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 June 30, 1999
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, 1999(Unaudited) and
December 31, 1998 3
Consolidated Statement of Income for the Three-
Month and Six-Month Periods Ended June 30, 1999
and 1998 (Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Six-Month Periods Ended June 30,
1999 and 1998 (Unaudited) 5
Consolidated Statement of Changes in Stockholders'
Equity for the Six-Month Period Ended June 30,
1999 (Unaudited) 6
Consolidated Statement of Cash Flows for the Six-
Month Periods Ended June 30, 1999 and 1998
(Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Six-Month Periods Ended June 30, 1999 and 1998
(Unaudited) 9-11
Item 2. Management's Discussion and Analysis or Plan
of Operation 12-18
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
June 30,
1999 December 31,
(Unaudited) 1998
------------------------------
(in thousands)
Assets
Cash and amounts due from depository institutions $ 4,906 $ 6,131
Investment securities:
Available for sale, at fair value 29,873 33,022
Held to maturity, at amortized cost (fair value
of $2,100 at 6/30/99 and $2,453 at 12/31/98) 2,090 2,431
Loans receivable, net 56,782 53,346
Premises and equipment, net 496 474
Accrued interest receivable 482 443
Goodwill, net of amortization 1,153 1,193
Other assets 27 30
------- -------
Total assets $95,809 $97,070
======= =======
Liabilities and Equity
Liabilities:
Deposits $70,887 $69,835
Advances from Federal Home Loan Bank 4,739 5,689
Accrued interest payable 271 290
Accrued income taxes 39 38
Deferred income taxes 840 860
Other liabilities 587 389
------- -------
Total liabilities 77,363 77,101
------- -------
Commitments and contingencies -- --
Equity:
Common stock - no par value, authorized 20,000,000
shares; issued and outstanding 1,382,013 shares 13,091 13,091
Retained earnings 6,907 6,950
Unearned compensation - employee stock
ownership plan (1,005) (1,129)
Shares in MRP plan - contra account (713) --
Shares in grantor trust - contra account (137) (137)
Shares in stock option plan - contra account (859) --
Accumulated other comprehensive income 1,162 1,194
------- -------
Total equity 18,446 19,969
------- -------
Total liabilities and equity $95,809 $97,070
======= =======
The accompanying notes are an integral part of these financial
statements.
3
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
---------------------- ----------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------- ----------------------
Interest income:
Loans $1,172 $1,069 $2,307 $2,110
Investment securities 452 338 887 611
Other interest - earning assets 40 29 118 135
------ ------ ------ ------
Total interest income 1,664 1,436 3,312 2,856
------ ------ ------ ------
Interest expense:
Deposits 750 634 1,482 1,264
Advances from Federal Home Loan Bank 60 - 126 -
------ ------ ------ ------
Total interest expense 810 634 1,608 1,264
------ ------ ------ ------
Net interest income 854 802 1,704 1,592
Provision for loan losses 6 6 12 12
------ ------ ------ ------
Net interest income after provision
for loan losses 848 796 1,692 1,580
------ ------ ------ ------
Noninterest income:
Deposit account service charges 23 19 44 35
Loan service charges and fees 26 22 45 42
Other 5 2 11 9
------ ------ ------ ------
Total noninterest income 54 43 100 86
------ ------ ------ ------
Noninterest expense:
Compensation and benefits 207 148 572 310
Occupancy and equipment 48 45 110 75
Federal deposit insurance premiums 12 12 24 24
Data processing fees 56 32 101 68
Advertising and promotion 23 17 39 32
Net (gain) loss on foreclosed real estate - (2) - (1)
Amortization 20 - 40 -
Other 180 110 343 175
------ ------ ------ ------
Total noninterest expense 546 362 1,229 683
------ ------ ------ ------
Income before income taxes 356 477 563 983
Income taxes 120 182 192 370
------ ------ ------ ------
Net income $ 236 $ 295 $ 371 $ 613
====== ====== ====== ======
Basic earnings per common share $ 0.21 $ 0.20 $ 0.31 $ 0.42
====== ====== ====== ======
The accompanying notes are an integral part of these financial
statements.
4
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------------------- ----------------------
(Unaudited - in (Unaudited - in
thousands) (thousands)
Net income $ 236 $295 $371 $613
----- ---- ---- ----
Other comprehensive income (loss), net
of tax:
Unrealized gains (losses) on investment
securities 270 (30) (52) 78
Less reclassification adjustment for gains
included in net income - - - -
Less income taxes related to unrealized
gains (losses) on investment securities (103) 11 20 (30)
----- ---- ---- ----
Other comprehensive income (loss),
net of tax 167 (19) (32) 48
----- ---- ---- ----
Comprehensive income $ 403 $276 $339 $661
===== ==== ==== ====
The accompanying notes are an
integral part of these financial statements.
5
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLDIATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
Accumulated
Unearned Stock Other Total
Common Retained MRP Grantor Compensation Option Comprehensive Shareholders'
Stock Earnings Plan Trust ESOP Plan Income Equity
----- ------------ ------ ------ ----------- ------ ------------ ------------
BALANCES, BEGINNING OF PERIOD $13,091 $ 6,950 $ - $(137) $(1,129) $ - $1,194 $19,969
Repurchase of common stock - - (713) - - (859) - (1,572)
Net income - 371 - - - - - 371
Other comprehensive
income (loss) - - - - - - (32) (32)
Payment on ESOP loan
principal - - - - 124 - - 124
Dividends paid - (414) - - - - - (414)
------- ------- ----- ----- ------- ----- ------- -------
BALANCES, END OF PERIOD $13,091 $6,907 $(713) $(137) $(1,005) $(859) $ 1,162 $18,446
======= ====== ===== ===== ======= ===== ======= =======
The accompanying notes are an integral part of these financial
statements.
6
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Six Months Ended June 30,
------------------------------
1999 1998
------------------------------
(Unaudited - in thousands)
Operating Activities:
Net income $ 371 $ 613
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 12 12
Depreciation 25 24
Amortization of goodwill 40 -
Federal home loan bank stock dividends (10) (20)
Decrease in unearned compensation - ESOP 124 35
Deferred income taxes (benefit) - (1)
(Increase) Decrease in:
Accrued interest receivable (39) (104)
Other assets 3 466
Increase (Decrease) in:
Accrued interest payable (19) (23)
Accrued income taxes 1 (193)
Other liabilities 198 (128)
------- -------
Total adjustments 335 68
------- -------
Net cash provided by operating activities 706 681
------- -------
Investing Activities:
Purchases of investment securities available
for sale (2,061) (7,512)
Proceeds from maturities of investment securities
available for sale 2,000 500
Principal payments received on investment securities
available for sale 3,168 1,732
Purchases of investment securities held to maturity (239) (1,034)
Proceeds from maturities of investment securities held
to maturity 500 -
Principal payments received on investment securities
held to maturity 80 -
Net increase in loans (3,448) (2,205)
Purchases of plant and equipment, net (47) (23)
Proceeds from sales of foreclosed real estate - 19
------- -------
Net cash provided by (used in) investing activities (47) (8,523)
------- -------
The accompanying notes are an integral part of these financial
statements.
7
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
Six Months Ended June 30,
------------------------------
1999 1998
------------------------------
(Unaudited - in thousands)
Financing Activities:
Dividends paid (414) (436)
Net increase (decrease) in deposits 1,052 (15,511)
Repurchase of common stock (1,572) -
Repayment of advances from Federal Home Loan Bank (950) -
------- --------
Net cash provided by (used in) financing activities (1,884) (15,947)
------- --------
Net increase (decrease) in cash and cash equivalents (1,225) (23,789)
Cash and cash equivalents, beginning of period 6,131 25,490
------- --------
Cash and cash equivalents, end of period $ 4,906 $ 1,701
======= ========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 829 $ 1,287
Income taxes $ 119 $ 563
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 (loss) on
investment securities available for sale $ (52) $ 78
Change in deferred income taxes associated with
unrealized gain (loss) on investment securities
available for sale $ (20) $ 30
Change in net unrealized gain (loss) on investment
securities available for sale $ (32) $ 48
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.
8
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 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. 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 three offices in Newport,
Tennessee. The Bank's primary deposit products are interest-
bearing savings accounts and certificates of deposit. The
Bank's 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 Company'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
Earnings per share is based on the weighted average number of
shares outstanding during the period. For the three months
ended June 30, 1999 and 1998, the weighted average number of
shares outstanding was 1,146,780 and 1,454,750, respectively.
For the six months ended June 30, 1999 and 1998, the weighted
average number of shares outstanding was 1,192,989 and
1,454,750, respectively. The weighted average number of shares
outstanding for the period ended June 30, 1999 is net of 58,190
shares held in the MRP plan trust, 12,856 shares held in the
grantor trust, and 70,490 shares held in the Stock Option plan
trust. During the periods ended June 30, 1999 and 1998 the
Company did not have any dilutive securities.
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. 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. 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. 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.
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
10
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 - MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN
In January 1999, the Company's board of directors approved the
Company's 1999 Stock Option Plan (SOP) and a Management
Recognition Plan (MRP). The Company's shareholders approved
both plans at the annual meeting held on May 18,1999.
The board of directors has reserved 145,475 shares of the
Company's common stock for issuance pursuant to the options to
be granted under the SOP. These shares will be either newly
issued shares or shares purchased on the open market. The Stock
Option trust purchased shares on the open market in the first
and second quarters of 1999. As of June 30, 1999, the Stock
Option trust had purchased 70,490 for a total cost of
approximately $859,000. The board of directors has also
authorized the issuance of 58,190 shares of common stock as
restricted stock pursuant to the MRP. The MRP trust purchased
these shares on the open market in the first and second quarters
of 1999. As of June 30, 1999, the MRP trust had purchased 58,190
shares for a total cost of approximately $713,000.
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 two branch offices 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 and other borrowings. 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). See "Year 2000
Readiness Disclosure.
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 June 30, 1999 and December
31, 1998
Total assets decreased from December 31, 1998 to June 30,
1999 by $1.3 million, or 1.3%, from $97.1 million at December
31, 1998 to $95.8 million at June 30, 1999. The decrease in
assets was principally the result of a reduction in cash and
investment securities available for sale, which were used to
fund increases in loans receivable during the period. Investment
securities available for sale decreased $3.1 million or 9.5%
from December 31, 1998, while investment securities held to
maturity also decreased $341,000 from $2.4 million to $2.1
million.
Loans receivable increased from December 31, 1998 to June
30, 1999 as originations exceeded repayments for the period by
approximately $3.4 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 June 30,
1999 and December 31, 1998, we had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
June 30, 1999 December 31, 1998
------------------ ------------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loan:
- ------------
Real estate loans -
One- to four-family residential $ 47,570 80.1% $ 41,833 76.1%
Commercial 5,966 10.0 7,267 13.2
Construction 3,543 5.9 3,235 5.9
Consumer loans:
Automobile 876 1.5 813 1.5
Loans to depositors, secured by
deposits 770 1.3 848 1.5
Home equity and second mortgage 193 0.3 162 0.3
Other 545 0.9 838 1.5
------- ----- ------- -----
59,463 100.0% 54,996 100.0%
===== =====
Less:
Loans in process 1,757 748
Deferred fees and discounts 275 261
Allowance for loan losses 649 641
------- -------
Total $56,782 $53,346
======= =======
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 conditions in the
assumptions used in making the initial determinations.
13
The following table sets forth information about our
allowance for loan losses for the period indicated.
Six Six
Months Ended Months Ended
June 30, June 30,
1999 1998
------------ ------------
(In Thousands)
Balance at beginning of period $ 641 $ 628
------ ------
Charge-offs:
Consumer (4) (4)
Recoveries:
Consumer - -
------ ------
Net charge-offs (4) (4)
Provision for loan losses 12 12
------ ------
Balance at end of period $ 649 $ 636
====== ======
The following table sets forth information about our
nonperforming assets at the dates indicated. At June 30, 1999,
we had approximately $71,000 of loans accounted for on a
nonaccrual basis.
June 30, December 31,
1999 1998
--------- -----------
(In Thousands)
Accruing loans which are
contractually past due
90 days or more:
Real estate:
One- to four-family residential $ 343 $ 475
Commercial 36 -
Consumer 6 7
------ ------
Total $ 385 $ 482
====== ======
At June 30, 1999 and December 31, 1998, all loans were
included in our adversely classified or designated asset amounts
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. We do
not expect to incur any loss in excess of attributable existing
reserves on any of our assets.
During the six months ended June 30, 1999, total deposits
increased $1.1 million or 1.5% from $69.8 million at December
31, 1998 to $70.9 million at June 30, 1999.
Our shareholders' equity decreased $1.6 million from $20.0
million at December 31, 1998 to $18.4 million at June 30, 1999.
The decrease was due to the repurchase of 128,680 shares of
stock for approximately $1,572,000 and dividends paid of
approximately $414,000, partially offset by $371,000 of net
income, payment of approximately $124,000 on the ESOP loan, and
a $32,000 decrease in our net unrealized gain on investment
securities. The Company has recently received approval from the
OTS to repurchase an additional 5% of its outstanding shares on
the open market. In addition, the Company has received a
favorable private letter ruling from the Internal Revenue
Service regarding the tax-free nature of a possible return of
capital distribution to its shareholders. The Company is merely
considering such a distribution at this time and no firm
decision including the amount or timing has been made. It
is currently anticipated that no return of capital distribution
would be made before the fourth quarter of 1999 and would be in
the range of $2 to $4 per share.
14
Discussion of Results of Operations for the Three Months Ended
June 30, 1999 and 1998
Our net income for the three months ended June 30, 1999 was
$236 thousand, a $59 thousand, or 20% decrease over the $295
thousand we earned during the three months ended June 30, 1998.
Basic earnings per share for the three months ended June 30,
1999 was $0.21 compared to $0.20 for the same period in 1998.
Average shares outstanding for the periods were 1,146,780 and
1,454,750, respectively. The decrease in net income is due
primarily to the establishment of a management recognition plan
during 1999 which increased compensation costs approximately $40
thousand.
Interest income increased $228 thousand, or 16%, from $1.44
million for the three months ended June 30, 1998 to $1.66
million for the three months ended June 30, 1999. The increase
in interest income was primarily due to a $114 thousand, or 34%,
increase in interest earned on the investment securities
portfolio which the Company has expanded in order to increase
income and better leverage its capital. Interest on loans
increased $103 thousand, or 10%, due to an increase in the
average balance of the loan portfolio.
Interest expense increased $116 thousand primarily due to
the purchase of the branch deposit accounts from Union Planters
Bank of the Lakeway Area in December 1998. In addition, the
Company incurred $60 thousand in interest expense on advances
from the Federal Home Loan Bank compared to no such expense in
the prior-year period. The Company invested funds from the
borrowings in mortgaged-backed securities in order to increase
interest income and better leverage its capital.
Net interest income increased $52,000, or 6%, between the
periods as the increase in interest income exceeded the increase
in interest expense. The Company's net interest margin, however,
narrowed to 3.85% for the three months ended June 30, 1999
compared to 4.45% for the comparable period of 1998. The
narrowing of the interest margin reflects the current rate
environment and the fact that recent loan refinancing has
reduced the yield on our loan portfolio.
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 $11,000 from $43,000 for the
three months ended June 30, 1998 to $54,000 for the three months
ended June 30, 1999. The increase in other income was mainly
from increased deposit account service charges consistent with
the higher level of deposit accounts during the 1999 period.
Loan service charges and fees also increased as loan
originations increased during the three month period.
Noninterest expenses increased $184,000 from $362,000 for
the three months ended June 30, 1998 to $546,000 for the three
months ended June 30, 1999. Compensation and benefits for the
three months ended June 30, 1999 were $59,000 higher primarily
due to compensation expense associated with the implementation
of a management recognition plan in 1999. Other noninterest
expenses increased $70,000 from $110,000 for the three months
ended June 30, 1998 to $180,000 for the three months ended June
30, 1999. The increase in other noninterest expenses is
primarily due to increases in costs associated with the Company
being a publicly-owned entity and increased operations costs for
the new branch purchased in December 1998.
15
Our effective tax rates for the three months ended June 30, 1999
and 1998 were 33.7% and 38.2%, respectively. The slightly lower
effective tax rate is due to an increase in our tax-exempt
investment securities during the three months ended June 30,
1999.
Discussion of Results of Operations for the Six Months Ended
June 30, 1999 and 1998
Our net income for the six months ended June 30, 1999 was
$371 thousand, a $242 thousand, or 39% decrease over the $613
thousand we earned during the six months ended June 30, 1998.
Basic earnings per share for the six months ended June 30, 1999
was $0.31 compared to $0.42 for the same period in 1998. Average
shares outstanding for the periods were 1,192,989 and 1,454,750,
respectively. The decrease in net income is due primarily to the
establishment of a management recognition plan during the first
quarter of 1999 which increased compensation costs approximately
$225 thousand.
Interest income increased $456 thousand, or 16.0%, from
$2.86 million for the six months ended June 30, 1998 to $3.31
million for the six months ended June 30, 1999. The increase in
interest income was primarily due to a $276 thousand, or 45.2%,
increase in interest earned on the investment securities
portfolio which the Company has expanded in order to increase
income and better leverage its capital. Interest on loans
increased $197 thousand, or 9.3%, due to an increase in the
average balance of the loan portfolio.
Interest expense increased $344 thousand primarily due to
the purchase of the branch deposit accounts from Union Planters
Bank of the Lakeway area in December 1998. In addition, the
Company incurred $126 thousand in interest expense on advances
from the Federal Home Loan Bank compared to no such expense in
the prior-year period. The Company invested funds from the
borrowings in mortgaged-backed securities in order to increase
interest income and better leverage its capital.
Net interest income increased $112,000, or 7.0%, between
the periods as the increase in interest income exceeded the
increase in interest expense. The Company's net interest margin,
however, narrowed to 3.84% for the six months ended June 30,
1999 compared to 4.36% for the comparable period of 1998. The
narrowing of the interest margin reflects the current rate
environment and the fact that recent loan refinancing has
reduced the yield on our loan portfolio.
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 $14,000 from $86,000 for the
six months ended June 30, 1998 to $100,000 for the six months
ended June 30, 1999. The increase in other income was mainly
from increased deposit account service charges consistent with
the higher level of deposit accounts during the 1999 period.
Noninterest expenses increased $546,000 from $683,000 for
the six months ended June 30, 1998 to $1,229,000 for the six
months ended June 30, 1999. Compensation and benefits for the
six months ended June 30, 1999 were $262,000 higher primarily
due to compensation expense associated with the implementation
of a management recognition plan in 1999. Other noninterest
expenses increased $168,000 from $175,000 for the six months
ended June 30, 1998 to $343,000 for the six months ended June
30, 1999. The increase in other noninterest expenses is
primarily due to increases in costs associated with the Company
being a publicly-owned entity and increased operations costs for
the new branch purchased in December 1998.
16
Our effective tax rates for the six months ended June 30,
1999 and 1998 were 34.1% and 37.6%, respectively. The slightly
lower effective tax rate is due to an increase in our tax-exempt
investment securities during the six months ended June 30, 1999.
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 June 30, 1999 and December 31,
1998, 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 June 30, 1999
and December 31, 1998.
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.
Year 2000 Readiness Disclosure
Like most financial services companies, the Bank relies
heavily on computers and other information technology systems.
As the year 2000 approaches, an important business issue has
emerged regarding how existing application software programs and
operating systems can accommodate this date value. For many
years, software applications routinely conserved magnetic
storage space by using only two digits to record calendar years;
for example, the year 1999 is stored as "99". On January 1,
2000, the calendars in many software applications, in their
current form, will produce erroneous results or will fail to run
at all since their logic cannot deal with this transition.
The Bank has identified its most mission critical system as
its on-line core account processing which is performed by a
third party provider. This service provider has advised the Bank
that it is Year 2000 compliant and has successfully done testing
with a number of its other customers. The service provider
tested the Bank's equipment and links during the fourth quarter
of 1998 and found
17
them to be Year 2000 compliant. The Bank has developed a
contingency plan for back-up manual processing in the event its
current data processor is unable to operate because of Year 2000
problems. The Bank also uses personal computers and a variety of
other software packages in other facets of its day-to-day
operations. All of these systems have been either tested
successfully or replaced with systems and software that is
millennium compliant. Management believes that it has also
identified all the equipment which relies on embedded computer
chips to operate and has received correspondence from the
vendors indicating that they are Year 2000 compliant. In
addition to the risk posed by the Year 2000 readiness of its
internal systems, the Bank recognizes that the Bank is exposed
to Year 2000 risks from its customers. The Bank has surveyed its
larger loan customers regarding their Year 2000 readiness and is
working to increase their awareness of the problem. The Bank
does not believe that the costs associated with its Year 2000
planning will have a material impact on its results of
operations.
18
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
On May 18, 1999, United Tennessee Bankshares, Inc. held
its 1999 Annual Meeting of Stockholders. The following is a
brief description of each matter voted upon and the results of
the voting.
1. Election of Directors
Nominee For Withheld
------- --- --------
Richard G. Harwood 1,019,989 6,582
Robert D. Self 1,015,695 10,876
There were no abstentions or broker non-votes.
The terms of office of Directors, William B. Henry, J.
William Myers, Tommy C. Bible, Clyde E. Driskill, Jr., Robert L.
Overholt and Ben W. Hooper continued after the meeting.
2. Approval of the United Tennessee Bankshares,
Inc. 1999 Stock Option Plan
For Against Abstain
--- ------- -------
689,801 92,301 2,461
There were no broker non-votes.
3. Approval of the United Tennessee Bankshares,
Inc. Management Recognition Plan.
For Against Abstain
--- ------- -------
685,593 96,484 2,486
There were no broker non-votes.
Item 5. Other Information
None.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed as a part of
this report:
3.1 1/ Charter of United Tennessee Bankshares, Inc.
3.2 1/ Bylaws of United Tennessee Bankshares, Inc.
4 1/ Form of Stock Certificate of United Tennessee
Bankshares, Inc.
10.1 2/ Form of United Tennessee Bankshares, Inc. 1999
Stock Option Plan
10.2 2/ Form of United Tennessee Bankshares, Inc.
Management Recognition Plan
10.3(a) 1/ Employment Agreements between Newport Federal
Savings and Loan Association and Richard G.
Harwood, Nancy L. Bryant and Peggy Holston
10.3(b) 1/ Forms of Guarantee Agreements between United
Tennessee Bankshares, Inc. and Richard G.
Harwood, Nancy L. Bryant and Peggy Holston
10.4 1/ Newport Federal Savings and Loan Association
Long-Term Incentive Plan
10.5 1/ Newport Federal Savings and Loan Association
Deferred Compensation Plan
27 Financial Data Schedule
_______________
1/ Incorporated by reference to United Tennessee
Bankshares, Inc.'s Registration Statement on Form
SB-2, File No. 333-36465.
2/ Incorporated by reference to United Tennessee
Bankshares, Inc.'s Registration Statement on Form
S-8, File No. 333-82803.
(b) Reports on Form 8-K:
During the quarter ended June 30, 1999, the
Company filed the following current reports on Form 8-K:
Date Filed Items Reported
---------- --------------
May 4, 1999 Item 5 - OTS approval of 5% Stock
Repurchase Program
June 15, 1999 Item 5 - Receipt of a favorable
private letter ruling regarding
tax-free nature of possible
return of capital distribution and
application to OTS for approval to
repurchase an additional 5% of
shares.
No financial statements were filed with either of the above
current reports.
20
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: August 16, 1999 /s/ Richard G. Harwood
-------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting
Officer)
21