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, 2001.
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: 1,343,926
---------
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2001 (Unaudited) and December 31, 2000 3
Consolidated Statements of Income for the Three-Month and
Nine-Month Periods Ended September 30, 2001 and 2000 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three-Month and Nine-Month Periods Ended September 30, 2001
and 2000 (Unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity for the
Nine-Month Period Ended September 30, 2001 (Unaudited) 6
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 2001 and 2000 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the Nine-Month
Periods Ended September 30, 2001 and 2000 (Unaudited) 9-11
Item 2. Management's Discussion and Analysis or Plan of Operation 12-17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
September 30,
2001 December 31,
(Unaudited) 2000
------------------------------------------
(In thousands)
Assets
Cash and amounts due from depository institutions $ 5,305 $ 3,067
Investment securities available for sale, at fair value 23,260 24,357
Loans receivable, net 71,531 68,878
Premises and equipment, net 508 470
Foreclosed real estate - held for sale 76 0
Accrued interest receivable 606 603
Goodwill, net of amortization 973 1,033
Prepaid expenses and other assets 39 145
------------------------------------------
Total assets $ 102,298 $ 98,553
==========================================
Liabilities and Equity
Liabilities:
Deposits $ 86,379 $ 81,614
Advances from Federal Home Loan Bank 178 1,753
Accrued interest payable 173 300
Deferred income taxes 996 841
Accrued benefit plan liabilities 610 643
Other liabilities 51 72
------------------------------------------
Total liabilities 88,387 85,223
------------------------------------------
Shareholders' equity:
Common stock - no par value; authorized 20,000,000 shares;
issued and outstanding 1,343,926 shares (1,382,013 in 2000) 12,746 13,091
Unearned compensation - ESOP ( 678) ( 843)
Shares in grantor trust - contra account ( 183) ( 183)
Shares in MRP plan - contra account ( 210) ( 390)
Shares in stock option plan trusts - contra account ( 1,657) ( 1,657)
Retained earnings 2,467 2,139
Accumulated other comprehensive income 1,426 1,173
------------------------------------------
Total shareholders' equity 13,911 13,330
------------------------------------------
Total liabilities and equity $ 102,298 $ 98,553
==========================================
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, 2001 AND 2000
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
----------------------------------- --------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------
2001 2000 2001 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ---------------- ---------------- --------------
Interest income:
Loans $ 1,469 $ 1,382 $ 4,428 $ 4,003
Investment securities 335 393 1,054 1,232
Other interest-earning assets 28 33 83 86
---------------- ---------------- ---------------- -------------
Total interest income 1,832 1,808 5,565 5,321
---------------- ---------------- ---------------- -------------
Interest expense:
Deposits 884 966 2,866 2,699
Advances from Federal Home Loan Bank and note
payable 7 81 38 257
---------------- ---------------- ---------------- -------------
Total interest expense 891 1,047 2,904 2,956
---------------- ---------------- ---------------- -------------
Net interest income 941 761 2,661 2,365
Provision for loan losses 19 9 47 25
---------------- ---------------- ---------------- -------------
Net interest income after provision for loan losses 922 752 2,614 2,340
---------------- ---------------- ---------------- -------------
Noninterest income:
Deposit account service charges 57 46 180 138
Loan service charges and fees 28 27 89 84
Net gain (loss) on sales of investment
securities available for sale 0 0 3 (9)
Other 10 4 31 18
---------------- ---------------- ---------------- -------------
Total noninterest income 95 77 303 231
---------------- ---------------- ---------------- -------------
Noninterest expense:
Compensation and benefits 288 268 876 796
Occupancy and equipment 54 62 156 163
Federal deposit insurance premiums 12 12 36 36
Data processing fees 64 65 174 161
Advertising and promotion 23 18 70 52
Amortization 60 60
20 20
Other 107 112 375 377
---------------- ---------------- ---------------- -------------
Total noninterest expense 568 557 1,747 1,645
---------------- ---------------- ---------------- -------------
Income before income taxes 449 272 1,170 926
Income taxes 168 49 428 300
---------------- ---------------- ---------------- -------------
Net income $ 281 $ 223 $ 742 $ 626
================ ================ ================ =============
Earnings per share:
Basic $ 0.21 $ 0.16 $ 0.54 $ 0.45
================ ================ ================ =============
Diluted $ 0.21 $ 0.16 $ 0.54 $ 0.45
================ ================ ================ =============
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, 2001 AND 2000
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------- ---------------- ---------------- ----------------
(Unaudited - in Thousands) (Unaudited - in Thousands)
--------------------------------- -----------------------------------
Net income $ 281 $ 223 $ 742 $ 626
--------------- ---------------- ---------------- ----------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities 229 566 411 371
Less reclassification adjustment for gains\losses
included in net income 0 0 (3) 9
Less income taxes related to unrealized
gains\losses on investment securities (87) (215) (155) (145)
--------------- ---------------- ---------------- ----------------
Other comprehensive income (loss), net of tax 142 351 253 235
--------------- ---------------- ---------------- ----------------
Comprehensive income $ 423 $ 574 $ 995 $ 861
=============== ================ ================ ================
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, 2001
Shares in Shares in Shares in Accumulated
Unearned Grantor MPR Plan- Stock Option Other Total
Common Compensation Trust-Contra Contra Plan-Contra Retained Comprehensive Shareholders
Stock ESOP Account Account Account Earnings Income Equity
----------- ------------- ------------- ---------- ------------ --------- -------------- -----------
(Unaudited - in Thousands)
-----------------------------------------------------------------------------------------------------
Balances, beginning of period $13,091 $ (843) $ (183) $ (390) $ (1,657) $ 2,139 $ 1,173 $ 13,330
Net income 0 0 0 0 0 742 0 742
Issuance of shares of common
stock
pursuant to MRP plan 0 0 0 180 0 0 0 180
Other comprehensive income
(loss) 0 0 0 0 0 0 253 253
Payment on ESOP loan principal 0 165 0 0 0 0 0 165
Dividends paid 0 0 0 0 0 (414) 0 (414)
Retirement of 38,087 shares
of
common stock (345) 0 0 0 0 0 0 (345)
----------- ------------- ------------- ---------- ------------ --------- -------------- -----------
Balances, end of period $12,746 $ (678) $ (183) $ (210) $ (1,657) 2,467 $ 1,426 $ 13,911
=========== ============= ============= ========== ============ ========= ============== ===========
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
Nine Months Ended
September 30
------------------------------------------
2001 2000
-------------------- --------------------
(Unaudited - in Thousands)
Operating Activities:
Net income $ 742 $ 626
-------------------- --------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 47 25
Depreciation 47 43
Amortization of goodwill 60 60
Net (gain) loss on sales of foreclosed real estate 0 10
Federal home loan bank stock dividends (44) (41)
Net (gain) loss on sales of investment securities
available for sale (3) 9
Deferred income taxes (benefit) 0 (47)
(Increase) Decrease in:
Accrued interest receivable (12) (105)
Other assets 105 45
Increase (Decrease) in:
Accrued interest payable (127) 1
Accrued income taxes 0 0
Accrued benefit plan liabilities (33) (22)
Other liabilities (21) (46)
-------------------- --------------------
Total adjustments 19 (68)
-------------------- --------------------
Net cash provided by operating activities 761 558
-------------------- --------------------
Investing Activities:
Purchases of investment securities available for sale (6,500) (2,474)
Proceeds from maturities of investment securities
available for sale 3,320 0
Principal payments received on investment securities
available for sale 4,230 4,240
Proceeds from sales of investment securities
available for sale 502 1,493
Net increase in loans (2,766) (5,305)
Purchases of plant and equipment, net (85) (14)
Proceeds from sales of foreclosed real estate 0 0
-------------------- --------------------
Net cash used in investing activities (1,299) (2,060)
-------------------- --------------------
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, 2001 AND 2000
Nine Months Ended
September 30,
------------------------------------------
2001 2000
-------------------- --------------------
(Unaudited - in Thousands)
Financing Activities:
Net increase (decrease) in deposits 4,765 5,668
Dividends paid (414) (414)
Purchase of common stock (345) 0
Issuance of common stock for MRP plan 180 155
Payment on ESOP loan and release of shares 165 162
Repayment of advances from Federal Home Loan Bank (1,575) (1,469)
Repayment of note payable 0 (3,200)
Proceeds from advances from Federal Home Loan Bank 0 3,000
-------------------- --------------------
Net cash provided by (used in) financing activities 2,776 3,902
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 2,238 2,400
Cash and cash equivalents, beginning of period 3,067 2,387
-------------------- --------------------
Cash and cash equivalents, end of period $ 5,305 $ 4,787
==================== ====================
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $3,031 $2,955
Income taxes $283 $344
Supplementary disclosures of noncash investing activities:
Sale of foreclosed real estate
by origination of mortgage loans $59 $75
Acquisition of foreclosed real estate $135 $85
Change in unrealized gain\loss on investment securities
available for sale $408 $380
Change in deferred income taxes associated with
unrealized gain\loss on investment securities available for sale $155 $145
Change in net unrealized gain\loss on investment
securities available for sale $253 $235
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, 2001 AND 2000
(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
Basic earnings per share represents income available to shareholders divided by
the weighted average number of shares outstanding during the period. Diluted
earnings per share reflects additional shares that would have been outstanding
if dilutive potential shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential shares that may be
issued by the Company relate solely to outstanding stock options, and are
determined using the treasury stock method.
Earning per share have been computed based on the following:
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------
September 30, September 30,
-------------------------------- ----------------------------
2001 2000 2001 2000
--------------- ---------------- ------------- --------------
Average number of shares outstanding 1,344,227 1,382,013 1,369,545 1,382,013
Effect of dilutive options 738 2,364 567 2,364
--------------- ---------------- ------------- --------------
Average number of shares outstanding used
to calculate earnings per share 1,344,965 1,384,377 1,370,112 1,384,377
=============== ================ ============= ==============
9
Note 3 - Comprehensive Income
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in the financial statements. The objective of the statement is to
report a measure of all changes in equity of an enterprise that results from
transactions and other economic events of the period other than transactions
with owners. Items included in comprehensive income include revenues, gains, and
losses that under generally accepted accounting principles are directly charged
to equity. Examples include foreign currency translations, pension liability
adjustments and unrealized gains and losses on investment securities available
for sale. The Company has included its comprehensive income in a separate
financial statement as part of its consolidated financial statements.
Note 4 - Management Recognition Plan
In January 1999, the Company's board of directors approved a Management
Recognition Plan (MRP), and in May 1999, the Company's shareholders ratified the
plan. The plan authorizes the board of directors to award up to 58,190 shares of
restricted common stock to members of the board of directors and senior
management.
The Company's board of directors has awarded 54,518 shares as of September 30,
2001 (50,845 shares as of September 30, 2000) of restricted common stock to
certain members of the board of directors and senior management. The shares are
awarded 25% per year. The Company and its subsidiary will share the cost of the
Plan and accrue the estimated cost of repurchasing shares to be reissued as
restricted stock over the period that such awards are earned.
Activity in the MRP plan is as follows:
Nine Month
Period Ended September 30,
------------------------------------
2001 2000
--------------- ----------------
Accrued Liability Balance at Beginning of Period $ 152,895 $ 142,595
Amount Charged to Expense 125,531 119,194
Less Cost of Shares Issued (180,124) (155,558)
--------------- ----------------
Accrued Liability Balance at End of Period $ 98,302 $ 106,231
=============== ================
The Company held 17,138 shares as of September 30, 2001 (32,772 shares as of
September 30, 2000) of its common stock in trust at a net cost of $209,770 as of
September 30, 2001 ($400,915 as of September 30, 2000). A contra-equity account
has been established to reflect the cost of such shares held in trust.
Note 5 - Stock Option Plan
In January 1999, the Company's board of directors approved the Company's 1999
stock option plan, and in May 1999, the Company's shareholders ratified the
plan. The plan reserved 145,475 shares of the Company's common stock for
issuance pursuant to the options to be granted. These shares will be either
newly issued shares or shares purchased on the open market.
The Company's board of directors has approved the issuance of stock options
under the Plan to certain members of the board of directors and senior
management. The options vest at a rate of 25% per year, expire in ten years, and
provide for the purchase of stock at an exercise price of $8.60 per share. Stock
options awarded totaled 209,299 and 205,869 as of September 30, 2001 and 2000
respectively.
The Company has repurchased 188,422 shares as of September 30, 2001 (184,527
shares as of September 30, 2000) of its common stock, which are being held in
trusts for when the stock options are exercised. A contra-equity account has
been established to reflect the costs of such shares held in trusts. The Company
intends to utilize dividends received to continue to purchase shares of its
common stock to be placed in the stock option trusts.
10
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent with
the method prescribed by FASB Statement No. 123, the Company's net income and
earnings per share would not have been significantly affected.
Note 6 - Improvement Plan for Main Office Facility
The Company's board of directors recently approved a plan to improve the
existing main office facilities. Total cost of the project is estimated to be
approximately $1,000,000.
Note 7 - Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. This Statement replaces FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. It revises the standards for accounting for securitization and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of Statement No. 125's provisions. The
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
March 31, 2001. This Statement is also effective for recognition and
reclassification of collateral and for disclosure related to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Since the Company does not currently engage in securitization and other
transfers of financial assets and collateral, this Statement is not expected to
significantly affect the financial condition or results of operations of the
Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001. SFAS 142 requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment annually. The Company is required to implement SFAS No. 142 on
January 1, 2002. However, the Company does not expect that this statement will
have an impact on its consolidated financial position or results of operations.
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 that 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.
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.
The following is a discussion of our financial condition as of and for the three
and nine-month periods ended September 30, 2001. These comments should be read
in conjunction with our consolidated financial statements and accompanying
footnotes appearing in this report.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objective of management for
future operations, and projections of revenues and other financial items that
are based on the beliefs of management, as well as assumptions made by and
information currently available to management. The words "expect," "anticipate,"
and "believe," as well as similar expressions, are intended to identify
forward-looking statements. Our actual results may differ materially from the
results discussed in the forward-looking statements.
12
Comparison of Financial Condition at September 30, 2001 and December 31, 2000
Total assets increased from December 31, 2000 to September 30, 2001 by $3.7
million, or 3.8%, from $98.6 million at December 31, 2000 to $102.3 million at
September 30, 2001. The increase in assets was principally the result of an
increase in loans receivable and cash and amounts due from depository
institutions. Cash and amounts due from depository institutions increased by
$2.2 million as a result of an increase in overnight deposits held by the
Federal Home Loan Bank of Cincinnati.
Loans receivable increased from December 31, 2000 to September 30, 2001 as
originations exceeded repayments for the period by approximately $2.6 million.
The following table sets forth information about the composition of our loan
portfolio by type of loan at the dates indicated. At September 30, 2001 and
December 31, 2000, we had no concentrations of loans exceeding 10% of gross
loans other than as disclosed below.
September 30, 2001 December 31, 2000
------------------------ -------------------------
(Dollars in Thousands)
Amount Percent Amount Percent
Type of Loan:
Real estate loans:
One- to four-family residential $ 55,898 74.3% $ 53,782 75.9%
Commercial 9,273 12.3% 10,229 14.4%
Construction 4,713 6.3% 2,589 3.6%
Consumer loans:
Automobile 1,298 1.7% 1,402 2.0%
Loans to depositors, secured by deposits 1,238 1.6% 1,250 1.8%
Home equity and second mortgage 178 0.3% 227 0.3%
Other 2,621 3.5% 1,415 2.0%
------------------------ -------------------------
75,219 100% 70,894 100%
-------------=========== -------------============
Less:
Loans in process 2,627 1,030
Deferred fees and discounts 363 326
Allowance for loan losses 698 660
-------------- --------------
Total $ 71,531 $ 68,878
-------------- --------------
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 Months Nine Months
Ended Ended
September 30, September 30,
2001 2000
------------------- -------------------
(In Thousands)
Balance at beginning of period $ 660 $ 661
------------------- -------------------
Charge-offs:
Consumer (8) (13)
Mortgage (1) (20)
Recoveries:
Consumer 0 4
Mortgage 0 0
------------------- -------------------
Net Charge-offs (9) (29)
Provision for loan losses 47 25
------------------- -------------------
Balance at end of period $ 698 $ 657
=================== ===================
The following table sets forth information about our nonperforming assets at the
dates indicated.
September 30, September 30,
2001 2000
------------------- -------------------
(In Thousands)
Nonaccrual Loans $ 0 $ 0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
One- to four-family residential 574 413
Commercial 43 60
Consumer 16 20
------------------- -------------------
Total $ 633 $ 493
=================== ===================
At September 30, 2001, the Bank had two additional commercial loans (from the
same borrower) as to which known information about possible credit problems of
the borrower caused us to have doubts as to the ability of the borrower to
comply with present loan repayment terms. One loan is real estate loan totaling
$467,015 and the other loan is a letter of credit in the amount of $9,500.
Although the real estate loan is current, the cash flows of the lessee of the
property are below expectations. The letter of credit is unfunded as of
September 30, 2001. Both loans, however, are well secured and we do not expect
to incur any loss in excess of attributable existing reserves on any of our
assets. 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.
During the nine months ended September 30, 2001, the Company increased its
liabilities by $3.2 million, or 3.7%, in order to fund asset growth. Total
deposits increased $4.8 million or 5.8% from $81.6 million at December 31, 2000
to $86.4 million at September 30, 2001. Advances from the Federal Home Loan Bank
decreased $1.6 million, or 89.8%, from $1.8 million at December 31, 2000 to
$178,000 at September 30, 2001.
14
Our shareholders' equity increased $581,000 from $13.3 million at December 31,
2000 to $13.9 million at September 30, 2001. The increase was due to $742,000 of
net income, payment of approximately $165,000 on the ESOP loan principal,
distribution of shares under the MRP plan at a cost of $180,000, a $253,000
increase in our net unrealized gain on investment securities, payment of a
dividend to shareholders of $414,000, and the retirement of 38,087 shares of
common stock at a cost of $345,000.
Discussion of Results of Operations for the Three Months Ended September 30,
2001 and 2000
Our net income for the three months ended September 30, 2001 was $281,000, a
$58,000, or 26.0% increase from the $223,000 we earned during the three months
ended September 30, 2000. Basic and diluted earnings per share for the three
months ended September 30, 2001 were each $0.21 compared to $0.16 for the same
period in 2000. Basic average shares outstanding for three months ended
September 30, 2001 was 1,344,227 shares and 1,382,013 shares for the three
months ended September 30, 2000. Average dilutive potential shares outstanding
were 738 and 2,364, respectively.
Interest income increased $24,000, or 1.3%, from $1.81 million for the three
months ended September 30, 2000 to $1.83 million for the three months ended
September 30, 2001. The increase in interest income was due to interest on
loans, which increased $87,000, or 6.3%, due to an increase in the average
outstanding balance of the loan portfolio. The increase in interest income on
loans was partially offset by a decrease in interest income on investment
securities and other interest earning assets of $58,000.
Interest expense on deposits decreased $82,000 from $966,000 for the three
months ended September 30, 2000 to $884,000 for the three months ended September
30, 2001, primarily due to the decrease in deposit account interest rates. In
addition, the Company incurred $7,000 in interest expense on advances from the
Federal Home Loan Bank compared to $81,000 in the prior-year period.
Net interest income increased $180,000, or 23.7%, between the periods as a
result of the increase in interest income and the decrease in interest expense.
The Company's net interest margin widened to 3.91% for the three months ended
September 30, 2001 compared to 3.55% for the comparable period of 2000. The
widening of the net interest margin reflects the current rate environment.
Noninterest income increased $18,000 from $77,000 for the three months ended
September 30, 2000 to $95,000 for the three months ended September 30, 2001. The
increase in noninterest income was mainly from increased deposit account service
charges consistent with the higher level of deposit accounts during the 2001
period.
Noninterest expenses increased $11,000 from $557,000 for the three months ended
September 30, 2000 to $568,000 for the three months ended September 30, 2001.
Compensation and benefits expense increased $20,000 from $268,000 for the three
months ended September 30, 2000 to $288,000 for the three months ended September
30, 2001 due to the addition of personnel and normal salary increases.
Our effective tax rates for the three months ended September 30, 2001 and 2000
were 37.4% and 18.0%, respectively. The higher effective tax rate is due to a
decrease in our tax-exempt investment securities in 2001 compared to 2000 and an
adjustment of our deferred tax liabilities in 2000 in accordance with FASB
Statement No. 109, which was not necessary in 2001.
15
Discussion of Results of Operations for the Nine Months Ended September 30, 2001
and 2000
Our net income for the nine months ended September 30, 2001 was $742,000, an
$116,000, or 18.5% increase over the $626,000 we earned during the nine months
ended September 30, 2000. Basic and diluted earnings per share for the nine
months ended September 30, 2001 were each $0.54 compared to $0.45 for the same
period in 2000. Basic average shares outstanding for nine months ended September
30, 2001 was 1,369,545 shares and 1,382,013 shares for the nine months ended
September 30, 2000. Average dilutive potential shares outstanding were 567 and
2,364, respectively.
Interest income increased $244,000, or 4.6% from $5.32 million for the nine
months ended September 30, 2000 to $5.57 million for the nine months ended
September 30, 2001. The increase in interest income was due to interest on
loans, which increased $425,000, or 10.6%, due to an increase in the average
balance of the loan portfolio. The increase in interest income on loans was
partially offset by a decrease in interest income on investment securities and
other interest earning assets of $178,000 due to a decrease in the average
balance of the investment portfolio and a decrease in the yield on the
investment portfolio.
Total interest expense for the nine months ended September 30, 2001 decreased
$52,000 compared to the same period in 2000. Interest expense on deposits
increased $167,000 due to the increase in average balance of deposits of $4.8
million compared to the same period in the prior year. The Company incurred
$38,000 in interest expense on advances from the Federal Home Loan Bank compared
to $257,000 in the prior-year period. The Company used the funds from the
additional deposits to fund loan originations and to repay advances from the
Federal Home Loan Bank.
Net interest income increased $296,000 or 12.5% between the periods as a result
of the increase in interest income and the decrease in interest expense. The
Company's net interest margin increased for the nine months ended September 30,
2001 to 3.68% compared to 3.44% for the same period in 2000.
Noninterest income increased $72,000 from $231,000 for the nine months ended
September 30, 2000 to $303,000 for the nine months ended September 30, 2001. The
increase in noninterest income was mainly from increased deposit account service
charges consistent with the higher level of deposit accounts during the 2001
period.
Noninterest expenses increased $102,000 from $1.6 million for the nine months
ended September 30, 2000 to $1.7 million for the nine months ended September 30,
2001. Compensation and benefits expense increased $80,000 from $796,000 for the
nine months ended September 30, 2000 to $876,000 for the nine months ended
September 30, 2001 due to the addition of personnel and normal salary increases.
Data processing expense and advertising and promotion expense also increased
slightly over the same period.
Our effective tax rates for the nine months ended September 30, 2001 and 2000
were 36.6% and 32.4%, respectively. The higher effective tax rate is due to a
decrease in our tax-exempt investment securities in 2001 compared to 2000.
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 paid a
return of capital distribution with funds on hand and approximately $3.0 million
in borrowings from a third party lender during the fourth quarter of 1999. The
Bank received permission from the OTS 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 first quarter of 2000.
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 funds are deposits,
proceeds from principal and interest payments on loans and investment securities
and earnings. While scheduled principal repayments on loans and investment
securities are a relatively predictable source of funds, deposit flows and loan
and investment securities prepayments are greatly influenced by general interest
rates, economic conditions, competition and other factors. We do not solicit
deposits outside of our market area through brokers or other financial
institutions.
We have also designated all of our investment securities as available for sale
in order to meet liquidity demands. In addition to internal sources of funding,
as a member of the Federal Home Loan Bank we 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, 2001 and December 31, 2000, we exceeded all current regulatory
capital requirements and met the definition of a "well-capitalized" institution,
the highest regulatory capital 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, 2001 and December
31, 2000.
17
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
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(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:
United Tennessee Bankshares, Inc. did not file a current report on Form 8-K
during the quarter covered by this report.
18
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 13, 2001 /s/ Richard G. Harwood
-------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)