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 March 31, 2004.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-23551
UNITED TENNESSEE BANKSHARES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
TENNESSEE 62-1710108
- ---------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
344 Broadway, Newport, Tennessee 37821
- ------------------------------------ -----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (423) 623-6088
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past ninety days:
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 1,230,379
---------
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
March 31, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Income for the Three Month
Month Periods Ended March 31, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three Month Periods Ended March 31, 2004
and 2003 (Unaudited) 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three Month Periods Ended
March 31, 2004 (Unaudited) 6
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 2004
and 2003 (Unaudited) 7-8
Notes to Consolidated Financial Statements for
the Three Month Periods Ended March 31, 2004
and 2003 (Unaudited) 9-11
Item 2. Management's Discussion and Analysis or
Plan of Operation 12-17
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
CERTIFICATIONS 20-21
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
March 31,
2004 December 31,
(Unaudited) 2003
-------------- ----------------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 3,562 $ 5,196
Investment securities available for sale, at fair value 32,486 29,756
Loans receivable, net 77,366 77,953
Premises and equipment, net 1,029 996
Foreclosed real estate - held for sale 261 49
Accrued interest receivable 651 559
Goodwill, net of amortization 773 793
Cash surrender value of life insurance 1,547 1,529
Prepaid expenses and other assets 65 151
-------------- ----------------
Total assets $ 117,740 $ 116,982
============== ================
Liabilities and Equity
Liabilities:
Deposits $ 97,815 $ 98,107
Accrued interest payable 80 79
Accrued income taxes 89 0
Deferred income taxes 790 653
Accrued benefit plan liabilities 1,099 1,183
Other liabilities 117 67
-------------- ----------------
Total liabilities 99,990 100,089
-------------- ----------------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000 shares;
issued and outstanding 1,230,379 shares (1,230,379 in 2003) 11,665 11,665
Unearned compensation - ESOP (235) (351)
Shares in grantor trust - contra account (216) (216)
Shares in stock option plan trusts - contra account (997) (1,122)
Retained earnings 6,177 5,785
Accumulated other comprehensive income 1,356 1,132
-------------- ----------------
Total shareholders' equity 17,750 16,893
-------------- ----------------
Total liabilities and equity $ 117,740 $ 116,982
============== ================
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 MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
(In Thousands Except
per Share Information)
-------------------------------------
Three Months Ended
-------------------------------------
March 31,
-------------------------------------
2004 2003
(Unaudited) (Unaudited)
--------------- ---------------
Interest income:
Loans $ 1,356 $ 1,468
Investment securities 323 279
Other interest-earning assets 3 6
--------------- ---------------
Total interest income 1,682 1,753
--------------- ---------------
Interest expense:
Deposits 376 437
--------------- ---------------
Total interest expense 376 437
--------------- ---------------
Net interest income 1,306 1,316
Provision for loan losses 28 36
--------------- ---------------
Net interest income after provision for loan losses 1,278 1,280
--------------- ---------------
Noninterest income:
Deposit account service charges 72 62
Loan service charges and fees 29 25
Net gain (loss) on sales of investment
securities available for sale 0 13
Other 29 20
--------------- ---------------
Total noninterest income 130 120
--------------- ---------------
Noninterest expense:
Compensation and benefits 510 360
Occupancy and equipment 60 63
Federal deposit insurance premiums 4 15
Data processing fees 78 67
Advertising and promotion 14 18
Net (gain) loss on foreclosed real estate 0 8
Amortization 20 20
Other 133 116
--------------- ---------------
Total noninterest expense 819 667
--------------- ---------------
Income before income taxes 589 733
Income taxes 197 283
--------------- ---------------
Net income $ 392 $ 450
=============== ===============
Earnings per share
Basic $ 0.32 $ 0.34
=============== ===============
Diluted $ 0.32 $ 0.34
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
Three Months Ended March 31,
-----------------------------------
2004 2003
------------- -------------
(Unaudited - in thousands)
Net income $ 392 $ 450
------------- -------------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities 362 (207)
Less reclassification adjustment for gains\losses
included in net income 0 (13)
Less income taxes related to unrealized
gains\losses on investment securities (138) 84
------------- -------------
Other comprehensive income (loss), net of tax 224 (136)
------------- -------------
Comprehensive income(loss) $ 616 $ 314
============= =============
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 THREE MONTH PERIOD ENDED MARCH 31, 2004
Shares in Shares in Accumulated
Unearned Grantor Stock Option Other Total
Common Compensation Trust-Contra Plan-Contra Retained Comprehensive Shareholders'
Stock ESOP Account Account Earnings Income Equity
--------- ------------ ------------ ------------ -------- ------------- -------------
Balances, beginning of perod $ 11,665 $ (351) $ (216) $ (1,122) $ 5,785 $ 1,132 $ 16,893
Net income 0 0 0 0 392 0 392
Other comprehensive income (loss) 0 0 0 0 0 224 224
Payment on ESOP loan principal 0 116 0 0 0 0 116
Dividents paid 0 0 0 0 0 0 0
Adjustment of cost on directors
long-term incentive plan 0 0 0 0 0 0 0
Proceeds form exercise of
stock options 0 0 0 206 0 0 206
Costs associated with stock options
surrendered 0 0 0 (81) 0 0 (81)
--------- ------------ ------------ ----------- -------- ----------- -------------
Balances, end of period $ 11,665 $ (235) $ (216) $ (997) $ 6,177 $ 1,356 $ 17,750
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 THREE MONTH PERIOD ENDED MARCH 31, 2004 AND 2003
Three Months Ended
March 31,
-------------------------------
2004 2003
(Unaudited - in thousands)
-------------------------------
Operating Activities:
Net income $ 392 $ 450
------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 28 36
Depreciation 24 23
Amortization of goodwill 20 20
Increase in cash surrender value of life insurance (18) 0
Net (gain) loss on sales of foreclosed real estate 0 8
Federal home loan bank stock dividends (9) (9)
Net (gain) loss on sales of investment securities available for
sale 0 (13)
(Increase) Decrease in:
Accrued interest receivable (92) (17)
Other assets 86 44
Increase (Decrease) in:
Accrued interest payable 1 (3)
Accrued income taxes 89 272
Accrued benefit plan liabilities (84) (154)
Other liabilities 50 (24)
------------- --------------
Total adjustments 95 183
------------- --------------
Net cash provided by operating activities 487 633
------------- --------------
Investing Activities:
Purchases of investment securities available for sale (4,339) (4,078)
Proceeds from maturities of investment securities available for sale 0 517
Payments received on investment securities available for sale 1,980 1,008
Proceeds from sales of investment securities available for sale 0 1,107
Net (increase) decrease in loans 331 553
Purchases of premises and equipment, net (57) (4)
Proceeds from sales of foreclosed real estate 15 119
------------- --------------
Net cash provided by (used in) investing activities (2,070) (778)
------------- --------------
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 THREE MONTH PERIOD ENDED MARCH 31, 2004 AND 2003
Three Months Ended
2004 2003
-------------- --------------
(Unaudited - in thousands)
Financing Activities:
Costs associated with stock options surrendered (81) (195)
Net increase (decrease) in deposits (292) 100
Purchase of common stock 0 (35)
Proceeds from exercise of stock options 206 9
Payment on ESOP loan and release of shares 116 116
-------------- --------------
Net cash provided by (used in) financing activities (51) (5)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (1,634) (150)
Cash and cash equivalents, beginning of period 5,196 5,350
-------------- --------------
Cash and cash equivalents, end of period $ 3,562 $ 5,200
============== ==============
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $375 $434
Income taxes $ 40 $250
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $227 $21
Change in unrealized gain\loss on investment securities
available for sale $362 ($220)
Change in deferred income taxes associated with unrealized
gain\loss on investment securities available for sale $138 ($84)
Change in net unrealized gain\loss on investment
securities available for sale $224 ($136)
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 PERIOD ENDED MARCH 31, 2004 AND 2003
(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
--------------------------
March 31,
--------------------------
(In thousands, except per share data) 2004 2003
----------- -----------
Net Income, as reported $ 392 $ 450
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
to calculate earnings per share 0 (4)
----------- -----------
Pro forma net income $ 392 $ 446
=========== ===========
Earnings per share:
Basic - as reported $ 0.32 $ 0.34
=========== ===========
Basic - pro forma $ 0.32 $ 0.34
=========== ===========
Diluted - as reported $ 0.32 $ 0.34
=========== ===========
Diluted - pro forma $ 0.32 $ 0.34
=========== ===========
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
-------------------------------
March 31,
-------------------------------
2004 2003
-------------- --------------
Average number of shares outstand 1,230,379 1,304,580
Effect of dilutive options 9,638 2,433
-------------- --------------
Average number of shares outstanding used
to calculate earnings per share 1,240,017 1,307,013
============== ==============
Note 3 - Comprehensive Income
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in the financial statements. The objective of the statement is to
report a measure of all changes in equity of an enterprise that results from
transactions and other economic events of the period other than transactions
with owners. Items included in comprehensive income include revenues, gains, and
losses that under generally accepted accounting principles are directly charged
to equity. Examples include foreign currency translations, pension liability
adjustments and unrealized gains and losses on investment securities available
for sale. The Company has included its comprehensive income in a separate
financial statement as part of its consolidated financial statements.
Note 4 - Management Recognition Plan
In January 1999, the Company's board of directors approved a Management
Recognition Plan (MRP), and in May 1999, the Company's shareholders ratified the
plan. The plan authorizes the board of directors to award up to 58,190 shares of
restricted common stock to members of the board of directors and senior
management.
The Company's board of directors has awarded 54,517 shares as of March 31, 2004
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 March 31,
-------------------------------
2004 2003
------------ --------------
Accrued Liability Balance at Beginning of Period $ 0 $ 5,538
Amount Charged to Expense 0 2,809
Less Cost of Shares Issued 0 0
------------ --------------
Accrued Liability at End of Period $ 0 $ 8,347
============ ==============
The Company paid out the remaining distribution of the MRP in the third quarter
of 2003 and cancelled the remaining 3,673 shares of its common stock in trust
and closed out the contra-equity account.
10
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
three month period ended March 31, 2004, 7,656 options were surrendered at a
total cost of $80,638 (36,394 shares for $195,664 in 2003). Stock options
awarded and outstanding totaled 70,401 and 138,927 as of March 31, 2004 and
2003, 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 March 31,
---------------------------------
2004 2003
--------------- --------------
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:
Three Months Ended March 31,
------------------------------------------------------------
2004 2003
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ------------ ----------- ------------
Outstanding at Beginning of Period 102,057 $ 8.59 175,321 $ 8.59
Granted 0 0
Exercised (24,000) 0
Surrendered (7,656) 8.60 (36,394) 8.60
Forfeited 0 0
----------- -----------
Outstanding at End of Year 70,401 $ 8.59 138,927 $ 8.59
=========== ===========
Options Exercisable at Period-End 68,745 $ 8.59 135,616 $ 8.59
Weighted-Average Fair Value of
Options Granted during the year n/a n/a
11
Information pertaining to options outstanding at March 31, 2004 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 70,401 4.8 years $ 8.59 68,745 $ 8.59
The Company has purchased 76,249 and 100,249 shares as of March 31, 2004 and
December 31, 2003, 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 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 April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement amends Statement 133 for
decisions made as part of the Derivatives Implementation Group process and other
board projects and in conjunction with other implementation issues. Since the
Company does not invest in derivatives or engage in hedging activities,
management does not expect this statement to have any impact on the Company's
consolidated financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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. Since
the Company has not yet issued any instruments of the type discussed in the
statement, management does not expect this statement to have a significant
impact on the Company's consolidated financial position or results of
operations.
Item 2. Management's Discussion and Analysis or Plan of Operation
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
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
instruments, 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 March 31, 2004
and for the three-month period ended March 31, 2004 These comments should be
read in conjunction with our consolidated financial statements and accompanying
footnotes appearing in this report.
Comparison of Financial Condition at March 31, 2004 and December 31, 2003
Total assets increased from December 31, 2003 to March 31, 2004 by $758,000, or
0.6%, from $117.0 million at December 31, 2003 to $117.7 million at March 31,
2004. The increase in assets was principally the result of an increase in
investment securities. Investment securities increased by $2.7 million offset by
a decrease in cash and amounts due from depository institutions of $1.6 million.
Loans receivable decreased slightly from December 31, 2003 to March 31, 2004 as
repayments exceeded originations for the period. The following table sets forth
information about the composition of our loan portfolio by type of loan at the
dates indicated. At March 31, 2004 and December 31, 2003, we had no
concentrations of loans exceeding 10% of gross loans other than as disclosed
below.
13
March 31, 2004 December 31, 2003
----------------------- -----------------------
Amount Percent Amount Percent
Type of Loan:
Real estate loans:
One- to four-family residential $ 62,977 78.3% $ 63,335 79.2%
Commercial 9,139 11.4% 9,261 11.5%
Construction 2,985 3.7% 1,769 2.2%
Consumer loans:
Automobile 1,490 1.8% 1,488 1.9%
Loans to depositors, secured by deposits 1,327 1.7% 1,293 1.6%
Home equity and second mortgage 1,135 1.4% 1,341 1.7%
Other 1,362 1.7% 1,504 1.9%
------------- -------- -------------- --------
80,415 100.0% 79,991 100.0%
-------------- ======== -------------- ========
Less:
Loans in process 1,765 764
Deferred fees and discounts 350 352
Allowance for loan losses 934 922
-------------- --------------
Total $ 77,366 $ 77,953
============== ==============
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.
14
The following table sets forth information about our allowance for loan losses
for the period indicated.
Three Three
Months Ended Months Ended
March 31, March 31,
2004 2003
------------------ -----------------
(In Thousands)
Balance at beginning of period $ 921 $ 803
------------------ -----------------
Charge-offs:
Consumer (4) (3)
Mortgage (12) 0
Recoveries:
Consumer 1 1
Mortgage 0 0
------------------ -----------------
Net Charge-offs (15) (2)
Provision for loan losses 28 36
------------------ -----------------
Balance at end of period $ 934 $ 837
================== =================
The following table sets forth information about our nonperforming assets at the
dates indicated.
March 31, March 31,
2004 2003
------------------ -----------------
(In Thousands)
Nonaccrual Loans $ 0 $ 0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential 378 394
Non-Residential 9 14
Consumer 9 21
------------------ -----------------
Total $ 396 $ 429
================== =================
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 three months ended March 31, 2004, the Company decreased its
liabilities by $99,000, or 0.1%. Total deposits decreased $292,000 or 0.3% from
$98.1 million at December 31, 2003 to $97.8 million at March 31, 2004.
15
During 2004, the Bank has accepted deposits totaling approximately $5.9 million
from various governmental and institutional customers, some of which are outside
of its traditional market area. The average term of these deposits is
approximately six months. Management is unable to determine whether the Bank
will retain these deposits upon maturity. In the event the Bank is not able to
retain these deposits, management has various sources of liquidity available
including cash and amounts due from depository institutions and investment
securities which are available for sale. In addition, the Bank has borrowing
authority from the Federal Home Loan Bank of approximately $4.0 million.
Our shareholders' equity increased $857,000 from $16.9 million at December 31,
2003 to $17.8 million at March 31, 2004. The Company's equity increased
primarily due to net income of $392,000, a decrease in unearned compensation
related to the Company's ESOP of $116,000, the exercise of 24,000 stock options
for $206,000, an increase in other accumulated comprehensive income of $224,000,
offset by the cost of 7,656 stock options surrendered for $81,000. 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 March 31, 2004
and 2003
Our net income for the three months ended March 31, 2004 was $392,000, which was
a decrease of $58,000 from the amount we earned during the three months ended
March 31, 2003. Basic and diluted earnings per share for the three months ended
March 31, 2004 were each $0.32 compared to $0.34 for the same period in 2003.
Basic average shares outstanding for three months ended March 31, 2004 was
1,230,379 shares and 1,304,580 shares for the three months ended March 31, 2003.
Average dilutive potential shares outstanding were 9,638 and 2,433,
respectively.
Interest income decreased $71,000, or 4.1%, from $1.75 million for the three
months ended March 31, 2003 to $1.68 million for the three months ended March
31, 2004. 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 $61,000 from $437,000 for the three
months ended March 31, 2003 to $376,000 for the three months ended March 31,
2004, primarily due to the decrease in deposit account interest rates.
Net interest income decreased $10,000, or 0.8%, between the periods as a result
of the larger decrease in interest income than the decrease in interest expense.
The Company's net interest margin narrowed to 4.77% for the three months ended
March 31, 2004 compared to 5.00% for the comparable period of 2003. 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 increased $10,000 from $120,000 for the three months ended
March 31, 2003 to $130,000 for the three months ended March 31, 2004. The
increase in noninterest income was due to a $10,000 increase in deposit account
service fees. The Bank put in place a new deposit account fee structure
effective August 2003.
Noninterest expenses increased $152,000 from $667,000 for the three months ended
March 31, 2003 to $819,000 for the three months ended March 31, 2004. The
increase in noninterest expense was primarily from an increase in compensation
and benefits resulting from the mark to market adjustment on the Directors
Incentive Plan of $57,000 and a $95,000 increase to the directors deferred
compensation liability. The directors have an option of deferring their fees and
earning a market return on the balance. The return on both plans is based on the
percentage increase or decrease in the market value of United Tennessee
Bankshares stock for the quarter. The return for the first quarter was 17.43%.
Our effective tax rates for the three months ended March 31, 2004 and 2003 were
33.4% and 38.6%, 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 March 31, 2004 and December 31, 2003, 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. The Company's chief
executive officer and chief financial officer have evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule13a-14(c)) as of a date within 90 days of the
filing date of this quarterly report. Based on that evaluation, the chief
executive officer and chief financial officer 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.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed as a part of this report:
3.1(1) Charter of United Tennessee Bankshares, Inc.
3.2(1) Bylaws of United Tennessee Bankshares, Inc.
4(1) Form of Stock Certificate of United Tennessee Bankshares, Inc.
10.1(2) United Tennessee Bankshares, Inc. 1999 Stock Option Plan
10.2(2) United Tennessee Bankshares, Inc. Management Recognition Plan
10.3(a)(1) Employment Agreements between Newport Federal Savings and Loan
Association and Richard G. Harwood, Nancy L. Bryant and Peggy Holston
10.3(b)(1) Forms of Guarantee Agreements between United Tennessee Bankshares,
Inc. and Richard G. Harwood, Nancy L. Bryant and Peggy Holston
10.4(1) Newport Federal Savings and Loan Association Long-Term Incentive Plan
10.5(1) Newport Federal Savings and Loan Association Deferred Compensation
Plan
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.
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.
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(1) Incorporated by reference to United Tennessee Bankshares, Inc.'s
Registration Statement on Form SB-2, File No. 333-36465.
(2) Incorporated by reference to United Tennessee Bankshares, Inc.'s
Registration Statement on Form S-8, File No. 333-82803.
(b) Reports on Form 8-K:
United Tennessee Bankshares, Inc. did not file a current report on
Form 8-K during the quarter covered by this report.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: May 10, 2004 /s/Richard G. Harwood
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Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
19