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 June 30, 2000.
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-23551
UNITED TENNESSEE BANKSHARES, INC.
---------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
TENNESSEE 62-1710108
---------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
344 Broadway, Newport, Tennessee 37821
------------------------------------ -----------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (423) 623-6088
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past ninety days:
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 1,382,013
---------
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
CONTENTS
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
June 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income for the Three-Month
and Six-Month Periods Ended June 30, 2000 and 1999
(Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three-Month and Six-Month Periods Ended June 30, 2000
and 1999 (Unaudited) 5
Consolidated Statement of Changes in Shareholders'
Equity for the Six-Month Period Ended June 30,
2000 (Unaudited) 6
Consolidated Statements of Cash Flows for the Six-
Month Periods Ended June 30, 2000 and 1999 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Six-Month Periods Ended June 30, 2000 and 1999
(Unaudited) 9-11
Item 2. Management's Discussion and Analysis or Plan of
Operation 12-18
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>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
----------- ------------
(in Thousands)
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 2,127 $ 2,387
Investment securities available for sale, at fair value 26,305 27,935
Loans receivable, net 65,331 61,516
Premises and equipment, net 483 511
Foreclosed real estate - held for sale 156 71
Accrued interest receivable 531 439
Goodwill, net of amortization 1,073 1,113
Prepaid expenses and other assets 74 148
-------- --------
Total assets $ 96,080 $ 94,120
======== ========
Liabilities and Equity
Liabilities:
Deposits $ 76,989 $ 73,810
Note Payable 0 3,200
Advances from Federal Home Loan Bank 5,772 3,767
Accrued interest payable 299 284
Deferred income taxes 386 457
Accrued benefit plan liabilities 514 619
Other liabilities 31 83
-------- --------
Total liabilities 83,991 82,220
-------- --------
Shareholders' equity:
Common stock - no par value, Authorized 20,000,000
shares; issued and outstanding 1,382,013 shares
in 2000 and 1999 13,091 13,091
Unearned compensation - ESOP (843) (1,005)
Shares in grantor trust - contra account (202) (202)
Shares in MRP plan - contra account (401) (556)
Shares in stock option plan - contra account (1,658) (1,658)
Retained earnings 1,739 1,751
Accumulated other comprehensive income 363 479
-------- --------
Total shareholders' equity 12,089 11,900
-------- --------
Total liabilities and equity $ 96,080 $ 94,120
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
UNITED TENNESSEE BANKSHARES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
---------------------- ---------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
(Unaudited)(Unaudited)(Unaudited)(Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans $1,341 $1,172 $2,621 $2,307
Investment securities 442 452 839 887
Other interest-earning assets 29 40 53 118
------ ------ ------ ------
Total interest income 1,812 1,664 3,513 3,312
------ ------ ------ ------
Interest expense:
Deposits 906 750 1,733 1,482
Advances from Federal Home Loan Bank
and Note Payable 87 60 176 126
------ ------ ------ ------
Total interest expense 993 810 1,909 1,608
------ ------ ------ ------
Net interest income 819 854 1,604 1,704
Provision for loan losses 9 6 16 12
------ ------ ------ ------
Net interest income after provision
for loan losses 810 848 1,588 1,692
------ ------ ------ ------
Noninterest income:
Deposit account service charges 46 23 92 44
Loan service charges and fees 29 26 57 45
Other 0 5 5 11
------ ------ ------ ------
Total noninterest income 75 54 154 100
------ ------ ------ ------
Noninterest expense:
Compensation and benefits 240 207 529 572
Occupancy and equipment 51 48 101 110
Federal deposit insurance premiums 12 12 24 24
Data processing fees 53 56 96 101
Advertising and promotion 16 23 34 39
Amortization 20 20 40 40
Other 134 180 265 343
------ ------ ------ ------
Total noninterest expense 526 546 1,088 1,229
------ ------ ------ ------
Income before income taxes 359 356 654 563
Income taxes 131 120 251 192
------ ------ ------ ------
Net income $ 228 $ 236 $ 403 $ 371
====== ====== ====== ======
Earnings per share:
Basic $ 0.16 $ 0.17 $ 0.29 $ 0.27
====== ====== ====== ======
Diluted $ 0.16 $ 0.17 $ 0.29 $ 0.27
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
--------------- ---------------- ---------------- ----------------
(Unaudited - in Thousands) (Unaudited - in Thousands)
--------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net income $ 228 $ 236 $ 403 $ 371
-------- -------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities
(34) 270 (195) (52)
Less reclassification adjustment for gains\losses
included in net income
8 0 9 0
Less income taxes related to unrealized
gains\losses on investment securities
9 (103) 70 20
-------- -------- --------- ---------
Other comprehensive income (loss), net of tax
(17) 167 (116) (32)
-------- -------- --------- ---------
Comprehensive income $ 211 $ 403 $ 287 $ 339
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Shares
in
Grantor Shares in Shares in Accumulated
Unearned Trust - MRP Plan - Stock Option Other Total
Common Compensation Contra Contra Plan - Contra Retained Comprehensive Shareholders'
Stock ESOP Account Account Account Earnings Income Equity
------- ------------ --------- ---------- ------------ -------- ------------- -------------
(Unaudited - in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, beginning of period $ 13,091 $(1,005) $(202) $(556) $(1,658) $1,751 $ 479 $11,900
Net income - - - - - 403 - 403
Issuance of shares of common
stock pursuant to MRP plan - - - 155 - - - 155
Other comprehensive income (loss) - - - - - - (116) (116)
(loss)
Payment on ESOP loan principal - 162 - - - - - 162
Dividends paid - - - - - (415) - (415)
-------- ------- ----- ----- ------- ------ ----- -------
Balances, end of period $ 13,091 $ (843) $(202) $(401) $(1,658) $1,739 $ 363 $12,089
======== ======= ===== ===== ======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Six Months Ended
June 30
-----------------------
2000 1999
--------- ---------
(Unaudited - in Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 403 $ 371
------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 16 12
Depreciation 29 25
Amortization of goodwill 40 40
Federal home loan bank stock dividends (27) (10)
Net (gain) loss on sales of investment securities
available for sale 9 0
Deferred income taxes (benefit) (1) 0
(Increase) Decrease in:
Accrued interest receivable (92) (39)
Other assets 74 3
Increase (Decrease) in:
Accrued interest payable 15 (19)
Accrued income taxes 0 1
Accrued benefit plan liabilities (105) 0
Other liabilities (52) 198
------- -------
Total adjustments (94) 211
------- -------
Net cash provided by operating activities 309 582
------- -------
Investing Activities:
Purchases of investment securities available for sale (2,474) (2,061)
Proceeds from maturities of investment securities
available for sale 0 2,000
Principal payments received on investment securities
available for sale 2,443 3,168
Proceeds from sales of investment securities
available for sale 1,493 0
Purchases of investment securities held to maturity 0 (239)
Proceeds from maturities of investment securities held
to maturity 0 500
Principal payments received on investment securities
held to maturity 0 80
Net increase in loans (3,916) (3,448)
Purchases of plant and equipment, net (1) (47)
------- -------
Net cash used in investing activities (2,455) (47)
------- -------
</TABLE>
7
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
2000 1999
--------- ----------
(Unaudited - in Thousands)
<S> <C> <C>
Financing Activities:
Dividends paid (415) (414)
Net increase (decrease) in deposits 3,179 1,052
Purchase of common stock for MRP plan trust 0 (1,572)
Issuance of common stock for MRP plan 155 0
Payment on ESOP loan and release of shares 162 124
Repayment of advances from Federal Home Loan Bank (995 (950)
Repayment of note payable (3,200) 0
Proceeds from advances from Federal Home Loan Bank 3,000 0
------- --------
Net cash provided by (used in) financing activities 1,886 (1,760)
------- --------
Net increase (decrease) in cash and cash equivalents (260) (1,225)
Cash and cash equivalents, beginning of period 2,387 6,131
------- --------
Cash and cash equivalents, end of period $ 2,127 $ 4,906
======= ========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,894 $ 1,627
Income taxes $ 252 $ 191
Supplementary disclosures of noncash investing
activities:
Acquisition of foreclosed real estate $ 85 $ 0
Change in unrealized gain\loss on investment securities
available for sale $ (186) $ (52)
Change in deferred income taxes associated with
unrealized gain\loss on investment securities available
for sale $ (70) $ (20)
Change in net unrealized gain\loss on investment
securities available for sale $ (116) $ (32)
</TABLE>
The accompanying notes are an integral part of these financial statements
8
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(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 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.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share represents income available to shareholders divided by
the weighted average number of shares outstanding during the period. For the
three months and six months ended June 30, 2000 and 1999, the weighted average
number of shares outstanding was 1,382,013. Diluted earnings per share reflects
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. Dilutive potential shares outstanding during the three months
and six months ended June 30, 2000 and 1999 were 4,763 and -0-, respectively.
Potential shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method.
9
<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 no par value stock at $10 per share 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
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 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 has included its comprehensive income in a separate
financial statement as part of its consolidated financial statements.
10
<PAGE>
NOTE 5 - 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). The Company's
shareholders approved both plans at the annual meeting held on May 18, 1999. The
board of directors has reserved 215,688 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 Stock
Option trust purchased shares on the open market in the first, second and third
quarters of 1999. As of June 30, 2000, the Stock Option trust had purchased
168,027 for a total cost of approximately $1,658,000. 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 purchased these shares on the open
market in the first and second quarters of 1999. As of June 30, 2000, the MRP
trust had purchased 58,190 shares for a total cost of approximately $713,000.
The Company's board of directors has awarded 50,845 shares of restricted common
stock to certain members of the board of directors and senior management. The
shares vest as follows: 25% in 1999 and 25% per year for the next three years.
The Company and its subsidiary share the cost of the Plan and accrue the
estimated cost of repurchasing shares to be reissued as restricted stock over
the period that such awards are earned.
During the six month period ended June 30, 2000, the Company issued 12,709
shares of restricted stock at a cost of $155,559 and held 32,772 shares of its
common stock in trust for the MRP plan as of June 30, 2000 at a net cost of
$400,915. A contra-equity account has been established to reflect the cost of
such shares held in trust. During the six month period ended June 30, 2000, the
Company purchased 42,192 shares of its common stock with the dividends received
on shares previously held in the Stock Option trust.
NOTE 6 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is encouraged, but is permitted only as of the beginning of any
fiscal quarter that begins after issuance of this statement. The Company elected
to apply the provisions of this statement as of July 1, 1999.
Although the Company and its subsidiary do not currently hold any derivative
instruments or engage in hedging activities, the statement also provides a
one-time opportunity for any investments in the held-to-maturity category to be
transferred into the available-for-sale category. On July 1, 1999, the Company
and its subsidiary transferred investments with an amortized cost of $2,090,063
(fair value of $2,100,160) from their held-to-maturity category to their
available-for-sale category.
NOTE 7 - ACCOUNTING FOR MORTGAGE-BACKED SECURITIES AFTER SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE
The FASB has issued Statement of Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities after Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends FASB
Statement No. 65, "Accounting for Certain Mortgage Banking Activities," which
establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations that
are substantially similar to the primary operations related to securitization of
mortgage loans, nor does the Company anticipate entering into any transactions
of this nature in the future. Therefore, SFAS No. 134 will not have a
significant effect on the Company's consolidated financial condition or results
of operations.
11
<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.
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.
12
<PAGE>
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets increased from December 31, 1999 to June 30, 2000 by $2.0
million, or 2.1%, from $94.1 million at December 31, 1999 to $96.1 million at
June 30, 2000. The increase in assets was principally the result of an increase
in loans receivable, which were offset by a slight decrease in investment
securities available for sale. Investment securities available for sale
decreased $1.6 million or 5.8% from December 31, 1999.
Loans receivable increased from December 31, 1999 to June 30, 2000 as
originations exceeded repayments for the period by approximately $3.8 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 June 30, 2000 and
December 31, 1999, we had no concentrations of loans exceeding 10% of gross
loans other than as disclosed below.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------- ----------------------------
(Dollars in Thousands)
Amount Percent Amount Percent
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Type of Loan:
------------
Real estate loans -
One- to four-family residential $53,304 78.8% $48,550 76.5%
Commercial 6,750 10.0 9,099 14.3
Construction 3,023 4.5 2,615 4.1
Consumer loans:
Automobile 1,282 1.9 980 1.5
Loans to depositors, secured by deposits 1,439 2.1 1,114 1.8
Home equity and second mortgage 172 0.2 208 0.3
Other 1,673 2.5 931 1.5
----------- --------- ------------ ---------
67,643 100.0% 63,497 100.0%
========= =========
Less:
Loans in process 1,331 1,033
Deferred fees and discounts 315 287
Allowance for loan losses 666 661
----------- ------------
Total $65,331 $61,516
=========== ============
</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.
13
<PAGE>
The following table sets forth information about our allowance for loan
losses for the period indicated.
<TABLE>
<CAPTION>
Six Six
Months Ended Months Ended
June 30, June 30,
2000 1999
-------------------- ------------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period $661 $641
-------- --------
Charge-offs:
Consumer (15) (4)
Recoveries:
Consumer 4 0
-------- --------
Net charge-offs (11) (4)
Provision for loan losses 16 12
-------- --------
Balance at end of period $666 $649
======== ========
</TABLE>
The following table sets forth information about our nonperforming
assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------------- ------------------
(In Thousands)
<S> <C> <C>
Nonaccrual loans $ 0 $ 0
Accruing loans which are contractually past due
90 days or more:
Real estate:
One- to four-family residential 358 348
Commercial 101 0
Consumer 19 29
---------- ----------
Total $478 $377
========== ==========
</TABLE>
At June 30, 2000 and December 31, 1999, all loans which were included
in our adversely classified or designated asset amounts 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
are reflected in the above table. We do not expect to incur any loss in excess
of attributable existing reserves on any of our assets.
During the six months ended June 30, 2000, the Company increased its
liabilities by $1.8 million, or 2.1%, in order to fund asset growth. Total
deposits increased $3.2 million or 4.3% from $73.8 million at December 31, 1999
to $77.0 million at June 30, 2000. Advances from the Federal Home Loan Bank also
increased $2.0 million, or 53.2%, from $3.8 million at December 31, 1999 to $5.8
million at June 30, 2000. The Company also repaid its short-term note payable of
$3.2 million.
Our shareholders' equity increased $189,000 from $11.9 million at
December 31, 1999 to $12.1 million at June 30, 2000. The increase was due to
$403,000 of net income, payment of approximately $162,000 on the ESOP loan
principal, distribution of shares under the MRP plan at a cost of $155,000, a
$116,000 decrease in our net unrealized gain on investment securities, and
payment of a dividend to shareholders of $415,000.
Discussion of Results of Operations for the Three Months Ended June 30, 2000 and
1999
Our net income for the three months ended June 30, 2000 was $228,000,
an $8,000, or 3.4% decrease from the $236,000 we earned during the three months
ended June 30, 1999. Basic and diluted earnings per share for the three months
ended June 30, 2000 were each $0.16 compared to $0.17 for the same period in
1999. Basic average shares outstanding for both periods was 1,382,013 shares.
Average dilutive potential shares outstanding were 4,763 and -0-, respectively.
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Interest income increased $148 thousand, or 8.9%, from $1.66 million
for the three months ended June 30, 1999 to $1.81 million for the three months
ended June 30, 2000. The increase in interest income was due to interest on
loans which increased $169,000, or 14%, due to an increase in the average
outstanding balance of the loan portfolio and a slight increase in loan rates.
The increase in interest income on loans was partially offset by a decrease in
interest income on investment securities and other interest earning assets of
$21,000.
Interest expense on deposits increased $156,000 primarily due to the
increase in average balance of deposits of $5.8 million compared to the same
period in the prior year, and a slight increase in interest rates. In addition,
the Company incurred $87,000 in interest expense on advances from the Federal
Home Loan Bank compared to $60,000 in the prior-year period.
Net interest income decreased $35,000, or 4.1%, between the periods as
the increase in interest expense exceeded the increase in interest income. The
Company's net interest margin narrowed to 3.40% for the three months ended June
30, 2000 compared to 3.85% for the comparable period of 1999. The narrowing of
the net interest margin reflects the current rate environment and the fact that
recent loan refinancings have reduced the yield on our loan portfolio while
competition for savings deposits has increased the interest cost of our
deposits.
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 $21,000 from $54,000 for the three months
ended June 30, 1999 to $75,000 for the three months ended June 30, 2000. The
increase in noninterest income was mainly from increased deposit account service
charges consistent with the higher level of deposit accounts during the 2000
period. Loan service charges and fees also increased as loan originations
increased during the three month period ended June 30, 2000.
Noninterest expenses decreased $20,000 from $546,000 for the three
months ended June 30, 1999 to $526,000 for the three months ended June 30, 2000.
Other noninterest expenses decreased $46,000 from $180,000 for the three months
ended June 30, 1999 to $134,000 for the three months ended June 30, 2000.
Our effective tax rates for the three months ended June 30, 2000 and
1999 were 36.5% and 33.7%, respectively. The higher effective tax rate is due to
a decrease in our tax-exempt investment securities in 2000 compared to 1999.
Discussion of Results of Operations for the Six Months Ended June 30, 2000 and
1999
Our net income for the six months ended June 30, 2000 was $403,000, a
$32,000, or 8.6% increase over the $371,000 we earned during the six months
ended June 30, 1999. Basic and diluted earnings per share for the six months
ended June 30, 2000 were each $0.29 compared to $0.27 for the same period in
1999. Average shares outstanding for both periods was 1,382,013 shares.
Interest income increased $201,000, or 6.1% from $3.31 million for the
six months ended June 30, 1999 to $3.51 million for the six months ended June
30, 2000. The increase in interest income was due to interest on loans which
increased $314,000, or 13.6%, due to an increase in the average balance of the
loan portfolio, and a slight increase in loan rates. The increase in interest
income on loans was partially offset by a decrease in interest income on
investment securities and other interest earning assets of $113,000.
Interest expense on deposits increased $251,000 due to the increase in
average balance of deposits of $6.1 million compared to the same period in the
prior year, and a slight increase in interest rates. In addition, the Company
incurred $176,000 in interest expense on advances for the Federal Home Loan
15
<PAGE>
Bank compared to $126,000 in the prior period. The Company used the funds from
the additional deposits to fund loan originations.
Net interest income decreased $100,000 or 5.9% between the periods as the
increase in interest expense exceeded the increase in interest income. The
Company's net interest margin narrowed to 3.42% for the six months ended June
30, 2000 compared to 3.84% for the comparable period of 1999. The narrowing of
the interest margin reflects the current rate environment and the fact that
competition for deposits has increased the interest cost of our deposits.
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
realizable value of the collateral.
Noninterest income increased $54,000 from $100,000 for the six months ended
June 30, 1999 to $154,000 for the six months ended June 30, 2000. The increase
in noninterest income was mainly from increased deposit account service charges
consistent with the higher level of deposit accounts during the 2000 period.
Noninterest expenses decreased $141,000 from $1,229,000 for the six months
ended June 30, 1999 to $1,088,000 for the six months ended June 30, 2000.
Compensation and benefits for the six months ended June 30, 2000 were $44,000
lower primarily due to a one time compensation expense associated with the
implementation of a management recognition plan in 1999. Other noninterest
expenses decreased $78,000 from $343,000 for the six months ended June 30, 1999
to $265,000 for the six months ended June 30, 2000.
Our effective tax rates for the six months ended June 30, 2000 and 1999
were 38.4% and 34.1%, respectively. The higher effective tax rate is due to a
decrease in our tax-exempt investment securities in 2000 compared to 1999.
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. The Company
paid a return of capital distribution with funds on hand and approximately $3.0
million in borrowings from a third party lender during the fourth quarter of
1999. The Bank received permission from the OTS to pay a dividend to the Company
in excess of regulatory safe harbor amounts in order to allow the Company to
repay the loan in the first quarter of 2000.
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.
16
<PAGE>
We have also designated all of our investment securities as available
for sale in order to meet liquidity demands. In addition to internal sources of
funding, as a member of the Federal Home Loan Bank we have substantial borrowing
authority with the Federal Home Loan Bank. Our use of a particular source of
funds is based on need, comparative total costs and availability.
We have historically maintained substantial levels of capital. The
assessment of capital adequacy depends on several factors, including asset
quality, earnings trends, liquidity and economic conditions. We seek to maintain
high levels of regulatory capital to give us maximum flexibility in the changing
regulatory environment and to respond to changes in market and economic
conditions. These levels of capital have been achieved through consistent
earnings enhanced by low levels of noninterest expense and have been maintained
at those high levels as a result of our policy of moderate growth generally
confined to our market area. At June 30, 2000 and December 31, 1999, we exceeded
all current regulatory capital requirements and met the definition of a
"well-capitalized" institution, the highest regulatory capital 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 June 30, 2000 and December 31,
1999.
Recent Legislation
On November 12, 1999, President Clinton signed legislation which could
have a far-reaching impact on the financial services industry. The
Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations between banking,
securities and insurance firms and authorizes bank holding companies and
national banks to engage in a variety of new financial activities. Among the new
activities that will be permitted to bank holding companies and national bank
subsidiaries are securities and insurance brokerage, securities underwriting and
certain forms of insurance underwriting. Bank holding companies will have
broader insurance underwriting powers than national banks and may engage in
merchant banking activities after the adoption of implementing regulations.
Merchant banking activities may also become available to national bank
subsidiaries after five years. The Federal Reserve Board, in consultation with
the Department of Treasury, may approve additional financial activities. The
G-L-B Act, however, prohibits future acquisitions of existing unitary savings
and loan holding companies, like the Company, by firms which are engaged in
commercial activities and prohibits the formation of new unitary holding
companies.
The G-L-B Act imposes new requirements on financial institutions with
respect to customer privacy. The G-L-B Act generally prohibits disclosure of
customer information to non-affiliated third parties unless the customer has
been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies
to customers annually. Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the
G-L-B Act. The G-L-B Act directs the federal banking agencies, the National
Credit Union Administration, the Secretary of the Treasury, the Securities and
Exchange Commission and the Federal Trade Commission, after consultation with
the National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
The G-L-B Act contains significant revisions to the Federal Home Loan
Bank System. The G-L-B Act imposes new capital requirements on the Federal Home
Loan Banks and authorizes them to issue two classes of stock with differing
dividend rates and redemption requirements. The G-L-B Act deletes the current
requirement that the Federal Home Loan Banks annually contribute $300 million to
pay interest on certain government obligations in favor of a 20% of net earnings
formula. The G-L-B Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small
agri-businesses. The G-L-B Act makes membership in the Federal Home Loan Bank
voluntary for federal savings associations.
17
<PAGE>
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
which may acquire the Company, it may facilitate affiliations with companies in
the financial services industry.
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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
On May 16, 2000, United Tennessee Bankshares, Inc. held its 2000
Annual Meeting of Stockholders. The following is a brief description of each
matter voted upon and the results of the voting.
1. Election of Directors
Nominee For Withheld
------------------------------ ----------------- --------------
William B. Henry 1,123,377 5,313
J. William Myers 1,118,980 9,710
Tommy C. Bible 1,121,505 7,185
There were no abstentions or broker non-votes.
The terms of office of Directors Richard G. Harwood, Robert D. Self,
Clyde E. Driskill, Jr., Robert L. Overholt and Ben W. Hooper continued after the
meeting.
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
27 Financial Data Schedule
---------------
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.
19
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNITED TENNESSEE BANKSHARES, INC.
Registrant
Date: August 10, 2000 /s/ Richard G. Harwood
-------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
