<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, 1999
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:
1,382,013
- ---------
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]<PAGE>
<PAGE>
CONTENTS
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of March 31, 1999(Unaudited) and
December 31, 1998 3
Consolidated Statement of Income for the Three-
Month Periods Ended March 31, 1999 and 1998
(Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three-Month Periods Ended March 31,
1999 and 1998 (Unaudited) 5
Consolidated Statement of Changes in Stockholders'
Equity for the Three-Month Period Ended March 31,
1999 (Unaudited) 6
Consolidated Statement of Cash Flows for the Three-
Month Periods Ended March 31, 1999 and 1998
(Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Three-Month Periods Ended March 31, 1999 and 1998
(Unaudited) 9-12
Item 2. Management's Discussion and Analysis or Plan
of Operation 13-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security
Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------- -------------
(in thousands)
------------------------------
ASSETS
<S> <C> <C>
Cash and amounts due from depository
institutions $ 3,753 $ 6,131
Investment securities:
Available for sale, at fair value 31,038 33,022
Held to maturity, at amortized cost (fair
value of $1,928 at 3/31/99 and $2,453
at 12/31/98) 1,898 2,431
Loans receivable, net 55,113 53,346
Premises and equipment, net 501 474
Foreclosed real estate - held for sale -- --
Accrued interest receivable 453 443
Goodwill, net of amortization 1,173 1,193
Other assets 35 30
------- -------
TOTAL ASSETS $93,964 $97,070
======= =======
LIABILITIES AND EQUITY
LIABILITIES:
Deposits $67,641 $69,835
Advances from Federal Home Loan Bank 5,217 5,689
Accrued interest payable 283 290
Accrued income taxes 73 38
Deferred income taxes 737 860
Other liabilities 560 389
------- -------
TOTAL LIABILITIES 74,511 77,101
------- -------
Commitments and contingencies -- --
SHAREHOLDERS' EQUITY:
Common stock - no par value, authorized
20,000,000 shares; issued and
outstanding 1,382,013 shares 13,091 13,091
Unearned compensation - employee stock
ownership plan (1,129) (1,129)
Shares in MRP plan trust - contra account (451) --
Shares in grantor trust - contra account (137) (137)
Retained earnings 7,085 6,950
Accumulated other comprehensive income 994 1,194
------- -------
TOTAL SHAREHOLDERS' EQUITY 19,453 19,969
------- -------
TOTAL LIABILITIES AND EQUITY $93,964 $97,070
======= =======
</TABLE>
Accompanying notes are an integral part of these financial
statements.
3<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
(In thousands except
per share information)
-------------------------
Three months ended
March 31,
-------------------------
1999 1998
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Interest income:
Loans $ 1,135 $ 1,041
Investment securities 435 273
Other interest-earning assets 78 106
---------- ----------
TOTAL INTEREST INCOME 1,648 1,420
---------- ----------
INTEREST EXPENSE:
Deposits 732 630
Advances from Federal Home Loan Bank 66 --
---------- ----------
TOTAL INTEREST EXPENSE 798 630
---------- ----------
NET INTEREST INCOME 850 790
PROVISION FOR LOAN LOSSES 6 6
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 844 784
---------- ----------
NONINTEREST INCOME:
Deposit account service charges 21 16
Loan service charges and fees 19 20
Net gain (loss) on sales of investment
securities available for sale -- --
Other 6 7
---------- ----------
TOTAL NONINTEREST INCOME 46 43
NONINTEREST EXPENSE:
Compensation and benefits 365 162
Occupancy and equipment 62 30
Federal deposit insurance premiums 12 12
Data processing fees 45 36
Advertising and promotion 16 15
Net (gain) loss on foreclosed real estate -- 1
Amortization 20 --
Other 163 100
---------- ----------
TOTAL NONINTEREST EXPENSE 683 356
---------- ----------
INCOME BEFORE INCOME TAXES 207 471
INCOME TAXES 72 153
---------- ----------
NET INCOME $ 135 $ 318
========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.10 0.22
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
4 <PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
(Unaudited- (Unaudited-
in Thousands) in Thousands)
----------- -----------
<S> <C> <C>
NET INCOME $ 135 $ 318
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains on investment securities (322) 108
Less reclassification adjustment for gains
included in net income - -
Less income taxes related to unrealized
gains on investment securities 122 (41)
-------- --------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX (200) 67
-------- --------
COMPREHENSIVE INCOME (LOSS) $ (65) $ 385
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
5
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Accumulated
Unearned MRP Grantor Unearned Other Total
Common Compensation Plan- Trust- Compensation Comprehensive Stockholders'
Stock ESOP Contra Contra ESOP Income Equity
----- ------------ ------ ------ ----------- ------------ ------------
(Unaudited - in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, BEGINNING OF PERIOD $13,091 $(1,129) $ - $(137) $6,950 $1,194 $19,969
Net income - - - - 135 - 135
Purchase of stock for management
recognition plan (451) (451)
Other comprehensive
income (loss) - - - - - (200) (200)
------- ------- ----- ----- ------ ------- -------
BALANCES, END OF PERIOD $13,091 $(1,129) $(451) $(137) $7,085 $ 994 $19,453
======= ====== ===== ===== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
6 <PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1999 1998
(Unaudited - (Unaudited -
in thousands) in thousands)
-------------- --------------
<S> <C> <C>
Operating Activities:
Net income $ 135 $ 318
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 6 6
Depreciation 13 12
Amortization of goodwill 20 -
Net (gain) loss on sales of foreclosed real
estate - (1)
Federal home loan bank stock dividends (10) (10)
Net (gain) loss on sales of investment
securities available for sale - -
Accrued income taxes 35 (35)
Deferred income taxes (benefit) (1) -
(Increase) Decrease in:
Accrued interest receivable (10) 5
Other assets (5) 458
Increase (Decrease) in:
Accrued interest payable (7) -
Other liabilities 171 (176)
------- -------
TOTAL ADJUSTMENTS 212 259
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 347 577
------- -------
INVESTING ACTIVITIES:
Purchases of investment securities available
for sale (952) (7,512)
Proceeds from sales of investment securities
available for sale - -
Proceeds from maturities of investment
securities available for sale 1,000 500
Principal payments received on investment
securities available for sale 1,625 614
Purchases of investment securities held to
maturity - (1,042)
Proceeds from maturities of investment
securities held to maturity 500 -
Principal payments received on investment
securities held to maturity 32
Net increase in loans (1,773) (396)
Purchases of plant and equipment, net (40) (19)
Proceeds from sales of foreclosed real estate - 20
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 392 (7,835)
------- -------
</TABLE>
7 <PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1999 1998
(Unaudited - (Unaudited -
in thousands) in thousands)
-------------- --------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from sale of common stock $ - $ 12,812
Net increase (decrease) in deposits (2,194) (27,982)
Purchase of common stock for MRP
plan trust (451) -
Repayment of advances from Federal Home
Loan Bank (472) -
-------- --------
NET CASH USED IN FINANCING
ACTIVITIES (3,117) (15,170)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,378) (22,428)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,131 25,490
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,753 $ 3,062
======== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $ 805 $ 630
Income taxes $ 37 $ 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 $ (322) $ 108
Change in deferred income taxes associated
with unrealized gain on investment
securities available for sale $ 122 $ (41)
Change in net unrealized gain on investment
securities available for sale $ (200) $ 67
</TABLE>
The accompanying notes are an integral part of these financial
statements.
8<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 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. 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 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 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, 1999 and 1998, the weighted average number of
shares outstanding was 1,311,934 and 1,454,750, respectively.
The weighted average number of shares outstanding for the three
month period ended March 31, 1999 is net of 36,600 shares held
in the MRP plan trust and 12,516 shares held in the grantor
trust. During the periods ended March 31, 1999 and 1998 the
Company did not have any dilutive securities.
9<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. 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. 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. In addition,
the Company established an ESOP plan which acquired $1,164,000
in stock during conversion. The contra-equity account "Unearned
Compensation - ESOP" will be decreased as contributions are made
to the ESOP plan and the shares are allocated to the
participants. 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.
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
10<PAGE>
<PAGE>
comprehensive income in a separate financial statement as part
of its consolidated financial statements.
NOTE 5 - REPURCHASE AND RETIREMENT OF COMMON STOCK
In September 1998, in accordance with its approved plan, the
Company repurchased and retired 48,165 shares of its common
stock for a total cost of $578,944. In October 1998, the Company
completed its plan to repurchase and retire a total of 5% of its
common stock by repurchasing an additional 24,572 shares for a
total cost of $305,615.
NOTE 6 - DIRECTORS LONG-TERM INCENTIVE PLAN
In June 1997, the Bank established a long-term incentive plan
for the board of directors to provide target retirement benefits
of 75% of board fees for ten years for directors who retire with
twenty or more years of service. Activity in the directors'
retirement plan for the years ended December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Liability balance at beginning of year $ 125,181 $ 0
Accrued and expensed 10,824 150,991
Transfer of assets to trustee (136,005) 0
Death benefit payment 0 (25,810)
Effect of change in accounting
principle pursuant to EITF 97-14 164,727 0
--------- --------
Liability balance at end of year $ 164,727 $125,181
========= ========
</TABLE>
In July 1998, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) issued EITF 97-14
Accounting for Deferred Compensation Arrangements Where Amounts
Earned are Held in a Rabbi Trust and Invested. Prior to the
issuance of EITF 97-14, the Bank had transferred the assets
purchased by the trust (12,516 shares of Holding Company stock)
to the trustee of the plan. In accordance with EITF 97-14, the
Bank has recognized a liability for the fair value of all shares
of Holding Company stock (13,721 shares as of December 31, 1998)
and other assets held by the trustee totalling $164,727 and a
contra-equity account Shares in Grantor Trust-Contra Account for
the cost of the shares totalling $137,210. This change in
accounting principle required a reduction in deferred tax
liabilities of $10,907 and a net charge to income in 1998 of
$16,610. Subsequent increases or decreases in the future in the
fair value of the assets held by the Plan's trustee will be
charged to expense or credited to income, net of any deferred
income tax effect.
11<PAGE>
<PAGE>
NOTE 7 - MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN
In January 1999, the Company's board of directors approved the
Company's 1999 Stock Option Plan (SOP) and a Management
Recognition Plan (MRP), subject to the approval of the Company's
shareholders at the annual meeting to be held May 18,1999.
The board of directors has reserved 145,475 shares of the
Company's common stock for issuance pursuant to the options to
be granted under the SOP. These shares will be either newly
issued shares or shares purchased on the open market. The board
of directors has also authorized the issuance of 58,190 shares
of common stock as restricted stock pursuant to the MRP. The
MRP trust will begin purchasing these shares on the open
market in the first quarter of 1999. As of March 31, 1999, the
MRP trust had purchased 36,600 shares for a total cost of
$450,756.
12<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 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 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 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. 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 with our data processing service
provider, in connection with issues related to the upcoming
millennium (that is, "Year 2000" issues). See "Year 2000
Readiness Disclosure."
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.
13<PAGE>
<PAGE>
Comparison of Financial Condition at March 31, 1999 And December
31, 1998
Total assets decreased from December 31, 1998 to March 31,
1999 by $3.1 million, or 3.2%, from $97.1 million at December
31, 1998 to $94.0 million at March 31, 1999. The decrease in
assets was principally the result of a reduction in cash and
investment securities available for sale, which were used to
fund deposit outflows during the quarter. Investment securities
available for sale decreased $2.0 million or 6.0% from December
31, 1998, while investment securities held to maturity also
decreased $533,000 from $2.4 million to $1.9 million.
Loans receivable increased from December 31, 1998 to March
31, 1999 as originations exceeded repayments for the period by
approximately $1.8 million. Our market area has experienced an
increase in lending activity during this period. The following
table sets forth information about the composition of our loan
portfolio by type of loan at the dates indicated. At March 31,
1999 and December 31, 1998, we had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------ ------------------
(Dollars in Thousands)
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans -
One- to four-family residential $ 46,201 80.5% $ 41,833 76.1%
Commercial 5,034 8.8 7,267 13.2
Construction 3,094 6.8 3,235 5.9
Consumer loans:
Automobile 824 1.4 813 1.5
Loans to depositors, secured by
deposits 717 1.2 848 1.5
Home equity and second mortgage 213 0.4 162 0.3
Other 520 0.9 838 1.5
------- ----- ------- -----
57,413 100.0% 54,996 100.0%
===== =====
Less:
Loans in process 1,390 748
Deferred fees and discounts 267 261
Allowance for loan losses 643 641
------- -------
Total $55,113 $53,346
======= =======
</TABLE>
We actively monitor our asset quality and charge off loans
and properties acquired in settlement of loans against the
allowances for losses on such loans and such properties when
appropriate and provide specific loss allowances when necessary.
Although we believe we use the best information available to
make determinations with respect to the allowances for losses,
future adjustments may be necessary if economic conditions
differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
14<PAGE>
<PAGE>
The following table sets forth information about our
allowance for loan losses for the period indicated.
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
March 31, March 31,
1999 1998
------------- ------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period $ 641 $ 628
Charge-offs:
Consumer (4) (3)
Recoveries:
Consumer - --
------- ------
Net charge-offs (4) (3)
Provision for loan losses 6 6
------- ------
Balance at end of period $ 643 $ 631
======= ======
</TABLE>
The following table sets forth information about our
nonperforming assets at the dates indicated. At these dates, we
did not have any assets accounted for on a nonaccrual basis or
modified in a troubled debt restructuring.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -----------
(In Thousands)
<S> <C> <C>
Accruing loans which are contractually past due
90 days or more:
Real estate:
One- to four-family residential $ 500 $ 475
Commercial - -
Consumer 4 7
------ ------
Total $ 504 $ 482
====== ======
</TABLE>
At March 31, 1999 and December 31, 1998, we had identified
approximately $1,000 and $ 0, respectively, of loans which
amounts are not reflected in the preceding table but as to which
known information about possible credit problems of borrowers
caused us to have doubts as to the ability of the borrowers to
comply with present loan repayment terms, all of which was
included in our adversely classified or designated asset amounts
at that date. At that date, we did not expect to incur any loss
in excess of attributable existing reserves on any of our
assets.
During the quarter ended March 31, 1999, total deposits
decreased $2.2 million or 3.1% from $69.8 million at December
31, 1998 to $67.6 million at March 31, 1999. The decrease in
deposits was attributable primarily to run-off at the recently
acquired Cosby Highway branch. Management attributes the run-
off to the change in ownership of the branch and the deposit
promotional activities of a bank which opened a new branch in
the vicinity.
Our shareholders' equity decreased $516 thousand from
$20.0 million at December 31, 1998 to $19.5 million at March 31,
1999. The decrease was due to the purchase of 36,600 shares of
stock related to the Management Recognition Plan trust for
approximately $451,000, $135,000 of net
15
<PAGE>
income and a $200,000 decrease in our net unrealized gain on
investment securities. The Company has recently received
approval from the OTS to repurchase up to 5% of its outstanding
shares on the open market. In addition, the Company has filed a
request with the Internal Revenue Service for a private letter
ruling regarding the tax-free nature of a possible return of
capital distribution to its shareholders. The Company is merely
considering such a distribution at this time and no firm
decision including the amount or timing has been made.
Discussion of Results of Operations for the Three Months Ended
March 31, 1999 and 1998
Our net income for the three months ended March 31, 1999
was $135 thousand, a $183 thousand, or 57% decrease over the
$318 thousand we earned during the three months ended March 31,
1998. Basic earnings per share for the three months ended March
31, 1999 was $0.10 compared to $0.22 for the same period in
1998. Average shares outstanding for the periods were 1,311,934
and 1,454,750, respectively. The decrease in net income is due
primarily to the establishment of a management recognition plan
during the first quarter of 1999 which increased compensation
costs approximately $185 thousand.
Interest income increased $228 thousand, or 16.1%, from
$1.42 million for the three months ended March 31, 1998 to $1.65
million for the three months ended March 31, 1999. The increase
in interest income was primarily due to a $162 thousand, or
59.3%, increase in interest earned on the investment securities
portfolio which the Company has significantly expanded in order
to increase income and better leverage its capital. Interest on
loans increased $94 thousand, or 9.0%, due to an increase in the
average balance of the loan portfolio.
Interest expense increased $168 thousand primarily due to
the purchase of the branch deposit accounts from Union Planters
Bank of the Lakeway area in December 1998. In addition, the
Company incurred $66 thousand in interest expense on borrowings
compared to no such expense in the prior-year period. The
Company invested funds from the borrowings in mortgaged-backed
securities in order to increase interest income and better
leverage its capital.
Net interest income increased $60,000, or 7.6%, between
the periods as the increase in interest income exceeded the
increase in interest expense. The Company's net interest margin,
however, narrowed slightly to 3.76% for the three months ended
March 31, 1999 compared to 3.80% for the comparable period of
1998. The narrowing of the interest margin reflects the current
rate environment and the fact that a significant portion of the
Company's asset growth since March 31, 1998 has consisted of
investment securities.
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.
Noninterest income increased $3,000 from $43,000 for the
three months ended March 31, 1998 to $46,000 for the three
months ended March 31, 1999. The increase in other income was
mainly from increased deposit account service charges consistent
with the higher level of deposit accounts during the 1999
period.
16<PAGE>
<PAGE>
Noninterest expenses increased $327,000 from $356,000 for
the three months ended March 31, 1998 to $683,000 for the three
months ended March 31, 1999. Compensation and benefits for the
three months ended March 31, 1999 were $203,000 higher primarily
due to compensation expense associated with the implementation
of a management recognition plan in 1999. Other noninterest
expenses increased $124,000 from $194,000 for the three months
ended March 31, 1998 to $318,000 for the three months ended
March 31, 1999. The increase in other noninterest expenses is
primarily due to increases in costs associated with the Company
being a publicly-owned entity, amortization of goodwill
associated with the branch purchase, and increased operations
costs for the new branch.
Our effective tax rates for the three months ended March
31, 1999 and 1998 were 34.8% and 32.5%, respectively. The
slightly higher effective tax rate is due to a decrease in our
tax-exempt investment securities during the three months ended
March 31, 1999.
Liquidity and Capital Resources
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, 1999 and December 31,
1998, we exceeded all current regulatory capital requirements
and met the definition of a "well-capitalized" institution, the
highest regulatory category.
We are required to maintain minimum levels of liquid
assets as defined by OTS regulations. This requirement, which
may be varied at the discretion of the OTS depending on economic
conditions and deposit outflows, is based upon a percentage of
deposits and, if any, short-term borrowings. We exceeded all of
the liquidity requirements of the OTS as of both March 31, 1999
and December 31, 1998.
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 fund 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.
We have also designated certain securities as available
for sale in order to meet liquidity demands. In addition to
internal sources of funding, we as a member of the Federal Home
Loan Bank 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.
17<PAGE>
<PAGE>
Year 2000 Readiness Disclosure
Like most financial services companies, the Bank relies
heavily on computers and other information technology systems.
As the year 2000 approaches, an important business issue has
emerged regarding how existing application software programs and
operating systems can accommodate this date value. For many
years, software applications routinely conserved magnetic
storage space by using only two digits to record calendar years;
for example, the year 1999 is stored as "99". On January 1,
2000, the calendars in many software applications, in their
current form, will produce erroneous results or will fail to run
at all since their logic cannot deal with this transaction.
The Bank has identified its most mission critical system as
its on-line core account processing which is performed by a
third party provider. This service provider has advised the Bank
that it is Year 2000 compliant and has successfully done testing
with a number of its other customers. The service provider
tested the Bank's equipment and links during the fourth quarter
of 1998 and found them to be Year 2000 compliant. The Bank has
developed a contingency plan for back-up manual processing in
the event its current data processor is unable to operate
because of Year 2000 problems. The Bank also uses personal
computers and a variety of other software packages in other
facets of its day-to-day operations. All of these systems have
been either tested successfully or replaced with systems and
software that is millennium compliant. Management believes that
it has also identified all the equipment which relies on
embedded computer chips to operate and has received
correspondence from the vendors indicating that they are Year
2000 compliant. In addition to the risk posed by the Year 2000
readiness of its internal systems, the Bank recognizes that the
Bank is exposed to Year 2000 risks from its customers. The Bank
has surveyed its larger loan customers regarding their Year 2000
readiness and is working to increase their awareness of the
problem. The Bank does not believe that the costs associated
with its Year 2000 planning will have a material impact on its
results of operations.
18<PAGE>
<PAGE>
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
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 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:
On January 27, 1999, the Company filed a Current Report on
Form 8-K reporting under Item 5. Other Events that it had filed
a private letter ruling request with the Internal Revenue
Service regarding the tax-free nature of a possible return of
capital distribution to its shareholders and to report adoption
by the Board of Directors of the 1999 Stock Option Plan and the
Management Recognition Plan subject to approval by shareholders
at the 1999 Annual Meeting. No financial statements were filed
as part of this report.
19<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 14, 1999 /s/ Richard G. Harwood
----------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting
Officer)
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