UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
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 March 31, 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 { }
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes { } No {X}
State the number of shares outstanding of each of the issuer's classes of common
stock as of May 13, 2005: 1,123,314
---------
Transitional Small Business Disclosure Format (Check one): Yes { } No {X}
Explanatory Note
----------------
The Company is amending this Form 10-QSB for the three months ended March 31,
2005 to restate its unaudited financial statements for the three months ended
March 31, 2005 and 2004.
On November 8, 2005, the Company received verbal notification from its
independent registered accounting firm Pugh & Company, P.C. that its financial
statements contained in its annual repors on Form 10-KSB for the years ended
December 31, 2003 and 2004 and the quarterly reports on Form 10-QSB for the
quarters ended March 31, 2005 and June 30, 2005 must be restated to correct the
recording of expense associated with the repurchase of its common stock from
employees and directors for the affected periods. 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, 2004 and 2003 and for the interim periods of
March 31, June 30, and September 30, 2005. The Company 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, the Company 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 Trusts 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 Trusts 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 Trusts 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 was computed incorrectly due to incorrectly
including the shares in the various trust accounts in the computation of
outstanding shares for 2002 through 2005.
The following table presents the originally reported amounts and the restated
amounts in the consolidated statements of financial condition as of March 31,
2005 and December 31, 2004:
March 31, 2005
Originally Reported As Restated Increase
(Decrease)
Common Stock $ 10,912 $ 11,335 $ 423
Shares in Stock Option Plan Trusts - Contra Account (563) (325) 238
Retained Earnings 7,735 7,074 (661)
Total Shareholders' Equity 18,564 18,564 0
December 31, 2004
Originally Reported As Restated Increase
(Decrease)
Common Stock $ 11,098 $ 11,459 $ 361
Shares in Stock Option Plan Trusts - Contra Account (749) (500) 249
Retained Earnings 7,258 6,648 (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 three months ended March 31, 2005 and 2004:
3/31/2005 3/31/2004
Net Income as Previously Reported $ 477 $ 392
Increase in Compensation Expense (49) (72)
Increase in Income Tax Expense (2) (3)
------ ------
Net Income as Restated $ 426 $ 317
====== ======
3/31/2005 3/31/2004
Earnings Per Share as Previously Reported:
Basic $0.40 $0.32
Diluted $0.40 $0.32
Earnings Per Share as Restated:
Basic $0.38 $0.29
Diluted $0.37 $0.28
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2005 (Unaudited) and December 31, 2004 3
Consolidated Statements of Income for the Three-Month
Periods Ended March 31, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Comprehensive Income for
the Three-Month Periods Ended March 31, 2005 and 2004
(Unaudited) 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three-Month Period Ended March 31, 2005
(Unaudited) 6
Consolidated Statements of Cash Flows for the Three-Month
Periods Ended March 31, 2005 and 2004 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Three-Month Periods Ended March 31, 2005 and 2004
(Unaudited) 9-15
Item 2. Management's Discussion and Analysis or
Plan of Operation 16-21
Item 3. Controls and Procedures 21
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22-23
SIGNATURES 23
CERTIFICATIONS 26-28
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
March 31, December
2005 31,
(Unaudited) 2004
----------- ------------
(In Thousands)
Assets
Cash and amounts due from depository institutions $ 623 $ 3,444
Investment securities available for sale, at fair value 32,860 35,579
Loans receivable, net 79,294 78,830
Premises and equipment, net 2,287 1,714
Real estate acquired through foreclosure 185 128
Accrued interest receivable 638 573
Goodwill, net of amortization 693 713
Cash surrender value of life insurance 1,617 1,597
Prepaid expenses and other assets 32 81
----------- ------------
Total assets $ 118,229 $ 122,659
=========== ============
Liabilities and Equity
Liabilities:
Deposits $ 97,752 $ 100,919
Advances from Federal Home Loan Bank 0 1,000
Accrued interest payable 107 135
Accrued income taxes 168 0
Deferred income taxes 287 561
Accrued benefit plan liabilities 1,243 1,531
Other liabilities 108 94
------------ ------------
Total liabilities 99,665 104,240
------------ ------------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000 shares;
issued 1,185,999 shares (1,196,999 in 2004); outstanding
1,123,314 shares (1,102,747 in 2004) 11,335 11,459
Unearned compensation - ESOP (64) (180)
Shares in grantor trust - contra account (224) (224)
Shares in stock option plan trusts - contra account (325) (500)
Retained earnings 7,074 6,648
Accumulated other comprehensive income 768 1,216
----------- ------------
Total shareholders' equity 18,564 18,419
----------- ------------
Total liabilities and equity $ 118,229 $ 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 MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(In Thousands Except
per Share Information)
---------------------------
Three Months Ended
----------------------------
March 31,
----------------------------
2005 2004
(Unaudited) (Unaudited)
------------ ------------
Interest income:
Loans $ 1,349 $ 1,356
Investment securities 343 323
Other interest-earning assets 5 3
------------ ------------
Total interest income 1,697 1,682
------------ ------------
Interest expense:
Deposits 477 376
Advances from Federal Home Loan Bank 2 0
------------ ------------
Total interest expense 479 376
------------ ------------
Net interest income 1,218 1,306
Provision for loan losses 18 28
------------ ------------
Net interest income after provision for loan losses 1,200 1,278
------------ ------------
Noninterest income:
Deposit account service charges 70 72
Loan service charges and fees 29 29
Net gain (loss) on sales of investment securities
available for sale 0 0
Other 31 29
------------ ------------
Total noninterest income 130 130
------------ ------------
Noninterest expense:
Compensation and benefits 333 582
Occupancy and equipment 53 60
Federal deposit insurance premiums 4 4
Data processing fees 84 78
Advertising and promotion 18 14
Net (gain) loss on foreclosed real estate 1 0
Amortization 20 20
Other 162 133
------------ ------------
Total noninterest expense 675 891
------------ ------------
Income before income taxes 655 517
Income taxes 229 200
------------ ------------
Net income $ 426 $ 317
============ ============
Earnings per share
Basic $ 0.38 $ 0.29
============ ============
Diluted $ 0.37 $ 0.28
============ ============
The accompanying notes are an integral part of these financial statements.
4
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
Three Months Ended
-------------------------
March 31,
-------------------------
2005 2004
----------- ----------
(Unaudited - in
thousands)
Net income $ 426 $ 317
----------- ----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities (722) 362
Less reclassification adjustment for gains\losses
included in net income 0 0
Less income taxes related to unrealized
gains\losses on investment securities 274 (138)
----------- ----------
Other comprehensive income (loss), net of tax (448) 224
----------- ----------
Comprehensive income(loss) $ (22) $ 541
=========== ==========
The accompanying notes are an integral part of these financial statements.
5
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2005
Shares
in
Shares in Stock
Grantor Option Accumulated
Unearned Trust - Plan- Other Total
Common Compensation Contra Contra Retained Comprehensive Shareholders'
Stock ESOP Account Account Earnings Income Equity
--------- ----------- ---------- --------- --------- ------------- -------------
(Unaudited-In Thousands)
Balances, beginning of period $ 11,459 $ (180) $ (224) $ (500) $ 6,648 $ 1,216 $ 18,419
Net income 0 0 0 0 426 0 426
Other comprehensive income
(loss) 0 0 0 0 0 (448) (448)
Retirement of Stock held
in the Stock Option
Plan Trust (126) 0 0 126 0 0 0
Purchase of Stock to be held
In the stock option plan
Trusts 0 0 0 (13) 0 0 (13)
Payment on ESOP loan
principal 0 116 0 0 0 0 116
Proceeds from exercise of
stock options 0 0 0 68 0 0 68
Increase to common stock
for portion of 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 $ 11,335 $ (64) $ (224) $ (325) $ 7,074 $ 768 $ 18,564
========= ========== ========== ========= ======== =========== ===========
The accompanying notes are an integral part of these financial statements.
6
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2005 AND 2004
Three Months Ended
March 31,
-------------------------
2005 2004
(Unaudited - in
thousands)
-------------------------
Operating Activities:
Net income $ 426 $ 317
----------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 18 28
Depreciation 17 24
Amortization of goodwill 20 20
Net (gain) loss on sales of foreclosed real estate 1 0
Federal home loan bank stock dividends (11) (9)
Increase to common stock for portion of income tax reduction
related to stock options exercised 2 3
Increase in cash surrender value of bank-owned life insurance (20) (18)
(Increase) Decrease in:
Accrued interest receivable (65) (92)
Other assets 49 86
Increase (Decrease) in:
Accrued interest payable (28) 1
Accrued income taxes 168 89
Accrued benefit plan liabilities (288) (84)
Other liabilities 14 50
----------- ----------
Total adjustments (123) 98
----------- ----------
Net cash provided by operating activities 303 415
----------- ----------
Investing Activities:
Purchases of investment securities available for sale 0 (4,339)
Proceeds from maturities of investment securities available for sale 0 0
Payments received on investment securities available for sale 2,008 1,980
Proceeds from sales of investment securities available for sale 0 0
Net (increase) decrease in loans (648) 331
Purchases of premises and equipment, net (590) (57)
Proceeds from sales of foreclosed real estate 108 15
----------- ----------
Net cash provided by (used in) investing activities 878 (2,070)
----------- ----------
The accompanying notes are an integral part of these financial statements.
7
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2005 AND 2004
Three Months Ended
2005 2004
---------- ----------
(Unaudited - in
thousands)
Financing Activities:
Net increase (decrease) in deposits (3,167) (292)
Purchase of common stock (13) 0
Proceeds from exercise of stock options 68 206
Increase in cost basis for withholding tax
on stock options exercised (6) (9)
Payment on ESOP loan and release of shares 116 116
Net repayment of advances from Federal Home Loan Bank (1,000) 0
--------- ---------
Net cash provided by (used in) financing activities (4,002) 21
--------- ---------
Net increase (decrease) in cash and cash equivalents (2,821) (1,634)
Cash and cash equivalents, beginning of period 3,444 5,196
---------- ---------
Cash and cash equivalents, end of period $ 623 $ 3,562
========== =========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 507 $ 375
Income taxes $ 59 $ 40
Supplementary disclosures of noncash investing activities:
Acquisition of foreclosed real estate $ 343 $ 227
Sale of foreclosed real estate by origination of mortgage loans $ 178 $ 0
Change in unrealized gain\loss on investment securities
available for sale $ (722) $ 362
Change in deferred income taxes associated with unrealized
gain\loss on investment securities available for sale $ (274) $ 138
Change in net unrealized gain\loss on investment
securities available for sale $ (448) $ 224
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 PERIODS ENDED
MARCH 31, 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 consolidated 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 and director
compensation.
Three Months Ended
--------------------
March 31,
--------------------
(In thousands, except per share data) 2005 2004
-------- --------
Net Income, as restated $ 426 $ 317
Add: Stock-based employee compensation
expense, net of tax 30 44
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 0 0
-------- --------
Pro forma net income $ 456 $ 361
======== ========
Earnings per share:
Basic - as restated $ 0.38 $ 0.29
======== ========
Basic - pro forma $ 0.41 $ 0.33
======== ========
Diluted - as restated $ 0.37 $ 0.28
======== ========
Diluted - pro forma $ 0.40 $ 0.32
======== ========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Period Ended
---------------------------------
March 31,
---------------------------------
2005 2004
--------------- --------------
Dividend Yield 3.5% 3.5%
Expected Life 8.5 years 8.5 years
Expected Volatility 52.0% 52.0%
Risk-Free Interest Rate 4.8% 4.8%
9
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,
2004 and 2003 and for the interim periods of March 31, June 30, and September
30, 2005. The Company 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, the
Company 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 Trusts 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 Trusts 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
Trusts 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 was
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 March 31,
2005 and December 31, 2004:
March 31, 2005
Originally Reported As Restated Increase
(Decrease)
Common Stock $ 10,912 $ 11,335 $ 423
Shares in Stock Option Plan Trusts - Contra Account (563) (325) 238
Retained Earnings 7,735 7,074 (661)
Total Shareholders' Equity 18,564 18,564 0
December 31, 2004
Originally Reported As Restated Increase
(Decrease)
Common Stock $ 11,098 $ 11,459 $ 361
Shares in Stock Option Plan Trusts - Contra Account (749) (500) 249
Retained Earnings 7,258 6,648 (610)
Total Shareholders' Equity 18,419 18,419 0
10
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 three months ended March 31, 2005 and 2004:
3/31/2005 3/31/2004
Net Income as Previously Reported $ 477 $ 392
Increase in Compensation Expense (49) (72)
Increase in Income Tax Expense (2) (3)
------ ------
Net Income as Restated $ 426 $ 317
====== ======
3/31/2005 3/31/2004
Earnings Per Share as Previously Reported:
Basic $0.40 $0.32
Diluted $0.40 $0.32
Earnings Per Share as Restated:
Basic $0.38 $0.29
Diluted $0.37 $0.28
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 which are determined using
the treasury stock method, and shares in the grantor trust-contra account which
according to EITF 97-14 are included for calculation of diluted earnings per
share.
11
Earnings per share have been computed based on the following:
Three Months Ended
-------------------------------
March 31,
-------------------------------
2005 2004
-------------- --------------
Average number of shares outstanding 1,123,314 1,093,565
Effect of dilutive options 20,747 20,337
-------------- --------------
Average number of shares outstanding used
to calculate earnings per share 1,144,061 1,113,902
============== ==============
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
establish 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 three month period ended March 31,
2005, 12,566 options were exercised (31,656 shares in 2004). Stock options
awarded and outstanding totaled 32,822 and 70,401 as of March 31, 2005 and 2004,
respectively.
12
A summary of the status of the Company's stock option plan is presented below:
Three Months Ended March 31,
----------------------------------------------------------
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 (12,566) 8.60 (31,656) 8.60
Surrendered 0 0
Forfeited 0 0
--------- ----------
Outstanding at End of Period 32,822 $ 8.60 70,401 $ 8.59
========= ==========
Options Exercisable at Period-End 32,822 $ 8.60 68,745 $ 8.59
Weighted-Average Fair Value of
Options Granted during the period n/a n/a
Information pertaining to options outstanding at March 31, 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 32,822 3.8 years $8.60 32,822 $ 8.60
The Company has purchased 33,162 and 48,560 shares as of March 31, 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.
13
Note 6 - Improvement Plan for Main Office Facility
The company completed construction and moved into its new main office facility
during September 2005. The new building consists of 15,000 square feet at a cost
of approximately $2.75 million.
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.
14
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 should not be material provided that no
additional stock options are issued 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 8 - Current Items in Process with the Securties 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. The Company delivered the proxy to shareholders in
October and scheduled a shareholders' meeting for November 10, 2005. Due to the
necessary restatements of the Company's financial statements (see Note 2), the
meeting was adjourned without voting on the proposed transaction. Management
intends to file an amendment to the proxy with the SEC and send it to
shareholders as soon as the effects of the restatements on the proposed
transaction can be determined.
15
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 March 31, 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 March 31, 2005 and December 31, 2004
Total assets decreased from December 31, 2004 to March 31, 2005 by $4.4 million,
or 3.6%, from $122.7 million at December 31, 2004 to $118.2 million at March 31,
2005. The decrease in assets was principally the result of a decrease in cash
and due from depository institutions and investment securities. Investment
securities decreased by $2.7 million and cash and amounts due from depository
institutions decreased by $2.8 million.
16
Loans receivable increased from December 31, 2004 to March 31, 2005 as
originations exceeded repayments for the period by approximately $464,000. The
following table sets forth information about the composition of our loan
portfolio by type of loan at the dates indicated. At March 31, 2005 and December
31, 2004, we had no concentrations of loans exceeding 10% of gross loans other
than as disclosed below.
March 31, 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 $ 62,686 75.8% $ 63,037 76.6%
Commercial 10,039 12.1% 10,227 12.4%
Construction 5,028 6.1% 4,172 5.1%
Consumer loans:
Automobile 1,170 1.4% 1,282 1.6%
Loans to depositors, secured by deposits 1,224 1.5% 1,224 1.5%
Home equity and second mortgage 998 1.2% 734 0.9%
Other 1,595 1.9% 1,567 1.9%
------- ------ ------- -------
$82,740 100.0% $82,243 100.0%
------- ====== ------- =======
Less:
Loans in process 2,101 2,085
Deferred fees and discounts 348 348
Allowance for loan losses 997 980
------- -------
Total $79,294 $78,830
------- -------
17
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.
Three Three
Months Ended Months Ended
March 31, March 31,
2005 2004
-------------- --------------
(In Thousands)
Balance at beginning of period $ 980 $ 921
-------------- --------------
Charge-offs:
Consumer 0 (4)
Mortgage (2) (12)
Recoveries:
Consumer 1 1
Mortgage 0 0
-------------- --------------
Net Charge-offs (1) (15)
Provision for loan losses 18 28
-------------- --------------
Balance at end of period $ 997 $ 934
============== ==============
The following table sets forth information about our nonperforming assets at the
dates indicated.
March 31, March 31,
2005 2004
-------------- --------------
(In Thousands)
Nonaccrual Loans $ - $ -
Accruing loans which are contractually past due 90 days or more:
Real Estate:
Residential 81 378
Non-Residential 3 9
Consumer 2 9
-------------- --------------
Total $ 86 $ 396
============== ==============
18
We conduct regular reviews of our assets and evaluate the need to establish
allowances on the basis of this review. Allowances are established on a regular
basis based on an assessment of risk in our assets taking into consideration the
composition and quality of the portfolio, delinquency trends, current charge-off
and loss experience, the state of the real estate market, regulatory reviews
conducted in the regulatory examination process, general economic conditions and
other factors deemed relevant by us. Allowances are provided for individual
assets, or portions of assets, when ultimate collection is considered improbable
based on the current payment status of the assets and the fair value or net
realizable value of the collateral.
During the three months ended March 31, 2005, the Company's liabilities
decreased by $4.6 million, or 4.4%. Total deposits decreased $3.1 million or
3.1% from $100.9 million at December 31, 2004 to $97.8 million at March 31,
2005.
During 2004, the Bank 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. As of March 31, 2005, the Bank had retained approximately $2.8
million of these deposits. Management is unable to determine whether the Bank
will retain these deposits upon maturity. In the event the Bank is not able to
retain these deposits, management has various sources of liquidity available
including cash and amounts due from depository institutions and investment
securities which are available for sale. Also the Bank has borrowing authority
from the Federal Home Loan Bank of approximately $4.0 million.
Our shareholders' equity increased $145,000 from $18.42 million at December 31,
2004 to $18.56 million at March 31, 2005. The Company's equity increased
primarily due to net income of $426,000 and proceeds from stock options
exercised of $68,000, and a decrease in unearned compensation related to the
Company's ESOP of $116,000, offset by a decrease in accumulated other
comprehensive income of $448,000 and the cost of purchasing shares in the stock
option plan trusts of $13,000. 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 March 31, 2005
and 2004
Our net income for the three months ended March 31, 2005 was $426,000, which was
an increase of $109,000 from the amount we earned during the three months ended
March 31, 2004. Basic earnings per share for the three months ended March 31,
2005 was $0.38 compared to $0.29 for the same period in 2004. Diluted earnings
per share for the three months ended March 31, 2005 was $0.37 compared to $0.28
for the same period in 2004. Basic average shares outstanding for three months
ended March 31, 2005 was 1,123,314 shares and 1,093,565 shares for the three
months ended March 31, 2004. Average dilutive potential shares outstanding were
20,747 and 20,337 respectively.
Interest income increased $15,000, or 1.0%, from $1.68 million for the three
months ended March 31, 2004 to $1.70 million for the three months ended March
31, 2005. The increase in interest income is primarily a result of an increase
in investment securities interest of $20,000 offset by a decrease in interest
income on loans of $7,000.
Interest expense on deposits increased $103,000, or 27.4% from $376,000 for the
three months ended March 31, 2004 to $479,000 for the three months ended March
31, 2005, primarily due to the increase in deposit account interest rates.
Rising rates has increased our average interest rate paid on deposits from 1.54%
for the three months ended March 31, 2004, to 1.89% for the three months ended
March 31, 2005.
Net interest income decreased $88,000, or 6.7%, between the periods as a result
of the larger increase in interest expense than the increase in interest income.
The Company's net interest margin narrowed to 4.21% for the three months ended
March 31, 2005 compared to 4.77% for the comparable period of 2004. The
narrowing of the net interest margin reflects the current rate environment and
the fact that our yield on loans and investments has reduced.
Noninterest income remained steady at $130,000 for the three months ended March
31, 2005 and 2004.
19
Noninterest expenses decreased $216,000 from $891,000 for the three months ended
March 31, 2004 to $675,000 for the three months ended March 31, 2005. The
decrease in noninterest expense was primarily from a decrease compensation and
benefits of $249,000, offset by an increase in other noninterest expenses of
$29,000. The decrease in compensation and benefits resulted from the mark to
market adjustment on the Directors Long-term Incentive Plan, which was a benefit
of $38,000 for the current quarter, and a $20,000 decrease to the directors
deferred compensation liability compared to an expense of $57,000 and $152,000,
respectively, for the comparable period of 2004. 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 expense related to the
repurchase of common stock from employees and directors decreased $23,000 from
$72,000 for the three months ended March 31, 2004 to $49,000 for the three
months ended March 31, 2005.
Our effective tax rates for the three months ended March 31, 2005 and 2004 were
35% and 38.7%, respectively. The decrease in our effective tax rate for the
period in 2005 was due primarily to an increase in income from municipal
investment securities which are not subject to federal income tax.
Liquidity and Capital Resources
The Company does not currently have any business activities other than the
operation of the Bank and does not have significant on-going funding commitments
other than the payment of dividends to shareholders. To date, the Company has
used the proceeds from its initial public offering and dividends from the Bank
to meet its liquidity needs. The Bank is subject to various regulatory
limitations on the payment of dividends to the Company.
Our most liquid assets are cash and amounts due from depository institutions,
which are short-term highly liquid investments with original maturities of less
than three months that are readily convertible to known amounts of cash. The
levels of these assets are dependent on our operating, financing and investing
activities during any given period. Our primary sources of funds are deposits,
proceeds from principal and interest payments on loans and investment securities
and earnings. While scheduled principal repayments on loans and investment
securities are a relatively predictable source of funds, deposit flows and loan
and investment securities prepayments are greatly influenced by general interest
rates, economic conditions, competition and other factors. We do not solicit
deposits outside of our market area through brokers or other financial
institutions; however, we do accept deposits from various governmental and
institutional investors outside our traditional market area from time to time.
We have also designated all of our investment securities as available for sale
in order to meet liquidity demands. In addition to internal sources of funding,
as a member of the Federal Home Loan Bank we have substantial borrowing
authority with the Federal Home Loan Bank. Our use of a particular source of
funds is based on need, comparative total costs and availability.
We have historically maintained substantial levels of capital. The assessment of
capital adequacy depends on several factors, including asset quality, earnings
trends, liquidity and economic conditions. We seek to maintain high levels of
regulatory capital to give us maximum flexibility in the changing regulatory
environment and to respond to changes in market and economic conditions. These
levels of capital have been achieved through consistent earnings enhanced by low
levels of noninterest expense and have been maintained at those high levels as a
result of our policy of moderate growth generally confined to our market area.
At March 31, 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.
20
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 March 31, 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.
21
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. did not file a current report on Form
8-K during the quarter covered by this report.
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: December 6, 2005 /s/Richard G. Harwood
---------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
23
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-15(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 that 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 the small business issuer's board of directors (or persons performing
the equivalent functions):
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: December 6, 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-15(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 that 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 the small business issuer's board of directors (or persons performing
the equivalent functions):
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: December 6, 2005 /s/Chris H. Triplett
---------------------------------------
Chris H. Triplett
Controller
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: December 6, 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, Controller 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: December 6, 2005 /s/Chris H. Triplett
-----------------------------------------
Chris H. Triplett
Controller