UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE UNITED STATES
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-23551
UNITED TENNESSEE BANKSHARES, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
TENNESSEE 62-1710108
- ---------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
344 Broadway, Newport, Tennessee 37821
- ------------------------------------ -----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (423) 623-6088
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past ninety days:
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 1,180,999
---------
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 2005 (Unaudited) and December 31, 2004...... 3
Consolidated Statements of Income for the
Three-Month and Six-Month Periods Ended
June 30, 2005 and 2004 (Unaudited)......................... 4
Consolidated Statements of Comprehensive Income
for the Three-Month and Six-Month Periods
Ended June 30, 2005 and 2004 (Unaudited)................... 5
Consolidated Statement of Changes in Shareholders'
Equity for the Six-Month Period Ended
June 30, 2005 (Unaudited).................................. 6
Consolidated Statements of Cash Flow for the
Six-Month Periods Ended June 30, 2005 and 2004
(Unaudited)................................................ 7
Notes to Consolidated Financial Statements for the
Three-Month and Six-Month Periods Ended June 30, 2005
and 2004 (Unaudited)....................................... 9
Item 2. Management's Discussion and Analysis or
Plan of Operation.......................................... 13
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, 2005 AND DECEMBER 31, 2004
June 30, December
2005 31,
(Unaudited) 2004
------------ -------------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 3,449 $ 3,444
Investment securities available for sale, at fair value 28,466 35,579
Loans receivable, net 80,399 78,830
Premises and equipment, net 3,006 1,714
Real estate acquired through foreclosure 0 128
Accrued interest receivable 590 573
Goodwill, net of amortization 673 713
Cash surrender value of life insurance 1,633 1,597
Prepaid expenses and other assets 28 81
------------ -------------
Total assets $ 118,244 $ 122,659
============ =============
Liabilities and Equity
Liabilities:
Deposits $ 97,148 $ 100,919
Advances from Federal Home Loan Bank 0 1,000
Accrued interest payable 112 135
Accrued income taxes 37 0
Deferred income taxes 455 561
Accrued benefit plan liabilities 1,470 1,531
Other liabilities 173 94
------------ -------------
Total liabilities 99,395 104,240
------------ -------------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000 shares;
issued and outstanding 1,180,999 shares (1,196,999 in 2004) $ 10,762 $ 11,098
Unearned compensation - ESOP 0 (180)
Shares in grantor trust - contra account (224) (224)
Shares in stock option plan trusts - contra account (508) (749)
Retained earnings 7,776 7,258
Accumulated other comprehensive income 1,043 1,216
------------ -------------
Total shareholders' equity 18,849 18,419
------------ -------------
Total liabilities and equity $ 118,244 $ 122,659
============ =============
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, 2005 AND 2004
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
---------------------------- ---------------------------
Three Months Ended Six Months Ended
---------------------------- ---------------------------
June 30, June 30,
---------------------------- ---------------------------
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ -----------
Interest income:
Loans $ 1,362 $ 1,353 $ 2,711 $ 2,709
Investment securities 333 339 676 662
Other interest-earning assets 17 2 22 5
------------ ------------ ------------ -----------
Total interest income 1,712 1,694 3,409 3,376
------------ ------------ ------------ -----------
Interest expense:
Deposits 537 391 1,014 767
Advances from Federal Home Loan Bank 4 0 6 0
------------ ------------ ------------ -----------
Total interest expense 541 391 1,020 767
------------ ------------ ------------ -----------
Net interest income 1,171 1,303 2,389 2,609
Provision for loan losses 18 24 36 52
------------ ------------ ------------ -----------
Net interest income after provision for loan losses 1,153 1,279 2,353 2,557
------------ ------------ ------------ -----------
Noninterest income:
Deposit account service charges 74 75 144 147
Loan service charges and fees 24 26 53 55
Net gain (loss) on sales of investment securities available for sale 484 0 484 0
Other 48 32 79 61
------------ ------------ ------------ -----------
Total noninterest income 630 133 760 263
------------ ------------ ------------ -----------
Noninterest expense:
Compensation and benefits 552 339 836 849
Occupancy and equipment 55 90 108 150
Federal deposit insurance premiums 23 4 27 8
Data processing fees 86 87 170 165
Advertising and promotion 19 21 37 35
Net (gain) loss on foreclosed real estate (3) (8) (2) (8)
Amortization 20 20 40 40
Other 241 165 403 298
------------ ------------ ------------ -----------
Total noninterest expense 993 718 1,619 1,537
------------ ------------ ------------ -----------
Income before income taxes 790 694 1,494 1,283
Income taxes 275 195 502 392
------------ ------------ ------------ -----------
Net income $ 515 $ 499 $ 992 $ 891
Earnings per share
Basic $ 0.43 $ 0.41 $ 0.83 $ 0.73
============ ============ ============ ===========
Diluted $ 0.43 $ 0.41 $ 0.83 $ 0.72
============ ============ ============ ===========
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 AND SIX MONTH PERIODS ENDED JUNE 30, 2005 AND 2004
Three Months Ended Six Months Ended
------------------------- ------------------------
June 30, June 30,
------------------------- ------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
(Unaudited - in (Unaudited - in
thousands) thousands)
Net income $ 515 $ 499 $ 992 $ 891
---------- ----------- ---------- ----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities 927 (863) 205 (501)
Less reclassification adjustment for gains\losses
included in net income (484) 0 (484) 0
Less income taxes related to unrealized
gains\losses on investment securities (168) 328 106 190
---------- ----------- ---------- ----------
Other comprehensive income (loss), net of tax 275 (535) (173) (311)
---------- ----------- ---------- ----------
Comprehensive income(loss) $ 790 $ (36) $ 819 $ 580
========== =========== ========== ==========
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, 2005
Shares in Shares in Accumulated
Stock
Unearned Grantor Option Other Total
Trust - Plan -
Common Compensation Contra Contra Retained Comprehensive Shareholders'
Stock ESOP Account Account Earnings Income Equity
------- ----------- ----------- ---------- -------- ------------ -----------
(In Thousands)
Balances, beginning of period $11,098 (180) (224) (749) 7,258 1,216 18,419
Net income 0 0 0 0 992 0 992
Other comprehensive income
(loss) 0 0 0 0 0 (173) (173)
Retirement of Stock held
in the Stock Option Plan
Trust (336) 0 0 336 0 0 0
Purchase of Stock to be
held in the Stock Option Plan 0 0 0 (68) 0 0 (68)
Payment on ESOP loan
principal 0 180 0 0 0 0 180
Dividends paid 0 0 0 0 (474) 0 (474)
Proceeds from exercise of
stock options 0 0 0 68 0 0 68
Costs associated with
stock options
surrendered 0 0 0 (95) 0 0 (95)
------- --------- --------- --------- -------- --------- -----------
Balances, end of period $ 10,762 $ - $ (224) $ (508) $ 7,776 $ 1,043 $ 18,849
======= ========= ========= ========= ======== ========= ===========
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, 2005 AND 2004
Six Months Ended
June 30,
-------------------------
2005 2004
(Unaudited - in
thousands)
-------------------------
Operating Activities:
Net income $ 992 $ 891
----------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 36 52
Depreciation 33 46
Amortization of goodwill 40 40
Net (gain) loss on sales of foreclosed real estate (2) (8)
Federal home loan bank stock dividends (23) (19)
Net (gain) loss on sales of investment securities available for sale (484) 0
Increase in cash surrender value of bank-owned life insurance (36) (35)
(Increase) Decrease in:
Accrued interest receivable (17) (84)
Other assets 53 (19)
Increase (Decrease) in:
Accrued interest payable (23) 22
Accrued income taxes 37 0
Accrued benefit plan liabilities (61) (29)
Other liabilities 79 70
----------- ----------
Total adjustments (368) 36
----------- ----------
Net cash provided by operating activities 624 927
----------- ----------
Investing Activities:
Purchases of investment securities available for sale 0 (14,799)
Proceeds from maturities of investment securities available for sale 1,912 0
Payments received on investment securities available for sale 1,544 5,057
Proceeds from sales of investment securities available for sale 3,885 0
Net (increase) decrease in loans (1,535) 571
Purchases of premises and equipment, net (1,325) (140)
Proceeds from sales of foreclosed real estate 60 149
----------- ----------
Net cash used in investing activities 4,541 (9,162)
----------- ----------
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, 2005 AND 2004
Six Months Ended
2005 2004
---------- ----------
(Unaudited - in
thousands)
Financing Activities:
Dividends paid (474) (442)
Costs associated with stock options surrendered (95) (276)
Net increase (decrease) in deposits (3,771) 6,391
Purchase of common stock (68) (54)
Proceeds from exercise of stock options 68 206
Payment on ESOP loan and release of shares 180 171
Net repayment of advances from Federal Home Loan Bank (1,000) 0
---------- ----------
Net cash provided by (used in) financing activities (5,160) 5,996
---------- ----------
Net increase (decrease) in cash and cash equivalents 5 (2,239)
Cash and cash equivalents, beginning of period 3,444 5,196
---------- ----------
Cash and cash equivalents, end of period $ 3,449 $ 2,957
========== ==========
Supplementary disclosures of cash flow information: Cash paid during the period
for:
Interest $1,043 $745
Income taxes $465 $449
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $343 $427
Sale of foreclosed real estate by origination of mortgage loans $413 $0
Change in unrealized gain\loss on investment securities
available for sale ($279) ($501)
Change in deferred income taxes associated with unrealized
gain\loss on investment securities available for sale ($106) ($190)
Change in net unrealized gain\loss on investment
securities available for sale ($173) ($311)
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, 2005 AND 2004 (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) 2005 2004 2005 2004
-------- -------- -------- --------
Net Income, as reported $ 515 $ 499 $ 992 $ 891
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 0 0 0
-------- -------- -------- --------
Pro forma net income $ 515 $ 499 $ 992 $ 891
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.43 $ 0.41 $ 0.83 $ 0.73
======== ======== ======== ========
Basic - pro forma $ 0.43 $ 0.41 $ 0.83 $ 0.73
======== ======== ======== ========
Diluted - as reported $ 0.43 $ 0.41 $ 0.83 $ 0.72
======== ======== ======== ========
Diluted - pro forma $ 0.43 $ 0.41 $ 0.83 $ 0.72
======== ======== ======== ========
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,
-------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ------------ -----------
Average number of shares outstanding 1,185,175 1,225,764 1,190,112 1,228,071
Effect of dilutive options 0 963 0 11,931
----------- ----------- ------------ -----------
Average number of shares outstanding used
to calculate earnings per share 1,185,175 1,226,727 1,190,112 1,240,002
=========== =========== ============ ===========
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 - 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, 2005, 12,819 options were surrendered at a total
cost of $138,122 (27,408 shares for $276,292 in 2004). Stock options awarded and
outstanding totaled 24,661 and 50,649 as of June 30, 2005 and 2004,
respectively.
10
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, 2005
------------------------
2005 2004
---------- ----------
Dividend Yield 3.5% 3.5%
Expected Life 7.5 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,
-----------------------------------------------------
2005 2004
------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ----------- --------- -----------
Outstanding at Beginning of Period 45,388 $ 8.60 102,057 $ 8.59
Granted 0 0
Exercised (7,911) (24,000)
Surrendered (12,816) 8.60 (27,408) 8.60
Forfeited 0 0
---------- ---------
Outstanding at End of Period 24,661 $ 8.60 50,649 $ 8.59
========== =========
Options Exercisable at Period-End 24,661 $ 8.60 48,993 $ 8.59
Weighted-Average Fair Value of
Options Granted during the period n/a n/a
Information pertaining to options outstanding at June 30, 2005 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 24,661 3.6 years $ 8.60 24,661 $8.60
The Company has purchased 26,562 and 48,650 shares as of June 30, 2005 and
December 31, 2004, 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.
11
Note 5 - Improvement Plan for Main Office Facility
The company is nearing completion of the construction a new main office facility
with approximately 15,000 square feet.The projected completion date is August
2005.
Note 6 - Recent Accounting Pronouncements
Derivative Instruments and Hedging Activities
- ---------------------------------------------
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. Management
does not expect this statement to have any significant impact on the Company's
financial position or results of operations.
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity
- --------------------------------------------------------------------------
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
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Management does not expect this statement to have a significant impact on the
Company's financial position or results of operations.
Consolidation of Variable Interest Entities
- -------------------------------------------
In December 2003, the FASB issued revised Interpretation No. 46 (FIN46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of ARB No. 51, "Consolidated Financial Statements," for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. This Interpretation requires variable interest entities to be
consolidated by the primary beneficiary, which represents the enterprise that
will absorb the majority of the variable interest entities' expected losses if
they occur, receive a majority of the variable interest entities' residual
returns if they occur, or both. This Interpretation is effective for the Bank in
the first fiscal year or interim period ending after December 15, 2004. The
Company does not presently have any related entities considered to be variable
interest entities and this Standard is not expected to have a material effect on
the Company's financial statements.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
- ----------------------------------------------------------------------
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, "Accounting for Certain Loans and Debt Securities
Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 addresses accounting for
differences between contractual cash flows expected to be collected and an
investor's initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit quality. SOP
03-3 also prohibits "carrying over" or creation of valuation allowances in the
initial accounting of all loans acquired in a transfer that are within the scope
of SOP 03-3. The prohibition of the valuation allowance carryover applies to the
purchase of an individual loan, a pool of loans, a group of loans, and loans
acquired in a purchase business combination. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. The Company does not
anticipate that the adoption of SOP 03-3 will have a material impact on its
financial condition or results of operations.
Meaning of Other-Than-Temporary Impairment
- ------------------------------------------
In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1,
"Meaning of Other Than Temporary Impairment" ("Issue 03-1"). The Task Force
reached a consensus on an other-than-temporary impairment model for debt and
equity securities accounted for under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and cost method investments, and required certain additional
financial statement disclosures. The implementation of the "Other-than-Temporary
Impairment" component of this consensus has been postponed. The adoption of the
guidance contained in this EITF consensus did not have a material effect on the
Company's financial statements.
12
Share-Based Payment
- --------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends SFAS Statement No. 95, "Statement of Cash
Flows." Generally, the approach to accounting for share-based payments in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values, which means that pro forma disclosure is no longer an
alternative to financial statement recognition. SFAS No. 123(R) is effective for
the Bank beginning January 1, 2006. The effect of this pronouncement on the
Company's financial statements will depend on whether or not the Company grants
more stock options in future periods.
Exchanges of Non-Monetary Assets
- --------------------------------
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an Amendment to APB opinion No. 29." This Statement addresses the measurement
of exchanges of nonmonetary assets. The Statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. Management
does not believe this Statement will have a material effect on the Bank's
financial statements.
Note 7 - Current Items in Process with the Securities and Exchange Commission
As announced on April 14, 2005, United Tennessee Bankshares, Inc., the holding
company for Newport Federal announced that the Company's Board of Directors has
approved proceeding with a proposed going private transaction. The proposed
transaction would reduce the number of stockholders of record from approximately
545 to approximately 96. Following the proposed transaction, the Company would
continue operations as a privately held corporation that would not be required
to file periodic public reports with the Securities and Exchange Commission (the
"SEC"). The terms of the proposed transaction are expected to provide that each
stockholder of record of the Company beneficially owning fewer than 2,500 common
shares will receive cash of $22.00 per share. The price established by the Board
of Directors was supported by a fairness opinion provided by a qualified
valuation firm. Each stockholder of record beneficially owning 2,500 or more
common shares will continue to hold the same number of shares of the Company
after the transaction and will not receive any cash for those shares. Beneficial
ownership includes stock owned by a person's spouse and minor children, as well
as stock directly owned. UTBI anticipates delivering the proxy to shareholders
sometime in August. A preliminary proxy was filed with the SEC on June 24, 2005
and is available for review on the SEC's website (www.sec.gov).
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.
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.
13
The following is a discussion of our financial condition as of June 30, 2005.
These comments should be read in conjunction with our consolidated financial
statements and accompanying footnotes appearing in this report.
Comparison of Financial Condition at June 30, 2005 and December 31, 2004
Total assets decreased from December 31, 2004 to June 30, 2005 by $4.4 million,
or 3.6%, from $122.6 million at December 31, 2004 to $118.2 million at June 30,
2005. The decrease in assets was principally the result of a decrease in
investment securities. Investment securities decreased by $7.1 million offset by
an increase in loans receivable of $1.6 million and an increase in premises and
equipment of $1.3 million. Investment securities were sold to fund the increase
in loan demand, repay advances from the Federal Home Loan Bank and fund a
reduction in deposits. The reduction in deposits is primarily related to
governmental and institutional deposits we had received last year.
Loans receivable increased from December 31, 2004 to June 30, 2005 as
originations exceeded repayments for the period by approximately $1.6 million.
The following table sets forth information about the composition of our loan
portfolio by type of loan at the dates indicated. At June 30, 2005 and December
31, 2004, we had no concentrations of loans exceeding 10% of gross loans other
than as disclosed below.
June 30, 2005 December 31, 2004
-------------------- --------------------
(Dollars in (Dollars in
Thousands) Thousands)
Amount Percent Amount Percent
Type of Loan:
Real estate loans:
One- to four-family residential $ 62,860 75.3% $ 63,037 76.6%
Commercial 10,700 12.8% 10,227 12.4%
Construction 5,031 6.0% 4,172 5.1%
Consumer loans:
Automobile 1,106 1.3% 1,278 1.6%
Loans to depositors,
secured by deposits 1,160 1.4% 1,224 1.5%
Home equity and second mortgage 1,026 1.2% 733 0.9%
Other 1,643 2.0% 1,567 1.9%
--------- -------- -------- --------
83,526 100.0% 82,238 100.0%
--------- ======== -------- ========
Less:
Loans in process 1,770 2,085
Deferred fees and discounts 347 348
Allowance for loan losses 1,010 980
---------- ---------
Total $ 80,399 $ 78,825
========== =========
14
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.
The following table sets forth information about our allowance for loan losses
for the period indicated.
Six Six
Months Months
Ended Ended
June 30, June 30,
2005 2004
------------ -------------
(In Thousands)
Balance at beginning of period $ 980 $ 921
------------ -------------
Charge-offs:
Consumer (5) (17)
Mortgage (2) (13)
Recoveries:
Consumer 1 2
Mortgage 0 0
------------ -------------
Net Charge-offs (6) (28)
Provision for loan losses 36 52
------------ -------------
Balance at end of period $ 1,010 $ 945
============ =============
The following table sets forth information about our nonperforming assets at the
dates indicated.
June 30, June 30,
2005 2004
---- ----
(In Thousands)
Nonaccrual Loans $ - $ -
Accruing loans which are
contractually past due
90 days or more:
Real Estate:
Residential 96 262
Non-Residential 2 4
Consumer 2 15
------- --------
Total $ 100 $ 281
======= ========
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.
15
During the six months ended June 30, 2005, the Company decreased its liabilities
by $4.8 million, or 4.6%. Total deposits decreased $3.8 million or 3.7% from
$100.9 million at December 31, 2004 to $97.1 million at June 30, 2005.
During 2004, the Bank has accepted deposits totaling approximately $8.3 million
from various governmental and institutional customers, some of which are outside
of its traditional market area. The average term of these deposits is
approximately six months. The Bank as of June 30, 2005, has retained $1.1
million of these deposits. In the event the Bank is not able to retain the
remaining 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 $430,000 from $18.4 million at December 31,
2004 to $18.8 million at June 30, 2005. The Company's equity increased primarily
due to net income of $992,000 and proceeds from stock options exercised of
$68,000, and a decrease in unearned compensation related to the Company's ESOP
of $180,000, offset by a decrease due to the cost of stock options surrendered
of $95,000, dividends paid of $474,000 and a decrease in accumulated other
comprehensive income of $173,000. The market value of UTBI's investment
portfolio decreased due to changes in the current interest rate environment
Discussion of Results of Operations for the Three Months Ended June 30, 2005 and
2004
Our net income for the three months ended June 30, 2005 was $515,000, which was
an increase of $16,000 from the amount we earned during the three months ended
June 30, 2004. Basic and diluted earnings per share for the three months ended
June 30, 2005 were each $0.43 compared to $0.41 for the same period in 2004.
Basic average shares outstanding for three months ended June 30, 2005 was
1,185,175 shares and 1,225,764 shares for the three months ended June 30, 2004.
Average dilutive potential shares outstanding were 0 and 963 respectively.
Interest income increased $18,000, or 1.1%, from $1.69 million for the three
months ended June 30, 2004 to $1.71 million for the three months ended June 30,
2005. The increase in interest income is a result of an increase in other
interest income of $15,000 and an increase in interest income on loans of
$9,000, offset by a decrease in interest income on investments of $6,000.
Interest expense on deposits increased $146,000 from $391,000 for the three
months ended June 30, 2004 to $537,000 for the three months ended June 30, 2005,
due to the increase in deposit account interest rates. Our cost of funds
increased from 1.54% at June 30, 2004, to 2.13% at June 30, 2005.
Net interest income decreased $132,000, or 10.1%, between the periods as a
result of the larger increase in interest expense compared to the increase in
interest income. The Company's net interest margin narrowed to 4.21% for the
three months ended June 30, 2005 compared to 4.70% for the comparable period of
2004. The narrowing of the net interest margin reflects the current rate
environment and the fact that our cost of funds has increased.
Noninterest income increased $497,000 from $133,000 for the three months ended
June 30, 2004 to $630,000 for the three months ended June 30, 2005. The increase
in noninterest income was due primarily to a $582,000 gain on the sale of our
Intrieve Inc. stock, our third-party data processor, offset by a loss on the
sale of mortgage back securities of $98,000. On April 4, 2005, Harland Financial
Solutions ("Harland") announced that it was acquiring Intrieve, Inc. UTBI will
continue its current third-party data processing arrangement with Harland. UTBI
owned 4,000 shares of stock in Intrieve, Inc., which was carried at a cost of
approximately $105,000.
Noninterest expenses increased $275,000 from $718,000 for the three months ended
June 30, 2004 to $993,000 for the three months ended June 30, 2005. The increase
in noninterest expense was primarily
16
from increase compensation and benefits of $213,000, and an increase in other
non-interest expense of $76,000. The increase compensation and benefits resulted
primarily from the mark to market adjustment on the Directors Incentive Plan of
$53,000 and a $128,000 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 period. The increase in the other non-interest expense
category reflects the increase in legal, accounting and consulting fees
associated with the April 14, 2005, announcement of United Tennessee Bankshares
proposed going private transaction.
Our effective tax rates for the three months ended June 30, 2005 and 2004 were
34.8% and 28.1%, respectively. The lower effective tax rate for the period in
2004 was due to the surrender of stock options, which provide a tax benefit to
the Company.
Discussion of Results of Operations for the Six Months Ended June 30, 2005 and
2004
Our net income for the six months ended June 30, 2005 was $992,000, which was an
increase of $101,000 from the amount we earned during the six months ended June
30, 2004. Basic and diluted earnings per share for the six months ended June 30,
2005 were each $0.83 compared to $0.73 and $0.72 for the same period in 2004.
Basic average shares outstanding for six months ended June 30, 2005 was
1,190,112 shares and 1,228,071 shares for the six months ended June 30, 2004.
Average dilutive potential shares outstanding were 0 and 11,931 respectively.
Interest income increased $33,000, or 1.0%, from $3.38 million for the six
months ended June 30, 2004 to $3.41 million for the six months ended June 30,
2005. The increase in interest income is a result of an increase in other
interest income of $17,000 and an increase in interest income on loans of $2,000
and an increase in interest income on investments of $14,000.
Interest expense on deposits increased $247,000 from $767,000 for the six months
ended June 30, 2004 to $1,014,000 for the six months ended June 30, 2005, due to
the increase in deposit account interest rates. Our cost of funds increased from
1.54% for the three months ended June 30, 2004, to 2.01% for the three months
ended June 30, 2005.
Net interest income decreased $220,000, or 8.4%, between the periods as a result
of the larger increase in interest expense compared to the increase in interest
income. The Company's net interest margin narrowed to 4.30% for the six months
ended June 30, 2005 compared to 4.79% for the comparable period of 2004. The
narrowing of the net interest margin reflects the current rate environment and
the fact that our cost of funds has increased.
Noninterest income increased $497,000 from $263,000 for the six months ended
June 30, 2004 to $760,000 for the six months ended June 30, 2005. The increase
in noninterest income was due primarily to a $582,000 gain on the sale of our
Intrieve, Inc. stock, our third-party data processor, offset by a loss on the
sale of mortgage back securities of $98,000. On April 4, 2005, Harland Financial
Solutions ("Harland") announced that it was acquiring Intrieve, Inc. UTBI will
continue its current third-party data processing arrangement with Harland. UTBI
owned 4,000 shares of stock in Intrieve, Inc., which was carried at a cost of
approximately $105,000.
Noninterest expenses increased $82,000 from $1.54 million for the six months
ended June 30, 2004 to $1.62 million for the six months ended June 30, 2005. The
increase in noninterest expense was primarily from an increase in other
noninterest expense of $105,000, offset by a decrease in occupancy and equipment
of $42,000. The increase in the other non-interest expense category reflects the
increase in legal, accounting and consulting fees associated with the April 14,
2005, announcement of United Tennessee Bankshares proposed going private
transaction.
17
Our effective tax rates for the six months ended June 30, 2005 and 2004 were
33.6% and 30.6%, respectively. The lower effective tax rate for the period in
2004 was due to the surrender of stock options, which provide a tax benefit to
the Company.
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, 2005 and December 31, 2004, we exceeded all current regulatory
capital requirements and met the definition of a "well-capitalized" institution,
the highest regulatory capital category.
Interest Rate Sensitivity
The Bank's profitability is dependent to a large extent upon net interest
income, which is the difference between its interest income on interest-earning
assets and interest expense on interest-bearing liabilities. In recent years,
the banking industry has experienced steady interest rates, which have likewise
produced steady growth in net interest income as the bank has grown. The Bank
will be affected by changes in levels of interest rates and other economic
factors beyond its control, particularly to the extent that such factors affect
the overall volume of its lending and deposit activities. A sudden increase in
interest rates could have a negative impact on the bank's net income through a
narrower interest margin and/or reduced lending volume.
The bank's Asset/Liability Committee ("ALCO" committee) follows the
Asset/Liability Management Policy approved by the board of directors. The ALCO
committee meets at least quarterly or more often as considered necessary to
discuss asset/liability management issues and make recommendations to the board
of directors regarding prudent asset/liability management policies and
procedures. Some of the issues the ALCO committee considers include: local and
national economic forecasts; interest rate forecasts and spreads; mismatches
between the maturities of the banks assets (loans, and investments) and
liabilities (deposits); anticipated loan demands; and the liquidity position of
the bank.
18
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income.
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 June 30, 2005. 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.
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
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
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Richard G.
Harwood, President and Chief Executive Officer of United Tennessee
Bankshares, Inc.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Chris H.
Triplett, Controller.
32.1 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.
32.2 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.
- ---------------
(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. filed a current report on Form 8-K
on April 14, 2005 announcing a proposed going private transaction.
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 8, 2005 /s/Richard G. Harwood
---------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized and Representative
and Principal Financial and Accounting
Officer)
21