<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, 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>
<PAGE>
CONTENTS
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
March 31, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income for the Three-Month
Periods Ended March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Comprehensive Income (Loss)
for the Three-Month Periods Ended March 31, 2000 and
1999 (Unaudited) 5
Consolidated Statement of Changes in Shareholders'
Equity for the Three-Month Period Ended March 31, 2000
(Unaudited) 6
Consolidated Statements of Cash Flows for the
Three-Month Periods Ended March 31, 2000 and 1999
(Unaudited) 7-8
Notes to Consolidated Financial Statements for the
Three-Month Periods Ended March 31, 2000 and 1999
(Unaudited) 9-11
Item 2. Management's Discussion and Analysis or Plan of
Operation 12-17
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
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<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
------------------------------
(in thousands)
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 4,536 $ 2,387
Investment securities available for sale,
at fair value 27,009 27,935
Loans receivable, net 63,041 61,516
Premises and equipment, net 497 511
Foreclosed real estate - held for sale 71 71
Accrued interest receivable 481 439
Goodwill, net of amortization 1,093 1,113
Prepaid expenses and other assets 14 148
------- -------
Total assets $96,742 $94,120
======= =======
Liabilities and Equity
Liabilities:
Deposits $77,034 $73,810
Note Payable 0 3,200
Advances from Federal Home Loan Bank 6,273 3,767
Accrued interest payable 275 284
Accrued income taxes 80 0
Deferred income taxes 396 457
Accrued benefit plan liabilities 385 619
Other liabilities 52 83
------- -------
Total liabilities 84,495 82,220
------- -------
Commitments and contingencies -- --
------- -------
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 (889) (1,005)
Shares in MRP plan - contra account (401) (556)
Shares in grantor trust - contra account (202) (202)
Shares in stock option plan - contra account (1,658) (1,658)
Retained earnings 1,926 1,751
Accumulated other comprehensive income 380 479
------- -------
Total shareholders' equity 12,247 11,900
------- -------
Total liabilities and equity $96,742 $94,120
======= =======
</TABLE>
The 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 MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
(In Thousands Except
per Share Information)
--------------------------------
Three Months Ended March 31,
-------------------------------
2000 1999
(Unaudited) (Unaudited)
--------------------------------
<S> <C> <C>
Interest income:
Loans $ 1,280 $ 1,135
Investment securities 397 435
Other interest-earning assets 24 78
-------- --------
Total interest income 1,701 1,648
-------- --------
Interest expense:
Deposits 827 732
Advances from Federal Home Loan Bank
and Note Payable 89 66
-------- --------
Total interest expense 916 798
-------- --------
Net interest income 785 850
-------- --------
Provision for loan losses 7 6
-------- --------
Net interest income after provision for
loan losses 778 844
-------- --------
Noninterest income:
Deposit account service charges 46 21
Loan service charges and fees 28 19
Other 5 6
-------- --------
Total noninterest income 79 46
-------- --------
Noninterest expense:
Compensation and benefits 288 365
Occupancy and equipment 50 62
Federal deposit insurance premiums 12 12
Data processing fees 43 45
Advertising and promotion 18 16
Amortization 20 20
Other 131 163
-------- --------
Total noninterest expense 562 683
-------- --------
Income before income taxes 295 207
Income taxes 120 72
-------- --------
Net income $ 175 $ 135
======== ========
Earnings per share
Basic $ 0.13 $ 0.10
======== ========
Diluted $ 0.13 $ 0.10
======== ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
4
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<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
2000 1999
----------- -----------
(Unaudited - in thousands)
<S> <C> <C>
Net income $ 175 $ 135
-------- --------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities (159) (322)
Less reclassification adjustment for gains\losses
included in net income (1) --
Less income taxes related to unrealized
gains\losses on investment securities 61 122
-------- --------
Other comprehensive income (loss), net of tax (99) (200)
-------- --------
Comprehensive income (loss) $ 76 $ (65)
======== ========
</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 SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Shares Shares in
in MRP Grantor Shares in Accumulated
Unearned Plan- Trust- 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) $(556) $(202) $(1,658) $1,751 $479 $11,900
Net income - - - - - 175 - 175
Issuance of shares
of common stock
pursuant to
MRP plan - - 155 - - - - 155
Other comprehensive
income (loss) - - - - - - (99) (99)
Payment on ESOP loan
principal - 116 - - - - - 116
Dividends paid - - - - - - - -
------- ----- ----- ----- ------- ------ ---- -------
Balances, end
of period $13,091 $(889) $(401) $(202) $(1,658) $1,926 $380 $12,247
======= ===== ===== ===== ======= ====== ==== =======
</TABLE>
The accompanying notes are an integral part of these financial
statements.
6
<PAGE>
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
---------- ------------
(Unaudited - in thousands)
<S> <C> <C>
Operating Activities:
Net income $ 175 $ 135
------- -------
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 7 6
Depreciation 14 13
Amortization of goodwill 20 20
Federal home loan bank stock dividends -- (10)
Net (gain) loss on sales of investment
securities available for sale 1 --
Deferred income taxes (benefit) -- (1)
(Increase) Decrease in:
Accrued interest receivable (42) (10)
Other assets 134 (5)
Increase (Decrease) in:
Accrued interest payable (9) (7)
Accrued income taxes 80 35
Accrued benefit plan liabilities (234) 41
Other liabilities (31) 130
------- -------
Total adjustments 60 212
------- -------
Net cash provided by operating activities 115 347
------- -------
Investing Activities:
Purchases of investment securities
available for sale (1,474) (952)
Proceeds from maturities of investment
securities available for sale -- 1,000
Principal payments received on investment
securities available for sale 1,238 1,625
Proceeds from sales of investment
securities available for sale 1,001 --
Proceeds from maturities of investment
securities held to maturity -- 500
Principal payments received on investment
securities held to maturity -- 32
Net increase in loans (1,532) (1,773)
Purchases of plant and equipment, net -- (40)
------- -------
Net cash provided by (used in) investing
activities (767) 392
------- -------
</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 PERIODS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
---------- ------------
(Unaudited - in thousands)
<S> <C> <C>
Financing Activities:
Net increase (decrease) in deposits 3,224 (2,194)
Purchase of common stock for MRP plan trust -- (451)
Issuance of common stock pursuant to MRP plan 155 --
Payment on ESOP loan and release of shares 116 --
Repayment of advances from Federal Home
Loan Bank (494) (472)
Repayment of note payable (3,200)
Proceeds from advances from Federal Home
Loan Bank 3,000 --
-------- --------
Net cash provided by (used in) financing
activities 2,801 (3,117)
-------- --------
Net increase (decrease) in cash and
cash equivalents 2,149 (2,378)
Cash and cash equivalents, beginning of period 2,387 6,131
-------- --------
Cash and cash equivalents, end of period $ 4,536 $ 3,753
======== ========
Supplementary disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 925 $ 805
Income taxes $ 40 $ 37
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\loss on
investment securities available for sale $ (160) $ (322)
Change in deferred income taxes
associated with unrealized gain\loss on
investment securities available for sale $ 61 $ 122
Change in net unrealized gain\loss on
investment securities available for sale $ (99) $ (200)
</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, 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. The weighted average number of
shares outstanding during the three months ended March 31, 2000
and 1999 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 ended March
31, 2000 and 1999 were 9,856 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>
<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 shares
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>
<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 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 Stock Option trust
purchased shares on the open market in the first, second and
third quarters of 1999. As of March 31, 2000, the Stock Option
trust had purchased 139,293 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
March 31, 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 three month period ended March 31, 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 as of March
31, 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.
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>
<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>
<PAGE>
Comparison of Financial Condition at March 31, 2000 and December
31, 1999
Total assets increased from December 31, 1999 to March 31,
2000 by $2.6 million, or 2.8%, from $94.1 million at December
31, 1999 to $96.7 million at March 31, 2000. The increase in
assets was principally the result of an increase in cash and
loans receivable, which were offset by a slight decrease in
investment securities available for sale. Investment securities
available for sale decreased $926 thousand or 3.3% from December
31, 1999.
Loans receivable increased from December 31, 1999 to March
31, 2000 as originations exceeded repayments for the period by
approximately $1.5 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,
2000 and December 31, 1999, we had no concentrations of loans
exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
March 31, 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 $ 52,078 79.5% $ 48,550 76.5%
Commercial 6,778 10.3 9,099 14.3
Construction 3,123 4.8 2,615 4.1
Consumer loans:
Automobile 1,186 1.8 980 1.5
Loans to depositors, secured by
deposits 1,182 1.8 1,114 1.8
Home equity and second mortgage 198 0.3 208 0.3
Other 987 1.5 931 1.5
------- ----- ------- -----
65,532 100.0% 63,497 100.0%
===== =====
Less:
Loans in process 1,516 1,033
Deferred fees and discounts 305 287
Allowance for loan losses 670 661
------- -------
Total $ 63,041 $ 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>
<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,
2000 1999
------------- ------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period $ 661 $ 641
------- ------
Charge-offs:
Consumer (2) (4)
Recoveries:
Consumer 4 --
------- ------
Net charge-offs 2 (4)
Provision for loan losses 7 6
------- ------
Balance at end of period $ 670 $ 643
======= ======
</TABLE>
The following table sets forth information about our
nonperforming assets at the dates indicated.
<TABLE>
<CAPTION>
March 31, 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 344 348
Commercial 488 --
Consumer 6 29
------ ------
Total $ 838 $ 377
====== ======
</TABLE>
At March 31, 2000 and December 31, 1999, all loans that
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 quarter, the Company increased its liabilities
by $2.3 million, or 2.85%, in order to fund asset growth. During
the three months ended March 31, 2000, total deposits increased
$3.2 million or 4.4% from $73.8 million at December 31, 1999 to
$77.0 million at March 31, 2000. Advances from the Federal Home
Loan Bank also increased $2.5 million, or 66.5%, from $3.8
million at December 31, 1999 to $6.3 million at March 31, 2000.
The Company also repaid its note payable of $3.2 million.
Our shareholders' equity increased $347,000 from $11.9
million at December 31, 1999 to $12.2 million at March 31, 2000.
The increase was due to $175,000 of net income, payment of
approximately $116,000 on the ESOP loan, distribution of shares
under the MRP plan at a cost of $155,000, and a $99,000 decrease
in our net unrealized gain on investment securities.
<PAGE>
Discussion of Results of Operations for the Three Months Ended
March 31, 2000 and 1999
Our net income for the three months ended March 31, 2000
was $175 thousand, a $40 thousand, or 30% increase from the $135
thousand we earned during the three months ended March 31, 1999.
Basic and diluted earnings per share for the three months ended
March 31, 2000 were each $0.13 compared to $0.10 for the same
period in 1999. Basic average shares outstanding for the periods
were 1,382,013. Average dilutive potential shares outstanding
were 9,856 and -0-, respectively. The increase in net income is
due primarily to a decrease in compensation costs related to the
management recognition plan which had increased compensation
costs in the first quarter of 1999.
14
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Interest income increased $53 thousand, or 3.2%, from
$1.65 million for the three months ended March 31, 1999 to $1.70
million for the three months ended March 31, 2000. The increase
in interest income was due to interest on loans which increased
$145 thousand, or 13%, due to an increase in the average
outstanding balance of the loan portfolio. 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 $92,000.
Interest expense increased $118 thousand primarily due to
the increase in average balance of deposits of $7.6 million
compared to the same period in the prior year. In addition, the
Company incurred $89 thousand in interest expense on advances
from the Federal Home Loan Bank compared to $66 thousand in the
prior-year period. The Bank used the funds from the FHLB
borrowings to partially fund a dividend from the Bank to the
Company totalling $4,200,000 which the Company used to pay off
its note payable.
Net interest income decreased $65,000, or 7.7%, between
the periods as the increase in interest expense exceeded the
increase in interest income. The Company's net interest margin
narrowed to 3.45% for the three months ended March 31, 2000
compared to 3.76% 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.
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 $33,000 from $46,000 for the
three months ended March 31, 1999 to $79,000 for the three
months ended March 31, 2000. The increase in other 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 March
31, 2000.
Noninterest expenses decreased $121,000 from $683,000 for
the three months ended March 31, 1999 to $562,000 for the three
months ended March 31, 2000. Compensation and benefits for the
three months ended March 31, 2000 were $77,000 lower primarily
due to a one time compensation expense associated with the
implementation of a management recognition plan in 1999. Other
noninterest expenses decreased $32,000 from $163,000 for the
three months ended March 31, 1999 to $131,000 for the three
months ended March 31, 2000.
Our effective tax rates for the three months ended March
31, 2000 and 1999 were 40.7% and 34.8%, respectively. The
higher effective tax rate is due to a decrease in our tax-exempt
investment securities during the three months ended March 31,
2000.
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,
15
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<PAGE>
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.
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.
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, 2000 and December 31,
1999, 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, 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
16
<PAGE>
<PAGE>
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.
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.
17
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<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
(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.
18
<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 12, 2000 /s/ Richard G. Harwood
---------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting
Officer)
19
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<PERIOD-END> MAR-31-2000
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