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, 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)
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: 1,311,124
---------
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, 2002 (Unaudited) and December 31, 2001 3
Consolidated Statements of Income for the Three
Month and Nine Month Periods Ended September 30,
2002 and 2001 (Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three Month and Nine Month Periods Ended
September 30, 2002 and 2001 (Unaudited) 5
Consolidated Statement of Changes in Shareholders'
Equity for the Nine Month Period Ended September 30,
2002 (Unaudited) 6
Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 2002 and 2001
(Unaudited) 7-8
Notes to Consolidated Financial Statements for
the Three Month and Nine Month Periods Ended
September 30, 2002 and 2001 (Unaudited) 9-11
Item 2. Management's Discussion and Analysis or Plan of Operation 12-17
Item 3. Controls and Procedures 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
CERTIFICATIONS 21-22
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
September 30,
2002 December 31,
(Unaudited) 2001
------------------- -----------------
(in thousands)
Assets
Cash and amounts due from depository institutions $ 2,492 $ 2,123
Investment securities available for sale, at fair value 25,235 24,398
Loans receivable, net 78,962 72,200
Premises and equipment, net 616 496
Foreclosed real estate - held for sale 171 0
Accrued interest receivable 707 603
Goodwill, net of amortization 893 953
Prepaid expenses and other assets 66 38
------------------- -----------------
Total assets $ 109,142 $ 100,811
=================== =================
Liabilities and Equity
Liabilities:
Deposits $ 91,714 $ 84,810
Accrued interest payable 153 161
Accrued income taxes 25 2
Deferred income taxes 992 869
Accrued benefit plan liabilities 697 743
Other liabilities 105 58
------------------- -----------------
Total liabilities 93,686 86,643
------------------- -----------------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000 shares;
issued and outstanding 1,311,124 shares (1,341,012 in 2001) 12,448 12,719
Unearned compensation - ESOP (517) (678)
Shares in grantor trust - contra account (199) (195)
Shares in MRP plan - contra account (56) (210)
Shares in stock option plan trusts - contra account (1,477) (1,591)
Retained earnings 3,768 2,835
Accumulated other comprehensive income 1,489 1,288
------------------- -----------------
Total shareholders' equity 15,456
14,168
------------------- -----------------
Total liabilities and equity $ 109,142 $ 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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
---------------------------------- ---------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------- ------------ -------------
Interest income:
Loans $ 1,506 $ 1,469 $ 4,449 $ 4,428
Investment securities 311 335 922 1,054
Other interest-earning assets 7 28 22 83
------------- ------------- ------------ -------------
Total interest income 1,824 1,832 5,393 5,565
------------- ------------- ------------ -------------
Interest expense:
Deposits 544 884 1,680 2,866
Advances from Federal Home Loan Bank
and note payable 0 7 0 38
------------- ------------- ------------ -------------
Total interest expense 544 891 1,680 2,904
------------- ------------- ------------ -------------
Net interest income 1,280 941 3,713 2,661
Provision for loan losses 45 19 93 47
------------- ------------- ------------ -------------
Net interest income after provision for loan
losses 1,235 922 3,620 2,614
------------- ------------- ------------ -------------
Noninterest income:
Deposit account service charges 65 57 181 180
Loan service charges and fees 27 28 85 89
Net gain on sales of investment
securities available for sale 7 0 46 3
Other 9 10 32 31
------------- ------------- ------------ -------------
Total noninterest income 108 95 344 303
------------- ------------- ------------ -------------
Noninterest expense:
Compensation and benefits 317 302 918 926
Occupancy and equipment 77 54 184 156
Federal deposit insurance premiums 13 12 37 36
Data processing fees 68 64 194 174
Advertising and promotion 19 23 61 70
Net (gain) loss on foreclosed real estate 0 0 0 0
Amortization 20 20 60 60
Other 129 93 398 325
------------- ------------- ------------ -------------
Total noninterest expense 643 568 1,852 1,747
------------- ------------- ------------ -------------
Income before income taxes 700 449 2,112 1,170
Income taxes 263 168 781 428
------------- ------------- ------------ -------------
Net income $ 437 $ 281 $ 1,331 $ 742
============= ============= ============ =============
Earnings per share:
Basic $ 0.33 $ 0.21 $ 1.00 $ 0.54
============= ============= ============ =============
Diluted 0.33 0.21 $ 1.00 0.54
$ $ $
============= ============= ============ =============
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, 2002 AND 2001
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- --------------------------------
2002 2001 2002 2001
----------- ----------- ---------- ----------
(Unaudited - in thousands) (Unaudited - in thousands)
Net income $ 437 $ 281 $ 1,331 $ 742
----------- ----------- ---------- ----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment
securities 200 229 370 411
Less reclassification adjustment for
gains\losses
included in net income (7) 0 (46) (3)
Less income taxes related to unrealized
gains\losses on investment securities (73) (87) (123) (155)
----------- ----------- ---------- ----------
Other comprehensive income (loss), net of tax 120 142 201 253
----------- ----------- ---------- ----------
Comprehensive income $ 557 $ 423 $ 1,532 $ 995
=========== =========== ========== ==========
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, 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 1,331 0 1,331
Issuance of shares of common
stock pursuant to MRP plan 0 0 0 154 0 0 0 154
Other comprehensive income
(loss) 0 0 0 0 0 0 201 201
Payment on ESOP loan principal 0 161 0 0 0 0 0 161
Dividends paid 0 0 0 0 0 (398) 0 (398)
Adjustment of cost on directors
long-term incentive plan 0 0 (4) 0 0 0 0 (4)
Purchase and retirement
of 16,388 shares of common
stock (157) 0 0 0 0 0 0 (157)
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 $12,448 $ (517) $ (199) $ (56)$ (1,477) $ 3,768 $ 1,489 $ 15,456
======= ============= ============= ============== ============= ========= ============= ==========
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, 2002 AND 2001
Nine Months Ended
September 30,
------------------------------
2002 2001
(Unaudited - in thousands)
------------------------------
Operating Activities:
Net Income $ 1,331 $ 742
-------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 93 47
Depreciation 57 47
Amortization of goodwill 60 60
Federal home loan bank stock dividends (30) (44)
Net gain on sales of investment securities available for sale (46) (3)
(Increase) Decrease in:
Accrued interest receivable (104) (12)
Other assets (28) 105
Increase (Decrease) in:
Accrued interest payable (8) (127)
Accrued income taxes 23 0
Accrued benefit plan liabilities (50) (33)
Other liabilities 47 (21)
-------------- --------------
Total adjustments 14 19
-------------- --------------
Net cash provided by operating activities 1,345 761
-------------- --------------
Investing Activities:
Purchases of investment securities available for sale (9,800) (6,500)
Proceeds from maturities of investment securities available for sale 1,580 3,320
Principal payments received on investment securities available for sale 5,041 4,230
Proceeds from sales of investment securities available for sale 2,742 502
Net increase in loans (7,026) (2,766)
Purchases of premises and equipment, net (177) (85)
-------------- --------------
Net cash used in investing activities (7,640) (1,299)
-------------- --------------
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Nine Months Ended
September 30,
-----------------------------------
2002 2001
---------------- ----------------
(Unaudited - in thousands)
-----------------------------------
Financing Activities:
Dividends paid (398) (414)
Net increase in deposits 6,904 4,765
Purchase and retirement of common stock (157) (345)
Issuance of common stock for MRP plan 154 180
Payment on ESOP loan and release of shares 161 165
Net repayment of advances from Federal Home Loan Bank 0 (1,575)
---------------- ----------------
Net cash provided by financing activities 6,664 2,776
---------------- ----------------
Net increase in cash and cash equivalents 369 2,238
Cash and cash equivalents, beginning of period 2,123 3,067
---------------- ----------------
Cash and cash equivalents, end of period $ 2,492 $ 5,305
================ ================
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,688 $ 3,301
Income taxes $ 758 $ 283
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $ 171 $ 135
Sale of foreclosed real estate by origination of mortgage loans $ 0 $ 59
Change in unrealized gain\loss on investment securities
available for sale $ 324 $ 408
Change in deferred income taxes associated with
unrealized gain\loss on investment securities available
for sale $ 123 $ 155
Change in net unrealized gain\loss on investment
securities available for sale $ 201 $ 253
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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
(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.
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 represent income available to shareholders divided by
the weighted average number of shares outstanding during the period. Diluted
earnings per share reflect 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 Nine Months Ended
------------------------------- -----------------------------
September 30, September 30,
------------------------------- -----------------------------
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Average number of shares outstanding 1,312,086 1,344,227 1,324,577 1,369,545
Effect of dilutive options 60 738 1,933 567
-------------- -------------- ------------- -------------
Average number of shares outstanding 1,312,146 1,344,965 1,326,510 1,370,112
used to calculate earnings per share ============== ============== ============= =============
9
Note 3 - Comprehensive Income
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standard 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,
2002 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 September 30,
------------------------------
2002 2001
-------------- --------------
Accrued Liability Balance at Beginning of Period $ 142,259 $ 152,895
Amount Charged to Expense 14,045 125,531
Less Cost of Shares Issued (153,575) (180,124)
-------------- --------------
Accrued Liability at End of Period $ 2,729 $ 98,302
============== ==============
The Company held 4,591 shares of its common stock in trust at a net cost of
$56,195 as of September 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.
During the nine month period ended September 30, 2002, 33,978 options were
purchased and retired at a total cost of $70,192. Stock options awarded and
outstanding totaled 175,321 and 209,299 as of September 30, 2002 and December
31, 2001, respectively.
The Company has purchased 175,039 and 188,422 shares as of September 30, 2002
and December 31, 2001, respectively, of its common stock, which is 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. The Company's board of
directors is currently seeking land on which to construct a new main office
facility.
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.
In October 2002, the Financial Accounting Standards Board issued Statement of
Financial Standard No. 147, Accounting for Certain Financial Institutions. This
statement removes acquisitions of financial institutions from the scope of FASB
Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift
Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17
When a Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method. In addition, this
statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term customer
relationship intangible assets of financial institutions such as depositor - and
borrower-relationship intangible assets and credit cardholder intangible assets.
This statement intends to improve the comparability of financial reporting by
requiring institutions to follow FASB Statement No. 141, Business Combinations.
SFAS No. 147 is effective for acquisitions for which the date of acquisition is
on or after October 1, 2002. Management does not expect this statement 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 September 30,
2002 and for the three and nine-month periods ended September 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 September 30, 2002 and December 31, 2001
Total assets increased from December 31, 2001 to September 30, 2002 by $8.3
million, or 8.2%, from $100.8 million at December 31, 2001 to $109.1 million at
September 30, 2002. The increase in assets was principally the result of an
increase in investment securities and loans receivable. Investment securities
increased by $837,000 due to an increase in investment purchases during the
current period and an increase in the fair market value of investment securities
available for sale.
Loans receivable increased from December 31, 2001 to September 30, 2002 as
originations exceeded repayments for the period by approximately $6.8 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, 2002 and
December 31, 2001, we had no concentrations of loans exceeding 10% of gross
loans other than as disclosed below.
September 30, 2002 December 31, 2001
------------------------ -----------------------
(Dollars in Thousands)
Amount Percent Amount Percent
Type of Loan:
Real estate loans:
One- to four-family residential $ 63,136 76.8% $ 57,577 76.8%
Commercial 9,986 12.2% 9,131 12.2%
Construction 4,403 5.4% 3,997 5.3%
Consumer loans:
Automobile 1,335 1.6% 1,260 1.7%
Loans to depositors, secured by deposits 1,489 1.8% 1,380 1.8%
Home equity and second mortgage 148 0.2% 157 0.2%
Other 1,664 2.0% 1,506 2.0%
------------ --------- ------------ ---------
82,161 100.0% 75,008 100.0%
========= =========
Less:
Loans in process 2,036 1,737
Deferred fees and discounts 375 352
Allowance for loan losses 788 719
------------ ------------
Total $ 78,962 $ 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.
Nine Nine
Months Ended Months Ended
September 30, September 30,
2002 2001
-------------------- ---------------------
(In Thousands)
Balance at beginning of period $ 719 $ 660
-------------------- ---------------------
Charge-offs:
Consumer (27) (8)
Mortgage 0 (1)
Recoveries:
Consumer 3 0
Mortgage 0 0
-------------------- ---------------------
Net Charge-offs (24) (9)
Provision for loan losses 93 47
-------------------- ---------------------
Balance at end of period $ 788 $ 698
===================== =====================
The following table sets forth information about our nonperforming assets at the
dates indicated.
September 30, September 30,
2002 2001
--------------------- --------------------
(In Thousands)
Nonaccrual Loans $ 0 $ 0
Accruing loans which are
contractually past due
90 days or more:
Real Estate:
Residential 565 574
Non-Residential 15 43
Consumer 12 16
---------------------- --------------------
Total $ 592 $ 633
====================== ====================
At September 30, 2002, the Bank had one additional commercial real estate loan
totaling $465,000, 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
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, 2002, the Company increased its
liabilities by $7.0 million, or 8.1%, in order to fund asset growth. Total
deposits increased $6.9 million or 8.1% from $84.8 million at December 31, 2001
to $91.7 million at September 30, 2002.
During 2002, the Bank has accepted deposits totaling approximately $7.3 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 $1.3 million from $14.2 million at December
31, 2001 to $15.5 million at September 30, 2002. The increase was due to $1.3
million of net income, a $201,000 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 $154,000, all
of which were partially offset by the payment of a dividend to shareholders of
$398,000, and the purchase and retirement of 16,388 shares of common stock at a
cost of $157,000. 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 September 30,
2002 and 2001
Our net income for the three months ended September 30, 2002 was $437,000, a
$156,000, or 55.5% increase from the $281,000 we earned during the three months
ended September 30, 2001. Basic and diluted earnings per share for the three
months ended September 30, 2002 were each $0.33 compared to $0.21 for the same
period in 2001. Basic average shares outstanding for three months ended
September 30, 2002 was 1,312,086 shares and 1,344,227 shares for the three
months ended September 30, 2001. Average dilutive potential shares outstanding
were 60 and 738, respectively.
Interest income decreased $8,000, or 0.4%, from $1.83 million for the three
months ended September 30, 2001 to $1.82 million for the three months ended
September 30, 2002. The decrease in interest income was due to a reduction in
interest income from investment securities and other interest earning assets of
$45,000 offset by an increase in interest income on loans of $37,000. The
decrease in interest income on investment securities is a result of a decrease
in the yields available on investment securities.
Interest expense on deposits decreased $340,000 from $884,000 for the three
months ended September 30, 2001 to $544,000 for the three months ended September
30, 2002, primarily due to the decrease in deposit account interest rates.
Net interest income increased $339,000, or 36.0%, 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
4.91% for the three months ended September 30, 2002 compared to 3.91% for the
comparable period of 2001. The widening of the net interest margin reflects the
current rate environment and the fact that our variable rate loans are not
adjusting as quickly as the rates on our interest-bearing deposits.
Noninterest income increased $13,000 from $95,000 for the three months ended
September 30, 2001 to $108,000 for the three months ended September 30, 2002.
The increase in noninterest income was primarily the result of a net gain on
sales of investment securities available for sale of $7,000 and an increase in
deposit account service charges of $8,000.
Noninterest expenses increased $75,000 from $568,000 for the three months ended
September 30, 2001 to $643,000 for the three months ended September 30, 2002.
The increase in noninterest expense was primarily from an increase in
compensation and benefits of $15,000, an increase in occupancy and equipment
expense of $23,000 and an increase in other operating expenses of $36,000.
Our effective tax rates for the three months ended September 30, 2002 and 2001
were 37.6% and 37.4%, respectively.
15
Discussion of Results of Operations for the Nine Months Ended September 30, 2002
and 2001
Our net income for the nine months ended September 30, 2002 was $1,331,000, a
$589,000, or 79.4% increase from the $742,000 we earned during the nine months
ended September 30, 2001. Basic and diluted earnings per share for the nine
months ended September 30, 2002 were each $1.00 compared to $0.54 for the same
period in 2001. Basic average shares outstanding for nine months ended September
30, 2002 was 1,324,577 shares and 1,369,545 shares for the nine months ended
September 30, 2001. Average dilutive potential shares outstanding were 1,933 and
567, respectively.
Interest income decreased $172,000, or 3.1%, from $5.57 million for the nine
months ended September 30, 2001 to $5.39 million for the nine months ended
September 30, 2002. The decrease in interest income was due to a reduction in
interest income from investment securities and other interest earning assets of
$193,000 offset by an increase in interest income on loans of $21,000. The
decrease in interest income is the result of a decrease in the yields available
on investment securities.
Interest expense on deposits decreased $1,224,000 from $2.90 million for the
nine months ended September 30, 2001 to $1.68 million for the nine months ended
September 30, 2002, primarily due to the decrease in deposit account interest
rates.
Net interest income increased $1,052,000, or 39.5%, 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 4.75%
for the nine months ended September 30, 2002 compared to 3.68% for the
comparable period of 2001. The widening of the net interest margin reflects the
current rate environment and the fact that our variable rate loans are not
adjusting as quickly as the rates on our interest-bearing deposits.
Noninterest income increased $41,000 from $303,000 for the nine months ended
September 30, 2001 to $344,000 for the nine months ended September 30, 2002. The
increase in noninterest income was primarily from net gains on sales of
investment securities available for sale of $46,000 with an offsetting decrease
in loan service charges and fees of $4,000.
Noninterest expenses increased $107,000 from $1.75 million for the nine months
ended September 30, 2001 to $1.85 million for the nine months ended September
30, 2002. The increase in noninterest expense was from an increase in other
noninterest expenses of $73,000 which includes an expense of approximately
$54,000 for the market value adjustment of the director's long-term incentive
plan. Data processing fees also increased by $20,000, occupancy and equipment
expense increase $28,000, while compensation and benefits expense decreased
$8,000.
Our effective tax rates for the nine months ended September 30, 2002 and 2001
were 37.0% and 36.6%, 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 September 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
Item 3. Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures. The Company's
President and Chief Executive Officer and its Controller have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within
90 days of the filing date of this quarterly report. Based on that evaluation,
the President and Chief Executive Officer and its Controller have concluded that
the Company's disclosure controls and procedures are effective to ensure that
material information relating to the Company and the Company's consolidated
subsidiaries is made known to such officers by others within these entities,
particularly during the period this quarterly report was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There have not been any significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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* Charter of United Tennessee Bankshares, Inc.
3.2* Bylaws of United Tennessee Bankshares, Inc.
4* Form of Stock Certificate of United Tennessee
Bankshares, Inc.
10.1** United Tennessee Bankshares, Inc. 1999 Stock Option Plan
10.2** United Tennessee Bankshares, Inc. Management Recognition
Plan
10.3(a)* Employment Agreements between Newport Federal Savings
and Loan Association and Richard G. Harwood, Nancy
L. Bryant and Peggy Holston
10.3(b)* Forms of Guarantee Agreements between United
Tennessee Bankshares, Inc. and Richard G. Harwood,
Nancy L. Bryant and Peggy Holston
10.4(b)* Newport Federal Savings and Loan Association Long-
Term Incentive Plan
10.5* Newport Federal Savings and Loan Association Deferred
Compensation Plan
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 November 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 on
November 13, 2002.
---------------------
* Incorporated by reference to United Tennessee Bankshares, Inc.'s
Registration Statement on Form SB-2, File No. 333-36465.
** 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: November 13, 2002 /s/ Richard G. Harwood
-------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
20
Certification of President and Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Richard G. Harwood, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of United Tennessee
Bankshares, Inc. ("United Tennessee");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of United Tennessee as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Richard G. Harwood
Date: November 13, 2002 ---------------------------------
Richard G. Harwood
President and
Chief Executive Officer
21
Certification of Controller
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Chris H. Triplett, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of United Tennessee
Bankshares, Inc. ("United Tennessee");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of United Tennessee as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Chris H. Triplett
Date: November 13, 2002 ---------------------------------
Chris H. Triplett
Controller
22