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, 2003.
[ ] 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: 1,273,124
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Income for the Three-Month
and Six-Month Periods Ended June 30, 2003 and 2002 (Unaudited) 4
Consolidated Statements of Comprehensive Income for
the Three-Month and Six-Month Periods Ended June 30, 2003
and 2002 (Unaudited) 5
Consolidated Statement of Changes in Shareholders'
Equity for the Six-Month Period Ended June 30, 2003
(Unaudited) 6
Consolidated Statements of Cash Flows for the Six-Month
Period Ended June 30, 2003 and 2002 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Three-Month and Six-Month Periods Ended June 30, 2003
and 2002 (Unaudited) 9-13
Item 2. Management's Discussion and Analysis or Plan of Operation 14-19
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2003 AND DECEMBER 31, 2002
June 30,
2003 December 31,
(Unaudited) 2002
------------ -----------------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 5,804 $ 5,350
Investment securities available for sale, at fair value 28,338 25,267
Loans receivable, net 78,133 78,362
Premises and equipment, net 973 969
Foreclosed real estate - held for sale 48 127
Accrued interest receivable 577 670
Goodwill, net of amortization 833 873
Prepaid expenses and other assets 163 135
------------ -----------------
Total assets $ 114,869 $ 111,753
============ =================
Liabilities and Equity
Liabilities:
Deposits $ 96,892 $ 93,747
Accrued interest payable 120 132
Deferred income taxes 915 1,008
Accrued benefit plan liabilities 816 856
Other liabilities 90 85
------------ -----------------
Total liabilities 98,833 95,828
------------ -----------------
Shareholders' equity:
Common stock - no par value, authorized 20,000,000 shares;
issued and outstanding 1,273,124 shares (1,311,124 in 2002) 12,051 12,448
Unearned compensation - ESOP (401) (517)
Shares in grantor trust - contra account (199) (199)
Shares in MRP plan - contra account (56) (56)
Shares in stock option plan trusts - contra account (1,376) (1,491)
Retained earnings 4,627 4,199
Accumulated other comprehensive income 1,390 1,541
------------ -----------------
Total shareholders' equity 16,036 15,925
------------ -----------------
Total liabilities and equity $ 114,869 $ 111,753
============ =================
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, 2003 AND 2002
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
--------------------------------------------------------
Three Months Ended Six Months Ended
--------------------------------------------------------
June 30, June 30,
--------------------------------------------------------
2003 2002 2003 2002
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Interest income:
Loans $ 1,433 $ 1,483 $ 2,901 $ 2,943
Investment securities 276 327 555 611
Other interest-earning assets 10 12 16 15
----------- ----------- ----------- -----------
Total interest income 1,719 1,822 3,472 3,569
----------- ----------- ----------- -----------
Interest expense:
Deposits 459 569 912 1,136
----------- ----------- ----------- -----------
Net interest income 1,260 1,253 2,560 2,433
Provision for loan losses 36 24 72 48
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 224 1,229 2,488 2,385
----------- ----------- ----------- -----------
Noninterest income:
Deposit account service charges 75 62 137 116
Loan service charges and fees 29 30 54 58
Net gain (loss) on sales of investment
securities available for sale 0 32 13 39
Other 13 9 33 23
----------- ----------- ----------- -----------
Total noninterest income 117 133 237 236
----------- ----------- ----------- -----------
Noninterest expense:
Compensation and benefits 339 310 662 601
Occupancy and equipment 65 52 128 107
Federal deposit insurance premiums 15 12 30 24
Data processing fees 65 63 132 126
Advertising and promotion 19 22 37 42
Net (gain) loss on foreclosed real estate 2 0 10 0
Amortization 20 20 40 40
Other 162 133 299 270
----------- ----------- ----------- -----------
Total noninterest expense 687 612 1,338 1,210
----------- ----------- ----------- -----------
Income before income taxes 654 750 1,387 1,411
Income taxes 256 270 539 518
----------- ----------- ----------- -----------
Net income $ 398 $ 480 $ 848 $ 893
=========== =========== =========== ===========
Earnings per share
Basic $ 0.31 $ 0.36 $ 0.66 $ 0.67
=========== =========== =========== ===========
Diluted $ 0.31 $ 0.36 $ 0.66 $ 0.67
=========== =========== =========== ===========
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, 2003 AND 2002
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- -------------- -------------
(Unaudited - in thousands) (Unaudited - in thousands)
Net income $ 398 $ 480 $ 848 $ 893
------------- -------------- -------------- -------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities (23) 449 (231) 170
Less reclassification adjustment for gains/losses
included in net income 0 (32) (13) (39)
Less income taxes related to unrealized
gains/losses on investment securities 8 (158) 93 (50)
------------- -------------- -------------- -------------
Other comprehensive income (loss), net of tax (15) 259 (151) 81
------------- -------------- -------------- -------------
Comprehensive income $ 383 $ 739 $ 697 $ 974
============= ============== ============== =============
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, 2003
Shares in Shares in Shares in Accumulated
Unearned Grantor MRP Plan- Stock Option Other Total
Common Compensation Trust-Contra Contra Plan-Contra Retained Comprehensive Shareholders'
Stock ESOP Account Account Account Earnings Income Equity
-------- ------------ ------------ --------- ------------ -------- ------------- ------------
(In Thousands)
Balances, beginning of
period $12,448 $ (517) $ (199) $ (56) $ (1,491) $ 4,199 $ 1,541 $ 15,925
Net income 0 0 0 0 0 848 0 848
Other comprehensive
income (loss) 0 0 0 0 0 0 (151) (151)
Payment on ESOP loan
with ESOP contribution
received 0 116 0 0 0 0 0 116
Dividends paid 0 0 0 0 0 (420) 0 (420)
Proceeds from exercise
of stock options 0 0 0 0 9 0 0 9
Costs associated with
stock options surrendered 0 0 0 0 (256) 0 0 (256)
Purchase and retirement of
2,500 shares of common
stock (35) 0 0 0 0 0 0 (35)
Retirement of 35,500
shares of common stock
held in the stock option
plan contra account (362) 0 0 0 362 0 0 0
------- --------- ---------- -------- --------- ------- ----------- ---------
Balances, end of period $12,051 $ (401) $ (199) $ (56) $ (1,376) $ 4,627 $ 1,390 $ 16,036
======= ========= ========== ======== ========= ======= =========== =========
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, 2003 AND 2002
Six Months Ended
June 30,
-----------------------------
2003 2002
(Unaudited - in thousands)
-----------------------------
Operating Activities:
Net income $ 848 $ 893
------------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 72 48
Depreciation 47 33
Amortization of goodwill 40 40
Net (gain) loss on sales of foreclosed real estate 10 0
Federal home loan bank stock dividends (18) (20)
Net (gain) loss on sales of investment securities available for sale (13) (39)
(Increase) Decrease in:
Accrued interest receivable 93 (74)
Other assets (28) 9
Increase (Decrease) in:
Accrued interest payable (12) (7)
Accrued income taxes 0 5
Accrued benefit plan liabilities (40) (135)
Other liabilities 5 16
------------- ------------
Total adjustments 156 (124)
------------- ------------
Net cash provided by operating activities 1,004 769
------------- ------------
Investing Activities:
Purchases of investment securities available for sale (7,134) (8,373)
Proceeds from maturities of investment securities available for sale 518 1,087
Principal payments received on investment securities available for sale 2,225 4,509
Proceeds from sales of investment securities available for sale 1,107 1,490
Net (increase) decrease in loans 109 (5,963)
Purchases of premises and equipment, net (51) (46)
Proceeds from sales of foreclosed real estate 117 0
------------- ------------
Net cash used in investing activities (3,109) (7,296)
------------- ------------
The accompanying notes are an integral part of these financial statements.
7
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2003 AND 2002
Six Months Ended
2003 2002
-------------- -------------
(Unaudited - in thousands)
Financing Activities:
Dividends paid (420) (398)
Costs associated with stock options surrendered (256) 0
Net increase (decrease) in deposits 3,145 8,705
Purchase and retirement of common stock (35) (145)
Proceeds from exercise of stock options 9 0
Issuance of common stock for MRP plan 0 143
Payment on ESOP loan and release of shares 116 161
-------------- -------------
Net cash provided by (used in) financing activities 2,559 8,466
-------------- -------------
Net increase in cash and cash equivalents 454 1,939
Cash and cash equivalents, beginning of period 5,350 2,123
-------------- -------------
Cash and cash equivalents, end of period $ 5,804 $ 4,062
============== =============
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $924 $1,143
Income taxes $581 $ 571
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $ 48 $ 0
Change in unrealized gain\loss on investment securities
available for sale ($244) $ 131
Change in deferred income taxes associated with unrealized
gain\loss on investment securities available for sale ($ 93) $ 50
Change in net unrealized gain\loss on investment
securities available for sale ($151) $ 81
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, 2003 AND 2002
(UNAUDITED)
Note 1 - Basis of Presentation and Principles of Consolidation and Significant
Accounting Policies
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.
The Company has a stock-based employee compensation plan, which is described
more fully in Note 5. The Company accounts for this plan under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 30, June 30,
--------------------------- ---------------------------
(In thousands, except per share data) 2003 2002 2003 2002
------------ ------------ ----------- ------------
Net Income, as reported $ 398 $ 480 $ 848 $ 893
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (2) (37) (6) (74)
------------ ------------ ----------- ------------
Pro forma net income $ 396 $ 443 $ 842 $ 819
============ ============ =========== ============
Earnings per share:
Basic - as reported $ 0.31 $ 0.36 $ 0.66 $ 0.67
============ ============ =========== ============
Basic - pro forma $ 0.31 $ 0.33 $ 0.65 $ 0.62
============ ============ =========== ============
Diluted - as reported $ 0.31 $ 0.36 $ 0.66 $ 0.67
============ ============ =========== ============
Diluted - pro forma $ 0.31 $ 0.33 $ 0.65 $ 0.61
============ ============ =========== ============
9
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 Six Months Ended
-------------------------- -------------------------
June 30, June 30,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Average number of shares outstanding 1,273,124 1,323,548 1,288,765 1,330,927
Effect of dilutive options 0 641 0 2,394
----------- ----------- ----------- -----------
Average number of shares outstanding used
to calculate earnings per share 1,273,124 1,324,189 1,288,765 1,333,321
=========== =========== =========== ===========
Note 3 - Comprehensive Income
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standard (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, 2003
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,
----------------------------
2003 2002
------------ -----------
Accrued Liability Balance at Beginning of Period 5,538 142,259
Amount Charged to Expense 5,698 11,236
Less Cost of Shares Issued 0 (142,339)
----------- -----------
Accrued Liability at End of Period $ 11,236 $ 11,156
=========== ===========
10
The Company held 4,591 shares of its common stock in trust at a net cost of
$56,195 as of June 30, 2003 and December 31, 2002. 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 equal to the fair value
of the Company's stock on the date the option is granted. Holders of the options
can also surrender the options and be paid cash for the difference between the
exercise price and the stock's fair value on the date surrendered. The board of
directors granted 202,676 options in 1999 and 6,623 options in 2001. During the
six month period ended June 30, 2003, 47,512 options were surrendered at a total
cost of $256,000 (33,978 shares for $70,192 in 2002). Stock options awarded and
outstanding totaled 126,809 and 175,321 as of June 30, 2003 and 2002,
respectively.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Period Ended June 30,
---------------------------------
2003 2002
-------------- ---------------
Dividend Yield 3.5% 3.5%
Expected Life 8.5 years 8.5 years
Expected Volatility 52.0% 52.0%
Risk-Free Interest Rate 4.8% 4.8%
A summary of the status of the Company's stock option plan is presented below:
Six Months Ended June 30,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- --------------- ----------- --------------
Outstanding at Beginning of
Period 175,321 $ 8.59 209,299 $ 8.59
Granted 0 0
Exercised (1,000) 8.60 0
Surrendered (47,512) 8.60 (33,978) 8.60
Forfeited 0 0
----------- -----------
Outstanding at End of Period 126,809 $ 8.59 175,321 $ 8.59
=========== ===========
Options Exercisable at Period-End 123,498 $ 8.59 172,010 $ 8.59
Weighted-Average Fair Value of
Options Granted during the period n/a n/a
11
Information pertaining to options outstanding at June 30, 2003 is as follows:
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------ ------------ ----------- ---------- ------------ ----------
$8.00 - $9.00 126,809 5.8 years $ 8.59 123,498 $ 8.59
The Company has purchased 139,633 and 175,139 shares as of June 30, 2003 and
December 31, 2002, 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.
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 has purchased
land on which to construct a new main office facility. Management is in the
process of working with an architect on the design of the new building.
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.
12
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.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123. This
statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, this statement amends the disclosure requirements of Statement 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement No. 148 is effective
for financial statements for fiscal years ending after December 15, 2002 and for
interim periods beginning after December 15, 2002. The Company and the Bank
apply the intrinsic value based method of accounting prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees, in accounting for their stock
option plans and have not elected a voluntary change to the fair value based
method prescribed in Statement No. 123. The Company's consolidated annual
financial statements beginning in 2002 and consolidated interim financial
statements beginning in 2003 include the additional disclosures required by SFAS
No. 148, but management does not anticipate this statement having a significant
impact on the Company's consolidated financial position or results of
operations.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement amends and clarifies
financial accounting and reporting for derivative financial instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under Financial Accounting Standards Board Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
intends to improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. In particular, this
statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in Statement
No. 133 and clarifies when a derivative contains a financial component. The
statement also amends the definition of an underlying to conform it to Financial
Accounting Standards Board Statement No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. Statement No. 149 is effective for contracts entered
into or modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. The provisions of this statement that relate to Statement
No. 133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003 should continue to be applied in accordance with
their respective effective dates. This statement is not expected to have a
significant impact on the Company's financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires an issuer to classify a financial instrument that is within its scope
as a liability or (or an asset in some circumstances). Many of these instruments
were previously classified as equity. This statement is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. The statement
is effective for financial instruments entered into or modified after May 31,
13
2003, and otherwise is effective for public companies at the beginning of the
first interim period beginning after June 15, 2003. Management does not expect
this statement to have a significant impact on the Company's financial position
or results of operations.
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), the Government National
Mortgage Association (GNMA) or the 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, 2003 and
for the three-month and six-month periods ended June 30, 2003. These comments
should be read in conjunction with our consolidated financial statements and
accompanying footnotes appearing in this report.
This report contains "forward-looking statements" relating to, without
limitation, future economic performance, plans and objective of management for
future operations, and projections of revenues and other financial items that
are based on the beliefs of management, as well as assumptions made by and
information currently available to management. The words "expect," "anticipate,"
and "believe," as well as similar expressions, are intended to identify
forward-looking statements. Our actual results may differ materially from the
results discussed in the forward-looking statements.
14
Comparison of Financial Condition at June 30, 2003 and December 31, 2002
Total assets increased from December 31, 2002 to June 30, 2003 by $3.1 million,
or 2.8%, from $111.8 million at December 31, 2002 to $114.9 million at June 30,
2003. The increase in assets was principally the result of an increase in
investment securities. Investment securities increased by $3.1 million to offset
an increase in deposits.
Loans receivable decreased from December 31, 2002 to June 30, 2003 as repayments
exceeded originations for the period by approximately $229,000 due to a
slow-down in new loan originations and the continued refinancing of existing
loans. The following table sets forth information about the composition of our
loan portfolio by type of loan at the dates indicated. At June 30, 2003 and
December 31, 2002, we had no concentrations of loans exceeding 10% of gross
loans other than as disclosed below.
June 30, 2003 December 31, 2002
----------------------- ----------------------
Amount Percent Amount Percent
Type of Loan:
Real estate loans:
One- to four-family residential $ 61,700 76.4% $ 62,773 77.6%
Commercial 8,938 11.1% 8,617 10.6%
Construction 3,624 4.4% 3,932 4.8%
Consumer loans:
Automobile 1,437 1.8% 1,354 1.7%
Loans to depositors, secured by deposits 1,122 1.4% 1,264 1.6%
Home equity and second mortgage 1,031 1.3% 948 1.2%
Other 2,880 3.6% 2,055 2.5%
------------- --------- ------------- --------
80,732 100.0% 80,943 100.0%
------------- ========= ------------- ========
Less:
Loans in process 1,361 1,406
Deferred fees and discounts 371 372
Allowance for loan losses 867 803
------------- -------------
Total $ 78,133 $ 78,362
============= =============
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.
15
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,
2003 2002
-------------- ---------------
(In Thousands)
Balance at beginning of period $ 803 $ 719
-------------- ---------------
Charge-offs:
Consumer (8) (21)
Mortgage 0 0
Recoveries:
Consumer 0 3
Mortgage 0 0
-------------- ---------------
Net Charge-offs (8) (18)
Provision for loan losses 72 48
-------------- ---------------
Balance at end of period $ 867 $ 749
============== ===============
The following table sets forth information about our nonperforming assets at the
dates indicated.
June 30, June 30,
2003 2002
--------------- --------------
(In Thousands)
Nonaccrual Loans $ 0 $ 0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential 367 359
Non-Residential 866 110
Consumer 19 7
--------------- --------------
Total
$ 1,252 $ 476
=============== ==============
Nonresidential real estate loans past due 90 days or more increased $756,000 to
$866,000 as of June 30, 2003 compared to $110,000 as of June 30, 2002 primarily
due to one commercial real estate loan. Payments on this loan have been brought
current subsequent to June 30, 2003.
At June 30, 2003, the Bank had one additional commercial real estate loan
totaling $460,000, 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 six months ended June 30, 2003, the Company increased its liabilities
by $3.0 million, or 3.1%. Total deposits increased $3.2 million or 3.4% from
$93.7 million at December 31, 2002 to $96.9 million at June 30, 2003.
16
During 2003, the Bank has accepted deposits totaling approximately $5.5 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.
Our shareholders' equity increased $111,000 from $15.9 million at December 31,
2002 to $16.0 million at June 30, 2003. The Company's equity increased primarily
due to net income of $848,000, a decrease in unearned compensation related to
the Company's ESOP of $116,000, offset by the cost associated with stock options
surrendered of $256,000, the purchase and retirement of $35,000 of the Company's
common stock, a reduction in other accumulated comprehensive income of $151,000
and a reduction in retained earnings for dividends paid to shareholders of
$420,000. 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, 2003 and
2002
Our net income for the three months ended June 30, 2003 was $398,000, an
$82,000, or 17.1% decrease from the $480,000 we earned during the three months
ended June 30, 2002. Basic and diluted earnings per share for the three months
ended June 30, 2003 were each $0.31 compared to $0.36 for the same period in
2002. Basic average shares outstanding for three months ended June 30, 2003 was
1,273,124 shares and 1,323,548 shares for the three months ended June 30, 2002.
Average dilutive potential shares outstanding were 0 and 641, respectively.
Interest income decreased $103,000, or 5.7%, from $1.82 million for the three
months ended June 30, 2002 to $1.72 million for the three months ended June 30,
2003. The decrease in interest income is a result of a decrease in the yields on
our loan and investment portfolios.
Interest expense on deposits decreased $110,000 from $569,000 for the three
months ended June 30, 2002 to $459,000 for the three months ended June 30, 2003,
primarily due to the decrease in deposit account interest rates.
Net interest income increased $7,000, or 0.62%, between the periods as a result
of the larger decrease in interest expense than the decrease in interest income.
The Company's net interest margin narrowed to 4.78% for the three months ended
June 30, 2003 compared to 4.96% for the comparable period of 2002. The narrowing
of the net interest margin reflects the current rate environment and the fact
that our yield on loans and investments has reduced.
Noninterest income decreased $16,000 from $133,000 for the three months ended
June 30, 2002 to $117,000 for the three months ended June 30, 2003. The decrease
in noninterest income was primarily due to a $32,000 net gain on sales of
investment securities sold during the quarter ended June 30, 2002 ($0 in 2003),
offset by an increase in deposit account service charges of $13,000 in 2003.
Noninterest expenses increased $75,000 from $612,000 for the three months ended
June 30, 2002 to $687,000 for the three months ended June 30, 2003. The increase
in noninterest expense was primarily from an increase in compensation and
benefits of $29,000 due to hiring two additional employees and normal salary
increases, an increase in occupancy and equipment expense of $13,000 primarily
related to updating computer equipment, and an increase of $29,000 in other
noninterest expense related to increases in insurance expense and other costs
associated with being a public company.
Our effective tax rates for the three months ended June 30, 2003 and 2002 were
39.1% and 36.0%, respectively.
17
Discussion of Results of Operations for the Six Months Ended June 30, 2003 and
2002
Our net income for the six months ended June 30, 2003 was $848,000, a $45,000,
or 5.0% decrease from the $893,000 we earned during the six months ended June
30, 2002. Basic and diluted earnings per share for the six months ended June 30,
2003 were each $0.66 compared to $0.67 for the same period in 2002. Basic
average shares outstanding for six months ended June 30, 2003 was 1,288,765
shares and 1,330,927 shares for the six months ended June 30, 2002. Average
dilutive potential shares outstanding were 0 and 2,394, respectively.
Interest income decreased $97,000, or 2.8%, from $3.57 million for the six
months ended June 30, 2002 to $3.47 million for the six months ended June 30,
2003. The decrease in interest income is a result of a decrease in the yields on
our loan and investment portfolios.
Interest expense on deposits decreased $224,000 from $1,136 million for the six
months ended June 30, 2002 to $912,000 for the six months ended June 30, 2003,
primarily due to the decrease in deposit account interest rates.
Net interest income increased $127,000, or 5.2%, between the periods as a result
of the larger decrease in interest expense than the decrease in interest income.
The Company's net interest margin widened slightly to 4.86% for the six months
ended June 30, 2003 compared to 4.81% for the comparable period of 2002. The
widening of the net interest margin, which has slowed down significantly from
the prior year, continues to reflect the current rate environment.
Noninterest income increased $1,000 from $236,000 for the six months ended June
30, 2002 to 237,000 for the six months ended June 30, 2003. The increase in
noninterest income was primarily due to an increase in deposit account service
charges of $21,000, increase in other noninterest income of $10,000, offset by a
decrease in net gain on sales of investment securities of $26,000 and a decrease
in loan service charges and fees of $4,000.
Noninterest expenses increased $128,000 from $1.21 million for the six months
ended June 30, 2002 to $1.34 million for the six months ended June 30, 2003. The
increase in noninterest expense was primarily from an increase in compensation
and benefits of $61,000 due to hiring two additional employees and normal salary
increases, an increase in occupancy and equipment expense of $21,000 primarily
related to updating computer equipment, and an increase in other noninterest
expense of $29,000 related to increases in insurance expense and other costs
associated with being a public company.
Our effective tax rates for the three months ended June 30, 2003 and 2002 were
38.9% and 36.7%, respectively.
18
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, 2003 and December 31, 2002, we exceeded all current regulatory
capital requirements and met the definition of a "well-capitalized" institution,
the highest regulatory capital category.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, the Company's 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)). Based on that evaluation, the
Chief Executive Officer and the 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.
19
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 20, 2003, United Tennessee Bankshares, Inc. held its 2003 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
------------------ --------------- --------
J. William Myers 1,018,598 31,737
William B. Henry 1,046,492 3,843
Tommy C. Bible 1,018,673 31,662
There were no abstentions or broker non-votes.
The terms of the office of Directors Richard G. Harwood, Robert R.
Self, Robert L. Overholt, and Ben W. Hooper, III, 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)(a) 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
31.1 Certification of Richard G. Harwood, President and Chief
Executive Officer of United Tennessee Bankshares, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chris H. Triplett, Controller of United
Tennessee Bankshares, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Richard G. Harwood, President and Chief
Executive Officer of United Tennessee Bankshares, Inc. pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chris H. Triplett, Controller of United
Tennessee Bankshares, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 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.
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: August 12, 2003 /s/Richard G. Harwood
------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
21