SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002.
[ ] 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: 1,312,273
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
June 30, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Income for the Three-Month and
Six-Month Periods Ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three-Month and Six-Month Periods Ended June 30, 2002
and 2001 (Unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity for the
Six-Month Period Ended June 30, 2002 (Unaudited) 6
Consolidated Statements of Cash Flows for the Six-Month Periods
Ended June 30, 2002 and 2001 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the Three-Month and
Six-Month Periods Ended June 30, 2002 and 2001 (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 20
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2002 AND DECEMBER 31, 2001
June 30,
2002 December 31,
(Unaudited) 2001
----------------- ------------------
(In thousands)
----------------------------------------
Assets
Cash and amounts due from depository institutions $ 4,062 $ 2,123
Investment securities available for sale, at fair value 25,875 24,398
Loans receivable, net 78,115 72,200
Premises and equipment, net 509 496
Accrued interest receivable 677 603
Goodwill, net of amortization 913 953
Prepaid expenses and other assets 29 38
----------------- ------------------
Total assets $ 110,180 $ 100,811
================= ==================
Liabilities and Equity
Liabilities:
Deposits $ 93,515 $ 84,810
Accrued interest payable 154 161
Accrued income taxes 7 2
Deferred income taxes 919 869
Accrued benefit plan liabilities 608 743
Other liabilities 74 58
----------------- ------------------
Total liabilities 95,277 86,643
----------------- ------------------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000 shares;
issued and outstanding 1,312,273 shares (1,341,012 in 2001) 12,460 12,719
Unearned compensation - ESOP (517) (678)
Shares in grantor trust - contra account (195) (195)
Shares in MRP plan - contra account (67) (210)
Shares in stock option plan trusts - contra account (1,477) (1,591)
Retained earnings 3,330 2,835
Accumulated other comprehensive income 1,369 1,288
----------------- ------------------
Total shareholders' equity 14,903 14,168
----------------- ------------------
Total liabilities and equity $ 110,180 $ 100,811
================= ==================
The accompanying notes are an integral part of these financial statements.
3
UNITED TENNESSEE BANKSHARES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
-------------------------------- --------------------------------
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, June 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- --------------- -------------- ---------------
Interest income:
Loans $ 1,483 $ 1,487 $ 2,943 $ 2,959
Investment securities 327 356 611 719
Other interest-earning assets 12 29 15 55
-------------- --------------- -------------- ---------------
Total interest income 1,822 1,872 3,569 3,733
-------------- --------------- -------------- ---------------
Interest expense:
Deposits 569 947 1,136 1,982
Advances from Federal Home Loan Bank
and Note Payable 0 12 0 31
-------------- --------------- -------------- ---------------
Total interest expense 569 959 1,136 2,013
-------------- --------------- -------------- ---------------
Net interest income 1,253 913 2,433 1,720
Provision for loan losses 24 16 48 28
-------------- --------------- -------------- ---------------
Net interest income after provision for loan losses 1,229 897 2,385 1,692
-------------- --------------- -------------- ---------------
Noninterest income:
Deposit account service charges 62 68 116 123
Loan service charges and fees 30 29 58 61
Net gain (loss) on sales of investment
securities available for sale 32 (2) 39 3
Other 9 12 23 21
-------------- --------------- -------------- ---------------
Total noninterest income 133 107 236 208
-------------- --------------- -------------- ---------------
Noninterest expense:
Compensation and benefits 310 290 601 624
Occupancy and equipment 52 37 107 102
Federal deposit insurance premiums 12 12 24 24
Data processing fees 63 62 126 110
Advertising and promotion 22 24 42 47
Amortization 20 20 40 40
Other 133 122 270 232
-------------- --------------- -------------- ---------------
Total noninterest expense 612 567 1,210 1,179
-------------- --------------- -------------- ---------------
Income before income taxes 750 437 1,411 721
Income taxes 270 160 518 260
-------------- --------------- -------------- ---------------
Net income $ 480 $ 277 $ 893 $ 461
============== =============== ============== ===============
Earnings per share
Basic $ 0.36 $ 0.21 $ 0.67 $ 0.34
============== =============== ============== ===============
Diluted $ 0.36 $ 0.21 $ 0.67 $ 0.34
============== =============== ============== ===============
The accompanying notes are an integral part of these financial statements.
4
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------
2002 2001 2002 2001
-------------- -------------- ------------- -------------
(Unaudited - in thousands) (Unaudited - in thousands)
---------------------------------- --------------------------------
Net income $ 480 $ 277 $ 893 $ 461
-------------- -------------- ------------- -------------
Other comprehensive income (loss), net of tax:
Unrealized gains on investment securities 449 90 170 182
Less reclassification adjustment for gains\losses
included in net income (32) 2 (39) (3)
Less income taxes related to unrealized
gains\losses on investment securities (158) (35) (50) (68)
-------------- -------------- ------------- -------------
Other comprehensive income, net of tax 259 57 81 111
-------------- -------------- ------------- -------------
Comprehensive income
$ 739 $ 334 $ 974 $ 572
============== ============== ============= =============
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 SIX MONTH PERIOD ENDED JUNE 30, 2002
Shares in Shares in Shares in Accumulated
Unearned Grantor MRP Plan- Stock Option Other Total
Common Compensation Trust-Contra Contra Plan Trusts - Retained Comprehensive Shareholders'
Stock ESOP Account Account Contra Account Earnings Income Equity
-----------------------------------------------------------------------------------------------
(Unaudited - in thousands)
-----------------------------------------------------------------------------------------------
Balances, beginning of period $12,719 $ (678) $ (195) $ (210) $ (1,591) $ 2,835 $ 1,288 $ 14,168
Net income 0 0 0 0 0 893 0 893
Issuance of shares of common
stock
pursuant to MRP plan 0 0 0 143 0 0 0 143
Other comprehensive income (loss) 0 0 0 0 0 0 81 81
Payment on ESOP loan principal 0 161 0 0 0 0 0 161
Dividends paid 0 0 0 0 0 (398) 0 (398)
Purchase and retirement of
15,239 shares of common stock (145) 0 0 0 0 0 0 (145)
Retirement of 13,500 shares of
common stock held in the stock
option plan contra account (114) 0 0 0 114 0 0 0
-----------------------------------------------------------------------------------------------
Balances, end of period $12,460 $ (517) $ (195) $ (67) $ (1,477) $ 3,330 $ 1,369 $ 14,903
===============================================================================================
The accompanying notes are an integral part of these financial statements.
6
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002 AND 2001
Six Months Ended
June 30,
--------------------------------
2002 2001
(Unaudited - in thousands)
--------------------------------
Operating Activities:
Net income $ 893 $ 461
--------------- ---------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 48 28
Depreciation 33 30
Amortization of goodwill 40 40
Federal home loan bank stock dividends (20) (29)
Net gain on sales of investment securities available for sale (39) (3)
Deferred income taxes 0 1
(Increase) Decrease in:
Accrued interest receivable (74) 10
Other assets 9 115
Increase (Decrease) in:
Accrued interest payable (7) (86)
Accrued income taxes 5 37
Accrued benefit plan liabilities (135) (124)
Other liabilities 16 (50)
--------------- ---------------
Total adjustments (124) (31)
--------------- ---------------
Net cash provided by operating activities 769 430
--------------- ---------------
Investing Activities:
Purchases of investment securities available for sale (8,373) (5,500)
Proceeds from maturities of investment securities available for sale 1,087 2,823
Principal payments received on investment securities available for sale 4,509 2,212
Proceeds from sales of investment securities available for sale 1,490 502
Net increase in loans (5,963) (1,133)
Purchases of premises and equipment, net (46) (64)
--------------- ---------------
Net cash used in investing activities (7,296) (1,160)
--------------- ---------------
The accompanying notes are an integral part of these financial statements.
7
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002 AND 2001
Six Months Ended
June 30,
---------------------------------------
2002 2001
------------------ ------------------
(Unaudited - in thousands)
---------------------------------------
Financing Activities:
Dividends paid (398) (415)
Net increase in deposits 8,705 3,380
Purchase and retirement of common stock (145) (329)
Issuance of common stock for MRP plan 143 169
Payment on ESOP loan and release of shares 161 164
Net repayment of advances from Federal Home Loan Bank 0 (1,043)
------------------ ------------------
Net cash provided by financing activities 8,466 1,926
------------------ ------------------
Net increase in cash and cash equivalents 1,939 1,196
Cash and cash equivalents, beginning of period 2,123 3,067
------------------ ------------------
Cash and cash equivalents, end of period $ 4,062 $ 4,263
================== ==================
Supplementary disclosures of cash flow information: Cash paid during the period
for:
Interest $ 1,143 $ 2,099
Income taxes $ 571 $ 223
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $ 0 $ 59
Change in unrealized gain\loss on investment securities
available for sale $ 131 $ 179
Change in deferred income taxes associated with
unrealized gain\loss on investment securities available
for sale $ 50 $ 68
Change in net unrealized gain\loss on investment
securities available for sale $ 81 $ 111
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 THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Note 1 - Basis of Presentation and Principles of Consolidation
United Tennessee Bankshares, Inc. (the "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 (the "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 (the
"Bank"), and was simultaneously acquired by its holding company, United
Tennessee Bankshares, Inc.
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.
Earnings per share have been computed based on the following:
Three Months Ended Six Months Ended
------------------------------- -----------------------------
June 30, June 30,
------------------------------- -----------------------------
2002 2001 2002 2001
------------------------------- -----------------------------
Average number of shares outstanding 1,323,548 1,345,713 1,330,927 1,372,888
Effect of dilutive options 641 0 2,394 0
------------------------------- -----------------------------
Average number of shares outstanding used
to calculate earnings per share 1,324,189 1,345,713 1,333,321 1,372,888
=============================== =============================
9
Note 3 - Comprehensive Income
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (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 June 30, 2002
and December 31, 2001 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:
Period Ended June 30,
---------------------------------
2002 2001
---------------- ---------------
Accrued Liability Balance at Beginning of Period $ 142,259 $ 152,895
Amount Charged to Expense 11,236 81,575
Less Cost of Shares Issued (142,339) (168,887)
---------------- ---------------
Accrued Liability at End of Period $ 11,156 $ 65,583
================ ===============
The Company held 5,509 shares of its common stock in trust at a net cost of
$67,431 as of June 30, 2002 (17,138 shares at a cost of $209,770 at December 31,
2001). 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 209,299 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 175,321 and 209,299 as of June 30, 2002 and December 31,
2001, respectively.
The Company has purchased 175,039 and 188,422 shares as of June 30, 2002 and
December 31, 2001, respectively, 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 applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized.
10
Note 6 - Improvement Plan for Main Office Facility
During the first quarter of 2001, the Company's board of directors approved a
plan to improve the existing main office facilities. Total cost of the project
was originally estimated to be approximately $1,000,000. The board of directors
is in the process of evaluating various options under this plan.
Note 7 - Recent Accounting Pronouncements
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 No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 142 requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment annually. SFAS No. 142 is effective on January 1, 2002. Since the
Company's intangible asset associated with its branch purchase is accounted for
in accordance with SFAS No. 72, the Company will not change its amortization of
its intangible asset.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except for
certain obligations of lessees. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Since the
Company does not have any legal obligations as described above, this statement
is not expected to have any impact on the Company's financial position or
results of operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets (SFAS No. 144). This statement supercedes SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. This statement is not expected to
have a significant impact on the Company's 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 Federal Home Loan Mortgage Corporation (FHLMC), Government National Mortgage
Association (GNMA) or Federal National Mortgage Association (FNMA). We also
maintain an investment in Federal Home Loan Bank of Cincinnati common stock and
FHLMC common 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 June 30, 2002 and
for the three and six-month periods ended June 30, 2002. These comments should
be read in conjunction with our consolidated financial statements and
accompanying footnotes appearing in this report.
The Company's board of directors approved a plan in July 2002 to purchase and
retire up to $500,000 of the Company's common stock over the next two years,
depending upon the stock price.
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 June 30, 2002 and December 31, 2001
Total assets increased from December 31, 2001 to June 30, 2002 by $9.4 million,
or 9.3%, from $100.8 million at December 31, 2001 to $110.2 million at June 30,
2002. The increase in assets was principally the result of an increase in cash
and amounts due from depository institutions, investment securities and loans
receivable. Cash and amounts due from depository institutions increased by $1.9
million as a result of an increase in overnight deposits held by the Federal
Home Loan Bank of Cincinnati. Investment securities increased by $1.5 million
due to investment purchases during the current period.
Loans receivable increased from December 31, 2001 to June 30, 2002 as
originations exceeded repayments for the period by approximately $5.9 million.
The following table sets forth information about the composition of our loan
portfolio by type of loan at the dates indicated. At June 30, 2002 and December
31, 2001, we had no concentrations of loans exceeding 10% of gross loans other
than as disclosed below.
June 30, 2002 December 31, 2001
----------------------- -------------------------
(Dollars in thousands)
Amount Percent Amount Percent
------ ------- ------ -------
Type of Loan:
Real estate loans:
One- to four-family residential $ 61,842 76.2% $ 57,577 76.8%
Commercial 10,294 12.7% 9,131 12.2%
Construction 4,139 5.1% 3,997 5.3%
Consumer loans:
Automobile 1,340 1.7% 1,260 1.7%
Loans to depositors, secured by deposits 1,565 1.9% 1,380 1.8%
Home equity and second mortgage 139 0.2% 157 0.2%
Other 1,798 2.2% 1,506 2.0%
---------------------- -------------------------
81,117 100.0% 75,008 100.0%
-----------============ -------------============
Less:
Loans in process 1,885 1,737
Deferred mortgage loan fees 368 352
Allowance for loan losses 749 719
------------ --------------
Total $ 78,115 $ 72,200
============ ==============
We actively monitor our asset quality and charge off loans and properties
acquired in settlement of loans against the allowances for losses on such loans
and such properties when appropriate and provide specific loss allowances when
necessary. Although we believe we use the best information available to make
determinations with respect to the allowances for losses, future adjustments may
be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.
13
The following table sets forth information about our allowance for loan losses
for the period indicated.
Six Six
Months Ended Months Ended
June 30, June 30,
2002 2001
-------------------- --------------------
(In thousands)
Balance at beginning of period $ 719 $ 660
-------------------- --------------------
Charge-offs:
Consumer (21) (4)
Mortgage 0 0
Recoveries:
Consumer 3 0
Mortgage 0 0
-------------------- --------------------
Net Charge-offs (18) (4)
Provision for loan losses 48 28
-------------------- --------------------
Balance at end of period $ 749 $ 684
==================== ====================
The following table sets forth information about our nonperforming assets at the
dates indicated.
June 30, December 31,
2002 2001
-------------------- --------------------
(In thousands)
Nonaccrual Loans $ 0 $ 0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential 359 411
Non-Residential 110 0
Consumer 7 10
-------------------- --------------------
Total $ 476 $ 421
==================== ====================
At June 30, 2002, the Bank had one additional commercial real estate loan
totaling $462,147, 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. Although the loan is current, the cash
flows of the lessee of the property are below expectations. The loan is
considered 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 six months ended June 30, 2002, the Company increased its liabilities
by $8.6 million, or 10.0%, in order to fund asset growth. Total deposits
increased $8.7 million or 10.3% from $84.8 million at December 31, 2001 to $93.5
million at June 30, 2002.
During 2002, the Bank has accepted deposits totaling approximately $6.9 million
from various governmental and institutional customers, some of which are outside
of its traditional market area. The average term of these deposits is
approximately six months. Management is unable to determine whether the Bank
will retain these deposits upon maturity. In the event the Bank is not able to
retain these deposits, management has various sources of liquidity available
including cash and amounts due from depository institutions and investment
securities which are available for sale. In addition, the Bank has borrowing
authority from the Federal Home Loan Bank of approximately $4.0 million.
14
Our shareholders' equity increased $735,000 from $14.2 million at December 31,
2001 to $14.9 million at June 30, 2002. The increase was due to $893,000 of net
income, an $81,000 increase in our net unrealized gain on investment securities,
payment of approximately $161,000 on the ESOP loan principal, distribution of
shares under the MRP plan at a cost of $143,000, all of which were partially
offset by the payment of a dividend to shareholders of $398,000, and the
purchase and retirement of 15,239 shares of common stock at a cost of $145,000.
The Company's board of directors approved a plan in July 2002 to purchase and
retire up to $500,000 of the Company's common stock over the next two years,
depending upon the stock price.
Discussion of Results of Operations for the Three Months Ended June 30, 2002 and
2001
Our net income for the three months ended June 30, 2002 was $480,000, a
$203,000, or 73.3% increase from the $277,000 we earned during the three months
ended June 30, 2001. Basic and diluted earnings per share for the three months
ended June 30, 2002 were each $0.36 compared to $0.21 for the same period in
2001. Basic average shares outstanding for three months ended June 30, 2002 was
1,323,548 shares and 1,345,713 shares for the three months ended June 30, 2001.
Average dilutive potential shares outstanding were 641 and 0, respectively.
Interest income decreased $50,000, or 2.7%, from $1.87 million for the three
months ended June 30, 2001 to $1.82 million for the three months ended June 30,
2002. The decrease in interest income was due primarily to a reduction in
interest income from investment securities and other interest earning assets of
$46,000. The decrease in interest income on investment securities is a result of
a decrease in the yields on investment securities.
Interest expense on deposits decreased $378,000 from $947,000 for the three
months ended June 30, 2001 to $569,000 for the three months ended June 30, 2002,
primarily due to the decrease in deposit account interest rates. In addition,
the Company incurred no interest expense on advances from the Federal Home Loan
Bank compared to $12,000 in the prior-year period.
Net interest income increased $340,000, or 37.2%, between the periods as a
result of the decrease in interest expense which was partially offset by the
slight decrease in interest income. The Company's net interest margin widened to
4.96% for the three months ended June 30, 2002 compared to 3.82% for the
comparable period of 2001. The widening of the net interest margin reflects the
current rate environment.
Noninterest income increased $26,000 from $107,000 for the three months ended
June 30, 2001 to $133,000 for the three months ended June 30, 2002. The increase
in noninterest income was primarily the result of a net gain on sales of
investment securities available for sale of $32,000.
Noninterest expenses increased $45,000 from $567,000 for the three months ended
June 30, 2001 to $612,000 for the three months ended June 30, 2002. The increase
in noninterest expense was primarily from an increase in compensation and
benefits of $20,000 and an increase in occupancy and equipment expense of
$15,000.
Our effective tax rates for the three months ended June 30, 2002 and 2001 were
36.0% and 36.6%, respectively.
15
Discussion of Results of Operations for the Six Months Ended June 30, 2002 and
2001
Our net income for the six months ended June 30, 2002 was $893,000, a $432,000,
or 93.7% increase from the $461,000 we earned during the six months ended June
30, 2001. Basic and diluted earnings per share for the six months ended June 30,
2002 were each $0.67 compared to $0.34 for the same period in 2001. Basic
average shares outstanding for six months ended June 30, 2002 was 1,330,927
shares and 1,372,888 shares for the six months ended June 30, 2001. Average
dilutive potential shares outstanding were 2,394 and 0, respectively.
Interest income decreased $164,000, or 4.4%, from $3.73 million for the six
months ended June 30, 2001 to $3.57 million for the six months ended June 30,
2002. The decrease in interest income was due to a reduction in interest income
from investment securities and other interest earning assets of $148,000.
Interest on loans also decreased $16,000. The decrease in interest income is the
result of lower interest rates on mortgage loans and a decrease in the yields on
investment securities.
Interest expense on deposits decreased $846,000 from $1.98 million for the six
months ended June 30, 2001 to $1.14 million for the six months ended June 30,
2002, primarily due to the decrease in deposit account interest rates. In
addition, the Company incurred no interest expense on advances from the Federal
Home Loan Bank compared to $31,000 in the prior-year period.
Net interest income increased $713,000, or 41.5%, between the periods as a
result of the decrease in interest expense which was partially offset by the
decrease in interest income. The Company's net interest margin widened to 4.81%
for the six months ended June 30, 2002 compared to 3.60% for the comparable
period of 2001. The widening of the net interest margin reflects the current
rate environment.
Noninterest income increased $28,000 from $208,000 for the six months ended June
30, 2001 to $236,000 for the six months ended June 30, 2002. The increase in
noninterest income was primarily from a net gain on sales of investment
securities available for sale of $39,000 with an offsetting decrease in deposit
account service charges of $7,000.
Noninterest expenses increased $31,000 from $1.18 million for the six months
ended June 30, 2001 to $1.21 million for the six months ended June 30, 2002. The
increase in noninterest expense was from an increase in other noninterest
expenses of $38,000 which includes an expense of approximately $28,000 for the
market value adjustment of the director's long-term incentive plan. Data
processing fees also increased by $16,000 while compensation and benefits
expense decreased $23,000.
Our effective tax rates for the three months ended June 30, 2002 and 2001 were
36.7% and 36.1%, respectively.
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.
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; however, we do accept deposits from various governmental and
institutional investors outside our traditional market area from time to time.
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 June 30, 2002 and December 31, 2001, we exceeded all current regulatory
capital requirements and met the definition of a "well-capitalized" institution,
the highest regulatory capital category.
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
On May 21, 2002, United Tennessee Bankshares, Inc. held its 2002 Annual
Meeting of Stockholders. The following is a brief description of each matter
voted upon and the results of the voting.
1. Election of Directors
Nominee For Withheld
------------------ --------------- --------
Richard G. Harwood 1,103,881 3,397
Robert R. Self 1,099,906 7,372
There were no abstentions or broker non-votes.
The terms of the office of Directors Robert L. Overholt, Ben W. Hooper,
III, William B. Henry, J. William, Myers and Tommy C. Bible continued after the
meeting.
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
18
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Richard G.
Harwood, President and Chief Executive Officer of United Tennessee
Bankshares, Inc. on August 13, 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Chris H.
Triplett, Controller of United Tennessee Bankshares, Inc. on August
13, 2002.
- ---------------
(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.
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: August 13, 2002 /s/Richard G. Harwood
---------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
20
EXHIBIT 99.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and in connection with the quarterly report on Form
10-QSB of United Tennessee Bankshares, Inc. (the "Company") for the quarter
ended June 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), the undersigned, Richard G. Harwood, the President
and Chief Executive Officer of the Company, hereby certifies that (1) the Report
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, and (2) the information contained in the Report fairly
presents, in all material respects, the financial condition and results of
operations of the Company.
This Certification is signed on August 13, 2002.
/s/Richard G. Harwood
---------------------
Richard G. Harwood
President and
Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and in connection with the quarterly report on Form
10-QSB of United Tennessee Bankshares, Inc. (the "Company") for the quarter
ended June 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), the undersigned, Chris H. Triplett, Controller,
hereby certifies that (1) the Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
This Certification is signed on August 13, 2002.
/s/Chris H. Triplett
--------------------
Chris H. Triplett
Controller