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 September 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.)
170 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: 1,142,999
---------
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
September 30, 2005 (Unaudited) and December 31, 2004 3
Consolidated Statements of Income for the Three-Month and
Nine-Month Periods Ended September 30, 2005 and 2004
(Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three-Month and Nine-Month Periods Ended September 30, 2005
and 2004 (Unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity
for the Nine-Month Period Ended September 30, 2005
(Unaudited) 6
Consolidated Statements of Cash Flow for the Nine-Month
Periods Ended September 30, 2005 and 2004 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Three-Month and Nine-Month Periods Ended September 30, 2005
and 2004 (Unaudited) 9-13
Item 2. Management's Discussion and Analysis or Plan of Operation 13-19
Item 3. Controls and Procedures 19
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
SIGNATURES 21
CERTIFICATIONS 22-25
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
September
30,
2005 December 31,
(Unaudited) 2004
------------ -------------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 3,223 $ 3,444
Investment securities available for sale, at fair value 26,978 35,579
Loans receivable, net 82,284 78,830
Premises and equipment, net 3,842 1,714
Real estate acquired through foreclosure 0 128
Accrued interest receivable 634 573
Goodwill, net of amortization 653 713
Cash surrender value of life insurance 1,650 1,597
Prepaid expenses and other assets 80 81
------------ -------------
Total assets $119,344 $ 122,659
============ =============
Liabilities and Equity
Liabilities:
Deposits $ 98,085 $ 100,919
Advances from Federal Home Loan Bank 1,000 1,000
Accrued interest payable 110 135
Accrued income taxes 0 0
Deferred income taxes 267 561
Accrued benefit plan liabilities 1,533 1,531
Other liabilities 167 94
------------ -------------
Total liabilities 101,162 104,240
------------ -------------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000 shares;
issued and outstanding 1,142,999 shares (1,196,999 in
2004) $ 10,597 $ 11,459
Unearned compensation - ESOP 0 (180)
Shares in grantor trust - contra account (224) (224)
Shares in stock option plan trusts - contra account (437) (500)
Retained earnings 7,510 6,648
Accumulated other comprehensive income 736 1,216
------------ -------------
Total shareholders' equity 18,182 18,419
------------ -------------
Total liabilities and equity $119,344 $ 122,659
============ =============
The accompanying notes are an integral part of these financial statements.
UNITED TENNESSEE BANKSHARES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
---------------------------- ---------------------------
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September 30, September 30,
---------------------------- ---------------------------
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------ ------------ ------------ -----------
Interest income:
Loans $ 1,362 $ 1,337 $ 4,073 $ 4,046
Investment securities 279 393 955 1,055
Other interest-earning assets 19 3 41 8
------------ ------------ ------------ -----------
Total interest income 1,660 1,733 5,069 5,109
------------ ------------ ------------ -----------
Interest expense:
Deposits 595 430 1,609 1,197
Advances from Federal Home Loan Bank 0 1 6 1
------------ ------------ ------------ -----------
Total interest expense 595 431 1,615 1,198
------------ ------------ ------------ -----------
Net interest income 1,065 1,302 3,454 3,911
Provision for loan losses 18 24 54 76
------------ ------------ ------------ -----------
Net interest income after provision for loan losses 1,047 1,278 3,400 3,835
------------ ------------ ------------ -----------
Noninterest income:
Deposit account service charges 84 80 228 227
Loan service charges and fees 27 29 80 84
Net gain (loss) on sales of investment securities available for
sale 33 26 517 26
Net gain (loss) on sales of premises and equipment 199 0 199 0
Other 39 22 118 83
------------ ------------ ------------ -----------
Total noninterest income 382 157 1,142 420
------------ ------------ ------------ -----------
Noninterest expense:
Compensation and benefits 357 448 1,282 1,506
Occupancy and equipment 54 55 162 205
Federal deposit insurance premiums 15 5 42 13
Data processing fees 80 86 250 251
Advertising and promotion 29 17 66 52
Net (gain) loss on foreclosed real estate 0 (2) (2) (10)
Amortization 20 20 60 60
Other 170 133 573 431
------------ ------------ ------------ -----------
Total noninterest expense 725 762 2,433 2,508
------------ ------------ ------------ -----------
Income before income taxes 704 673 2,109 1,747
Income taxes 269 260 773 675
------------ ------------ ------------ -----------
Net income $ 435 $ 413 $ 1,336 $ 1,072
============ ============ ============ ===========
Earnings per share
Basic $ 0.37 $ 0.37 $ 1.15 $ .97
============ ============ ============ ===========
Diluted $ 0.36 $ 0.37 $ 1.13 $ .95
============ ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
Three Months Ended Nine Months Ended
------------------------- ------------------------
September 30, September 30,
------------------------- ------------------------
2005 2004 2005 2004
---------- ----------- ---------- ----------
(Unaudited - in thousands) (Unaudited- in thousands)
Net income $ 435 $ 413 $ 1,336 $ 1,072
---------- ----------- ---------- ----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities (462) 607 (257) 106
Less reclassification adjustment for gains\losses
included in net income (33) (26) (517) (26)
Less income taxes related to unrealized
gains\losses on investment securities 188 (220) 294 (30)
---------- ----------- ---------- ----------
Other comprehensive income (loss), net of tax (307) 361 (480) 50
---------- ----------- ---------- ----------
Comprehensive income(loss) $ 128 $ 774 $ 856 $ 1,122
========== =========== ========== ==========
The accompanying notes are an integral part of these financial statements.
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 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 $11,459 $ (180) $ (224) $ (500) $ 6,648 $ 1,216 $ 18,419
Net income 0 0 0 0 1,336 0 1,336
Other comprehensive income (loss) 0 0 0 0 0 (480) (480)
Retirement of stock held
in the stock option plan
trusts (864) 0 0 864 0 0 0
Purchase of Common Stock 0 0 0 (877) 0 0 (877)
Decrease in cost of shares
in stock option plan trust 0 0 0 14 0 0 14
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
Increase to common stock
for income tax
reduction related to
stock options exercised 2 0 0 0 0 0 2
Increase in cost basis for
withholding tax on stock
options exercised 0 0 0 (6) 0 0 (6)
------- ----------- ----------- ---------- -------- ------------ -----------
Balances, end of period $10,597 $ 0 $ (224) $ (437) $ 7,510 $ 736 $18,182
======= =========== =========== ========== ======== ============ ===========
The accompanying notes are an integral part of these financial statements.
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
Nine Months Ended
September 30,
------------------------------
2005 2004
(Unaudited - in thousands)
------------------------------
Operating Activities:
Net income $ 1,336 $ 1,072
------------- -------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 54 76
Depreciation 50 69
Amortization of goodwill 60 60
Net (gain) loss on sales of foreclosed real estate (2) (10)
Federal home loan bank stock dividends (35) (29)
Net (gain) loss on sales of investment securities available
for sale (517) (26)
Net (gain) loss on sale of premises and equipment (199) 0
Deferred income taxes (benefit) 0 0
Increase in common stock for income tax reduction related to
stock options exercised 2 24
Increase in cash surrender value of bank-owned life insurance (53) (52)
(Increase) Decrease in:
Accrued interest receivable (61) (103)
Other assets 1 101
Increase (Decrease) in:
Accrued interest payable (25) 22
Accrued income taxes 0 68
Accrued benefit plan liabilities 2 116
Other liabilities 73 104
------------- -------------
Total adjustments (650) 420
------------- -------------
Net cash provided by operating activities 686 1,492
------------- -------------
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 2,582 6,664
Proceeds from sales of investment securities available for sale 3,885 718
Net (increase) decrease in loans (3,438) (1,075)
Purchases of premises and equipment, net (2,303) (289)
Proceeds from sales of premises and equipment 324 0
Proceeds from sales of foreclosed real estate 60 411
------------- -------------
Net cash used in investing activities 3,022 (8,370)
------------- -------------
The accompanying notes are an integral part of these financial statements.
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
Nine Months Ended
September 30,
------------------------------
2005 2004
(Unaudited - in thousands)
------------------------------
Financing Activities:
Dividends paid (474) (442)
Decrease in cost of shares in stock option plan trusts 14 27
Net increase (decrease) in deposits (2,834) 4,486
Purchase of common stock (877) (74)
Proceeds from exercise of stock options 68 206
Increase in cost basis for withholding tax on stock options
exercised (6) (71)
Payment on ESOP loan and release of shares 180 171
------------- -------------
Net cash provided by (used in) financing activities (3,929) 4,303
------------- -------------
Net increase (decrease) in cash and cash equivalents (221) (2,575)
Cash and cash equivalents, beginning of period 3,444 5,196
------------- -------------
Cash and cash equivalents, end of period $ 3,223 $ 2,621
============= =============
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $1,640 $1,220
Income taxes $817 $551
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $343 $436
Sale of Foreclosed Real Estate by Origination of Mortgage Loans $413 $178
Change in unrealized gain\loss on investment securities
available for sale ($774) $80
Change in deferred income taxes associated with unrealized
gain\loss on investment securities available for sale ($294) $30
Change in net unrealized gain\loss on investment
securities available for sale ($480) $50
The accompanying notes are an integral part of these financial statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS
ENDED SEPTEMBER 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. Stock-based employee compensation cost
is reflected in net income when and if options are exercised by employees and
directors, and the Company purchases those shares within six months of the
option exercise. Compensation expense equals the cash amount paid to employees
and directors, net of any statutory federal income tax withholding and
applicable payroll taxes paid from the proceeds. 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 Nine Months
Ended Ended
-------------------- --------------------
September 30, September 30,
-------------------- --------------------
(In thousands, except per share data) 2005 2004 2005 2004
-------- -------- -------- --------
Net Income, as restated $ 435 $ 413 $1,336 $1,072
Add: Stock-based employee compensation 8 20 63 149
Expense, net of related tax effect
Less: Total stock-based compensation expense determined
Under fair value based method for all awards, net of
related tax effect 0 0 0 0
-------- -------- -------- --------
Pro forma net income $ 443 $ 433 $1,399 $1,221
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 0.37 $ 0.37 $ 1.15 $ .97
======== ======== ======== ========
Basic - pro forma $ 0.38 $ 0.39 $ 1.20 $ 1.11
======== ======== ======== ========
Diluted - as reported $ 0.36 $ 0.37 $ 1.13 $ 0.95
======== ======== ======== ========
Diluted - pro forma $ 0.37 $ 0.38 $ 1.18 $ 1.08
======== ======== ======== ========
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
------------------------
September 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%
NOTE 2 - RESTATEMENT OF FINANCIAL STATEMENTS
On November 8, 2005, management and the board of directors determined that the
Company did not correctly record the expense associated with the repurchase of
its common stock from employees and directors for the years ended December 31,
2003 and 2004, and for the interim periods of March 31, June 30, and September
30, 2005. UTBI has consistently applied APB Opinion No. 25 in accounting for its
1999 Stock Option Plan. When stock options were issued, the amount of the
options and the exercise price was fixed, and the exercise price was equal to
the fair market value of the stock on the date granted. Accordingly, UTBI did
not record any compensation cost when the stock options were issued. Stock
options were exercised by employees and directors and the stock was immediately
repurchased by the Company. The Company had previously repurchased stock using
its Stock Option Plan Trust to provide for the shares needed when the options
were exercised. The cost of these repurchased shares was recorded in a
contra-equity account called "Stock Option Plan Trust Contra Account" which
reduced shareholders' equity. When the options were exercised and the stock
repurchased, the cost basis of the shares was adjusted in the Stock Option Plan
Trust Contra Account. After further research of APB Opinion No. 25 and related
interpretation FIN 44, management and the board of directors have determined
that the amount of cash paid to employees and directors should have been charged
to compensation expense, net of any statutory federal or state tax withholding
and payroll taxes paid from the proceeds. In addition, earnings per share were
computed incorrectly due to incorrectly including the shares in the various
trust accounts in the computation of outstanding shares.
The following table presents the originally reported amounts and the restated
amounts in the consolidated statements of financial condition as of December 31,
2004:
December 31, 2004
Originally As Increase
Reported Restated (Decrease)
---------- -------- ----------
Common Stock $ 11,098 $ 11,459 $ 361
Shares in Stock Option Plan Trusts
- - Contra Account (749) (500) 249
Retained Earnings 7,257 6,647 (610)
Total Shareholders' Equity 18,419 18,419 0
The following table presents the impact of the compensation adjustment and
correction of the calculation of earnings per share on consolidated net income
and earnings per share for the nine month period ended September 30, 2004:
Three months ended Nine months ended
September 30, 2004 September 30, 2004
(thousands)
Net Income as Previously Reported $ 447 $ 1,338
Increase in Compensation Expense 33 242
Increase in Income Tax Expense 1 24
Net Income as Restated $ 413 $ 1,072
Earnings Per Share as Previously Reported:
Basic $ 0.37 $ 1.10
Diluted $0.37 $1.09
Earnings Per Share as Restated:
Basic $0.37 $0.97
Diluted $0.37 $0.95
Note 3 - 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 to outstanding stock options and shares held in Grantor
Trust and are determined using the treasury stock method.
Earnings per share have been computed based on the following:
Three Months Ended Nine Months Ended
-------------------------- ---------------------------
September 30, September 30,
-------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ------------ -----------
Average number of shares outstanding 1,174,803 1,104,280 1,164,179 1,104,751
Effect of dilutive options 20,747 20,747 20,747 20,747
----------- ----------- ------------ -----------
Average number of shares outstanding used
to calculate earnings per share 1,195,550 1,125,027 1,184,926 1,125,498
----------- ----------- ------------ -----------
Note 4 - 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 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. The board of directors
granted 202,676 options in 1999 and 6,623 options in 2001. During the nine month
period ended September 30, 2005, 21,727 options were exercised (55,069 shares in
2004). Stock options awarded and outstanding totaled 23,661 and 46,988 as of
September 30, 2005 and 2004, respectively.
A summary of the status of the Company's stock option plan is presented below:
Nine Months Ended September 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 (21,727) 8.60 (55,069) 8.60
Forfeited 0 0
---------- ---------
Outstanding at End of Period 23,661 8.60 46,988 8.59
========== =========
Options Exercisable at Period-End 23,661 8.60 47,338 8.59
Weighted-Average Fair Value of
Options Granted during the period n/a n/a
Information pertaining to options outstanding at September 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 23,661 3.8 years $ 8.60 23,661 $ 8.60
The Company has purchased 24,594 and 48,650 shares as of September 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.
Note 6 - Improvement Plan for Main Office Facility
The company moved into its new main office facility and opened to the public on
September 19, 2005.
Note 7 - 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.
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.
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.
The following is a discussion of our financial condition as of September 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 September 30, 2005 and December 31, 2004
Total assets decreased from December 31, 2004 to September 30, 2005 by $3.3
million, or 2.7%, from $122.6 million at December 31, 2004 to $119.3 million at
September 30, 2005. The decrease in assets was principally the result of a
decrease in investment securities. Investment securities decreased by $8.6
million offset by an increase in loans receivable of $3.5 million and an
increase in premises and equipment of $2.1 million. Investment securities were
sold to fund the increase in loan demand, fund the building program 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 September 30, 2005 as
originations exceeded repayments for the period by approximately $3.5 million.
The following table sets forth information about the composition of our loan
portfolio by type of loan at the dates indicated. At September 30, 2005 and
December 31, 2004, we had no concentrations of loans exceeding 10% of gross
loans other than as disclosed below.
September 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 $ 65,772 75.6% $ 63,037 76.6%
Commercial 11,196 12.9% 10,227 12.4%
Construction 5,518 6.3% 4,172 5.1%
Consumer loans:
Automobile 1,045 1.2% 1,278 1.6%
Loans to depositors, secured by deposits 1,027 1.2% 1,224 1.5%
Home equity and second mortgage 743 0.9% 733 0.9%
Other 1,727 2.0% 1,567 1.9%
-------------------- ---------------------
87,028 100.0% 82,238 100.0%
----------- ======== ------------ ========
Less:
Loans in process 3,356 2,085
Deferred fees and discounts 364 348
Allowance for loan losses 1,024 980
----------- ------------
Total $ 82,284 $ 78,825
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.
Nine Nine
Months Months
Ended Ended
September September
30, 30,
2005 2004
(In Thousands)
Balance at beginning of period $ 980 $ 921
------------ -------------
Charge-offs:
Consumer (9) (19)
Mortgage (2) (22)
Recoveries:
Consumer 1 2
Mortgage 0 0
------------ -------------
Net Charge-offs (10) (39)
Provision for loan losses 54 76
------------ -------------
Balance at end of period $ 1,024 $ 958
The following table sets forth information about our nonperforming assets at the
dates indicated.
September 30, September 30,
2005 2004
(In Thousands)
Nonaccrual Loans $ 0 $ 0
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential 424 64
Non-Residential 63 4
Consumer 18 15
------------- -------------
Total $ 505 $ 83
============= =============
We conduct regular reviews of our assets and evaluate the need to establish
allowances on the basis of this review. Allowances are established on a regular
basis based on an assessment of risk in our assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, the state of the real estate market, regulatory reviews
conducted in the regulatory examination process, general economic conditions and
other factors deemed relevant by us. Allowances are provided for individual
assets, or portions of assets, when ultimate collection is considered improbable
based on the current payment status of the assets and the fair value or net
realizable value of the collateral.
During the nine months ended September 30, 2005, the Company's liabilities
decreased by $3.1 million, or 3.0%. Total deposits decreased $2.8 million or
2.8% from $100.9 million at December 31, 2004 to $98.1 million at September 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 September 30, 2005, has retained $2.2
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.
The Company's equity decreased primarily due to the repurchase of common stock
at a cost of $877,000, dividends paid of $474,000 and a decrease in accumulated
other comprehensive income of $480,000, offset by net income of $1.34 million,
proceeds from stock options exercised of $68,000 and a decrease in unearned
compensation related to the Company's ESOP of $180,000. 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 September 30,
2005 and 2004
Our net income for the three months ended September 30, 2005 was $435,000, which
was an increase of $23,000 from the amount we earned during the three months
ended September 30, 2004. Basic and diluted earnings per share for the three
months ended September 30, 2005 were $0.37 and $0.36 compared to $0.37 for the
same period in 2004. Basic average shares outstanding for three months ended
September 30, 2005 was 1,174,803 shares and 1,104,280 shares for the three
months ended September 30, 2004. Average dilutive potential shares outstanding
were 20,747 respectively.
Interest income decreased $73,000, or 4.2%, from $1.73 million for the three
months ended September 30, 2004 to $1.66 million for the three months ended
September 30, 2005. The decrease in interest income is a result of a decrease in
investment interest income of $114,000 offset by an increase in interest income
on loans of $25,000 and an increase in other interest income of $16,000.
Interest expense on deposits increased $165,000 from $430,000 for the three
months ended September 30, 2004 to $595,000 for the three months ended September
30, 2005, due to the increase in deposit account interest rates. Our cost of
funds increased from 1.55% at September 30, 2004, to 2.18% at September 30,
2005.
Net interest income decreased $237,000, or 18.2%, 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 3.79% for the
three months ended September 30, 2005 compared to 4.47% 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 $225,000 from $157,000 for the three months ended
September 30, 2004 to $382,000 for the three months ended September 30, 2005.
The increase in noninterest income was due primarily to a net gain realized on
the sale of our former main office facility of $199,000.
Noninterest expenses decreased $37,000 from $762,000 for the three months ended
September 30, 2004 to $725,000 for the three months ended September 30, 2005.
The decrease in noninterest expense was primarily from a decrease in
compensation and benefits expense due to a reduction in pension expense of
$38,000.
Our effective tax rates for the three months ended September 30, 2005 and 2004
were 38.2% and 38.5%, respectively.
Discussion of Results of Operations for the Nine Months Ended September 30, 2005
and 2004
Our net income for the nine months ended September 30, 2005 was $1.34 million
which was an increase of $239,000 from the amount we earned during the nine
months ended September 30, 2004. Basic and diluted earnings per share for the
nine months ended September 30, 2005 were $1.15 and $1.13 compared to $0.97 and
$0.95 for the same period in 2004. Basic average shares outstanding for nine
months ended September 30, 2005 was 1,164,179 shares and 1,104,751 shares for
the nine months ended September 30, 2004. Average dilutive potential shares
outstanding were 20,747 respectively.
Interest income decreased $40,000, or 0.8%, from $5.11 million for the nine
months ended September 30, 2004 to $5.07 million for the nine months ended
September 30, 2005. The decrease in interest income is a result of a decrease in
investment interest income of $100,000 offset by an increase in interest on
loans of $27,000 and an increase in other interest income of $33,000.
Interest expense on deposits increased $412,000 from $1.2 million for the nine
months ended September 30, 2004 to $1.6 million for the nine months ended
September 30, 2005, due to the increase in deposit account interest rates. Our
cost of funds increased from 1.55% for the nine months ended September 30, 2004,
to 2.18% for the nine months ended September 30, 2005.
Net interest income decreased $457,000, or 11.7%, 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 4.13% for the
nine months ended September 30, 2005 compared to 4.61% 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 $722,000 from $420,000 for the nine months ended
September 30, 2004 to $1,142,000 for the nine months ended September 30, 2005.
The increase in noninterest income was due primarily to a $615,000 gain on the
sale of our Intrieve, Inc. stock, a gain on the sale of our former main office
facility of $199,000, offset by a loss on the sale of mortgage back securities
of $98,000.
Noninterest expenses decreased $75,000 from $2.51 million for the nine months
ended September 30, 2004 to $2.43 million for the nine months ended September
30, 2005. The decrease in noninterest expense was primarily due to a decrease in
compensation and benefits expense due to a reduction in the recognition of
expense on stock options exercised of $146,000, a reduction in expense related
to the Company's ESOP of $93,000 offset by an increase of $142,000 in other
noninterest expense and an increase in advertising of $14,000. 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.
Our effective tax rates for the nine months ended September 30, 2005 and 2004
were 36.7% and 38.6%, respectively
Liquidity and Capital Resources
The Company does not currently have any business activities other than the
operation of the Bank and does not have significant on-going funding commitments
other than the payment of dividends to shareholders. To date, the Company has
used the proceeds from its initial public offering and dividends from the Bank
to meet its liquidity needs. The Bank is subject to various regulatory
limitations on the payment of dividends to the Company.
Our most liquid assets are cash and amounts due from depository institutions,
which are short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash. The
levels of these assets are dependent on our operating, financing and investing
activities during any given period. Our primary sources of funds are deposits,
proceeds from principal and interest payments on loans and investment securities
and earnings. While scheduled principal repayments on loans and investment
securities are a relatively predictable source of funds, deposit flows and loan
and investment securities prepayments are greatly influenced by general interest
rates, economic conditions, competition and other factors. We do not solicit
deposits outside of our market area through brokers or other financial
institutions; however, we do accept deposits from various governmental and
institutional investors outside our traditional market area from time to time.
We have also designated all of our investment securities as available for sale
in order to meet liquidity demands. In addition to internal sources of funding,
as a member of the Federal Home Loan Bank we have substantial borrowing
authority with the Federal Home Loan Bank. Our use of a particular source of
funds is based on need, comparative total costs and availability.
We have historically maintained substantial levels of capital. The assessment of
capital adequacy depends on several factors, including asset quality, earnings
trends, liquidity and economic conditions. We seek to maintain high levels of
regulatory capital to give us maximum flexibility in the changing regulatory
environment and to respond to changes in market and economic conditions. These
levels of capital have been achieved through consistent earnings enhanced by low
levels of noninterest expense and have been maintained at those high levels as a
result of our policy of moderate growth generally confined to our market area.
At September 30, 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.
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 September 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.
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
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.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: November 21, 2005 /s/Richard G. Harwood
---------------------- ----------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Richard G. Harwood, certify that:
1. I have reviewed this quarterly report of United Tennessee Bankshares, Inc.
("United Tennessee");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report.
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-1(e) and
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f) and 15d-15(f))for the small business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter tht has materially
affected, or is reasonably likely to materially affect, the small
business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of small business issuer's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 21, 2005 /s/ Richard G. Harwood
------------------- --------------------------
Richard G. Harwood
President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Chris H. Triplett, certify that:
1. I have reviewed this quarterly report of United Tennessee Bankshares, Inc.
("United Tennessee");
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report.
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-1(e) and
internal control over financial reporting (as defined in Exchange Act Rule
13a-15(f) and 15d-15(f))for the small business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the small business issuer's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter tht has materially
affected, or is reasonably likely to materially affect, the small
business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the small business issuer's auditors and the audit committee
of small business issuer's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer's
internal control over financial reporting.
Date: November 21, 2005 /s/ Chris H. Triplett
------------------ ------------------------
Chris H. Triplett
CFO
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-QSB of United Tennessee
Bankshares, Inc. I, Richard G. Harwood, President and Chief Executive Officer of
United Tennessee Bankshares, Inc., certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
2. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
3. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of United Tennessee Bankshares, Inc.
Date: November 21, 2005 /s/ Richard G. Harwood
------------------- ------------------------
Richard G. Harwood
President and
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-QSB of United Tennessee
Bankshares, Inc. I, Chris H. Triplett, CFO of United Tennessee Bankshares, Inc.,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of United Tennessee Bankshares, Inc.
Date: November 21, 2005 /s/ Chris H. Triplett
------------------- --------------------------
Chris H. Triplett
Chief Financial Officer