G-L-B  Act  imposes  new  requirements  on  financial
institutions with respect to customer privacy. The G-L-B Act generally prohibits
disclosure of customer  information to  non-affiliated  third parties unless the
customer has been given the  opportunity  to object and has not objected to such
disclosure.  Financial  institutions  are further  required  to  disclose  their
privacy policies to customers annually.

     The  G-L-B  Act  contains  significant  revisions  to the FHLB  System.  In
addition to other provisions, the
G-L-B Act expands the permissible uses of FHLB advances by community financial
institutions (under $500 million in assets) to include funding loans to small
businesses, small farms and small agri-businesses. The G-L-B Act contains a
variety of other provisions including a prohibition against ATM surcharges
unless the customer has first been provided notice of the imposition and amount
of the fee. We have not experienced a material impact on our operation by this
legislation.

General

     The Bank,  as a  Tennessee  state  chartered  bank,  is  subject to primary
supervision, periodic examination and regulation by the TDFI and the FDIC. If as
a result of an examination  of a bank,  the FDIC should  determine the financial
condition,  capital resources,  asset quality,  earnings prospects,  management,
liquidity or other aspects of the Bank's  operations are  unsatisfactory or that
the Bank or its  management is violating or has violated any law or  regulation,
various  remedies are available to the FDIC. Such remedies  include the power to
enjoin "unsafe or unsound"  practices,  to require affirmative action to correct
any  conditions   resulting  from  any  violation  or  practice,   to  issue  an
administrative order that can be judicially  enforced,  to direct an increase in
capital, to restrict the growth of the Bank, to assess civil money penalties, to
remove  officers and  directors  and  ultimately  to terminate a bank's  deposit
insurance.  The  Commissioner of the TDFI has many of the same remedial  powers,
including the power to take possession of a bank whose capital becomes impaired.
As of December 31,  2004,  the Bank is not the subject of any action by the FDIC
or the TDFI.

                                      -7-

<PAGE>

     The  deposits  of the Bank are insured by the FDIC in the manner and to the
extent  provided  by law.  For  this  protection,  the Bank  pays a  semi-annual
statutory assessment.  The Bank is subject to certain regulations of the Federal
Reserve Board.

     Various  requirements  and  restrictions  under  the  laws of the  State of
Tennessee  and the United States  affect the  operations of the Bank.  State and
federal  statutes  and  regulations   relate  to  many  aspects  of  the  Bank's
operations,  including  reserves  against  deposits,  interest  rates payable on
deposits, loans, investments, mergers and acquisitions,  borrowings,  dividends,
locations  of branch  offices and  capital  requirements.  Further,  the Bank is
required to maintain certain levels of capital.

Payment of Dividends

     Our payment of  dividends  depends to a great  extent on the ability of the
Bank to pay  dividends  to us.  The Bank is  subject  to the  provisions  of the
Tennessee  Banking  Act,  which  provides  that  dividends  will be paid  out of
undivided profits. Capital surplus, however, must equal or exceed 50% of capital
stock,  and in the event capital  surplus falls below 50% of capital  stock,  no
dividends may be paid until net profits have been transferred to capital surplus
so that it equals 50% of capital stock.  Thereafter,  10% of net profits must be
transferred to capital  surplus prior to the payment of dividends  until capital
surplus equals capital  stock.  The Bank is also subject to the minimum  capital
requirements  of the FDIC,  which impact the Bank's  ability to pay dividends to
us.  If the  Bank  fails  to  meet  these  standards,  it may not be able to pay
dividends  to  us  or  to  accept  additional  deposits  because  of  regulatory
requirements.

     If,  in  the  opinion  of  the  applicable  bank  regulatory  authority,  a
depository  institution  is  engaged  in or is about to  engage  in an unsafe or
unsound practice (which,  depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may require
that such institution  cease and desist from such practice.  The federal banking
agencies  have  indicated  that  paying  dividends  that  deplete  a  depository
institution's  capital base to an  inadequate  level would be such an unsafe and
unsound practice.  Moreover,  the Federal Reserve Board and the FDIC have issued
policy  statements  which  provide  that  bank  holding  companies  and  insured
depository  institutions  generally  should  only pay  dividends  out of current
operating earnings.

     Our payment of dividends may also be affected or limited by other  factors.
For example,  the Bank is required to maintain adequate capital above regulatory
guidelines.

USA Patriot Act of 2001

     In October 2001, the USA Patriot Act of 2001 was enacted in response to the
terrorist attacks in New York, Pennsylvania and Washington, DC which occurred on
September  11,  2001.  The  Patriot  Act is  intended  to  strengthen  U.S.  law
enforcement's  and the intelligence  communities/  ability to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial institutions of all kinds is wide ranging. The Patriot Act contains
sweeping  anti-money  laundering  and financial  transparency  laws and requires
various regulations,  including standards for verifying customer  identification
at  account  opening,   and  rules  to  promote   cooperation   among  financial
institutions,  regulators and law  enforcement  entities in identifying  parties
that may be involved in terrorism or money laundering.

Sarbanes-Oxley Act

     On July 30, 2002,  President Bush signed into law the Sarbanes-Oxley Act of
2002 ("SOX"). The stated goals of SOX are to increase corporate  responsibility,
provide for enhanced  penalties from  accounting and auditing  improprieties  at
publicly-held  companies and to protect  investors by improving the accuracy and
reliability of corporate disclosures pursuant to securities laws.

     SOX is the most far-reaching U.S.  securities  legislation  enacted in some
time. SOX generally  applies to all companies that are required to file periodic
reports  with the  Securities  and  Exchange  Commission  under  the  Securities
Exchange Act of 1934.

                                      -8-
<PAGE>

     SOX includes  very  specific  additional  disclosure  requirements  and new
corporate  governance rules,  requires the SEC and securities exchanges to adopt
extensive  additional  disclosure  corporate  governance and related rules . SOX
represents  significant  federal  involvement in matters  traditionally  left to
state  regulatory  systems such as the regulation of the accounting  profession,
and to  state  corporate  law,  such as the  relationship  between  a  board  of
directors and its committees.

     SOX addresses, among other matters:

     o    audit committees,
     o    certification of financial  statements by the chief executive  officer
          and the chief financial officer
     o    the forfeiture of bonuses or other  incentive-based  compensation  and
          profits  from the sale of an  issuer's  securities  by  directors  and
          senior officers in the 12-month period following  initial  publication
          of any financial statements that later require restatement,
     o    a prohibition on insider trading during pension plan blackout periods,
     o    disclosure of off-balance sheet transactions,
     o    a prohibition on personal loans to directors and officers,
     o    expedited filing requirements for Forms 4,
     o    disclosure  of a code of ethics  and filing of a Form 8-K for a change
          or waiver of such code,
     o    "real time" filing of periodic reports,
     o    the formation of a public accounting oversight board,
     o    auditor independence, and
     o    various  increased  criminal  penalties  for  violations of securities
          laws.

ITEM 2 - DESCRIPTION OF PROPERTY

     We operate three facilities for our banking operations.  We own our two Oak
Ridge  branch  facilities  and  lease  current  operating   Knoxville  location.
Additionally,  we lease property at Cedar Bluff Road and Bob Gray Road that will
be our second Knoxville branch location  anticipated to be completed in mid-late
2005. The Main Office is located at 401 South Illinois Avenue in Oak Ridge.  The
15,000 square foot facility  sits on  approximately  three acres and offers full
service  banking  including ATM, safe deposit,  night  depository and drive thru
services.   The  Main  Office  also  houses  the  operations   and   bookkeeping
departments,  credit administration and most other administrative functions. Our
Jackson  Square branch is located at 900 Oak Ridge  Turnpike in Oak Ridge.  This
2,000 square foot  facility  offers full service  banking  including  ATM,  safe
deposit,  night  depository  and drive thru  services.  Our  Farragut  branch is
located at 11200  Kingston  Pike in Knoxville,  TN. It is a full service  branch
with approximately  4,000 square feet. The Farragut lease is $6,000 monthly with
a term of 10 years with two 5 year renewal  options and a purchase  option after
the initial  ten year term.  The  property  for our second  Knoxville  branch is
leased at $2,917 per month. This lease was made effective March 15, 2004 and has
an initial  term of 20 years with four  successive  five-year  renewal  periods.
Additionally,  we own property located on E. Tri-County Blvd. in Oliver Springs.
This  location was  obtained by  foreclosure  in 2004.  The property has a 2,500
square foot commercial garage which we currently utilize for general storage.

ITEM 3 - LEGAL PROCEEDINGS

     From time to time in the  normal  course of  business,  we are  subject  to
various  regulatory  proceedings,  lawsuits,  claims and other matters.  At this
time, we do not believe any of these  matters will result in a material  adverse
effect on our business or financial condition.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of fiscal year 2004.

                                      -9-
<PAGE>


                                     PART II

ITEM 5 - MARKET PRICE OF AND  DIVIDENDS ON THE  REGISTRANT'S  COMMON  EQUITY AND
OTHER SHAREHOLDER MATTERS

     There  is  no  established  market  for  our  common  stock.  There  is  no
significant  likelihood  that any market will  develop in the future.  There has
been isolated trading of the common stock where shareholders wishing to transfer
shares would do so in individually negotiated transactions.  The following table
shows a  range  of  high  and low  sales  prices,  to the  best of  management's
knowledge, for our common stock.

                                                          High             Low
                                                          ----             ---
2003:
         First Quarter................................  $17.00            $17.00
         Second Quarter..............................    19.50             19.50
         Third Quarter.................................  19.50             19.50
         Fourth Quarter...............................   19.50             19.50
2004:
         First Quarter................................  $19.50            $19.50
         Second Quarter..............................    19.50             19.50
         Third Quarter.................................  19.50             19.50
         Fourth Quarter...............................   19.50             19.50

     The payment of cash  dividends is subject to the discretion of our board of
directors.  Our ability to pay dividends is dependent on cash  dividends paid to
us by the Bank.  The ability of the Bank to pay dividends to us is restricted by
applicable  regulatory  requirements.  See ITEM 1  "Description  of  Business  -
Payment of  Dividends".  We paid a cash  dividend of $0.26 per share  during the
fourth  quarter of 2004.  Shareholders  were given the  opportunity  to reinvest
these proceeds through a Dividend  Reinvestment  Plan established by the Company
in 2004.  This plan is  coordinated  through the Company's  registered  transfer
agent,  Illinois  Stock  Transfer  Company.  The price  per  share  for  initial
reinvestment  was $26.00 based on the evaluation of an independent  third party.
Initial  participation  in this program  resulted in $54,281 of total  dividends
paid being  reinvested  in exchange  for an  additional  2,088  shares of common
stock.  The Company has allocated  25,000 shares of common stock for the purpose
of the Dividend Reinvestment Plan. Shareholders not already enrolled in the plan
can  do  so  at  any  time  for  future  participation.   Additionally,  current
participants  may amend  allocations at their  discretion.  We cannot assure you
that we will declare  additional  dividends or, if declared,  what the amount of
the dividend would be or whether dividends would continue in future periods.

     Options  convertible into 15,500 shares of common stock were outstanding as
of December  31,  2004.  As of December 31,  2004,  our  executive  officers and
directors  beneficially  owned 98,026 shares of common stock,  including  shares
issuable upon the exercise of options.  We are not presently  publicly  offering
shares of common stock and have not proposed to publicly  offer shares of common
stock  which  could  have a material  effect on the  market  price of our common
stock. As of December 31, 2004, we had  approximately 755 shareholders of record
and 533,618 shares of common stock outstanding.


                                      -10-
<PAGE>

The following table provides  information about our equity compensation plans as
of December 31, 2004.


<TABLE>
<CAPTION>

                                    EQUITY COMPENSATION PLAN INFORMATION

                                                                                     Number of securities
                              Number of securities to       Weighted-average       remaining available for
                              be issued upon exercise      exercise price of        future issuance under
                              of outstanding options,     outstanding options,     equity compensation plan
       Plan Category            warrants and rights       warrants and rights
---------------------------- -------------------------- ------------------------- ---------------------------
<S>                                        <C>                    <C>                        <C>
Equity compensation
    plans approved by                      15,500                 $16.22                     111,203
    shareholders
Equity compensation
    plans not approved                          0                     NA                           0
    by shareholders                ______________         ______________              ______________
Total                                      15,500                 $16.22                     111,203
</TABLE>

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward Looking Statements

     This  report  contains   forward-looking   statements   under  the  Private
Securities  Litigation Reform Act of 1995 that involve risks and  uncertainties.
When   used  in  this   discussion,   the   words   "believes",   "anticipates",
"contemplates",  "expects",  and similar  expressions  are  intended to identify
forward-looking  statements.  Such  statements  are subject to certain risks and
uncertainties  which could cause actual results to differ  materially from those
projected.   Although   we  believe   that  the   assumptions   underlying   the
forward-looking  statements  are  reasonable,  any of the  assumptions  could be
inaccurate,  and  therefore,  we  cannot  assure  you that  the  forward-looking
statements set out in this report will prove to be accurate.

     Factors  that  could  cause  actual  results  to  differ  from the  results
discussed in the forward-looking statements include, but are not limited to:

     o    Economic  conditions  (both  generally  and more  specifically  in the
          markets in which we operate);
     o    Competition  for our  customers  from  other  providers  of  financial
          services;
     o    Government legislation and regulation (which changes from time to time
          and over which we have no control);
     o    Changes in interest rates; and
     o    Material  unforeseen changes in liquidity,  results of operations,  or
          financial condition of our customers.

These risks are difficult to predict and many of them are beyond our control.

Results of Operations for the Years Ended December 31, 2004 and 2003

General

     We are a Tennessee  bank holding  company which acquired the Bank through a
share exchange in May 2002. We are a registered  bank holding  company under the
Federal  Reserve  Act.  Our only  activity  is owning the Bank  which  commenced
operations on May 30, 1995.

     We achieved  net income of $958,000  for 2004  compared to  $1,078,000  for
2003, a decrease of 11%. On a per share basis,  we earned $1.80 per common share
in 2004  compared to $2.02 per common share in 2003.  The decrease in net income
for 2004 can primarily be attributed to decreases in non-interest  income,  more
specifically  a  significant  decline  in  proceeds  from  sale of  loans in the
secondary market,  and a continued trend increase in non- interest expense.  Fee
income  from  sale of  loans  decreased  $562,000  in  2004  compared  to  2003.
Non-interest expense increased $325,000 from 2003. The increases in non-interest
expense  primarily  relate to growth in  overhead  brought  on by the  growth in
assets of the bank and a new branch facility in Farragut in 2004. Offsetting the
decline in  non-interest  income  and  increase  in  non-interest  expense  were
increases in net interest income.  Net interest income increased $606,000 or 14%
in 2004 as compared to 2003, primarily as a result of growth in earnings assets,
particularly  loans and an increase in our net  interest  margin.  Our loan loss
provision  decreased $61,500 to $228,000 in 2004 compared to 2003.  Although the
net charge-off  ratio increased to 0.26% of average loans  outstanding from 2003
and loan growth continued,  required reserve  allocations were alleviated by the
payoff of certain classified assets,  which were reserved at a higher allocation
than loans which are not classified.

                                      -11-

<PAGE>

The table below presents certain key ratios.

                                  Schedule I
                          Return on Assets and Equity
                                                          2004          2003
                                                      -------------------------
Return on Average Assets                                     0.82%       1.00%
Return on Average Equity                                    10.85%      13.15%
Dividend Payout Ratio                                       14.44%      17.34%
Average Equity to Average Assets                             7.54%       7.60%


Earning Assets, Sources of Funds and Net Interest Income

         Schedule II presents an analysis of interest earning assets and
interest bearing liabilities for the years ended December 31, 2004 and 2003.

                                   Schedule II
                    Average Balances, Interest and Rate/Yield
<TABLE>
<CAPTION>
                                                                       2004                           2003
                                                       ----------------------------------------------------------------
                                                            Average   Interest  Average   Average    Interest Average
                                                          Balance(1)   (2)     Yield/Rate Balance(1)   (2)    Yield/Rate
                                                       ----------------------------------------------------------------
<S>                                                     <C>           <C>        <C>       <C>        <C>         <C>
Assets
Investment securities:
Available for sale:
Taxable                                                     9,115       289      3.17%      9,167         368     4.01%
Tax exempt                                                  5,268       266      5.05%      4,104         239     5.82%

FHLB Stock                                                    562        23      4.09%        541          21     3.88%
Gross loans, including fees                                94,204     6,318      6.71%     83,518       5,815     6.96%
                                                       ----------------------------------------------------------------
Total interest earning assets                              110,467   $6,914      6.26%     99.231    $  6,464     6.51%
                                                                     =================               ==================

Cash and due from banks                                     2,028                           1,787

All other assets                                            5,986                           8,161

Less:

Reserve for loan losses                                     1,257                           1,167

Unearned fees and interest                                    130                             110
                                                       ----------                       ----------
Total Assets                                            $ 117,094                       $ 107,902
                                                       ==========                       ==========

Liabilities and Shareholders' Equity
------------------------------------

Interest bearing deposits:

Time deposits                                          $   45,515     1,214     2.67%   $  44,002       1,350     3.07%

Other deposits                                             43,467       408     0.94%      38,176         395     1.03%

FHLB advances and repurchase agreements and other           9,392       362     3.85%       8,550         341     3.99%
                                                       ----------------------------------------------------------------
Total interest-bearing liabilities                     $   98,374   $ 1,984     2.02%      90,728    $  2,086     2.30%
                                                       ================================================================

Non-interest bearing deposits                               9,296           ----------      8,172             ---------
Cost of funds                                                                    1.84%                            2.11%
                                                                            ==========                        =========
All other liabilities                                         595                             804

Shareholders' equity                                        8,764                           8,000

Unrealized gain (loss) on available for sale securities        65                             198
                                                      ------------                      ----------
Total Liabilities and Shareholders' Equity            $   117,094                         107,902
                                                      ============                      ==========
                                                                           -----------                       ----------
Net interest spread                                                              4.42%                            4.40%
                                                                           ===========                       ==========

                                                                           -----------                       ----------
Net interest margin                                                              4.46%                            4.41%
                                                                           ===========                       ==========
</TABLE>

(1)  Average  Balances  were  computed  averaging  daily  balances  for the time
     specified.
(2)  Interest  is  computed  based  on a tax  equivalent  basis  for tax  exempt
     securities.

                                      -12-

<PAGE>

     As seen from  Schedule  II,  average  interest  earning  assets  grew $11.2
million or 11% during 2004 as compared to 2003.  Average interest earning assets
include  loans,  investment  securities  and  federal  funds  sold.  The primary
component of growth in average  interest  earning  assets was loans,  which grew
$10.7 million or 13% in 2004 as compared to 2003. Average investment  securities
(which includes average available for sale taxable and tax-exempt securities and
Federal Home Loan Bank Stock)  increased  approximately  $1.1 million in 2004 as
compared  to 2003,  while  average  federal  funds sold  declined  approximately
$583,000 in 2004 as compared to 2003.

     Average  interest  bearing  liabilities  grew $7.6 million or 8% in 2004 as
compared  to  2003.  Average  interest  bearing  liabilities  include  deposits,
advances  from the Federal Home Loan Bank,  which we refer to as the "FHLB." and
other borrowings. During 2004, average total deposits grew $7.9 million or 9% as
compared to 2003.  The majority of the average  deposit  growth during 2004 came
from other  deposits,  which  include money  market,  NOW and savings  accounts.
Management attributes this increase to additional marketing and management focus
on attracting more deposit  relationships  of this type in an effort to increase
our net interest  margin,  as well as, as  successful  product  promotion at our
Farragut branch.

     The yield on average  interest  earning  assets  decreased  25 basis points
during 2004 to 6.26%.  The primary reason for this decline is mainly  attributed
to the continued low interest rate environment  through mid-year 2004;  however,
prime rate increases beginning in July 2004 alleviated a further declining trend
in the overall yield on earning  assets.  The Federal  Reserve began raising key
interest rates for the first time since 2000 in July 2004. By December 2004, the
Prime rate had increased 125 basis  points.  While some of our interest  earning
assets reprice  immediately,  others reprice at contractual  maturities or other
agreed upon  repricing  dates,  as well as,  indices  other than the prime rate.
Additionally, when earning assets grow during periods of falling interest rates,
yields will  typically  decline as new earning  assets are added at yields lower
than those presently in the earning asset portfolio.

     The yield on loans for 2004 was  6.71%,  a  decline  of 25 basis  points as
compared  to 2003.  The  performance  of the  loan  portfolio  can be  primarily
attributed to the interest rate environment as discussed  previously.  New loans
made during the first half of 2004  generally  carried  lower  yields than loans
originated in the latter part of 2004. Yields on taxable  investment  securities
declined 84 basis  points and yields on  tax-exempt  securities  (computed  on a
tax-equivalent  basis) declined 77 basis points during 2004 as compared to 2003,
again impacted by the general interest rate environment. The decline in yield on
all investment securities can be attributed to the maturity, call, or prepayment
(mortgage  backed  securities) of high yielding  securities.  As the balances in
these high yielding securities declined, the overall yields were more influenced
by newly acquired securities  purchased at lower yields in a lower interest rate
environment.  The  yield on  federal  funds  increased  27 basis  points in 2004
compared to 2003 directly related to the gradual  increases in interest rates in
the last half of 2004.

     Our cost of funds declined 27 basis points during 2004 to 1.84%. This level
can be primarily  attributed to the general interest rate environment  described
above in that a  decrease  in cost of  funds is  noted;  however,  rising  rates
impacted  any further  improvement  in total cost of funds in the second part of
2004.  Rates  on time  deposits  declined  40 basis  points  to 2.67% in 2004 as
compared to 2003.  Other  interest-bearing  deposits  saw rates  decline 9 basis
points during 2004 to 0.94%.  Rates on time deposits declined as higher yielding
time deposits matured and were replaced with time deposits carrying lower rates.
Other interest  bearing deposits do not have  contractual  maturities;  rates on
those  deposits  can be changed at  management's  discretion  but are subject to
competitive  pressures  and our need  for  liquidity.  Rates  on FHLB  Advances,
repurchase  agreements  and capital lease  obligations  declined 14 basis points
during 2004 to 3.85% due to the overall  interest  rate  environment.  We have a
Cash  Management  Line of Credit  with the FHLB which is priced at an  overnight
interest  rate. We anticipate  the bank's overall cost of funds will increase in
the near future.

     Our net interest  margin improved 5 basis points during 2004 as compared to
2003.  Improvement  in the net interest  margin in 2003  compared to 2002 was 24
basis points and positively impacted by an accelerated decrease in cost of funds
in relation to declining yields on interest bearing liabilities.


                                      -13-
<PAGE>


                                  Schedule III
                       Rate Volume Analysis (in thousands)
                                        ----------------------------------------
                                                      2004 vs. 2003
                                        ----------------------------------------

                                        ----------------------------------------
                                        Average Balance Rate/Yield      Total
                                        ----------------------------------------
Interest Income
Federal funds sold                         (8)              5          (3)
Securities available for sale              44             (96)        (52)
FHLB stock                                  1               1           2
Loans, including fees                     706            (203)        503
                                        ----------------------------------------
Total interest income                     743            (293)        450
                                        ----------------------------------------

Interest Expense
Interest-bearing deposits                 123            (246)       (123)
FHLB advances, Repurchase Agreements
and other                                  32             (11)         21
                                        ----------------------------------------
Total interest expense                    155            (253)        (98)
                                        ----------------------------------------
Net change in net interest income         588             (40)        548
                                        ========================================

Non-Interest Income

     Non-interest  income  decreased  approximately  $546,000  or 40% in 2004 as
compared to 2003 due primarily to a substantial  decrease in fees on loans sold.
We offer  traditional  residential  mortgage  financing  through  the  secondary
market.  Under this program, we originate  residential mortgage loans, which are
in turn funded and serviced by secondary  market lenders and we receive fees for
our loan origination,  as well as, relinquish our loan servicing rights. Fees on
loans sold  decreased  approximately  $562,000  during 2004 as compared to 2003.
This decrease was a result of the declining  volume of mortgage  refinancing  as
compared  to  2003.  This  was  mainly  due to an  increasing  rate  environment
beginning   in  July   2004.   Gains   on   sales   of   investment   securities
Available-for-Sale  were due to investment  sales to either meet liquidity needs
or  transactions  aimed at  improving  the bank's  yield or  interest  rate risk
profile  by  selling  bonds and  purchasing  others.  These  proceeds  were down
approximately  $27,000 from 2003.  Service charges on demand deposits  increased
approximately  $39,000  during  2004 as  compared  to 2003 due  primarily  to an
increase  in  the  volume  of  our  deposit  accounts.  Other  income  increased
approximately $4,000 during 2004 as compared to 2003.

     Non-interest  income  increased  approximately  $547,000  or 66% in 2003 as
compared to 2002 due primarily to increases in fees on loans sold,  net gains on
sales of investment securities available for sale, and service charges on demand
deposits.  Fees on loans sold increased  approximately  $454,000  during 2003 as
compared to 2002.  The  increase  was the result of an increase in the volume of
loans  sold and  hence the fees on loans  sold can be  primarily  attributed  to
continued low interest rates during 2003. Many of these loans were the result of
customers  refinancing  their  mortgages to take advantage of the lower interest
rate  environment.  Gains on sales of investment  securities  available for sale
were the result of sales to take advantage of routine  fluctuations  in the bond
markets.  Service charges on demand  deposits  increased  approximately  $38,000
during 2003 as compared  to 2002 due  primarily  to an increase in the volume of
our deposit accounts.

                                      -14-

<PAGE>

Non-Interest Expense

     Non-interest expense increased approximately $325,000, or 8% during 2004 as
compared to 2003. This increase is mainly the result of growth in earning assets
which  necessitates  growth in  non-interest  expense to support  safe and sound
asset growth. Two categories of non-interest expenses had increases of more than
20% from 2003.  These are advertising and promotion  (increase of  approximately
$57,000 or 60%) and legal and  professional  expense  (increase of approximately
$59,000 or 64%).  Advertising and promotion  costs  increased  mainly due to the
relocation of the  Knoxville  branch to Farragut and the  promotional  campaigns
associated  with  that  move.  Legal  and  professional  fees  increased  mainly
increased due to upgrading of our internal audit procedures and costs related to
being a publicly held company.

     All other categories were below a 20% increase level. Salaries and employee
benefits  totaled $1.9 million,  representing an increase of $50,000.  Occupancy
costs equaled  $464,000,  representing  an increase of $86,000.  Data processing
fees  totaled  $291,000,  representing  an increase of $39,000.  Other  expenses
increased $7,000 over 2003.

     Non-interest expense increased approximately $671,000 or 22% during 2003 as
compared to 2002. The primary  categories of increase  during 2003 were salaries
and employee benefits (increase of approximately  $373,000 or 25% during 2003 as
compared to 2002),  other expense (an increase of approximately  $149,000 or 27%
during 2003 as compared to 2002), and occupancy costs (an increase of $68,000 or
22% during 2003 as  compared to 2002).  The  increase in salaries  and  employee
benefits was primarily  due to additional  personnel to support asset growth and
increases  in  commissions  to employees  for loans sold.  The increase in other
expense was due  primarily to the growth in volume we  experienced  during 2003;
one of the largest  increases in other expense was loan expense which  increased
approximately  $96,000 to $296,364  during 2003, due primarily to an increase in
loan  origination  volume.  The increase in occupancy costs was primarily due to
higher building repair and maintenance  costs,  and increased lease expense (due
to a full year's  expense on the lease on the Kingston  Pike location in 2003 as
compared to seven months' expense in 2002).

Income Taxes

     We recognize income taxes under the asset and liability method  established
in Statement of Financial  Accounting  Standards No. 109,  Accounting for Income
Taxes.  Under this method,  deferred tax assets and  liabilities are established
for the temporary  differences between the accounting basis and the tax basis of
our assets and  liabilities  at enacted tax rates  expected to be in effect when
the amounts related to such temporary  differences are realized or settled.  Our
deferred tax assets are reviewed  quarterly and  adjustments  to such assets are
recognized  as  deferred  income tax  expense or benefit  based on  management's
judgment relating to the realizability of such assets.

     We  recognized  income  tax  expense  of  approximately  $501,000  for 2004
compared to approximately $584,000 in 2003 and $329,000 in 2002.

Loan Losses and Credit Risk

     The  allowance  for loan losses is  established  by charging  expense at an
amount which will maintain the  allowance for loan losses at a level  sufficient
to provide for  potential  loan  losses.  We charge loan losses  directly to the
allowance when incurred and we credit recoveries to the allowance when realized.
We base the amount of provision on past loss experience, management's evaluation
of the loan portfolio under current economic conditions, and other factors as in
management's  best judgment  deserve  current  recognition  in  estimating  loan
losses.  The balance of the allowance for loan losses was $1,270,869 or 1.24% of
gross loans  outstanding  at  December  31,  2004.  During  2004,  the loan loss
provision totaled $228,500,  a decrease of approximately  $61,500 as compared to
2003.  Although the net charge-off ratio increased to 0.26% from 2003 and steady
loan growth  continued,  required  reserve  allocations  were  alleviated by the
payoff of certain classified assets,  which were reserved at a higher allocation
than loans which are not  classified.  As of  December  31,  2004,  management's
review of the allowance for loan losses  concluded that the balance was adequate
to provide for  potential  losses based upon an  evaluation  of risk in the loan
portfolio. Despite our credit standards,  internal controls, and continuous loan
review  process,  the inherent risk in the lending  process  results in periodic
charge-offs.

                                      -15-
<PAGE>

     Through  the  provision  for loan  losses,  we  maintain a reserve for loan
losses that  management  believes is adequate to absorb  losses  within the loan
portfolio.  In addition,  various  regulatory  agencies,  as an integral part of
their examination  procedures,  periodically review our reserve for loan losses,
and based on their judgment may require us to recognize additions to the reserve
for loan losses.  Management completes a formal analysis of the reserve for loan
losses  adequacy on a monthly basis.  This formal  analysis of the allowance for
loan loss reserve  segregates the loan  portfolio into general and  specifically
classified  categories.  Management  employs a loan grading system for all loans
based on credit  quality.  Loans in the four lowest  categories  are  considered
specifically classified and allocated a higher percentage of potential loan loss
than the general loan  population.  The general loan population is segregated by
collateral  type and a reserve amount is assigned  based on the historical  loss
ratio and expected  future loss potential for that particular  collateral  type.
For specifically  classified loans,  reserve amounts are assigned based on rates
defined in the Bank's loan policy and  consistent  with  industry  standards and
regulatory  guidance.  The rates defined by our loan policy are determined based
on a variety of factors including our historical loss experience,  industry loss
rates,  guidance  received  from  previous  regulatory  examinations,  and other
factors such as the borrower's ability to repay the loan and the availability of
the collateral.  As of December 31, 2004  approximately $2.4 million of the loan
portfolio was considered  specifically  classified with approximately 26% of the
allowance for loan losses related to these loans.  We assigned the remaining 74%
of the allowance for loan losses to the general population of loans.

     Included in  management's  formal analysis of the allowance for loan losses
are loans considered  impaired as provided in Statement of Financial  Accounting
Standards No. 114  "Accounting by Creditors for Impairment of a Loan." A loan is
considered  impaired  when,  based on  current  information  and  events,  it is
probable  that we will be unable to collect  all amounts  due  according  to the
contractual terms of the loan agreement. Impairment losses are measured based on
the  present  value of  expected  future  cash  flows  discounted  at the loan's
effective interest rate or the fair value of the underlying collateral. Loans in
our lowest three adversely classified  categories are considered for impairment.
Due to the relatively  small size of our loan  portfolio,  management  considers
each individual loan specifically for impairment.  The allowance for loan losses
related to impaired loans amounted to approximately  $333,000 as of December 31,
2004 and $338,000 as of December 31, 2003.  Schedules IV and V present a summary
of our loan loss experience and reserve analysis during 2004 and 2003.

                                       Schedule IV
                      Analysis of Loan Loss Reserve (in thousands)

                                                    The year ended December 31,
                                            ------------------------------------
                                                     2004             2003
                                            ------------------------------------
Balance at Beginning of Period                 $  1,283          $  1,047
Charge-Offs:
Commercial, financial and agricultural               28                12
Real Estate - construction
Real estate - mortgage                               63                14
Installment - consumer                              182                54
Other                                                 -                 -
                                            ------------------------------------
Total charge-offs                                   273                80
                                            ------------------------------------

Recoveries:
Commercial, financial and agricultural               -                  -
Real Estate - construction                           -                  -
Real estate - mortgage                               5                  -
Installment - consumer                              27                 26
Other                                                -                  -
                                            ------------------------------------
Total recoveries                                    32                 26
                                            ------------------------------------
Net charge-offs                                    241                 54
Provision for loan losses                          229                290
                                            ------------------------------------
Balance at the End of Period                   $ 1,271             $1,283
                                            ====================================


                                            ------------------------------------

Ratio of net charge-offs to                       0.26%              0.06%
 average loans outstanding                  ====================================

                                      -16-
<PAGE>

                                             Schedule V
                           Allocation of Loan Loss Reserve (In thousands)
<TABLE>
<CAPTION>
                                          -----------------------------------------------------------
                                                      2004                         2003
                                          -----------------------------------------------------------
                                            $ Allocation   % Allocation  $ Allocation   % Allocation
                                          -----------------------------------------------------------
<S>                                         <C>               <C>        <C>            <C>
Commercial, financial and agricultural          450           35%             581             45%
Real Estate - construction                       30            2%              15              1%
Real estate - mortgage                          644           51%             502             39%
Installment - consumer                          147           12%             185             15%
Other                                             -            0%               -              0%
                                          ------------------           ------------------
Total                                      $  1,271                      $   1,283
                                          ==================           ==================
</TABLE>
Summary of Loans and Non-Performing Assets

     Non-performing assets consist of

     (a)  loans  no  longer  accruing   interest  due  to  doubts  about  future
          collectibility;
     (b)  loans more than 90 days past due for the last  principal  or  interest
          payment;
     (c)  loans   restructured   due  to  the  borrower's   inability  meet  the
          contractual loan terms; and
     (d)  other real estate owned by us, taken originally as loan collateral.

Schedule VI presents the amounts of  non-performing  assets at December 31, 2004
and 2003.

                               Schedule VI
                   Non-Performing Assets (in thousands)
                                                    December 31,
                                                 2004              2003
                                           --------------------------------
Non-accrual loans (1) (3)                   $      546      $      962
Loans past due greater than 90 days and
still accruing interest (2) (3)                      0              21
Restructured loans (3)                             257             155
Other real estate owned                            335              20
                                           --------------------------------
Total Non-Performing Assets                 $    1,138      $    1,158
                                           ================================

(1)  Included in  non-accrual  loans is  approximately  $546,000 and $962,000 of
     loans considered impaired as of December 31, 2004 and 2003, respectively.
(2)  There  were no loans past due 90 days or more and still  accruing  interest
     which  were  considered  impaired  as of  December  31,  2004 and 2003.  At
     December 31, 2004 approximately  $451,000 of loans considered  restructured
     were considered impaired.
(3)  Footnotes  (1) and  (2)  disclose  the  amount  of  impaired  loans  in the
     categories  presented  in  Schedule  VI.  At  December  31,  2004  and 2003
     respectively,  there were $1.8  million and  $630,000  in loans  considered
     impaired which were not in non-accrual  status or were not past due 90 days
     or more and still accruing  interest or were not  considered  restructured.
     These loans were  considered  impaired due to factors  known to  management
     which raised  concerns  about our ability to collect  amounts due under the
     applicable loan  agreement.  Factors such as a known  deterioration  in the
     borrower's financial condition or collateral position are considered in the
     decision to evaluate and recognize loans as being impaired.

     We determine loans to be non-accruing when we determine that our ability to
collect  the  unpaid  balance  of these  loans  is  highly  unlikely  due to the
financial position of the borrower and general economic  conditions.  Management
makes this  determination of  classification on a case by case basis for problem
loans.  Generally,  we review  each loan 90 days or more past due monthly and we
place on  non-accrual  status  the loans for which we  determine  collection  is
doubtful.  During 2004, we would have earned  approximately  $63,000 on loans in
non-accrual status had these loans been current in accordance with their terms.

                                      -17-

<PAGE>

     Loans are  determined to be 90 days  delinquent  when such a period of time
has elapsed since the last  required  payment of principal or interest was made.
At such  time,  we  consider  whether to place the loan on  non-accrual  status.
However, until we make this classification, interest will continue to accrue.

     Non-accrual  loans decreased to  approximately  $546,000 as of December 31,
2004 compared to $962,000 as of December 31, 2003.  The decrease in  non-accrual
loans is due primarily to  management's  identification  and monitoring of these
credits along with diligent  collection  processes.  Of the loans in non-accrual
status  as  of  December  31,  2003,  $25,000  were  charged  off  during  2004.
Additionally,   $597,000  were  removed  from  nonaccrual  status  per  payoffs,
restructuring,  or foreclosure while $6,000 remained in non-accrual status as of
December 31, 2004, although this loan had paid down approximately  $3,000 during
2004. Therefore, the loans in non-accrual status as of December 31, 2004 include
approximately $6,000 in loans which were non-accrual as of December 31, 2003 and
approximately  $540,000 in loans added to non-accrual  status during 2004. There
were no loans past due over 90 days and still  accruing  interest as of December
31,  2004.  It is our policy to place loans on  non-accrual  after they reach 90
days past due.

     Net charge-offs increased to $241,000 during 2004 as compared to $54,000 in
2003. The ratio of net charge-offs to average loans was 0.26% for 2004 and 0.06%
for 2003.  Increased  charge-offs were primarily  recognized due to overall loan
volume  growth  and the fact that more  inherent  risks are  present as the loan
portfolio expands.

     Loans  increased $15.7 million to $101.2 million as of December 31, 2004 as
compared to December 31, 2003.  Management attributes this continued growth to a
favorable  interest rate environment,  aggressive growth in the Knoxville market
and the strong effort of our lending personnel. The primary categories of growth
were construction and land development.  commercial and industrial, and consumer
loans.

                                   Schedule VII
                           Loans by Type (in thousands)
                                                        December 31,
                                                   2004              2003
                                            ------------------------------------
Loans secured by real estate:
Commercial properties                        $    14,419       $      15,458
Construction and land development                 23,552              12,363
Residential and other properties                  38,320              38,669
                                            ------------------------------------
Total loans secured by real estate                76,291              66,490

Commercial and industrial loans                   14,778              11,439
Consumer loans and other                          11,566               8,981
                                            ------------------------------------
                                                 102,635              86,910
Less: Allowance for loan losses                   (1,271)             (1,283)
      Unearned loan fees                            (137)               (129)
                                            ------------------------------------
                                             $   101,227       $      85,498
                                            ====================================

                                      -18-

<PAGE>

Investment Securities

     Investment  securities  were $15.3 million as of December 31, 2004 compared
to $14.5 million as of December 31, 2003. At December 31, 2004 and 2003,  all of
our investment  securities were classified available for sale. During 2004, $6.6
million in  available  for sale  securities  were  purchased as compared to $7.4
million in purchases of available for sale  securities in 2003.  Maturities  and
calls  of   investment   securities   and  principal   payments   received  from
mortgage-backed  securities  totaled  $3.4  million in 2004 and $4.7  million in
2003.  Proceeds  from the sale of  available  for sale  securities  totaled $2.2
million,  with gross gains on these sales of $24,227 and gross losses of $2,752.
Proceeds  from the sale of available  for sale  securities  in 2003 totaled $1.9
million,  with gross  gains on the sales of $48,301 and no gross  losses.  These
sales were used to fund loan  demand and to  reinvest  funds in higher  yielding
investment  securities.   The  gross  unrealized  gain  on  available  for  sale
securities was $74,569 at December 31, 2004 compared to $174,512 at December 31,
2003. The fair value of debt securities fluctuates with the movement of interest
rates. Generally,  during periods of declining interest rates, the fair value of
debt  securities  increases  whereas  the  opposite  may  hold  true in a rising
interest rate environment.

     The  investment  portfolio is primarily  comprised of U.S.  Government  and
federal agency obligations and mortgage-backed  securities issued by the Federal
Home Loan  Mortgage  Corporation,  the FHLB,  the Federal Farm Credit Bank , the
Government National Mortgage Association , Small Business Administration and the
Federal National Mortgage Association;  bank-qualified,  investment-grade state,
county and municipal bonds; and corporate debt securities. Our investment policy
prohibits us from  investing in state,  county and municipal  bonds rated Baa or
lower by  Moody's or BBB by S&P.  Mortgage-backed  issues  comprised  32% of the
portfolio at December 31, 2004 and 35% at December 31, 2003.  Schedule VIII sets
forth the  maturity of the  securities  held in the  investment  portfolio as of
December 31, 2004:


<TABLE>
<CAPTION>
                                                Schedule VIII
                                Maturities of Securities at December 31, 2004

                                                                       Due After One Year     Due After Five Years
($ in thousands)                              Due in One Year or Less     Through Five Years    Through Ten Years
Securities available for sale:                   Amount      Yield      Amount        Yield      Amount     Yield
                                              -------------------------------------------------------------------
<S>                                             <C>         <C>       <C>            <C>     <C>           <C>

U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies       $   -                 $  3,408       3.74%   $    614      3.92%
Mortgage-Backed and Related Securities              5       7.49%          269       5.45%      1,227      4.16%
Obligations of State and Political Subdivisions     -                      264       5.28%      1,207      4.46%
Corporate Debt Securities                           -                                               -
                                              --------------------------------------------------------------------
Total Debt Securities                          $    5       7.49%     $  3,941       3.96%   $  3,049      4.19%
                                              ====================================================================
($ in thousands)                                Due After Ten Years         Total
Securities available for sale:                   Amount      Yield      Amount    Yield
                                              --------------------------------------------
U.S. Treasury Securities and Obligations of     $ 190       2.15%     $ 4,212        3.76%
U.S. Government Corporations and Agencies
Mortgage-Backed and Related Securities          3,248       3.87%       4,749        3.73%
Obligations of State and Political
Subdivisions                                    4,321       3.68%       5,792        3.66%
Corporate Debt Securities                           -
                                              --------------------------------------------
Total Debt Securities                          $7,759       3.64%     $14,753        3.71%
                                              ============================================
</TABLE>

                                      -19-

<PAGE>
Asset/Liability Management and Interest Rate Risk Management

     Asset/liability  management  is the process of planning,  implementing  and
controlling  the mix and maturity  features of our interest  bearing  assets and
liabilities  to maximize net  interest  margin and minimize the risk of negative
effects on net interest  margin by changes in market  interest  rates.  One tool
utilized  in  our  asset  liability  management  process  is the  Interest  Rate
Sensitivity  Analysis  presented in Schedule IX. The Interest  Rate  Sensitivity
Analysis  evaluates gaps between  repricing  frequencies of our interest earning
assets and interest bearing liabilities. As seen from this analysis, we are in a
negative gap position in both repricing  categories  through three months to one
year.  This could  result in a decline in net  interest  should  interest  rates
decline.  Management continually monitors the asset liability position and takes
corrective measures where possible.

<TABLE>
<CAPTION>
                                   Schedule IX
                Interest Rate Sensitivity Analysis (in thousands)
                             As of December 31, 2004

                                     Within 3 months     3 months to 1 year    1 to 5 years    After 5 years   Total
                                     ---------------------------------------------------------------------------------
<S>                                  <C>                 <C>                   <C>              <C>          <C>
Earning Assets:

Loans                                $ 55,785            $    9,165            $    37,537      $   149      $ 102,636
Investment securities                   1,308                 1,232                  6,119        6,666         15,325
Federal funds sold                   ---------------------------------------------------------------------------------
Total earning assets                   57,093                10,397                 43,656        6,815        117,961
                                     ---------------------------------------------------------------------------------
Interest Bearing Liabilities:
Interest bearing deposits              53,340                20,471                 19,030            -         92,841
FHLB advances                           4,200                                        5,500            -          9,700
Federal Funds Purchased                   375                                                                      375
Other Borrowings                          593                                                                      593
                                   -----------------------------------------------------------------------------------
Total interest bearing liabilities     58,508               20,471                  24,530            -        103,509
Repricing Gap                          (1,415)             (10,074)                 19,126        6,815         14,452
Repricing Gap as a percentage of
earning assets                           -1.2%                -8.5%                   16.2%         5.8%
Cumulative repricing gap               (1,415)             (11,489)                  7,637       14,452
Cumulative repricing gap as a
percentage of earning assets             -1.2%                -9.7%                   6.5%         12.3%
</TABLE>

Management has made the following  assumptions in this interest rate sensitivity
analysis:

1.   Assets and liabilities are generally  assigned to a period based upon their
     earliest repricing  opportunity,  when such repricing opportunity is before
     the contractual maturity.
2.   Non-accrual loans are included in the loan category
3.   Investment  securities are scheduled for repricing  based on their earliest
     repricing date;  however,  callable  agency  securities are only considered
     repriced at the call date if the  security  is at a market  value above par
     value.

Liquidity and Capital Resources

     Our primary sources of liquidity are deposit  balances,  available-for-sale
securities,  principal and interest payments on loans and investment securities,
Fed Fund lines, and FHLB advances.

     At  December  31,  2004,  we  held  $15.3  million  in   available-for-sale
securities. Deposits increased $16.7 million during 2004. We had $3.0 million in
available  federal  funds lines and  approximately  $3.5 million in  potentially
available borrowings from the FHLB as of December 31, 2004.

     We utilize  various  types of other  borrowings  to help fund balance sheet
growth  and  mitigate  our  interest  rate  risk.  The  primary  source of other
borrowings  is through  the FHLB  which has many  different  types of  borrowing
structures  available  to member  banks.  As of  December  31,  2004 we had $9.7
million in  outstanding  advances  with the FHLB.  We had $500,000 in fixed rate
advances  which offer fixed interest rates on balances that are due at maturity.
We had $8.0 million in  Convertible  Fixed Rate  Advances,  which we refer to as
"CFR,"  outstanding.  CFR advances  offer fixed rates of interest for an initial
term,  then may convert,  at the FHLB's  option to a floating  rate.  Due to the
optionality of these advances,  they do inherently carry more interest rate risk
than fixed rate advances.  We also maintain a Cash Management Advance,  which we
refer to as "CMA,"  with the FHLB to meet short term  liquidity  needs.  The CMA
line of credit, which was established in 2001, is for amounts up to $6.0 million
and expires  annually.  As of December 31, 2004 we had $1.2 million  outstanding
under our CMA line of credit.

                                      -20-

<PAGE>

     We can also enter into repurchase  agreement  transactions  should the need
for  additional  liquidity  arise.  At December  31,  2004,  we had  $353,000 in
repurchase agreements outstanding.

     At December 31, 2004, we had qualifying capital of $10.3 million,  or 10.1%
of total risk-based assets as compared to $9.3 million, or 11.1% at December 31,
2003.  Tennessee  chartered  banks that are  insured by the FDIC are  subject to
minimum  capital  maintenance  requirements.  Regulatory  guidelines  define the
minimum  amount  of  qualifying  capital  an  institution  must  maintain  as  a
percentage of risk-weighted assets and average total assets.

     The footnotes to the audited financial  statements enclosed contain further
discussion of regulatory capital requirements.  For further information,  please
refer to Note 13 of those audited financial statements.

Impact of New Accounting Standards

Derivative Instruments and Hedging Activities
---------------------------------------------

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

Accounting  for  Certain  Financial  Instruments  with  Characteristics  of Both
Liabilities and Equity
--------------------------------------------------------------------------------

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
established  standards  for  how  an  issuer  classifies  and  measures  certain
financial  instruments  with  characteristics  of both  liabilities  and equity.
Management  does not expect this  statement to have a significant  impact on the
Company's financial position or results of operations.

Consolidation of Variable Interest Entities
-------------------------------------------

In  December  2003,  the FASB  issued  revised  Interpretation  No. 46  (FIN46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application  of ARB No. 51,  "Consolidated  Financial  Statements,"  for certain
entities  in  which  equity  investors  do not  have  the  characteristics  of a
controlling  financial interest or do not have sufficient equity at risk for the
entity to finance its activities  without additional  subordinated  support from
other parties.  This  Interpretation  requires  variable interest entities to be
consolidated by the primary  beneficiary,  which  represents the enterprise that
will absorb the majority of the variable interest  entities'  expected losses if
they  occur,  receive a majority of the  variable  interest  entities'  residual
returns if they occur, or both. This Interpretation is effective for the Company
in the first fiscal year or interim  period ending after  December 15, 2004. The
Company does not presently have any related  entities  considered to be variable
interest entities and this Standard is not expected to have a material effect on
the Company's financial statements.

Accounting for Certain Loans or Debt Securities Acquired in a Transfer
----------------------------------------------------------------------

In December 2003, the American  Institute of Certified Public Accountants issued
Statement of Position 03-3,  "Accounting  for Certain Loans and Debt  Securities
Acquired  in a  Transfer"  ("SOP  03-3").  SOP  03-3  addresses  accounting  for
differences  between  contractual  cash flows  expected to be  collected  and an
investor's initial investment in loans or debt securities acquired in a transfer
if those differences are attributable,  at least in part, to credit quality. SOP
03-3 also prohibits  "carrying over" or creation of valuation  allowances in the
initial accounting of all loans acquired in a transfer that are within the scope
of SOP 03-3. The prohibition of the valuation allowance carryover applies to the
purchase of an  individual  loan, a pool of loans,  a group of loans,  and loans
acquired in a purchase  business  combination.  SOP 03-3 is effective  for loans
acquired in fiscal years beginning after December 15, 2004. The Company does not
anticipate  that the  adoption  of SOP 03-3 will have a  material  impact on its
financial condition or results of operations.

                                      -21-
<PAGE>

Meaning of Other-Than-Temporary Impairment
------------------------------------------

In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1,
"Meaning of Other Than  Temporary  Impairment"  ("Issue  03-1").  The Task Force
reached a consensus  on an  other-than-temporary  impairment  model for debt and
equity  securities   accounted  for  under  Statement  of  Financial  Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities"  and  cost  method  investments,  and  required  certain  additional
financial statement disclosures. The implementation of the "Other-than-Temporary
Impairment" component of this consensus has been postponed.  The adoption of the
guidance  contained in this EITF consensus did not have a material effect on the
Company's financial statements.


Share-Based Payment
-------------------

In December  2004,  the FASB issued SFAS No. 123  (revised  2004),  "Share-Based
Payment,"  which is a revision  of SFAS No.  123,  "Accounting  for  Stock-Based
Compensation."  SFAS No. 123(R)  supersedes APB Opinion No. 25,  "Accounting for
Stock Issued to Employees," and amends SFAS Statement No. 95, "Statement of Cash
Flows." Generally,  the approach to accounting for share-based  payments in SFAS
No. 123(R) is similar to the approach  described in SFAS No. 123. However,  SFAS
No. 123(R) requires all share-based  payments to employees,  including grants of
employee stock options,  to be recognized in the financial  statements  based on
their  fair  values,  which  means  that pro  forma  disclosure  is no longer an
alternative to financial statement recognition. SFAS No. 123(R) is effective for
the Company beginning  January 1, 2006. The Company is currently  evaluating the
provisions of SFAS No. 123(R) to determine its impact on the Company's financial
statements in future periods.

Exchanges of Non-Monetary Assets
--------------------------------

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- an Amendment to APB opinion No. 29." This Statement  addresses the measurement
of exchanges of nonmonetary  assets.  The Statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005.  Management
does not believe this  Statement  will have a material  effect on the  Company's
financial statements.
















                                      -22-

<PAGE>

ITEM 7 - FINANCIAL STATEMENTS







                          Index to Financial Statements


Independent Auditor's Report..................................................24

Consolidated Balance Sheets as of December 31, 2004 and 2003..................25

Consolidated Statements of Income for the Years ended
December 31, 2004, 2003 and 2002..............................................26

Consolidated Statements of Comprehensive Income for the
Years ended December 31, 2004, 2003 and 2002..................................27

Consolidated Statements of Changes in Shareholders' Equity
for the Three Years ended December 31, 2004...................................28

Consolidated Statements of Cash Flows for the Years ended
December 31, 2004, 2003 and 2002...........................................29-30

Notes to Financial Statements..............................................31-48


















                                      -23-

<PAGE>




             Report of Independent Registered Public Accounting Firm



Board of Directors
Tennessee Valley Financial Holdings, Inc.
Oak Ridge, Tennessee


We have audited the accompanying consolidated balance sheets of Tennessee Valley
Financial Holdings, Inc. and subsidiary as of December 31, 2004 and 2003 and the
related  consolidated  statements of income,  comprehensive  income,  changes in
shareholders'  equity,  and cash flows for the years ended  December  31,  2004,
2003, and 2002. These consolidated  financial  statements are the responsibility
of the Bank'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 the standards of the Public  Company
Accounting Oversight Board (United States). 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 Tennessee Valley
Financial  Holdings,  Inc. and  subsidiary as of December 31, 2004 and 2003, and
the  results  of their  operations  and their  cash  flows  for the years  ended
December 31, 2004,  2003, and 2002, in conformity with U.S.  generally  accepted
accounting principles.

                                      Pugh &Company, P.C.
                                      Certified Public Accountants
                                      Knoxville, Tennessee
                                      January 28, 2005












                                      -24-
<PAGE>


                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                       As of December 31,              2004                        2003
                                                                               ----------------------     -----------------------
<S>                                                                            <C>                        <C>
                                 ASSETS
Cash and Due From Banks                                                        $           2,369,004      $            2,073,710
Federal Funds Sold                                                                                 0                      71,664
                                                                               ----------------------     -----------------------
   Total Cash and Cash Equivalents                                                         2,369,004                   2,145,374

Investment Securities Available for Sale, at Fair Value                                   15,324,753                  14,502,488
Loans Held for Sale, at Fair Value                                                           859,114                     273,500
Loans, Net                                                                               101,227,259                  85,498,056
Premises and Equipment, Net                                                                4,168,637                   3,713,642
Accrued Interest Receivable                                                                  672,277                     554,840
Deferred Income Tax Benefit                                                                  269,722                     301,960
Prepaid Expenses and Other                                                                    97,981                      73,550
Prepaid Income Taxes                                                                          12,833                           0
Foreclosed Real Estate                                                                       335,000                      20,000
                                                                               ----------------------     -----------------------

TOTAL ASSETS                                                                   $         125,336,580      $          107,083,410
                                                                               ======================     =======================

                         LIABILITIES AND EQUITY
LIABILITIES
 Deposits:
  Demand                                                                       $          60,297,901      $           47,005,402
  Term                                                                                    44,501,258                  41,112,536
                                                                               ----------------------     -----------------------
   Total Deposits                                                                        104,799,159                  88,117,938

 Securities Sold Under Agreements to Repurchase                                              353,471                     339,308
 Federal Funds Purchased                                                                     375,000                     370,000
 Advances From Federal Home Loan Bank                                                      9,700,000                   8,650,000
 Obligation Under Capital Lease                                                              239,567                     260,957
 Accrued Interest Payable                                                                    354,750                     282,158
 Accrued Income Taxes                                                                              0                     334,383
 Other                                                                                       259,771                     231,410
                                                                               ----------------------     -----------------------
   Total Liabilities                                                                     116,081,718                  98,586,154
                                                                               ----------------------     -----------------------

SHAREHOLDERS' EQUITY
 Common Stock, Par Value $1, Authorized 2,000,000 Shares;
  Issued and Outstanding 533,618 in 2004 and 534,130 in 2003                                 533,618                     534,130
 Capital in Excess of Par Value                                                            6,491,520                   6,487,427
 Retained Earnings                                                                         2,182,746                   1,363,212
                                                                               ----------------------     -----------------------
                                                                                           9,207,884                   8,384,769
 Accumulated Other Comprehensive Income                                                       46,978                     112,487
                                                                               ----------------------     -----------------------
   Total Shareholders' Equity                                                              9,254,862                   8,497,256
                                                                               ----------------------     -----------------------
TOTAL LIABILITIES AND EQUITY                                                   $         125,336,580      $          107,083,410
                                                                               ======================     =======================
</TABLE>

                                      -25-
<PAGE>


                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                For the Years Ended December 31,          2004                   2003                   2002
                                                                    -----------------     -------------------     -----------------
<S>                                                                 <C>                   <C>                     <C>

INTEREST INCOME
 Loans (Including Fees)                                             $      6,317,958      $        5,814,501      $       5,623,920
 Investment Securities                                                       577,820                 574,607               699,255
 Federal Funds Sold                                                           18,121                  21,367                29,398
                                                                    -----------------     -------------------     -----------------
  Total Interest Income                                                    6,913,899               6,410,475             6,352,573
                                                                    -----------------     -------------------     -----------------

INTEREST EXPENSE
 Deposits                                                                  1,622,272               1,745,106             2,279,720
 Advances From Federal Home Loan Bank                                        349,693                 332,763               291,015
 Other                                                                        11,847                   8,204                 2,095
                                                                    -----------------     -------------------     -----------------
  Total Interest Expense                                                   1,983,812               2,086,073             2,572,830
                                                                    -----------------     -------------------     -----------------

NET INTEREST INCOME                                                        4,930,087               4,324,402             3,779,743

PROVISION FOR LOAN LOSSES                                                    228,500                 290,000               485,000
                                                                    -----------------     -------------------     -----------------

NET INTEREST INCOME AFTER PROVISION
  FOR LOAN LOSSES                                                          4,701,587               4,034,402             3,294,743
                                                                    -----------------     -------------------     -----------------

NONINTEREST INCOME
 Service Charges on Demand Deposits                                          384,269                 345,548               307,648
 Fees on Loans Sold                                                          343,742                 906,092               451,996
 Net Gain on Sales of Investment Securities
  Available for Sale                                                          21,475                  48,301                 3,700
 Other                                                                        76,112                  71,668                60,905
                                                                    -----------------     -------------------     -----------------
  Total Noninterest Income                                                   825,598               1,371,609               824,249
                                                                    -----------------     -------------------     -----------------

NONINTEREST EXPENSE
 Salaries and Employee Benefits                                            1,933,346               1,883,229             1,509,933
 Occupancy Costs                                                             464,455                 378,005               309,884
 Furniture and Equipment Depreciation and Maintenance                        198,343                 160,856               144,519
 Data Processing Fees                                                        290,705                 252,193               234,154
 Office Supplies and Postage                                                 175,985                 187,100               160,225
 Advertising and Promotion                                                   151,599                  94,712               100,567
 Legal and Professional                                                      151,439                  92,015                66,697
 Other                                                                       703,059                 696,118               547,032
                                                                    -----------------     -------------------     -----------------
   Total Noninterest Expense                                               4,068,931               3,744,228             3,073,011
                                                                    -----------------     -------------------     -----------------

INCOME BEFORE INCOME TAXES                                                 1,458,254               1,661,783             1,045,981

INCOME TAXES                                                                 500,522                 583,601               329,340
                                                                    -----------------     -------------------     -----------------

NET INCOME                                                          $        957,732      $        1,078,182      $        716,641
                                                                    =================     ===================     =================

EARNINGS PER SHARE:
 Basic                                                              $           1.80      $             2.02      $           1.34
                                                                    =================     ===================     =================

 Assuming Dilution                                                  $           1.79      $             2.01      $           1.34
                                                                    =================     ===================     =================
</TABLE>

                                      -26-
<PAGE>


                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



<TABLE>
<CAPTION>


                                     For the Years Ended December 31,          2004                2003                2002
                                                                           --------------     ---------------     ---------------
<S>                                                                        <C>                <C>                 <C>
NET INCOME                                                                 $     957,732      $   1,078,182       $      716,641
                                                                           --------------     ---------------     ---------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 Unrealized Gains (Losses) on Investment Securities Available
 for Sale                                                                       (78,468)           (143,414)            194,413

 Reclassification Adjustment for Net (Gains) Losses Included
 in Net Income                                                                  (21,475)            (48,301)             (3,700)

 Income Taxes Associated With Unrealized Gains/Losses on
    Investment Securities Available for Sale                                      34,434             71,000             (67,723)
                                                                           --------------     ---------------     ---------------

      Other Comprehensive Income (Loss), Net of Tax                             (65,509)           (120,715)            122,990
                                                                           --------------     ---------------     ---------------

COMPREHENSIVE INCOME                                                       $    892,223             957,467       $     839,631

                                                                           ==============     ===============     ===============
</TABLE>




                                      -27-
<PAGE>




                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                   For the Three Years Ended December 31, 2004

<TABLE>
<CAPTION>
                                                                                                 Accumulated
                                                              Capital in                            Other                Total
                                                 Common        Excess of          Retained      Comprehensive        Shareholders'
                                                 Stock         Par Value          Earnings         Income               Equity
                                              -------------  --------------   -------------  ------------------   ---------------
<S>                                           <C>             <C>              <C>             <C>                <C>
BALANCES, JANUARY 1, 2002                     $    534,030    $  5,242,917     $   998,344     $     110,212      $    6,885,503

Effect of Share Exchange and
 Conversion of Bank Stock
 to Holding Company Stock                                0       1,243,010      (1,243,010)                0                   0

Common Stock Options Exercised                         100           1,500               0                 0               1,600
 (100 Shares at $16 Per Share)

Net Income                                               0               0         716,641                 0             716,641

Other Comprehensive Income                               0               0               0           122,990             122,990
                                              -------------  --------------   -------------  ------------------  ----------------

BALANCES, DECEMBER 31, 2002                        534,130       6,487,427         471,975           233,202           7,726,734

Net Income                                               0               0       1,078,182                 0           1,078,182

Other Comprehensive Loss                                 0               0               0          (120,715)           (120,715)

Cash Dividends Paid                                      0               0        (186,945)                0            (186,945)
                                              -------------  --------------   -------------  ------------------  ----------------

BALANCES, DECEMBER 31, 2003                        534,130       6,487,427       1,363,212           112,487           8,497,256

Net Income                                               0               0         957,732                 0             957,732

Other Comprehensive Loss                                 0               0               0           (65,509)            (65,509)

Cash Dividends Paid                                      0               0         (83,917)                0             (83,917)

Stock Dividends Issued through
   Dividend Reinvestment Plan                        2,088          52,193         (54,281)                0                   0

Purchase and Retirement of
   2,600 Shares of Common Stock                    (2,600)         (48,100)              0                 0             (50,700)
                                              -------------  --------------   -------------  ------------------  ----------------

BALANCES, DECEMBER 31, 2004                   $   533,618    $   6,491,520    $  2,182,746    $       46,978      $    9,254,862
                                              =============  ==============   =============  ==================  ================
</TABLE>




                                      -28-
<PAGE>


                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>


                                  For the Years Ended December 31,           2004                2003                 2002
                                                                        ----------------    ----------------     ----------------
<S>                                                                     <C>                 <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
 Net Income                                                             $       957,732     $    1,078,182       $      716,641
                                                                        ----------------    ----------------     ----------------
 Adjustments to Reconcile Net Income to Net Cash
  Provided by Operating Activities:
   Provision for Loan Losses                                                    228,500            290,000              485,000
   Depreciation                                                                 214,774            166,747              158,357
   Loss on Sales of Premises and Equipment                                            0                  0                  999
   Deferred Income Taxes (Benefit)                                               66,672            (63,946)             (66,126)
   Increase (Decrease) in Unearned Loan Fees                                      8,021             43,995               (5,034)
   Net Amortization of Premiums and Discounts on
Investment          Securities                                                   79,111             92,274               56,696
   FHLB Stock Dividends                                                        (22,500)            (21,100)             (19,800)
   Net Gain on Sales of Investment Securities Available for Sale               (21,475)            (48,301)              (3,700)
   Fees on Loans Sold                                                         (343,742)           (906,092)            (430,000)
   Gain on Sales of Foreclosed Real Estate                                     (12,585)                  0                 (188)
   (Increase) Decrease in Accrued Interest Receivable                         (117,437)             13,510              (24,180)
   (Increase) Decrease in Prepaid Expenses and Other                           (24,431)             32,455              (50,202)
   Increase in Prepaid Income Taxes                                            (12,833)                  0                    0
   Increase (Decrease) in Accrued Interest Payable                               72,592            (64,837)             (60,063)
   Increase (Decrease) in Accrued Income Taxes                                (334,383)            275,562              (20,764)
   Increase in Other Liabilities                                                 28,361             20,875                7,192
                                                                        ----------------    ----------------     ----------------
      Total Adjustments                                                       (191,355)           (168,858)              28,187
                                                                        ----------------    ----------------     ----------------
         Net Cash Provided by Operating Activities                              766,377            909,324              744,828
                                                                        ----------------    ----------------     ----------------
CASH FLOWS FROM INVESTING ACTIVITIES Investment Securities Available for Sale:
  Sales                                                                       2,157,170          1,895,626            2,211,658
  Purchases                                                                 (6,556,012)         (7,441,296)          (5,742,169)
  Maturities                                                                  1,957,000          2,030,000            1,880,000
  Principal Repayments Received                                               1,484,498          2,651,827            2,072,676
 Net Increase in Loans                                                     (16,385,724)         (4,646,111)         (14,577,962)
 New Loans Originated for Sale                                             (21,640,693)        (58,237,823)         (28,401,750)
 Proceeds From Sales of Loans                                                21,398,821         64,812,765           25,503,150
 Purchases of Premises and Equipment                                          (594,769)           (238,360)             (66,468)
 Proceeds From Sales of Foreclosed Real Estate                                   42,585                  0                7,241
                                                                        ----------------    ----------------     ----------------
        Net Cash Provided by (Used in) Investing Activities                (18,137,124)            826,628          (17,113,624)
                                                                        ----------------    ----------------     ----------------
</TABLE>


                                      -29-
<PAGE>




                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)



<TABLE>
<CAPTION>
                                  For the Years Ended December 31,           2004                 2003                2002
                                                                        ----------------     ---------------     ----------------
<S>                                                                     <C>                  <C>                 <C>
CASH FLOWS FROM FINANCING ACTIVITIES
 Net Increase (Decrease) in Deposits                                         16,681,221         (3,343,407)          15,630,035
 Net Increase in Securities Sold Under Agreements
to                       Repurchase                                              14,163             56,910              282,398
 Net Increase in Federal Funds Purchased                                          5,000            370,000                    0
 Net Increase in Advances From Federal Home Loan Bank                         1,050,000          1,379,300              515,700
 Decrease in Obligation Under Capital Lease                                    (21,390)            (12,147)                   0
 Cash Dividends Paid                                                           (83,917)           (186,945)                   0
 Proceeds From Issuance of Common Stock                                              0                   0                1,600
 Purchase and Retirement of Common Stock                                       (50,700)                  0                    0
                                                                        ----------------     ---------------     ----------------
     Net Cash Provided by (Used in) Financing Activities                     17,594,377         (1,736,289)          16,429,733
                                                                        ----------------     ---------------     ----------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                                                                223,630               (337)              60,937

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                2,145,374          2,145,711            2,084,774
                                                                        ----------------     ---------------     ----------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                $     2,369,004      $   2,145,374       $    2,145,711
                                                                        ================     ===============     ================

Supplementary Disclosures of Cash Flow Information:
 Cash Paid During the Year for:
  Interest                                                              $     1,911,220      $   2,150,910       $    2,632,893
  Income Taxes                                                          $       781,066      $     370,251       $      415,495

Supplementary Disclosures of Noncash Investing and
 Financing Activities:
  Acquisition of Foreclosed Real Estate                                 $       420,000      $      20,000       $       48,312
  Conversion of Foreclosed Real Estate to Premises
and                    Equipment                                        $        75,000      $           0       $            0
  Sales of Foreclosed Real Estate by Origination of
Mortgage             Loans                                              $             0      $           0       $       41,259
   Building Acquired Through Capital Lease                              $             0      $    (273,104)      $            0
   Issuance of Common Stock through Dividend
Reinvestment           Plan                                             $        54,281      $           0       $            0
  Change in Unrealized Gain/Loss on Investment Securities
     Available for Sale                                                 $       (99,943)     $    (191,715)      $      190,713
  Change in Deferred Taxes Associated With Unrealized
     Gain/Loss on Investment Securities Available for Sale              $       (34,434)     $     (71,000)      $       67,723
  Change in Net Unrealized Gain/Loss on Investment Securities
     Available for Sale                                                 $       (65,509)     $     (120,715)     $      122,990
</TABLE>




                                      -30-

<PAGE>

                    TENNESSEE VALLEY FINANCIAL HOLDINGS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2004, 2003, and 2002

NOTE 1 - PRINCIPLES OF CONSOLIDATION, NATURE OF OPERATIONS AND SHARE EXCHANGE

The consolidated  financial  statements include the accounts of Tennessee Valley
Financial Holdings, Inc. (the "Company"), a bank holding company, and its wholly
owned   subsidiary,   TNBank  (the  "Bank").   All  intercompany   balances  and
transactions have been eliminated.

TNBank  was  incorporated  on July 6,  1994  for the  purpose  of  organizing  a
state-chartered commercial bank and commenced operations on May 30, 1995. TNBank
provides a variety of banking services to individuals and businesses through its
two  offices in Oak Ridge and one office in  Knoxville,  Tennessee.  Its primary
deposit  products  are demand  deposits  and  certificates  of deposit,  and its
primary lending  products are commercial  business,  real estate  mortgage,  and
consumer installment loans.

On May 9, 2002, TNBank's  shareholders  approved a share exchange agreement with
Tennessee Valley Financial Holdings, Inc. whereby one share of Company stock was
exchanged for one share of Bank stock. The Bank's retained earnings as of May 9,
2002, totaling $1,243,010,  was transferred to capital in excess of par value on
a consolidated basis.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications  - Certain items in the 2003 and 2002  consolidated  financial
statements  have  been  reclassified  to  conform  with  the  2004  consolidated
financial statements.

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

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  result
from   transactions   and  other  economic  events  of  the  period  other  than
transactions  with  owners.  Items  included  in  comprehensive  income  include
revenues  and  gains and  losses  that  under  accounting  principles  generally
accepted  in the  United  States of  America  are  directly  charged  to equity.
Examples include foreign currency  translations,  pension liability adjustments,
and unrealized gains and losses on investment securities available for sale.

Cash and Due From  Banks - Cash and due from  banks  includes  balances  in four
correspondent  commercial  banks  located  in the  Southeastern  United  States.
Balances in  correspondent  bank accounts in excess of FDIC insurance limits are
approximately $121,000 as of December 31, 2004 ($73,000 in 2003).

Federal  Funds Sold - Federal  funds sold  consists of an unsecured  loan to one
correspondent  commercial bank located in the  Southeastern  United States.  The
loan was repaid on the next business day.

Investment Securities - In accordance with SFAS No. 115, the Bank has segregated
its investment securities into the following category:

Available for Sale - All debt  securities  and all 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
nonmarketable  securities  is estimated to be  equivalent  to  historical  cost.
Securities  may be sold in  response  to changes in  interest  rates,  liquidity
needs,  and for other  purposes.  Any unrealized gain or loss is reported in the
statements of  comprehensive  income,  net of any deferred tax effect.  Realized
gains and losses on the sales of  investment  securities  available for sale are
based on the net proceeds and amortized cost of the securities  sold,  using the
specific identification method.

                                      -31-
<PAGE>

Recognition  of Interest on Loans - Interest  on loans is  calculated  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  borrower's  financial
condition is such that collection of interest is doubtful.

Allowance  for Loan Losses - The  allowance  for loan losses is  maintained at a
level which,  in  management's  judgment,  is adequate to absorb  credit  losses
inherent  in the  loan  portfolio.  The  amount  of the  allowance  is  based on
management's  evaluation of the collectibility of the loan portfolio,  including
the nature of the portfolio,  credit  concentrations,  trends in historical loss
experience,  specific  impaired loans, and economic  conditions.  Allowances for
impaired  loans  are  generally  determined  based on  collateral  values or the
present  value  of  estimated  future  cash  flows.   Because  of  uncertainties
associated with regional economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that management's estimate of
credit  losses  inherent in the loan  portfolio  and the related  allowance  may
change  materially  in the near term.  The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by charge-offs,  net of
recoveries.  Changes in the allowance  relating to impaired loans are charged or
credited to the provision for loan losses.

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

Loans  Held for Sale - Loans  held for sale  are  stated  at fair  value,  which
approximates book value as of December 31, 2004 and 2003.

Premises  and  Equipment  - Premises  and  equipment  are  stated at cost,  less
accumulated  depreciation.  Depreciation  is  computed  using the  straight-line
method using estimated useful lives of three to forty years.

Federal Funds Purchased - Federal funds purchased  consists of an unsecured loan
from one  correspondent  commercial  bank  located  in the  Southeastern  United
States. The loan was repaid on the next business day.

Advertising  and  Promotion - Advertising  and  promotion  costs are expensed as
incurred.

Income Taxes - Income  taxes are  provided  for the tax effects of  transactions
reported in the consolidated financial statements and consist of taxes currently
due plus deferred taxes related  primarily to  differences  between the basis of
the allowance for loan losses,  accumulated depreciation,  and other book income
versus  taxable  income  reporting  differences.  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. See Note 11 for additional information.

Stock Option  Plans - The Company has two stock option plans that are  described
more fully in Note 14. The Company  accounts for the plans under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees,  and related  interpretations.  No stock-based employee  compensation
cost is reflected in consolidated  net income,  as all options granted under the
plans had an exercise price equal to the market value of the  underlying  common
stock on the date of grant.  The following  table  illustrates the effect on net
income  and  earnings  per  share if the  Company  had  applied  the fair  value
recognition  provisions of FASB Statement No. 123,  Accounting  for  Stock-Based
Compensation, to stock-based employee compensation.

                                      -32-
<PAGE>


Earnings Per Share - Earnings per share is based on the following for the years
ended December 31:

NOTE 3 - INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities are as
follows:

<TABLE>
<CAPTION>
                                         Less Than 12 Months              12 Months or Greater                     Total
                                     -----------------------------     ----------------------------    -----------------------------
                                                         Gross                            Gross                             Gross
                                                      Unrealized                       Unrealized                        Unrealized
                                      Fair Value        Losses         Fair Value        Losses         Fair Value         Losses
                                    -------------    ------------     ------------    ------------    --------------    ------------
<S>                                 <C>              <C>              <C>             <C>             <C>               <C>

As of December 31, 2004:
Obligations of U.S.
  Government Corporations
    and Agencies                    $   2,036,428    $   (38,218)     $          0    $         0     $    2,036,428    $   (38,218)
Mortgage-Backed Securities              2,018,436        (13,939)          703,473         (4,410)         2,721,909        (18,349)
Obligations of States and
  Political Subdivisions                1,627,948        (27,915)        1,163,890        (28,024)         2,791,838        (55,939)
                                    -------------    ------------     ------------    ------------    --------------    ------------
      Total Temporarily
        Impaired Securities         $   5,682,812    $   (80,072)     $  1,867,363    $   (32,434)    $    7,550,175    $  (112,506)
                                    =============    ============     ============    ============    ==============    ============

As of December 31, 2003:
Obligations of U.S.
  Government Corporations
    and Agencies                    $   1,184,690    $   (21,159)     $          0    $         0     $    1,184,690    $   (21,159)
Mortgage-Backed Securities              1,716,664        (20,617)                0              0          1,716,664        (20,617)
Obligations of States and
  Political Subdivisions                1,572,585        (39,917)                0              0          1,572,585        (39,917)
                                    -------------    ------------     ------------    ------------    --------------    ------------
      Total Temporarily
        Impaired Securities         $   4,473,939    $   (81,693)     $          0    $         0     $    4,473,939    $   (81,693)
                                    =============    ============     ============    ============    ==============    ============
</TABLE>



                                      -33-

<PAGE>

The amortized  cost and estimated  fair value of debt  securities as of December
31, 2004, by contractual maturity, are as follows:

                                                   Available for Sale
                                           -----------------------------------
                                             Amortized            Estimated
                                                Cost              Fair Value
                                           ----------------    ---------------
Due in One Year or Less                    $           0       $            0
Due After One Year Through Five Years          3,639,986            3,671,771
Due After Five Years Through Ten Years         1,784,858            1,820,452
Due After Ten Years                            4,533,591            4,511,212
                                           ----------------    --------------
                                               9,958,435           10,003,435
Mortgage-Backed and Related Securities         4,720,050            4,749,618
                                           ----------------    --------------
                                           $  14,678,485       $   14,753,053
                                           ================    ==============

Expected  maturities can differ from contractual  maturities because issuers may
have the right to call or prepay  obligations with or without call or prepayment
penalties.

Proceeds  from sales of investment  securities  classified as available for sale
totaled  $2,157,170  during the year ended December 31, 2004 ($1,895,626 in 2003
and $2,211,658 in 2002).  Gross gains of $24,227  ($48,301 in 2003 and $8,856 in
2002) and gross  losses of $2,752 ($0 in 2003 and $5,156 in 2002) were  realized
by the Bank during the year ended December 31, 2004.

Investments with a total estimated fair value (which approximates book value) of
approximately  $7,137,000  as of  December  31, 2004  ($6,813,000  in 2003) were
pledged to secure deposits of public and private funds.

The following table shows the Bank's  investments'  gross unrealized  losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous loss position,  as of December 31, 2004 and
2003.

<TABLE>
<CAPTION>

                                         Less Than 12 Months              12 Months or Greater                     Total
                                   -----------------------------     ----------------------------    ------------------------------
                                                         Gross                            Gross                             Gross
                                                      Unrealized                       Unrealized                        Unrealized
                                      Fair Value        Losses         Fair Value        Losses         Fair Value         Losses
                                   -------------   -------------     ------------    ------------    --------------    ------------
<S>                                <C>             <C>               <C>             <C>             <C>               <C>

As of December 31, 2004:
Obligations of U.S.
  Government Corporations
    and Agencies                   $   2,036,428   $    (38,218)     $         0     $         0     $   2,036,428     $    (38,218)
Mortgage-Backed Securities             2,018,436        (13,939)          703,473         (4,410)        2,721,909          (18,349)
Obligations of States and
  Political Subdivisions               1,627,948        (27,915)        1,163,890        (28,024)        2,791,838          (55,939)
                                   -------------   ------------      ------------    ------------    --------------    ------------
      Total Temporarily
        Impaired Securities       $    5,682,812   $    (80,072)     $  1,867,363    $   (32,434)    $   7,550,175     $   (112,506)
                                   =============    ============     ============    ============    ==============    ============
As of December 31, 2003:
Obligations of U.S.
  Government Corporations
    and Agencies                  $    1,184,690   $    (21,159)     $          0    $         0     $   1,184,690     $    (21,159)
Mortgage-Backed Securities             1,716,664        (20,617)                0              0         1,716,664          (20,617)
Obligations of States and
  Political Subdivisions               1,572,585        (39,917)                0              0         1,572,585          (39,917)
                                   -------------   -------------     ------------    ------------    --------------    ------------
      Total Temporarily
        Impaired Securities       $    4,473,939   $     (81,693)    $         0     $         0         4,473,939     $    (81,693)
                                   =============   =============     ============    ============    ==============    ============

</TABLE>


Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.

                                      -34-
<PAGE>

At December 31, 2004, the  twenty-three  debt securities with unrealized  losses
have depreciated 1.5% from the Company's  amortized cost basis. These securities
are guaranteed by either the U.S. Government  corporations and agencies or other
local  governments.  These  unrealized  losses  relate  principally  to  current
interest  rates for  similar  types of  securities.  In  analyzing  an  issuer's
financial  condition,  management considers whether the securities are issued by
the  federal  government  or its  agencies,  whether  downgrades  by bond rating
agencies  have  occurred,  and the results of reviews of the issuer's  financial
condition.  As  management  has the  ability  to hold  debt  securities  for the
foreseeable future, no declines are deemed to be other-than-temporary.

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

The Bank  provides  mortgage,  commercial,  and  consumer  lending  services  to
businesses  and  individuals  primarily in the Anderson,  Knox, and Roane County
areas. A summary of loans as of December 31, 2004 and 2003 is as follows:



                                                       2004           2003
                                                 -------------   ------------
Loans Secured by Real Estate:
  Commercial Properties                          $ 14,419,438    $15,458,130
  Construction and Land Development                23,551,923     12,362,854
  Residential and Other Properties                 38,319,677     38,668,918
                                                 ------------    -----------
    Total Loans Secured by Real Estate             76,291,038     66,489,902

Commercial and Industrial Loans                    14,778,556     11,439,618
Consumer Loans and Other                           11,565,940      8,981,386
                                                 ------------    -----------
                                                  102,635,534     86,910,906
Less:  Allowance for Loan Losses                   (1,270,869)    (1,283,465)
       Unearned Loan Fees                            (137,406)      (129,385)
                                                 ------------    -----------
                                                 $101,227,259    $85,498,056

Loans held for sale represent  individual  real estate loans  originated for the
purpose of selling the loans to one of several third party purchasers with which
the Bank does  business.  These  loans are sold  without  recourse  and the Bank
receives certain fees for originating the loans.

In the ordinary course of business,  the Bank has entered into off-balance-sheet
financial  instruments  consisting of commitments  to extend credit,  commercial
letters of credit,  and standby letters of credit.  These financial  instruments
are  recorded in the  financial  statements  when they are  funded.  Outstanding
letters of credit were approximately  $707,000 as of December 31, 2004 ($585,000
as of December 31, 2003).  Unadvanced  lines of credit and commitments to extend
credit were approximately $26,943,000 as of December 31, 2004 ($27,969,000 as of
December 31, 2003).  Of the total  outstanding  letters of credit and unadvanced
lines and commitments as of December 31, 2004,  approximately  $21,391,000  were
secured, primarily by real estate ($22,632,000 in 2003).

From  time  to  time,  the  Bank  provides  credit  to its  executive  officers,
directors, and their affiliates. Such transactions are made on the same terms as
those  prevailing for comparable  transactions  with other  borrowers and do not
represent  more than a normal risk of collection.  Loans to executive  officers,
directors, and their affiliates are as follows:

                                                    2004             2003
                                               -------------   ---------------
Loans at Beginning of Year                        $1,116,837     $     528,779
  Disbursements                                      867,634         1,508,079
  Repayments                                        (500,390)         (920,021)
                                               -------------   ----------------
Loans at End of Year                              $1,484,081     $   1,116,837


                                      -35-
<PAGE>

The transactions in the allowance for loan losses are as follows:

The Bank had approximately $161,000 in 2004 ($21,000 in 2003) of loans past due
ninety days or more and still accruing interest, and approximately $546,000 in
loans on which the accrual of interest had been discontinued as of December 31,
2004 ($962,000 in 2003).

As  of  December  31,  2004,  the  Bank  had  approximately  $791,000  in  loans
specifically classified as impaired ($1,516,000 in 2003). The allowance for loan
losses  related to  impaired  loans  amounted  to  approximately  $173,000 as of
December 31, 2004 ($338,000 in 2003).

NOTE 5 - PREMISES AND EQUIPMENT

A summary of premises and equipment is as follows:

                                                  2004                 2003
                                           ----------------    -----------------
Land                                       $     1,198,326     $     1,148,074
Buildings                                        2,294,416           1,984,582
Leasehold Improvements                             487,140               6,894
Furniture, Fixtures, and Equipment               1,074,580             882,038
Construction in Progress                             4,880             375,337
                                           ----------------    -----------------
                                                 5,059,342           4,396,925
Less Accumulated Depreciation                     (890,705)           (683,283)
                                           ----------------    -----------------
                                           $     4,168,637     $     3,713,642
                                           ================    =================

Included in Buildings above is $273,104 for the capitalized  cost of a lease for
a branch  building  that is an asset  under  capital  lease  (see Note  15).  In
addition,  leasehold  improvements  related  to this  branch  totaled  $487,140.
Depreciation expense related to these assets was $27,859 in 2004 ($0 in 2003).


NOTE 6 - ACCRUED INTEREST RECEIVABLE

A summary of accrued interest receivable is as follows:


                                             2004                 2003
                                       ----------------    -----------------
Investment Securities                  $     132,354       $      147,946
Loans                                        539,923              406,894
                                       ----------------    -----------------
                                       $     672,277       $      554,840
                                       ================    =================

                                      -36-
<PAGE>

NOTE 7 - DEPOSITS

A summary of deposits is as follows:

                                               2004                 2003
                                       ----------------    -----------------
Demand Deposits:
 Noninterest-Bearing Accounts          $     11,957,336    $       7,814,857
 NOW and MMDA Accounts                       44,966,262           36,048,879
 Savings Accounts                             3,374,303            3,141,666
                                       ----------------    -----------------
  Total Demand Deposits                      60,297,901           47,005,402
                                       ----------------    -----------------

Term Deposits:
 Less Than $100,000                          29,878,912           26,317,023
 $100,000 or More                            14,622,346           14,795,513
                                       ----------------    -----------------
  Total Term Deposits                        44,501,258           41,112,536
                                       ----------------    -----------------
                                       $    104,799,159    $      88,117,938
                                       ================    =================

As of December 31, 2004, the scheduled maturities of certificates of deposits
are as follows:

           2005                                 $    25,434,442
           2006                                       7,375,398
           2007                                      10,865,574
           2008                                         483,903
           2009 and Thereafter                          341,941
                                               ----------------
                                               $     44,501,258
                                               ================
NOTE 8 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Bank sells  certain  investment  securities  with  agreements  to repurchase
primarily  on an  overnight  basis to selected  depositors.  The  balances as of
December 31, 2004 and 2003 were $353,471 and $339,308, respectively.

Securities sold under agreements to repurchase averaged  approximately  $319,000
and $263,000 during 2004 and 2003, respectively.  The maximum amount outstanding
at any month-end during 2004 and 2003 was  approximately  $354,000 and $339,000,
respectively.

NOTE 9 - ADVANCES FROM FEDERAL HOME LOAN BANK

The following table is a maturity schedule of advances from Federal Home Loan
Bank ("FHLB") as of December 31, 2004:

<TABLE>
<CAPTION>
                                                                                                            Amount
      Date of Advance                                  Next Call/                   Final                Outstanding
                             Interest Rate           Prepayment Date            Maturity Date            at 12/31/04
      ----------------     ------------------     ----------------------    ----------------------     -----------------
         <S>                     <C>                     <C>                      <C>                  <C>

          9/21/00                6.22%                   3/22/05                   9/22/10             $      1,000,000
         12/27/00                5.00%                   3/21/05                  12/27/10                    1,000,000
          8/10/01                5.09%                   8/10/06                   8/10/11                    1,000,000
          8/15/01                3.60%                   2/9/06                    8/15/11                    1,000,000
          6/21/02                4.82%                    None                     6/21/07                      500,000
          8/30/02                3.65%                   8/30/07                   8/30/12                    2,000,000
          4/25/03                2.41%                   4/25/06                   4/25/13                    2,000,000
         12/22/04                2.38%                    Daily                    1/3/05                     1,200,000
                                                                                                       -----------------
                                                                                                       $      9,700,000
                                                                                                       =================
</TABLE>
                                      -37-
<PAGE>

Interest expense associated with the advances from the FHLB totaled $349,693 for
the year ended  December  31,  2004  ($332,763  in 2003 and  $291,015  in 2002).
Pursuant to collateral agreements with the FHLB, the advances are secured by the
Bank's  FHLB  stock  and  certain  first  mortgage  loans.  The  Bank has a Cash
Management  Advance  (CMA)  agreement  with the FHLB with maximum  borrowings of
$8,000,000 expiring in April 2005.

NOTE 10 - INTEREST EXPENSE

A summary of interest expense is as follows:
<TABLE>
<CAPTION>
                                                                            2004                 2003                 2002
                                                                      ----------------     ----------------    -----------------
<S>                                                                   <C>                  <C>                 <C>
NOW and MMDA Accounts                                                 $       389,528      $       377,271     $        447,195
Savings Accounts                                                               15,035               17,924               20,277
Term Deposits                                                               1,217,709            1,349,911            1,812,385
FHLB Advances and Repurchase Agreements                                       353,024              335,670              292,973
Capital Lease Obligation                                                        8,516                5,297                    0
                                                                      ----------------     ----------------    -----------------
 Total Interest Expense                                           $         1,983,812  $         2,086,073  $         2,572,830
                                                                      ================     ================    =================
</TABLE>

NOTE 11 - INCOME TAXES

Income  taxes as shown in the  statements  of  income  differ  from the  amounts
computed using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
                                                 2004                            2003                             2002
                                     -----------------------------    ----------------------------     ----------------------------

                                                       Percent                          Percent                          Percent
                                                         of                              of                               of
                                                        Pretax                          Pretax                           Pretax
                                       Amount           Income          Amount          Income           Amount          Income
                                     ------------    -------------    ------------    ------------     ------------    ------------
<S>                                  <C>                    <C>      <C>                    <C>       <C>                   <C>

Federal Income Tax at
 Statutory Rate                      $   495,806            34.0%     $   565,006           34.0%      $   355,634          34.0 %
Tax Exempt Interest
 and Dividends                           (67,714)           (4.6)         (59,328)          (3.6)          (53,816)         (5.1)
State Income Tax and
 Other, Net                               72,430             4.9           77,923            4.7            27,522           2.6
                                    ------------     -------------    ------------    ------------     ------------    -----------
                                    $    500,522            34.3%     $   583,601           35.1%      $   329,340          31.5%
                                    ============     =============    ============    ============     ============    ===========
Income Taxes Consist of:

Current                             $    433,850                      $   647,547                      $   395,466
Deferred Benefit                          66,672                          (63,946)                         (66,126)
                                    ------------                      ------------                     ------------
                                    $    500,522                      $   583,601                      $   329,340
                                    ============                      ============                     ============
</TABLE>



                                      -38-
<PAGE>


The tax effect of each type of temporary  difference and  carryfoward  that give
rise to deferred tax assets and liabilities is as follows:

                                                  2004                 2003
                                           ----------------    -----------------
Deferred Tax Assets:
 Allowance for Loan Losses                 $      449,577      $       458,432
 Deferred Loan Fees                                55,649               52,401
 Conversion to Cash Basis                           7,261               14,522
 Organizational Costs                               8,721               13,141
 Prepaid Items                                      1,491                2,896
                                          ----------------    -----------------
  Total Deferred Tax Assets                       522,699              541,392
                                          ----------------    -----------------

Deferred Tax Liabilities:
 Depreciation                                     146,092              105,338
 FHLB Stock Dividends                              51,557               42,444
 Discount Accretion                                 9,986                8,110
 Unrealized Holding Gains on
   Investment Securities Available for Sale        27,590               62,267
 State Tax                                         17,752               21,273
                                          ----------------    -----------------
  Total Deferred Tax Liabilities                  252,977              239,432
                                          ----------------    -----------------
   Net Deferred Tax Assets                $       269,722     $        301,960
                                          ================    =================

NOTE 12 - PROFIT SHARING PLAN

Contributions to the profit sharing plan,  determined annually at the discretion
of the Bank's board of  directors,  were $16,094,  $28,749,  and $23,729 for the
years ended December 31, 2004, 2003, and 2002, respectively.

NOTE 13 - REGULATORY MATTERS

The Bank is subject to various regulatory capital  requirements  administered by
the  federal  and  state  banking  agencies.  Failure  to meet  minimum  capital
requirements   can  initiate   certain   mandatory,   and  possibly   additional
discretionary,  actions by regulators  that, if undertaken,  could have a direct
material  effect on the Bank's  financial  statements.  Under  capital  adequacy
guidelines and the regulatory  framework for prompt corrective  action, the Bank
must meet specific capital guidelines that involve 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 are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below)  of  Total  and  Tier  I  capital  (as  defined  in the  regulations)  to
Risk-Weighted Assets (as defined), and of Tier I capital (as defined) to Average
Assets (as defined). Management believes, as of December 31, 2004, that the Bank
meets all capital adequacy requirements to which it is subject.

As of December 31, 2004, 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. There are no conditions or
events since that date that management  believes have changed the  institution's
category.

                                      -39-

<PAGE>

The Bank's actual capital amounts and ratios are also presented in the table.
All amounts are in thousands of dollars.

<TABLE>
<CAPTION>
                                                                                                               To Be Well
                                                                                 To Comply With             Capitalized Under
                                                                                Minimum Capital             Prompt Corrective
                                                         Actual                   Requirements              Action Provisions
                                                 ------------------------    -----------------------     -----------------------
                                                    Amount         Ratio        Amount        Ratio         Amount         Ratio
                                                 ----------    ----------    ----------     --------     ----------    ----------
<S>                                              <C>               <C>       <C>               <C>       <C>               <C>
As of December 31, 2004:
Total Capital
 (to Risk-Weighted Assets)                       $  10,331         10.1%     $   8,163         8.0%      $  10,204         10.0%
Tier I Capital
 (to Risk-Weighted Assets)                       $   9,060          8.9%     $   4,082         4.0%      $   6,122          6.0%
Tier I Capital
 (to Average Assets)                             $   9,060          7.4%     $   6,145         5.0%      $   6,145          5.0%

As of December 31, 2003:
Total Capital
 (to Risk-Weighted Assets)                       $   9,321         11.1%     $   6,724         8.0%      $   8,405         10.0%
Tier I Capital
 (to Risk-Weighted Assets)                       $   8,268          9.8%     $   3,362         4.0%      $   5,043          6.0%
Tier I Capital
 (to Average Assets)                             $   8,268          7.7%     $   5,357         5.0%      $   5,357          5.0%
</TABLE>

NOTE 14 - KEY EMPLOYEES STOCK OPTION PLANS

In 1996,  the board of  directors  approved a stock  option  plan to provide key
employees with  additional  incentive to contribute to the best interests of the
Company.  The plan terminates in ten years, or sooner at the board's discretion.
The board of directors also has  discretion  concerning  which eligible  persons
shall be granted  options,  the term of each granted  option,  and the number of
shares for which each option shall be granted.  Options must be exercised within
ten years from the date they are granted  and must  include a price per share of
at least 85% to 110% of the fair value of the Company's common stock on the date
the option is granted.  The board of  directors  has reserved  19,457  shares of
common stock for  issuance  during the term of the plan.  In 1999,  the board of
directors  awarded a total of 14,600  options  at an  exercise  price of $16 per
share,  which was equal to the fair  value of the stock on the date the  options
were granted.  The options vested over a four-year period. In 2002,  options for
100 shares were exercised (none exercised in other years). In 2004, the board of
directors awarded 1,000 options at an exercise price of $19.50 per share,  which
was equal to the fair value of the stock on the date the options  were  granted.
These options also vest over a four-year period.

In 2002,  the board of  directors  approved an  additional  stock option plan to
provide key  employees  with  additional  incentive  to  contribute  to the best
interests  of the  Company.  The plan  terminates  in ten  years.  The  board of
directors also has discretion concerning which eligible persons shall be granted
options,  the term of each  granted  option,  and the number of shares for which
each option shall be granted.  Options  must be exercised  within ten years from
the date they are granted and must include a price per share of at least 100% of
the fair value of the Company's  common stock on the date the option is granted.
The board of  directors  has  limited  the number of options  that can be issued
under this plan to the lesser of 20% of the shares outstanding or 213,612 shares
of common stock for issuance during the term of the plan. The board of directors
has not awarded any options under this plan.

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

                                         Years Ended December 31,
                           ----------------------------------------------------
                              2004                2003               2002
                           ------------     --------------       --------------
Dividend Yield                1.35%                N/A                   1.37%
Expected Life               9 years                N/A                  6 years
Expected Volatility          10.00%                N/A                    10%
Risk-Free Interest Rate       3.90%                N/A                   5.2%

                                      -40-

<PAGE>

A summary of the status of the Company's stock option plans is presented below:

<TABLE>
<CAPTION>
                                              2004                            2003                             2002
                                   ---------------------------    -----------------------------    -----------------------------
                                                    Weighted                        Weighted                         Weighted
                                                    Average                          Average                          Average
                                                    Exercise                        Exercise                         Exercise
                                     Shares          Price           Shares           Price          Shares            Price
                                   ------------    -----------    -------------    ------------    ------------     ------------
<S>                                     <C>        <C>                  <C>        <C>                 <C>          <C>

Outstanding at
 Beginning of Year                      14,500     $    16.00           14,500     $     16.00         14,600       $     16.00
Granted                                  1,000          19.50                0                              0
Exercised                                    0                               0                           (100)            16.00
Forfeited                                    0                               0                              0
                                   ------------                   -------------                    ------------
Outstanding at                          15,500     $    16.22           14,500     $     16.00         14,500       $     16.00
 End of Year                       ============                   =============                    ============

Options Exercisable                     14,750     $    16.06           14,500     $     16.00         14,500       $     16.00
 at Year-End
Weighted-Average Fair
 Value of Options Granted
 During the Year                         $4.03                             N/A                             N/A
</TABLE>


Information pertaining to options outstanding at December 31, 2004 is as
follows:

<TABLE>
<CAPTION>
                                                       Options Outstanding                             Options Exercisable
                                       -----------------------------------------------------     --------------------------------
                                                              Weighted
                                                               Average           Weighted                             Weighted
                                                              Remaining           Average                             Average
             Range of                       Number           Contractual         Exercise           Number            Exercise
         Exercise Prices                 Outstanding             Life              Price         Exercisable           Price
-----------------------------------    -----------------    ---------------     ------------    ---------------     -------------
         <S>                                <C>               <C>               <C>                    <C>           <C>
         $16.00 - $19.50                    15,500            4.67 years        $     16.22            14,750        $      16.06
</TABLE>

NOTE 15 - LEASE COMMITMENTS

The Bank leases certain office facilities and office equipment. On June 1, 2003,
the Bank began leasing a branch  building that has been  classified as a capital
lease for financial accounting  purposes.  This lease is for an initial ten year
period with additional renewal options and purchase options.

On March 15, 2004, the Bank leased  property in Knoxville,  Tennessee on which a
branch  building  will be  constructed.  This  lease has been  classified  as an
operating lease for financial accounting purposes. The initial term of the lease
is for twenty years with four renewal option periods of five years. The bank has
other leases which are  classified  as operating  leases and provide for monthly
lease payments over 12 to 180 months.  Total lease expense under  noncancellable
operating  leases for the years ended December 31, 2004,  2003, and 2002 totaled
$66,851, $53,701, and $35,905.

                                      -41-
<PAGE>

The following is a schedule by years of future minimum rental payments required
under all noncancellable operating and capital leases as of December 31, 2004:

                                Capital         Operating
                                Lease            Leases              Total
                         ---------------     ---------------    ----------------
 2005                     $      29,906      $     82,250       $     112,156
 2006                            29,906            82,250             112,156
 2007                            29,906            81,624             111,530
 2008                            33,406            78,494             111,900
 2009                            35,906            78,494             114,400
 Thereafter                     122,679           739,154             861,833
                         ---------------     ---------------    ----------------
 Total minimum lease payments   281,709      $  1,142,266       $   1,423,975
                                             ===============    ================
 Less amount representing
 interest                        42,052
                         --------------
Present value of minimum
lease payments           $      239,657
                         ===============

NOTE 16 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

The Bank's  primary  business  activity is with  customers  located  within East
Tennessee. As of December 31, 2004, the Bank had concentrations of loans secured
by commercial  properties and residential and other  properties.  The usual risk
associated with such  concentrations is generally mitigated by being spread over
several hundred  unrelated  borrowers and by adequate  collateral  loan-to-value
ratios.

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 Bank to disclose the fair value
of  financial  instruments,  both  assets  and  liabilities  recognized  and not
recognized in the statements of financial condition, for which it is practicable
to estimate fair value.

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

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

For the 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 Bank's  practice
and intent to hold the majority of its financial instruments to maturity and not
to engage in trading or sales activities.  Therefore, much of the information as
well as the amounts  disclosed  below are highly  subjective  and  judgmental in
nature.   The  subjective   factors  include   estimates  of  cash  flows,  risk
characteristics, credit quality, and interest rates, all of which are subject to
change.  Because the fair value is  estimated  as of December 31, 2004 and 2003,
the amounts that 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.

                                      -42-
<PAGE>

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

Cash and Cash Equivalents - Cash and cash equivalents  include cash and due from
banks and federal funds sold.  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.

Net Loans - The estimated fair value of fixed rate mortgage loans and commercial
loans are  calculated by  discounting  future cash flows to their present value.
Future cash flows,  consisting  of both  principal  and interest  payments,  are
discounted using current Bank rates for similar loans with similar maturities.

The estimated fair value of variable rate loans is considered  equal to recorded
book value.

Fixed rate installment  loans have an average maturity of less than three years,
a  relatively  stable  average  interest  rate,  and a variety  of credit  risks
associated  with them. The fair value of these loans is estimated by discounting
future  estimated cash flows to their present value using current Bank rates for
similar loans with similar maturities.

The  estimated  fair value of the  allowance for loan losses is considered to be
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.

Securities  Sold  Under   Agreements  to  Repurchase  -  Securities  sold  under
agreements  to  repurchase  are  short-term in nature and recorded book value is
considered to approximate fair value.

Federal  Funds  Purchased - For this  short-term  instrument,  the recorded book
value is a reasonable estimate of fair value.

Advances  From  Federal  Home Loan Bank - For  advances  that are fixed rate and
fixed maturity liabilities,  their fair value is estimated using rates currently
available to the Bank for debt with similar terms and remaining maturities. Book
value approximates fair value for advances that have variable rates.

Obligation  Under Capital  Lease - For 2004,  the book value  approximates  fair
value since interest rates have not changed  significantly since this obligation
was incurred.

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 letters of credit is based on fees  currently  charged for similar
agreements or on the estimated  cost to terminate  them or otherwise  settle the
obligations  with the  counterparties  at the reporting  date. The fair value of
these items is not material to the Bank as of December 31, 2004 and 2003.

                                      -43-
<PAGE>

The  recorded  book  value and  estimated  fair  value of the  Bank's  financial
instruments as of December 31, 2004 and 2003 are as follows:
<TABLE>
<CAPTION>
                                                                          2004                                 2003
                                                            ---------------------------------    ---------------------------------
                                                              Recorded          Estimated          Recorded           Estimated
                                                             Book Value         Fair Value        Book Value         Fair Value
                                                            --------------    ---------------    --------------     --------------
<S>                                                         <C>               <C>                <C>                <C>
FINANCIAL ASSETS:
Cash and Cash Equivalents                                   $   2,369,004     $    2,369,004     $   2,145,374      $   2,145,374
Investment Securities                                       $  15,324,753     $   15,324,753     $  14,502,488      $  14,502,488
Loans Held for Sale                                         $     859,114     $      859,114     $     273,500      $     273,500
Net Loans                                                   $ 101,227,259     $  103,279,160     $  85,498,056      $  85,381,695

FINANCIAL LIABILITIES:
Deposits                                                    $ 104,799,159     $  104,962,777     $  88,117,938      $  88,575,464
Securities Sold Under Agreements to Repurchase              $     353,471     $      353,471     $     339,308      $     339,308
Federal Funds Purchased                                     $     375,000     $      375,000     $     370,000      $     370,000
Advances From Federal Home Loan Bank                        $   9,700,000     $    9,967,804     $   8,650,000      $   8,522,981
Obligation Under Capital Lease                              $     239,567     $      239,567     $     260,957      $     260,957
</TABLE>

NOTE 18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Condensed  financial  information  pertaining only to Tennessee Valley Financial
Holdings, Inc. is as follows:

                             CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                               As of December 31,            2004                  2003
                                                                                      -------------------    ------------------
 <S>                                                                                  <C>                    <C>

 Assets:
 Cash in Bank                                                                         $           91,236     $          59,783
 Prepaid and Deferred Income Taxes                                                                27,742                46,101
 Investment in Common Stock of TNBank                                                          9,088,906             8,278,885
                                                                                      -------------------    ------------------
Total Assets                                                                          $        9,207,884     $       8,384,769
                                                                                      ===================    ------------------

Liabilities                                                                           $                0     $               0
                                                                                      -------------------    ------------------

Shareholders' Equity:
 Common Stock                                                                                    533,618               534,130
 Capital in Excess of Par Value                                                                6,491,520             6,487,427
 Retained Earnings                                                                             2,182,746             1,363,212
                                                                                      -------------------    ------------------
   Total Shareholders' Equity                                                                  9,207,884             8,384,769
                                                                                      -------------------    ------------------
 Total Liabilities and Shareholders' Equity                                           $        9,207,884     $       8,384,769
                                                                                      ===================    ==================
</TABLE>


                                      -44-

<PAGE>

                         CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                 For the Years Ended December 31,           2004                   2003
                                                                                      ------------------    -------------------
<S>                                                                                   <C>                   <C>

Income - Dividends From TNBank                                                        $         174,698     $          291,000
Operating Expenses                                                                               42,608                 47,759
                                                                                      ------------------    -------------------
Income Before Income Tax Benefit and Equity in                                                  132,090
 Undistributed Net Income of TNBank                                                                                    243,241
Income Tax Benefit                                                                               15,621                 18,284
Equity in Undistributed Net Income of TNBank                                                    810,021                816,657
                                                                                      ------------------    -------------------
Net Income                                                                            $         957,732     $        1,078,182
                                                                                      ==================    ===================
</TABLE>


                       CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                 For the Years Ended December 31,           2004                  2003
                                                                                      ------------------    ------------------
<S>                                                                                   <C>                   <C>
Cash Flows From Operating Activities:
 Net Income                                                                           $         957,732     $      1,078,182
                                                                                      ------------------    ------------------
  Adjustments to Reconcile Net Income to
  Net Cash Provided by Operating Activities:
   Equity in Undistributed Net Income of TNBank                                                (810,021)            (816,657)
   (Increase) Decrease in Prepaid and Deferred Income Taxes                                      18,359             (18,019)
                                                                                      ------------------    ------------------
    Total Adjustments                                                                          (791,662)            (834,676)
                                                                                      ------------------    ------------------
     Net Cash Provided by Operating Activities                                                  166,070              243,506
                                                                                      ------------------    ------------------
Cash Flows From Financing Activities:
 Purchase and Retirement of Common Stock                                                        (50,700)                   0
 Cash Dividends Paid                                                                            (83,917)            (186,945)
                                                                                      ------------------    ------------------
     Net Cash Provided by (Used in) Financing Activities                                       (134,617)            (186,945)
                                                                                      ------------------    ------------------
Net Increase in Cash and Cash Equivalents                                                        31,453               56,561
Cash and Cash Equivalents, Beginning of Period                                                   59,783                3,222
                                                                                      ------------------    ------------------
 Cash and Cash Equivalents, End of Period                                             $          91,236     $         59,783
                                                                                      ==================    ==================
 Supplementary Disclosure of Noncash Financing Activities:
    Issuance of Common Stock through Dividend Reinvestment Plan                       $          54,281     $              0
</TABLE>


                                      -45-

<PAGE>

ITEM 8 -  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE
Not applicable.

ITEM 8A - CONTROLS AND PROCEDURES

     (a)  Evaluation of Disclosure  Controls and  Procedures.  Our President and
Chief Executive  Officer and our Vice President have evaluated the effectiveness
of the design and  operation  of our  disclosure  controls  and  procedures  (as
defined in Exchange Act Rule 13a-14(c)) as of the last day of the period covered
by this  annual  report.  Based on that  evaluation,  the  President  and  Chief
Executive  Officer and the Vice  President  have  concluded  that our disclosure
controls  and  procedures  are  effective.

     (b)  Changes in  Internal  Controls.  There  have not been any  significant
changes in our internal  controls or in other  factors that could  significantly
affect these controls subsequent to the date of their evaluation.


                                    PART III

ITEM 9  -  DIRECTORS,   EXECUTIVE  OFFICERS,   PROMOTERS  AND  CONTROL  PERSONS;
           COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

Audit Committee Financial Expert

     We do not currently have an "audit committee  financial  expert" as defined
under the rules of the Securities and Exchange Commission,  serving on our Audit
Committee.  We  believe  that all of the  members  of the  Audit  Committee  are
qualified to serve on the  committee  and have the  experience  and knowledge to
perform the duties  required of the  committee.  We do not have any  independent
directors who would qualify as an audit committee  financial expert, as defined.
We believe that it has been, and may continue to be, impractical to recruit such
a director unless and until we are significantly larger.

Code of Ethics

     We have  adopted a code of ethics  that  applies to our senior  management,
including our chief  executive  officer,  vice president  (principal  accounting
officer) and persons performing similar functions.  Copies of our code of ethics
are available  without charge upon written request  directed to Jason Wilkinson,
Vice President, TnBank, 401 S. Illinois Avenue, Oak Ridge TN 37830.

     The  remainder  of this item is  incorporated  by reference to the sections
entitled  "Management  of  the  Company"  and  "Beneficial  Ownership  Reporting
Compliance" of our 2005 Proxy Statement.

ITEM 10 - EXECUTIVE COMPENSATION

     This item is incorporated by reference to the sections entitled  "Executive
Compensation,"  "Stock Options" and "Directors'  Compensation" of our 2005 Proxy
Statement.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     This item is incorporated by reference to the section entitled "Information
Regarding Certain Beneficial Owners" of our 2005 Proxy Statement.

                                      -46-

<PAGE>


ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     This item is  incorporated  by reference to the section  entitled  "Certain
Relationships and Related Transactions" in our 2005 Proxy Statement.

































                                      -47-
<PAGE>

ITEM 13 - EXHIBITS

        Exhibits

Exhibit No.  Description

3.1*         Charter of Tennessee Valley Financial Holdings, Inc.

3.2*         Bylaws of Tennessee Valley Financial Holdings, Inc.

21.1         Subsidiaries of Tennessee Valley Financial Holdings, Inc.

23.1         Consent of Independent Public Accountants

31.1         Certification  of Thomas E.  Tuck,  President  and Chief  Executive
             Officer of  Tennessee  Valley Financial Holdings, Inc., Pursuant to
             Section 302 of the Sarbanes-Oxley Act of 2002.

31.2         Certification  of  Jason  Wilkinson,   Vice  President   (principal
             accounting  and financial  officer)  of  Tennessee Valley Financial
             Holdings,  Inc., Pursuant  to Section 302 of the Sarbanes-Oxley Act
             of 2002.

32.1         Certification  of Thomas E.  Tuck,  President  and Chief  Executive
             Officer of  Tennessee  Valley Financial Holdings, Inc., Pursuant to
             Section 906 of the Sarbanes-Oxley Act of 2002.

32.2         Certification    of   Jason   Wilkinson,  Vice President (principal
             accounting  and  financial  officer)  of Tennessee Valley Financial
             Holdings,  Inc.,  Pursuant to Section 906 of the Sarbanes-Oxley Act
             of 2002.

         ----------------------

          *    Incorporated by reference to the Company's Registration Statement
               on Form 10-SB filed with the Securities  and Exchange  Commission
               on June 13, 2002.


ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES


     This item is incorporated by reference to the section  entitled  "Principal
Accountant Fees and Services" in our 2005 Proxy Statement.

                                      -48-
<PAGE>
                                   SIGNATURES


In  accordance  with  Section 13 or 15(d) or the Exchange  Act,  the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                   Tennessee Valley Financial Holdings, Inc.



                                   By: /s/ Thomas E. Tuck
                                       ----------------------
                                       Thomas E. Tuck
                                       President and CEO
                                       Date:  March 28, 2005

In  accordance  with the  Exchange  Act,  this  report  has been  signed  by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

/s/ Jason Wilkinson                     /s/ Thomas E. Tuck
--------------------------------------------------------------------------------
Jason Wilkinson                             Thomas E. Tuck
Vice President                              President and Chief
Date:  March 28, 2005                       Executive Officer, Director
                                            Date:  March 28, 2005


/s/ Victor Dodson                      /s/ J. Michael Anderson
--------------------------------------------------------------------------------
Victor Dodson                              J. Michael Anderson
Director                                   Director
Date:  March 28, 2005                      Date:  March 28, 2005


/s/ J. Frank Jamison                   /s/ A. P. Cappiello
--------------------------------------------------------------------------------
J. Frank Jamison                           A.P. Cappiello
Director                                   Director
Date:  March 28, 2005                      Date:  March 28, 2005


/s/ Larry Beeman                       /s/ Terry L. Kerbs
--------------------------------------------------------------------------------
Larry Beeman                               Terry L. Kerbs

Director                                   Director
Date:  March 28, 2005                      Date:  March 28, 2005


/s/ Thomas D. Moye, Jr.                /s/ William Robert Witt
--------------------------------------------------------------------------------
Dr. Thomas D. Moye, Jr.                    William Robert Witt
Director                                   Director
Date: March 28,2005                        Date: March 28, 2005


                                      -49-

<PAGE>