<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Mark One
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
Commission File Number: 0-23551
UNITED TENNESSEE BANKSHARES, INC.
---------------------------------
(Exact Name of Small Business Issuer as Specified
in its Charter)
TENNESSEE 62-1710108
--------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
344 BROADWAY, NEWPORT, TENNESSEE 37821
-------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (423) 623-6088
--------------
Check whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days: Yes [X] No []
State the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
1,454,750
- ---------
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]<PAGE>
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 1998 (Unaudited) and December 31, 1997
Consolidated Statement of Income for the Three-Month
Period Ended March 31, 1998 (Unaudited)
Consolidated Statement of Changes in Equity for the
Three-Month Period Ended March 31, 1998 (Unaudited)
Consolidated Statement of Cash Flows for the Three-Month
Period Ended March 31, 1998 (Unaudited)
Consolidated Statement of Comprehensive Income for the
Three Month Period Ended March 31, 1998 (Unaudited)
Notes to Consolidated Financial Statements for the
Three-Month Period Ended March 31, 1998 (Unaudited)
Item 2. Management's Discussion and Analysis or Plan of
Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
March 31,
1998 December 31,
(Unaudited) 1997
------------- -------------
ASSETS (In thousands)
------
<S> <C> <C>
Cash received for stock subscriptions $ -- $ 23,598
Cash and amounts due from depository
institutions 3,062 1,892
Investment securities:
Available for sale, at fair value 21,710 15,204
Held to maturity, at amortized cost 2,119 1,077
Loans receivable, net 47,548 47,158
Premises and equipment, net 203 196
Foreclosed real estate - held for sale - 19
Accrued interest receivable 382 377
Other assets 29 487
----------- -----------
Total assets $ 75,053 $ 90,008
=========== ===========
LIABILITIES AND EQUITY
----------------------
Liabilities:
Deposits:
Escrow accounts for stock subscriptions $ - $ 23,598
Other deposits 53,688 58,072
----------- -----------
Total deposits 53,688 81,670
Accrued interest payable 255 255
Accrued income taxes 174 209
Deferred income taxes 636 595
Other liabilities 51 227
----------- -----------
Total liabilities 58,804 82,956
----------- -----------
Commitments and contingencies -- --
Equity:
Common stock 13,976 --
Retained earnings 6,063 6,285
Unearned compensation - employee stock
ownership plan (1,164) --
Net unrealized gain on investment
securities - net of taxes 834 767
----------- -----------
Total equity 20,249 7,052
----------- -----------
Total liabilities and equity $ 75,053 $ 90,008
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998
(Unaudited)
----------------
(In thousands)
<S> <C>
Interest income:
Loans $1,041
Investment securities 273
Other interest - earning assets 106
------
Total interest income $1,420
Interest expense on deposits 630
------
Net interest income 790
Provision for loan losses 6
------
Net interest income after provision
for loan losses 784
------
Noninterest income:
Deposit account service charges 16
Loan service charges and fees 20
Net gain (loss) on sales of investment
securities available for sale --
Other 7
------
Total noninterest income 43
------
Noninterest expense:
Compensation and benefits 162
Occupancy and equipment 30
Federal deposit insurance premiums 12
Data processing fees 36
Advertising and promotion 15
Net (gain) loss on foreclosed real estate 1
Other 100
------
Total noninterest expense 356
------
Income (loss) before income taxes (benefit) 471
Income taxes (benefit) 153
------
Net income $ 318
======
Basic earnings per common share $ 0.22
======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Net
Unrealized
Unearned Gain on
Common Retained Compensation-- Investment Total
Stock Earnings ESOP Securities Equity
------ ---------- ---------- ---------- --------
(Unaudited - In thousands)
<S> <C> <C> <C> <C> <C>
Balances, beginning of period $ -- $6,285 $ -- $ 767 $ 7,052
Net effect of stock conversion 13,976 -- (1,164) -- 12,812
Net income -- 318 -- -- 318
Change in net unrealized gain
on investment securities -- -- -- 67 67
------- ------ ------- ----- -------
Balances, end of period $13,976 $6,603 $(1,164) $ 834 $20,249
======= ====== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998
(Unaudited)
----------------
(In thousands)
<S> <C>
Operating Activities:
Net income $ 318
------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6
Depreciation 12
Net (gain) loss on sales of foreclosed
real estate (1)
Federal home loan bank stock dividends (10)
Net (gain) loss on sales of investment
securities available for sale --
Accrued income taxes (35)
Deferred income taxes (benefit) 41
(Increase) Decrease in:
Accrued interest receivable 5
Other assets (458)
Increase (Decrease) in:
Accrued interest payable --
Other liabilities (176)
------
Total adjustments (616)
------
Net cash provided by operating activities (298)
------
Investing Activities:
Purchases of investment securities available
for sale 7,512
Proceeds from sales of investment securities
available for sale --
Proceeds from maturities of investment
securities available for sale (500)
Principal payments received on investment
securities available for sale (719)
Purchases of investment securities held to
maturity 1,034
Proceeds from maturities of investment
securities held to maturity --
Net increase in loans 390
Purchases of plant and equipment, net (18)
Proceeds from sales of foreclosed real estate 20
------
Net cash provided by investing activities 7,719
------
</TABLE>
The accompanying notes are an integral part of these financial
statements.<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998
(Unaudited)
----------------
(In thousands)
<S> <C>
Financing Activities:
Net increase (decrease) in deposits $(27,982)
--------
Net increase (decrease) in cash and
cash equivalents (22,428)
Cash and cash equivalents, beginning of period 25,490
--------
Cash and cash equivalents, end of period $ 3,062
--------
Supplementary disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 630
Income taxes $ 324
Supplementary disclosures of noncash
investing activities:
Sale of foreclosed real estate
by origination of mortgage loans $ --
Acquisition of foreclosed real estate $ --
Change in unrealized gain on investment
securities available for sale $ 108
Change in deferred income taxes associated
with unrealized gain on investment
securities available for sale $ 41
Change in net unrealized gain on investment
securities available for sale $ 67
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998
(Unaudited)
----------------
(In thousands)
<S> <C>
Net income $ 318
Other comprehensive income, net of tax:
Unrealized gains on investment securities 108
Less reclassification adjustment for gains
included in net income --
Less income taxes related to unrealized
gains on investment securities (41)
------
Other comprehensive income, net of tax 67
------
Comprehensive income $ 385
======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
Note 1 - Basis of Presentation and Principles of Consolidation
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.
On November 20, 1997, the Company commenced a subscription
offering of its shares in connection with the conversion of the
Association. 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. See Note 3 for additional information
concerning the Association's stock conversion.
The Bank provides a variety of financial services to individuals
and corporate customers through its two offices in Newport,
Tennessee. The Bank's primary deposit products are interest-
bearing savings accounts and certificates of deposit. Its
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 to Form
10-QSB and on the same basis as the Association'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 period presented have
been included. The results of operations for such interim period
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.
Note 2 - Earnings Per Share
Basic earnings per share is based on the weighted average number
of shares outstanding during the period. For the three months
ended March 31, 1998 the weighted average number of shares was
1,454,750. During the period ended March 31, 1998 the Company
did not have any dilutive securities.<PAGE>
<PAGE>
Note 3 - Stock Conversion
In May 1997, the board of directors approved a plan of
reorganization from a mutual savings association to a capital
stock savings bank and the concurrent formation of a holding
company. In November 1997 the Office of Thrift Supervision
approved the plan of conversion subject to the approval of the
members, and in December 1997 the members of the Association
also approved the plan of conversion. The conversion was
accomplished effective January 1, 1998 through amendment of the
Association's charter and the sale of the Company's common stock
in an amount equal to the appraised pro forma consolidated
market value of the Company and the Association after giving
effect to the conversion. A subscription offering of the shares
of common stock was offered to depositors, borrowers, directors,
officers, employees and employee benefit plans of the
Association and to certain other eligible subscribers. The
subscription offering opened on November 20, 1997 and closed on
December 16, 1997. The Association held cash receipts of
$23,598,226 as of December 31, 1997 in escrow accounts for stock
subscribers. These funds were invested in overnight deposits at
the Federal Home Loan Bank of Cincinnati. On January 1, 1998, in
accordance with its approved plan of conversion, the Company
issued 1,454,750 of its $10 par value stock providing gross
receipts of $14,547,500. The remainder of the subscription
receipts were returned to subscribers in January 1998. On
January 1, 1998, the Association changed its name to Newport
Federal Bank and issued 100,000 shares of its $1 par value stock
to the Holding Company in exchange for $7,100,000.
Conversion costs were being deferred until completion of the
conversion. As of December 31, 1997, conversion costs that had
been incurred and deferred totaled $466,862. Total conversion
costs of $571,822 were repaid to the Bank by the Company in
January 1998, and the Company deducted them from the proceeds of
the shares sold in the conversion.
At the time of the conversion, the Association was required to
establish a liquidation account in an amount equal to its
capital as of June 30, 1997. The liquidation account will be
maintained for the benefit of eligible accountholders who
continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to
the extent that eligible accountholders have reduced their
qualifying deposits as of each anniversary date. Subsequent
increases will not restore an eligible accountholder's interest
in the liquidation account. In the event of a complete
liquidation, each eligible accountholder will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for
accounts then held. The Bank and the Company will be subject to
several restrictions concerning the repurchase of stock and
dividend payment restrictions pursuant to the applicable rules
and policies of the OTS.<PAGE>
<PAGE>
Note 4 - Comprehensive Income
In June 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in the
financial statements. The object 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 adopted
this statement in the first quarter of 1998 and has included its
comprehensive income in a separate financial statement as part
of its consolidated financial statements.<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
-----------------------------------------------
GENERAL
The principal business of United Tennessee Bankshares, Inc.
and our wholly owned subsidiary Newport Federal Bank ("we," "us,"
etc.) consists of accepting deposits from the general public
through our main office and branch office 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 which are guaranteed as to principal
and interest by the FHLMC, GNMA or FNMA. We also maintain an
investment in Federal Home Loan Bank of Cincinnati common stock
and FHLMC preferred 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. 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. Based on our review of our internal bookkeeping
practices and our conferences with our third party service
companies, we do not expect to incur significant additional
bookkeeping, data processing or other expenses, and in
particular we do not expect to encounter significant
difficulties
<PAGE>
<PAGE>
with our data processing service provider, in connection with
issues related to the upcoming millennium (that is, "Year 2000"
issues).
Our operations and those of the thrift industry as a whole
are significantly affected by prevailing economic conditions,
competition and the monetary and fiscal policies of governmental
agencies. Our lending activities are influenced by demand for
and supply of housing and competition among lenders and the
level of interest rates in our market area. Our deposit flows
and costs of funds are influenced by prevailing market rates of
interest, primarily on competing investments, account maturities
and the levels of personal income and savings in our market
area.
Our stock conversion increased our capital by the amount of
the net proceeds, after deduction of conversion-related expenses
and the shares to be sold to the ESOP. Funds withdrawn from our
deposits decreased our interest-bearing liabilities, and new
funds increased our interest-earning assets. While these
changes increased our net interest income, we also have
experienced increases in our noninterest expenses by increasing
our compensation and other operating expenses.
<PAGE>
<PAGE>
Comparison of Financial Condition at March 31, 1998 and December
31, 1997
Total assets shrunk from December 31, 1997 to March 31,
1998 as total assets decreased $15.0 million, or 16.7%, from
$90.0 million at December 31, 1997 to $75.0 million at March 31,
1998. Cash received for stock subscriptions decreased from
$23.6 million to zero with $14.5 million of stock issued and the
remainder returned to subscribers. Investment securities
available for sale increased $6.5 million or 42.8% from December
31, 1997 to March 31, 1998, while investment securities held to
maturity also increased slightly. We purchased investment
securities with some of the funds received from the stock
conversion pending use of the funds for new loans as loan demand
dictates.
Loans receivable increased slightly from December 31, 1997
to March 31, 1998 as originations exceeded repayments for the
period by approximately $390 thousand. Our market area has
experienced an increase in refinancing activity during this
period.
Total deposits decreased $28.0 million or 34.3% from $81.7
million at December 31, 1997 to $53.7 million at March 31, 1998.
The decrease was primarily due to closing out the stock
subscription accounts upon conversion on January 1, 1998.
Our equity increased $13.2 million from $7,052,000 at
December 31, 1997 to $20,249,000 at March 31, 1998. The
increase was due to issuing stock in our stock conversion for a
net increase of $12.8 million, $318,000 of net income and an
increase in our net unrealized gain on investment securities.
<PAGE>
<PAGE>
Discussion of Results of Operations for the Three Months Ended
March 31, 1998
Prior to January 1, 1998 United Tennessee Bankshares, Inc.
engaged in no business activities. Accordingly, any results of
operations prior to January 1, 1998 would relate only to Newport
Federal Bank. At March 31, 1997, the Bank only prepared
financial reports as required by the office of Thrift
Supervision. The form and content of those reports were not
sufficient to allow for timely preparation of the consolidated
statement of income and comprehensive income for the three month
period ended March 31, 1997.
Our results of operations for the three months ended March
31, 1998 differed from the results of operations we have
historically had primarily due to the effects of our recent
stock conversion. Our net interest income increased due to the
increase in interest-earning investments and loans. Our
operating expenses also increased slightly due to increases in
compensation and benefits expense and other operating costs.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
There were no reportable changes in securities during
the reported period. For information regarding use of proceeds,
see Note 3 of the Notes to Consolidated Financial Statements at
Part I, Item 1 of this report and management's discussion and
analysis at Part I, Item 2 of this report, which note and
discussion and analysis are hereby incorporated herein by
reference.
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
Exhibits:
The following exhibits are filed as a part of this report:
2 1/ Plan of Conversion of Newport Federal Savings
and Loan Association
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 1/ Form of United Tennessee Bankshares, Inc. Stock
Option and Incentive Plan
10.2 1/ Form of 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
27 Financial Data Schedule
_______________
1/ Incorporated by reference to United Tennessee Bankshares,
Inc.'s Registration Statement on Form SB-2, File No. 333-36465.
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.<PAGE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: May 15, 1998 /s/ Richard G. Harwood
----------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,561,957
<INT-BEARING-DEPOSITS> 1,500,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,710,087
<INVESTMENTS-CARRYING> 2,118,548
<INVESTMENTS-MARKET> 2,117,713
<LOANS> 48,463,383
<ALLOWANCE> 630,865
<TOTAL-ASSETS> 75,052,992
<DEPOSITS> 53,688,056
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,115,872
<LONG-TERM> 0
<COMMON> 13,975,678
0
0
<OTHER-SE> 6,273,385
<TOTAL-LIABILITIES-AND-EQUITY> 75,052,992
<INTEREST-LOAN> 1,041,016
<INTEREST-INVEST> 273,112
<INTEREST-OTHER> 106,277
<INTEREST-TOTAL> 1,420,405
<INTEREST-DEPOSIT> 630,053
<INTEREST-EXPENSE> 630,053
<INTEREST-INCOME-NET> 790,352
<LOAN-LOSSES> 6,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 355,233
<INCOME-PRETAX> 471,297
<INCOME-PRE-EXTRAORDINARY> 318,297
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 318,297
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 3.80
<LOANS-NON> 0
<LOANS-PAST> 443,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 627,669
<CHARGE-OFFS> 2,804
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 630,865
<ALLOWANCE-DOMESTIC> 630,865
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
