SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
Commission File Number: 0-23551
UNITED TENNESSEE BANKSHARES, INC.
---------------------------------
(Exact Name of Small Business Issuer as Specified
in its Charter)
TENNESSEE 62-1710108
--------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
344 BROADWAY, NEWPORT, TENNESSEE 37821
-------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (423) 623-6088
--------------
Check whether the issuer: (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 ninety days: Yes [X] No []
State the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
1,382,013
- ---------
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statement of Income for the Three-
Month Period Ended June 30, 1998 (Unaudited)
and the Six-Month Periods Ended June 30, 1998
and 1997 (Unaudited) 4
Consolidated Statement of Changes in Equity for
the Six-Month Period Ended June 30, 1998
(Unaudited) 5
Consolidated Statement of Cash Flows for the Six-
Month Period Ended June 30, 1998 (Unaudited) 6-7
Consolidated Statement of Comprehensive Income for
the Three-Month and Six-Month Periods Ended June
30, 1998 (Unaudited) 8
Notes to Consolidated Financial Statements for the
Six-Month Period Ended June 30, 1998 (Unaudited) 9-11
Item 2. Management's Discussion and Analysis or Plan
of Operation 12-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security
Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18-19
SIGNATURES 20
-2-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
September 30,
1998 December 31,
(Unaudited) 1997
------------- -------------
Assets (in thousands)
Cash received for stock subscriptions $ -- $23,598
Cash and amounts due from depository
institutions 1,942 1,892
Investment securities:
Available for sale, at fair value 20,171 15,204
Held to maturity, at amortized cost (fair
value of $2,004 and $1,105, respectively) 1,979 1,077
Loans receivable, net 50,528 47,158
Premises and equipment, net 184 196
Foreclosed real estate - held for sale -- 19
Accrued interest receivable 391 377
Other assets 15 487
------- -------
Total assets $75,210 $90,008
======= =======
Liabilities and Equity
Liabilities:
Deposits:
Escrow accounts for stock subscriptions $ - $23,598
Other deposits 54,129 58,072
------- -------
Total deposits 54,129 81,670
Accrued interest payable 239 255
Accrued income taxes 50 209
Deferred income taxes 707 595
Other liabilities 140 227
------- -------
Total liabilities 55,265 82,956
------- -------
Commitments and contingencies -- --
Equity:
Common stock - no par value, authorized
20,000,000 shares; issued and
outstanding 1,406,585 shares in 1998
and -0- in 1997 13,397 --
Retained earnings 6,732 6,285
Unearned compensation - employee stock
ownership plan (1,129) --
Accumulated other comprehensive income 945 767
------- -------
Total equity 19,945 7,052
------- -------
Total liabilities and equity $75,210 $90,008
======= =======
The accompanying notes are an integral part of these financial
statements.
-3-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Nine Nine
Months Ended Months Ended Months Ended
September 30, September 30, September 30,
1998 1998 1997
------------ ------------ ------------
(Unaudited - in thousands)
Interest income:
Loans $1,073 $3,183 $2,995
Investment securities 319 930 677
Other interest - earning assets 24 159 108
------ ------ ------
Total interest income 1,416 4,272 3,780
Interest expense on deposits 629 1,893 1,992
------ ------ ------
Net interest income 787 2,379 1,788
Provision for loan losses 6 18 120
------ ------ ------
Net interest income after provision
for loan losses 781 2,361 1,668
------ ------ ------
Noninterest income:
Deposit account service charges 20 55 34
Loan service charges and fees 20 62 50
Net gain (loss) on sales of investment
securities available for sale - - -
Other 3 12 8
------ ------ ------
Total noninterest income 43 129 92
------ ------ ------
Noninterest expense:
Compensation and benefits 151 461 635
Occupancy and equipment 36 111 111
Federal deposit insurance premiums 12 36 32
Data processing fees 44 112 80
Advertising and promotion 16 48 36
Net (gain) loss on foreclosed real estate - - (1)
Other 119 293 135
------ ------ ------
Total noninterest expense 378 1,061 1,028
------ ------ ------
Income before income taxes 446 1,429 732
Income taxes 176 546 300
------ ------ ------
Net income $ 270 $ 883 $ 432
====== ====== ======
Basic earnings per common share $ 0.19 $ 0.61 N/A
====== ====== ======
The accompanying notes are an integral part of these financial
statements.
-4-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
Accumulated
Unearned Other
Common Retained Compensation Comprehensive Total
Stock Earnings - ESOP Income Equity
------ -------- ------------ ----------- ------
(Unaudited - in thousands)
Balances, beginning of period $ -- $6,285 $ -- $ 767 $ 7,052
Net effect of stock conversion 13,976 -- (1,129) -- 12,847
Repurchase and retirement of
48,165 shares of common stock (579) -- -- -- (579)
Net income -- 883 -- -- 883
Dividends paid -- (436) (436)
Change in net unrealized gain
on investment securities -- -- -- 178 178
------- ------ ------- ------- -------
Balances, end of period $13,397 $6,732 $(1,129) $ 815 $19,845
======= ====== ======= ======= =======
The accompanying notes are an integral part of these financial
statements.
-5-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(Unaudited -
in thousands)
----------------
Operating Activities:
Net income $ 883
-------
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 18
Depreciation 36
Net (gain) loss on sales of foreclosed real
estate -
Federal home loan bank stock dividends (30)
Decrease in unearned compensation - ESOP 35
Net (gain) loss on sales of investment
securities available for sale -
Deferred income taxes (benefit) 3
(Increase) Decrease in:
Accrued interest receivable (14)
Other assets 472
Increase (Decrease) in:
Accrued interest payable (16)
Accrued income taxes (159)
Other liabilities (87)
-------
Total adjustments 258
-------
Net cash provided by operating activities 1,141
-------
Investing Activities:
Purchases of investment securities available
for sale (9,432)
Proceeds from sales of investment securities
available for sale -
Proceeds from maturities of investment
securities available for sale 2,368
Principal payments received on investment
securities available for sale 2,414
Purchases of investment securities held to
maturity (1,034)
Proceeds from maturities of investment
securities held to maturity 132
Net increase in loans (3,388)
Purchases of plant and equipment, net (24)
Proceeds from sales of foreclosed real estate 19
-------
Net cash provided by (used in) investing
activities (8,945)
-------
The accompanying notes are an integral part of these financial
statements.
-6-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(Unaudited -
in thousands)
----------------
Financing Activities:
Dividends Paid $ (436)
Repurchase of common stock (579)
Net increase (decrease) in deposits (14,729)
--------
Net cash provided by (used in) financing
activities (15,744)
--------
Net increase (decrease) in cash and cash
equivalents (23,548)
Cash and cash equivalents, beginning of period 25,490
--------
Cash and cash equivalents, end of period $ 1,942
========
Supplementary disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,909
Income taxes $ 705
Supplementary disclosures of noncash investing
activities:
Sale of foreclosed real estate
by origination of mortgage loans $ -
Acquisition of foreclosed real estate $ -
Change in unrealized gain on investment
securities available for sale $ 287
Change in deferred income taxes associated
with unrealized gain on investment
securities available for sale $ 109
Change in net unrealized gain on investment
securities available for sale $ 178
Supplementary disclosures of noncash financing
activities:
Net transfer from escrow deposit accounts for
issuance of common stock $ 12,812
The accompanying notes are an integral part of these financial
statements.
-7-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1998
------------- -------------
(Unaudited - in thousands)
Net income $ 270 $ 883
-------- --------
Other comprehensive income, net of tax:
Unrealized gains on investment securities 209 287
Less reclassification adjustment for gains
included in net income - -
Less income taxes related to unrealized
gains on investment securities (79) (109)
-------- --------
Other comprehensive income, net of tax 130 178
-------- --------
Comprehensive income $ 400 $ 1,061
======== ========
The accompanying notes are an integral part of these financial
statements.
-8-
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 (UNAUDITED)
Note 1 - Basis of Presentation and Principles of Consolidation
United Tennessee Bankshares, Inc. ("Company") was incorporated
under the laws of the State of Tennessee for the purpose of
becoming the holding company of Newport Federal Savings and Loan
Association ("Association"), in connection with the
Association's conversion from a federally chartered mutual
savings and loan association to a federally chartered capital
stock savings bank. On November 20, 1997, the Company commenced
a subscription offering of its shares in connection with the
conversion of the Association. The Company had no assets or
operations prior to the conversion. On January 1, 1998 the
Association converted from a mutual savings association to a
capital stock savings bank, changed its name to Newport Federal
Bank ("Bank"), and was simultaneously acquired by its holding
company, United Tennessee Bankshares, Inc. See Note 3 for
additional information concerning the Association's stock
conversion.
The Bank provides a variety of financial services to individuals
and corporate customers through its two offices in Newport,
Tennessee. The Bank's primary deposit products are interest-
bearing savings accounts and certificates of deposit. Its
primary lending products are one-to-four family first mortgage
loans.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions for Form
10-QSB and on the same basis as the Association's audited
consolidated financial statements. In the opinion of management,
all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position, results of
operations, and cash flows for the interim period presented have
been included. The results of operations for such interim period
are not necessarily indicative of the results expected for the
full year.
The consolidated financial statements include the accounts of
the Company and the Bank. All intercompany accounts have been
eliminated.
Note 2 - Earnings Per Share
Basic earnings per share is based on the weighted average number
of shares outstanding during the period. For the three month
period and nine month period ended September 30, 1998 the
weighted average number of shares was 1,438,695 and 1,449,398,
respectively. During the period ended September 30, 1998 the
Company did not have any dilutive securities. Prior to January
1, 1998, the Company did not have any shares outstanding.
-9-
Note 3 - Stock Conversion
In May 1997, the board of directors approved a plan of
reorganization from a mutual savings association to a capital
stock savings bank and the concurrent formation of a holding
company. In November 1997 the Office of Thrift Supervision
approved the plan of conversion subject to the approval of the
members, and in December 1997 the members of the Association
also approved the plan of conversion. The conversion was
accomplished effective January 1, 1998 through amendment of the
Association's charter and the sale of the Company's common stock
in an amount equal to the appraised pro forma consolidated
market value of the Company and the Association after giving
effect to the conversion. A subscription offering of the shares
of common stock was offered to depositors, borrowers, directors,
officers, employees and employee benefit plans of the
Association and to certain other eligible subscribers. The
subscription offering opened on November 20, 1997 and closed on
December 16, 1997. The Association held cash receipts of
$23,598,226 as of December 31, 1997 in escrow accounts for stock
subscribers. These funds were invested in overnight deposits at
the Federal Home Loan Bank of Cincinnati. On January 1, 1998, in
accordance with its approved plan of conversion, the Company
issued 1,454,750 of its $10 par value stock providing gross
receipts of $14,547,500. The remainder of the subscription
receipts were returned to subscribers in January 1998. On
January 1, 1998, the Association changed its name to Newport
Federal Bank and issued 100,000 shares of its $1 par value stock
to the Holding Company in exchange for $7,100,000. In addition,
the Company established an ESOP plan which acquired $1,164,000
in stock during conversion. The contra-equity account "Unearned
Compensation - ESOP" will be decreased as contributions are made
to the ESOP plan and the shares are allocated to the
participants.
Conversion costs were being deferred until completion of the
conversion. As of December 31, 1997, conversion costs that had
been incurred and deferred totaled $466,862. Total conversion
costs of $571,822 were repaid to the Bank by the Company in
January 1998, and the Company deducted them from the proceeds of
the shares sold in the conversion.
At the time of the conversion, the Association was required to
establish a liquidation account in an amount equal to its
capital as of June 30, 1997. The liquidation account will be
maintained for the benefit of eligible accountholders who
continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to
the extent that eligible accountholders have reduced their
qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible accountholder's interest
in the liquidation account. In the event of a complete
liquidation, each eligible accountholder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for
accounts then held. The Bank and the Company will be subject to
several restrictions concerning the repurchase of stock and
dividend payment restrictions pursuant to the applicable rules
and policies of the OTS.
-10-
Note 4 - Comprehensive Income
In June 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in the
financial statements. The object of the statement is to report
a measure of all changes in equity of an enterprise that results
from transactions and other economic events of the period other
than transactions with owners. Items included in comprehensive
income include revenues, gains and losses that under generally
accepted accounting principles are directly charged to equity.
Examples include foreign currency translations, pension
liability adjustments and unrealized gains and losses on
investment securities available for sale. The Company adopted
this statement in the first quarter of 1998 and has included its
comprehensive income in a separate financial statement as part
of its consolidated financial statements.
Note 5 - Repurchase and Retirement of Common Stock
In September 1998, in accordance with its approved plan, the
Company repurchased and retired 48,165 shares of its common
stock for a total cost of $578,944. In October 1998, the Company
completed its plan to repurchase and retire a total of 5% of its
common stock by repurchasing an additional 24,572 shares for a
total cost of $305,615.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
-----------------------------------------------
GENERAL
The principal business of United Tennessee Bankshares,
Inc. and our wholly owned subsidiary Newport Federal Bank ("we,"
"us," etc.) consists of accepting deposits from the general
public through our main office and branch office and investing
those funds in loans secured by one- to four-family residential
properties located in our primary market area. We also maintain
a portfolio of investment securities and originate a limited
amount of commercial real estate loans and consumer loans. Our
investment securities portfolio consists of U.S. Treasury notes
and U.S. government agency securities, local municipal bonds and
mortgage-backed securities which are guaranteed as to principal
and interest by the FHLMC, GNMA or FNMA. We also maintain an
investment in Federal Home Loan Bank of Cincinnati common stock
and FHLMC preferred stock.
Our net income primarily depends on our net interest
income, which is the difference between interest income earned
on loans and investment securities and interest paid on
customers' deposits. Our net income is also affected by
noninterest income, such as service charges on customers'
deposit accounts, loan service charges and other fees, and
noninterest expense, primarily consisting of compensation
expense, deposit insurance and other expenses incidental to our
operations. Based on our review of our internal bookkeeping
practices and our conferences with our third party service
companies, we do not expect to incur significant additional
bookkeeping, data processing or other expenses, and in
particular we do not expect to encounter significant
difficulties with our data processing service provider, in
connection with issues related to the upcoming millennium (that
is, "Year 2000" issues).
Our operations and those of the thrift industry as a whole
are significantly affected by prevailing economic conditions,
competition and the monetary and fiscal policies of governmental
agencies. Our lending activities are influenced by demand for
and supply of housing and competition among lenders and the
level of interest rates in our market area. Our deposit flows
and costs of funds are influenced by prevailing market rates of
interest, primarily on competing investments, account maturities
and the levels of personal income and savings in our market
area.
Our stock conversion increased our capital by the amount
of the net proceeds, after deduction of conversion-related
expenses and the shares to be sold to the ESOP. Funds withdrawn
from our deposits decreased our interest-bearing liabilities,
and new funds increased our interest-earning assets. While
these changes increased our net interest income, we also have
experienced increases in our noninterest expenses by increasing
our compensation and other operating expenses.
-12-
Comparison of Financial Condition at September 30, 1998 and
December 31, 1997
Total assets shrunk from December 31, 1997 to September
30, 1998 as total assets decreased $14.8 million, or 16.4%, from
$90.0 million at December 31, 1997 to $75.2 million at September
30, 1998. Cash received for stock subscriptions decreased from
$23.6 million to zero with $14.5 million of stock issued and the
remainder returned to subscribers. Investment securities
available for sale increased $5.0 million or 32.7% from December
31, 1997 to September 30, 1998, while investment securities held
to maturity also increased slightly. We purchased investment
securities with some of the funds received from the stock
conversion pending use of the funds for new loans as loan demand
dictates.
Loans receivable increased from December 31, 1997 to
September 30, 1998 as originations exceeded repayments for the
period by approximately $3.3 million. Our market area has
experienced an increase in lending activity during this period.
The following table sets forth information about the composition
of our loan portfolio by type of loan at the dates indicated. At
September 30, 1998 and December 31, 1997, we had no
concentrations of loans exceeding 10% of gross loans other than
as disclosed below.
September 30, 1998 December 31, 1997
------------------ ------------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loan:
- ------------
Real estate loans -
One- to four-family residential $ 44,330 84.5% $ 40,482 82.0%
Commercial 3,206 6.1 3,493 7.1
Construction 2,644 5.0 3,266 6.6
Consumer loans:
Automobile 790 1.5 646 1.3
Loans to depositors, secured by
deposits 672 1.3 634 1.3
Home equity and second mortgage 210 0.4 243 0.5
Other 635 1.2 608 1.2
------- ----- ------- -----
52,487 100.0% 49,372 100.0%
===== =====
Less:
Loans in process 1,048 1,308
Deferred fees and discounts 276 278
Allowance for loan losses 635 628
------- -------
Total $50,528 $47,158
======= =======
We actively monitor our asset quality and charge off loans
and properties acquired in settlement of loans against the
allowances for losses on such loans and such properties when
appropriate and provide specific loss allowances when necessary.
Although we believe we use the best information available to
make determinations with respect to the allowances for losses,
future adjustments may be necessary if economic conditions
differ substantially from the economic
-13-
conditions in the assumptions used in making the initial
determinations. The following table sets forth information
about our allowance for loan losses for the period indicated.
Nine
Months Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
(In Thousands)
Balance at beginning of period $ 628 $ 494
Charge-offs:
Consumer (11) (18)
Recoveries:
Consumer - 2
------- ------
Net charge-offs (11) (16)
Provision for loan losses 18 150
------- ------
Balance at end of period $ 635 $ 628
======= ======
The following table sets forth information about our
nonperforming assets at the dates indicated. At these dates, we
did not have any assets accounted for on a nonaccrual basis or
modified in a troubled debt restructuring.
September 30, December 31,
1998 1997
------------ -----------
(In Thousands)
Accruing loans which are contractually past due
90 days or more:
Real estate:
One- to four-family residential $ 548 $ 638
Commercial - -
Consumer 5 17
------ ------
Total $ 553 $ 655
====== ======
At September 30, 1998 and December 31, 1997, we had
identified approximately $118,000 and $163,000, respectively, of
loans which amounts are not reflected in the preceding table but
as to which known information about possible credit problems of
borrowers caused us to have doubts as to the ability of the
borrowers to comply with present loan repayment terms, all of
which was included in our adversely classified or designated
asset amounts at the date. At the date, we did not expect to
incur any loss in excess of attributable existing reserves on
any of our assets.
Total deposits decreased $27.5 million or 33.7% from $81.7
million at December 31, 1997 to $54.1 million at September 30,
1998. The decrease was primarily due to closing out the stock
subscription accounts upon conversion on January 1, 1998. Total
deposits are expected to increase as a result of the proposed
acquisition of the Newport branch of Union Planters Bank of the
Lakeway
-14-
Area which is expected to close during the fourth
quarter. This branch has approximately $16.0 million in
deposits.
Our equity increased $12.9 million from $7,052,000 at
December 31, 1997 to $19,945,000 at September 30, 1998. The
increase was due to issuing stock in our stock conversion for a
net increase of $12.8 million, $883,000 of net income less
payment of dividends of $436,000, a slight increase in our net
unrealized gain on investment securities, and the repurchase of
48,165 shares of common stock for a total cost of $578,944.
Discussion of Results of Operations for the Nine Months Ended
September 30, 1998 and 1997
Prior to January 1, 1998 United Tennessee Bankshares, Inc.
engaged in no business activities. Accordingly, any results of
operations prior to January 1, 1998 relates only to Newport
Federal Bank. At September 30, 1997, the Bank only prepared
financial reports as required by the Office of Thrift
Supervision. The form and content of those reports were not
sufficient to allow for timely preparation of the consolidated
statement of income for the three month period ended September
30, 1997 without unreasonable delay or expense. Accordingly,
this discussion only addresses our results of operations for the
nine months ended September 30, 1998 and 1997.
Our net income for the nine months ended September 30,
1998 was $883 thousand, a $451 thousand, or 104% increase over
the $432 thousand we earned during the nine months ended
September 30, 1997. Basic earnings per share for the nine
months ended September 30, 1998 were $0.61. Earnings per share
data is not available for the nine months ended September 30,
1997 since we had no shares outstanding during that period. The
improvement in our net income during 1998 is attributable mainly
to a $591 thousand, or 33%, increase in net interest income
between the periods but was also aided by reductions in the
provision for loan losses and noninterest expense as well as an
increase in noninterest income. To a significant degree, the
increase in net interest income was a result of the completion
of our conversion to stock form and similar increases are not
expected to occur in future periods.
Interest income increased $492 thousand from $3.8 million
for the nine months ended September 30, 1997 to $4.3 million for
the nine months ended September 30, 1998. The increase in
interest income was due to an increase in the average balances
of interest-earning loans and investment securities. The
average balances increased from the net proceeds of our stock
conversion on January 1, 1998.
Interest expense decreased slightly due to reductions in
deposit accounts associated with our stock conversion. Interest
expense is expected to increase as a result of the assumption of
deposits in connection with the proposed purchase of
the Newport branch of Union Planters Bank of the Lakeway Area.
Provision for loan losses decreased from $120,000 for the
nine month period ended September 30, 1997 to $18,000 for the
nine month period ended September 30, 1998. The allowance for
loan losses required a smaller provision in 1998 based on our
analysis of the reserve at the end of each period. Our
methodology for establishing the allowance for losses takes into
consideration
-15-
probable losses that have been identified in connection with
specific assets as well as losses that have not been identified
but can be expected to occur. We conduct regular reviews of our
assets and evaluate the need to establish allowances on the
basis of this review. Allowances are established on a regular
basis based on an assessment of risk in our assets taking into
consideration the composition and quality of the portfolio,
delinquency trends, current charge-off and loss experience, the
state of the real estate market, regulatory reviews conducted in
the regulatory examination process, general economic conditions
and other factors deemed relevant by us. Allowances are provided
for individual assets, or portions of assets, when ultimate
collection is considered improbable based on the current payment
status of the assets and the fair value or net realizable value
of the collateral.
Noninterest income increased $37,000 from $92,000 for the
nine months ended September 30, 1997 to $129,000 for the nine
months ended September 30, 1998. The increase in noninterest
income was due to an increase in lending volume thereby
increasing loan service charges and fees, as well as an increase
in fees charged to deposit account holders.
Noninterest expenses increased $33,000 net from $1,028,000
for the nine months ended September 30, 1997 to $1,061,000 for
the nine months ended September 30, 1998. Compensation and
benefits for the nine months ended September 30, 1997 were
$174,000 higher primarily due to a one-time charge to
compensation expense associated with the implementation of a
long-term incentive plan for the board of directors.
Conversely, other noninterest expenses increased $158,000 from
$135,000 for the nine months ended September 30, 1997 to
$293,000 for the nine months ended September 30, 1998. The
increase in other noninterest expenses is primarily due to
increases in costs associated with the Company being a publicly-
owned entity.
Our effective tax rates for the nine months ended
September 30, 1998 and 1997 were 38% and 41%, respectively. The
slightly lower effective tax rate is due to an increase in our
tax-exempt investment securities during the nine months ended
September 30, 1998.
Liquidity and Capital Resources
We have historically maintained substantial levels of
capital. The assessment of capital adequacy depends on several
factors, including asset quality, earnings trends, liquidity and
economic conditions. We seek to maintain high levels of
regulatory capital to give us maximum flexibility in the
changing regulatory environment and to respond to changes in
market and economic conditions. These levels of capital have
been achieved through consistent earnings enhanced by low levels
of noninterest expense and have been maintained at those high
levels as a result of our policy of moderate growth generally
confined to our market area. At September 30, 1998 and December
31, 1997, we exceeded all current regulatory capital
requirements and met the definition of a "well-capitalized"
institution, the highest regulatory category.
We are required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which
may be varied at the discretion of the OTS depending on economic
conditions and deposit outflows, is based upon a percentage of
deposits and, if any, short-term borrowings. We exceeded all of
the liquidity requirements of the OTS as of both September 30,
1998 and December 31, 1997.
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Our most liquid assets are cash and amounts due from
depository institutions, which are short-term highly liquid
investments with original maturities of less than three months
that are readily convertible to known amounts of cash. The
levels of these assets are dependent on our operating, financing
and investing activities during any given period. Our primary
sources of fund are deposits, proceeds from principal and
interest payments on loans and investment securities and
earnings. While scheduled principal repayments on loans and
investment securities are a relatively predictable source of
funds, deposit flows and loan and investment securities
prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors. We do not
solicit deposits outside of our market area through brokers or
other financial institutions.
We have also designated certain securities as available
for sale in order to meet liquidity demands. In addition to
internal sources of funding, we as a member of the Federal Home
Loan Bank have substantial borrowing authority with the Federal
Home Loan Bank. Our use of a particular source of funds is based
on need, comparative total costs and availability.
In July 1998, we entered into an agreement with Union
Planters Bank to acquire their branch located in Newport,
Tennessee. We will assume the deposits of the branch and
purchase certain other fixed assets. The deposits of the branch
were approximately $16.0 million at September 30, 1998. Since we
anticipate using the net proceeds to invest in available for
sale securities, our liquidity position is not expected to be
affected in any significant manner.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
The following exhibits are filed as a part of this report:
2 1/ Purchase and Assumption Agreement, dated July
24, 1998, between Newport Federal Bank and
Union Planters Bank of the Lakeway Area
3.1 2/ Charter of United Tennessee Bankshares, Inc.
3.2 2/ Bylaws of United Tennessee Bankshares, Inc.
4 2/ Form of Stock Certificate of United Tennessee
Bankshares, Inc.
10.1 2/ Form of United Tennessee Bankshares, Inc. Stock
Option and Incentive Plan
10.2 2/ Form of United Tennessee Bankshares, Inc.
Management Recognition Plan
10.3(a) 2/ Employment Agreements between Newport Federal
Savings and Loan Association and Richard G.
Harwood, Nancy L. Bryant and Peggy Holston
10.3(b) 2/ Forms of Guarantee Agreements between United
Tennessee Bankshares, Inc. and Richard G.
Harwood, Nancy L. Bryant and Peggy Holston
10.4 2/ Newport Federal Savings and Loan Association
Long-Term Incentive Plan
10.5 2/ Newport Federal Savings and Loan Association
Deferred Compensation Plan
27 Financial Data Schedule
_______________
1/ Incorporated by reference from United Tennessee Bankshares,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998.
2/ Incorporated by reference to United Tennessee Bankshares,
Inc.'s Registration Statement on Form SB-2, File No.
333-36465.
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Reports on Form 8-K:
United Tennessee Bankshares, Inc. did not file a Current
Report on Form 8-K during the quarter covered by this report.
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: November 16, 1998 /s/ Richard G. Harwood
----------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting
Officer)