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, 1999.
OR
[ ] TRANSITION REPORT UNDER 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
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as
of September 30, 1999 (Unaudited) and December
31, 1998 3
Consolidated Statements of Income for the Three-
Month and Nine-Month Periods Ended September
30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three-Month and Nine-Month Periods
Ended September 30, 1999 and 1998 (Unaudited) 5
Consolidated Statement of Changes in
Shareholders' Equity for the Nine-Month Period
Ended September 30, 1999 (Unaudited) 6
Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 30, 1999
and 1998 (Unaudited) 7-8
Notes to Consolidated Financial Statements
for the Nine-Month Periods Ended September 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 19
SIGNATURES 20
2
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
(in thousands)
Assets
Cash and amounts due from depository
institutions $ 3,414 $ 6,131
Investment securities:
Available for sale, at fair value 32,655 33,022
Held to maturity, at amortized cost (fair
value of $2,453) -- 2,431
Loans receivable, net 58,825 53,346
Premises and equipment, net 508 474
Accrued interest receivable 439 443
Goodwill, net of amortization 1,133 1,193
Other assets 43 30
------- -------
Total assets $97,017 $97,070
======= =======
Liabilities and Shareholders' Equity
Liabilities:
Deposits $73,184 $69,835
Advances from Federal Home Loan Bank 4,256 5,689
Accrued interest payable 267 290
Accrued income taxes 6 38
Deferred income taxes 790 860
Other liabilities 686 389
------- -------
Total liabilities 79,189 77,101
------- -------
Commitments and contingencies -- --
Shareholders' Equity:
Common stock - no par value, authorized
20,000,000 shares; issued and outstanding
1,382,013 shares 13,091 13,091
Retained earnings 7,085 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 (1,573) --
Accumulated other comprehensive income 1,080 1,194
------- -------
Total shareholders' equity 17,828 19,969
------- -------
Total liabilities and shareholders' equity $97,017 $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 NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
----------------------- ----------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Interest income:
Loans $1,194 $1,073 $3,501 $3,183
Investment securities 417 319 1,304 930
Other interest - earning assets 52 24 170 159
------ ------ ------ ------
Total interest income 1,663 1,416 4,975 4,272
------ ------ ------ ------
Interest expense:
Deposits 800 629 2,282 1,893
Advances from Federal Home
Loan Bank 54 - 180 -
------ ------ ------ ------
Total interest expense 854 629 2,462 1,893
------ ------ ------ ------
Net interest income 809 787 2,513 2,379
Provision for loan losses 6 6 18 18
------ ------ ------ ------
Net interest income after
provision for loan losses 803 781 2,495 2,361
------ ------ ------ ------
Noninterest income:
Deposit account service charges 41 20 85 55
Loan service charges and fees 23 20 68 62
Other 1 3 12 12
------ ------ ------ ------
Total noninterest income 65 43 165 129
------ ------ ------ ------
Noninterest expense:
Compensation and benefits 264 151 836 461
Occupancy and equipment 43 36 153 111
Federal deposit insurance
premiums 12 12 36 36
Data processing fees 55 44 156 112
Advertising and promotion 20 16 59 48
Net loss on foreclosed
real estate - - - -
Amortization 20 - 60 -
Other 165 119 508 293
------ ------ ------ ------
Total noninterest expense 579 378 1,808 1,061
------ ------ ------ ------
Income before income taxes 289 446 852 1,429
Income taxes 110 176 302 546
------ ------ ------ ------
Net income $ 179 $ 270 $ 550 $ 883
====== ====== ====== ======
Basic earnings per common share $ 0.16 $ 0.19 $ 0.46 $ 0.61
====== ====== ====== ======
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 NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1999 AND 1998
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited - in (Unaudited - in
thousands) thousands)
Net income $ 179 $270 $ 550 $ 883
----- ---- ----- ------
Other comprehensive income
(loss), net of tax:
Unrealized gains (losses) on
investment securities (135) 209 (187) 287
Less reclassification adjustment
for gains included in net
income - - - -
Less income taxes related to
unrealized gains (losses) on
investment securities 53 (79) 73 (109)
----- ---- ----- ------
Other comprehensive income
(loss), net of tax (82) 130 (114) 178
----- ---- ----- ------
Comprehensive income $ 97 $400 $ 436 $1,061
===== ==== ===== ======
The accompanying notes are an integral part of these financial
statements.
5
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 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) - - (1,573) - (2,286)
Net income - 550 - - - - - 550
Other comprehensive
income (loss) - - - - - - (114) (114)
Payment on ESOP loan
principal - - - - 124 - - 124
Dividends paid - (415) - - - - - (415)
------- ------- ----- ----- ------- ------- ------ -------
BALANCES, END OF PERIOD $13,091 $7,085 $(713) $(137) $(1,005) $(1,573) $1,080 $17,828
======= ====== ===== ===== ======= ======= ====== =======
6
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Nine Months Ended
September 30,
-------------------------
1999 1998
---------- ---------
(Unaudited - in thousands)
Operating Activities:
Net income $ 550 $ 883
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 18 18
Depreciation 38 36
Amortization of goodwill 60 -
Federal Home Loan Bank stock dividends (25) (30)
Decrease in unearned compensation - ESOP 124 35
Deferred income taxes (benefit) 3 3
(Increase) Decrease in:
Accrued interest receivable 4 (14)
Other assets (13) 472
Increase (Decrease) in:
Accrued interest payable (23) (16)
Accrued income taxes (32) (159)
Other liabilities 297 (87)
------- -------
Total adjustments 451 258
------- -------
Net cash provided by operating activities 1,001 1,141
------- -------
Investing Activities:
Purchases of investment securities available
for sale (5,599) (9,432)
Proceeds from maturities of investment securities
available for sale 2,000 2,368
Principal payments received on investment securities
available for sale 5,085 2,414
Purchases of investment securities held to maturity (464) (1,034)
Proceeds from maturities of investment securities
held to maturity 500 132
Principal payments received on investment securities
held to maturity 1,114 -
Net increase in loans (5,497) (3,388)
Purchases of plant and equipment, net (72) (24)
Proceeds from sales of foreclosed real estate - 19
------- -------
Net cash provided by (used in) investing activities (2,933) (8,945)
------- -------
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Nine Months Ended
September 30,
-------------------------
1999 1998
---------- ---------
(Unaudited - in thousands)
Financing Activities:
Dividends paid (415) (436)
Net increase (decrease) in deposits 3,349 (14,729)
Repurchase of common stock (2,286) (579)
Repayment of advances from Federal Home Loan Bank (1,433) -
------- --------
Net cash provided by (used in) financing activities (785) (15,744)
------- --------
Net increase (decrease) in cash and cash equivalents (2,717) (23,548)
Cash and cash equivalents, beginning of period 6,131 25,490
------- --------
Cash and cash equivalents, end of period $ 3,414 $ 1,942
======= ========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,485 $ 1,909
Income taxes $ 331 $ 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 (loss) on investment
securities available for sale $ (187) $ 287
Change in deferred income taxes associated with
unrealized gain (loss) on investment securities
available for sale $ (73) $ 109
Change in net unrealized gain (loss) on investment
securities available for sale $ (114) $ 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.
8
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 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 periods presented
have been included. The results of operations for such interim
periods 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 September 30, 1999 and 1998, the weighted average number
of shares outstanding was 1,146,780 and 1,454,750, respectively.
For the nine months ended September 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 September 30, 1999 is net of
58,190 shares held in the MRP plan trust, 12,856 shares held in
the grantor trust, and 125,835 shares held in the Stock Option
plan trust. During the periods ended September 30, 1999 and 1998
the Company did not have any dilutive securities.
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
9
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 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, second and
third quarters of 1999. As of September 30, 1999, the Stock
Option trust had purchased 125,835 for a total cost of
approximately $1,573,000. 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 September 30, 1999, the MRP trust had purchased
58,190 shares for a total cost of approximately $713,000.
NOTE 6 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
establishes standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application is encouraged, but is permitted only as of
the beginning of any fiscal quarter that begins after issuance
of this statement. The Company elected to apply the provisions
of this statement as of July 1, 1999.
Although the Company and its subsidiary do not currently hold
any derivative instruments or engage in hedging activities, the
statement also provides a one-time opportunity for any
investments in the held-to-maturity category to be transferred
into the available-for-sale category. On July 1, 1999, the
Company and its subsidiary transferred investments with an
amortized cost of $2,090,063 (fair value of $2,100,160) from
their held-to-maturity category to their available-for-sale
category.
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 September 30, 1999 and
December 31, 1998
Total assets decreased from December 31, 1998 to September
30, 1999 by $53,000, or .1%, from $97.1 million at December 31,
1998 to $97.0 million at September 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 $367 thousand or 1.1%
from December 31, 1998, while investment securities held to
maturity also decreased $2.4 million from $2.4 million to $-0-.
As explained in Note 6 to the interim financial statements, the
Company adopted FASB SFAS No. 133 on July 1, 1999 and
transferred $2.1 million in securities from its held-to-maturity
category to its available-for-sale category.
Loans receivable increased from December 31, 1998 to
September 30, 1999 as originations exceeded repayments for the
period by approximately $5.5 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, 1999 and December 31, 1998, we had no
concentrations of loans exceeding 10% of gross loans other than
as disclosed below.
September 30, 1999 December 31, 1998
------------------ ------------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loan:
- ------------
Real estate loans -
One- to four-family residential $ 49,679 81.0% $ 41,833 76.1%
Commercial 5,780 9.4 7,267 13.2
Construction 3,345 5.4 3,235 5.9
Consumer loans:
Automobile 846 1.4 813 1.5
Loans to depositors, secured by
deposits 820 1.3 848 1.5
Home equity and second mortgage 197 0.3 162 0.3
Other 750 1.2 838 1.5
------- ----- ------- -----
61,417 100.0% 54,996 100.0%
===== =====
Less:
Loans in process 1,658 748
Deferred fees and discounts 279 261
Allowance for loan losses 655 641
------- -------
Total $58,825 $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.
Nine Nine
Months Ended Months Ended
September 30, September 30,
1999 1998
------------ ------------
(In Thousands)
Balance at beginning of period $ 641 $ 628
------ ------
Charge-offs:
Consumer (4) (11)
Recoveries:
Consumer - -
------ ------
Net charge-offs (4) (11)
Provision for loan losses 18 18
------ ------
Balance at end of period $ 655 $ 635
====== ======
The following table sets forth information about our
nonperforming assets at the
dates indicated.
September 30, December 31,
1999 1998
------------- ------------
(In Thousands)
Nonaccrual loans $ 71 $ -
Accruing loans which are
contractually past due
90 days or more:
Real estate:
One- to four-family residential 274 475
Commercial - -
Consumer 9 7
------ ------
Total $ 354 $ 482
====== ======
At September 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 nine months ended September 30, 1999, total
deposits increased $3.4 million or 4.8% from $69.8 million at
December 31, 1998 to $73.2 million at September 30, 1999.
Our shareholders' equity decreased $2.2 million from $20.0
million at December 31, 1998 to $17.8 million at September 30,
1999. The decrease was due to the repurchase of 184,025 shares
of stock for approximately $2,286,000 and dividends paid of
approximately $415,000, partially offset by $550,000 of net
income, payment of approximately $124,000 on the ESOP loan, and
a $114,000 decrease in our net unrealized gain on investment
securities. On September 23, 1999, the Company's board of
directors declared a special cash distribution of $4.00 per
share payable on November 30, 1999 to shareholders of record on
November 1, 1999. Based on a private letter ruling received
from the Internal Revenue Service, the Company believes that the
distribution will not be treated as a taxable dividend to
shareholders but will instead be treated as a return of capital
which will reduce shareholders' adjusted basis in their shares.
The Company will borrow funds from a third party lender to
finance the distribution which will total approximately
$5.5 million. The trustees of the Company's ESOP, Stock Option
Plan, and Management Recognition Plan trusts expect to use their
portion of the return of capital distribution (approximately
$1.4 million) to purchase additional shares of the Company's
common stock. As a result of the distribution of capital and
related stock purchases by the Company's benefit plan trusts,
the Company anticipates that its shareholders' equity will be
reduced by approximately $4.0 million as a result of the return
of capital distribution.
14
Discussion of Results of Operations for the Three Months Ended
September 30, 1999 and 1998
Our net income for the three months ended September 30, 1999
was $179 thousand, a $91 thousand, or 20% decrease from the $270
thousand we earned during the three months ended September 30,
1998. Basic earnings per share for the three months ended
September 30, 1999 was $0.16 compared to $0.19 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 $60 thousand and amortization of goodwill
associated with the branch purchase of $20 thousand.
Interest income increased $247 thousand, or 17.4%, from $1.42
million for the three months ended September 30, 1998 to $1.66
million for the three months ended September 30, 1999. The
increase in interest income was due in part to a $98 thousand,
or 31%, 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 $121 thousand, or 11%, due to an increase in the
average balance of the loan portfolio.
Interest expense increased $225 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 $54 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 $22,000, or 2.8%, between the
periods as the increase in interest income exceeded the increase
in interest expense. The Company's net interest margin, however,
narrowed to 3.73% for the three months ended September 30, 1999
compared to 4.33% for the comparable period of 1998. The
narrowing of the net interest margin reflects the current rate
environment and the fact that recent loan refinancings have
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 $22,000 from $43,000 for the
three months ended September 30, 1998 to $65,000 for the three
months ended September 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 ended
September 30, 1999.
Noninterest expenses increased $201,000 from $378,000 for the
three months ended September 30, 1998 to $579,000 for the three
months ended September 30, 1999. Compensation and benefits for
the three months ended September 30, 1999 were $113,000 higher
primarily due to compensation expense associated with the
implementation of a management recognition plan in 1999 and
additional employees obtained in our branch purchase in December
1998. The Company expects to record a compensation charge of
approximately $170,000 during the fourth quarter as the result
of the payment of the return of capital distribution on shares
held by the Company's restricted stock plans. Other noninterest
expenses increased $46,000 from $119,000 for the three months
ended September 30, 1998 to $165,000 for the three months ended
September 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.
Our effective tax rates for the three months ended
September 30, 1999 and 1998 were 38.1% and 39.5%, respectively.
The slightly lower effective tax rate is due to an increase in
our tax-exempt investment securities during the three months
ended September 30, 1999.
15
Discussion of Results of Operations for the Nine Months Ended
September 30, 1999 and 1998
Our net income for the nine months ended September 30, 1999
was $550 thousand, a $333 thousand, or 38% decrease from the
$883 thousand we earned during the nine months ended September
30, 1998. Basic earnings per share for the nine months ended
September 30, 1999 was $0.46 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 $265 thousand.
Interest income increased $703 thousand, or 16.5%, from $4.27
million for the nine months ended September 30, 1998 to $4.98
million for the nine months ended September 30, 1999. The
increase in interest income was primarily due to a $374
thousand, or 40.2%, 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 $318 thousand, or 10.0%, due to an
increase in the average balance of the loan portfolio.
Interest expense increased $569 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 $180 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 $134,000, or 5.6%, between the
periods as the increase in interest income exceeded the increase
in interest expense. The Company's net interest margin, however,
narrowed to 3.72% for the nine months ended September 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 refinancings have
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 $36,000 from $129,000 for the
nine months ended September 30, 1998 to $165,000 for the nine
months ended September 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 $747,000 from $1,061,000 for
the nine months ended September 30, 1998 to $1,808,000 for the
nine months ended September 30, 1999. Compensation and benefits
for the nine months ended September 30, 1999 were $375,000
higher primarily due to compensation expense associated with the
implementation of a management recognition plan in 1999 and
additional employees associated with our branch purchase in
December 1998. Other noninterest expenses increased $215,000
from $293,000 for the nine months ended September 30, 1998 to
$508,000 for the nine months ended September 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.
Our effective tax rates for the nine months ended September
30, 1999 and 1998 were 35.4% and 38.2%, 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, 1999.
16
Liquidity and Capital Resources
The Company does not currently have any business activities
other than the operation of the Bank and does not have
significant on-going funding commitments other than the payment
of dividends to shareholders. To date, the Company has used the
proceeds from its initial public offering and dividends from the
Bank to meet its liquidity needs. The Bank is subject to
various regulatory limitations on the payment of dividends to
the Company. The Company intends to pay its proposed return of
capital distribution with funds on hand and approximately $3.0
million in borrowings from a third party lender. The Bank has
applied to the OTS for permission to pay a dividend to the
Company in excess of regulatory safe harbor amounts in order to
allow the Company to repay the loan in the next fiscal year. If
the OTS does not approve the Bank's proposed capital
distribution, the Company will extend the maturity of its loan
so that it can be repaid with Bank dividends within OTS safe
harbor amounts.
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.
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, 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 September 30,
1999 and December 31, 1998.
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 them to be Year 2000 compliant. The Bank has
developed a contingency plan for back-up manual processing in
the
17
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.
Recently Enacted Legislation
On November 12, 1999, President Clinton signed legislation
which could have a far-reaching impact on the financial services
industry. 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 Federal
Reserve Board, in consultation with the Department of Treasury,
may approve additional financial activities. National bank
subsidiaries will be permitted to engage in similar financial
activities but only on an agency basis unless they are one of
the 50 largest banks in the country. National bank subsidiaries
will be prohibited from insurance underwriting, real estate
development and merchant banking. The G-L-B Act, however,
prohibits future acquisitions of existing unitary savings and
loan holding companies, like the Company, by firms which are
engaged in commercial activities and prohibits the formation of
new unitary holding companies.
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. Financial
institutions, however, will be required to comply with state law
if it is more protective of customer privacy than the G-L-B Act.
The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the
Securities and Exchange Commission and the Federal Trade
Commission, after consultation with the National Association of
Insurance Commissioners, to promulgate implementing regulations
within six months of enactment. The privacy provisions will
become effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal
Home Loan Bank System. The G-L-B Act imposes new capital
requirements on the Federal Home Loan Banks and authorizes them
to issue two classes of stock with differing dividend rates and
redemption requirements. The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute
$300 million to pay interest on certain government obligations
in favor of a 20% of net earnings formula. The G-L-B Act
expands the permissible uses of Federal Home Loan Bank 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 makes membership
in the Federal Home Loan Bank voluntary for federal savings
associations.
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. The G-L-B Act reduces the frequency of
Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository
institutions that make payments to non-governmental entities in
connection with the Community Reinvestment Act. The G-L-B Act
eliminates the SAIF special reserve and authorizes a federal
savings association that converts to a national or state bank
charter to continue to use the term "federal" in its name and to
retain any interstate branches.
The Company is unable to predict the impact of the G-L-B Act
on its operations at this time. Although the G-L-B Act reduces
the range of companies with which the Company may affiliate, it
may facilitate affiliations with companies in the financial
services industry.
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
None.
Item 5. Other Information
None.
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/ United Tennessee Bankshares, Inc. 1999 Stock
Option Plan
10.2 2/ 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:
On September 28, 1999, the Company filed a Current Report on
Form 8-K reporting under Item 5 that its board of directors had
authorized the payment of a special cash distribution of $4.00
per share on November 30, 1999 to shareholders of record on
November 1, 1999. No financial statements were filed as part of
this report.
19
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 12, 1999 /s/ Richard G. Harwood
-------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting
Officer)
20