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 September 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
September 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Income for the Three-Month and
Nine-Month Periods Ended September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three-Month and Nine-Month Periods Ended September 30, 2000
and 1999 (Unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity
for the Nine-Month Period Ended September 30, 2000 (Unaudited) 6
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended September 30, 2000 and 1999 (Unaudited) 7-8
Notes to Consolidated Financial Statements for the Nine-Month
Periods Ended September 30, 2000 and 1999 (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>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
-------------- -------------
(in Thousands)
Assets
<S> <C> <C>
Cash and amounts due from depository institutions $ 4,787 $ 2,387
Investment securities available for sale, at fair value 25,088 27,935
Loans receivable, net 66,786 61,516
Premises and equipment, net 482 511
Foreclosed real estate - held for sale 71 71
Accrued interest receivable 544 439
Goodwill, net of amortization 1,053 1,113
Prepaid expenses and other assets 103 148
--------- ---------
Total assets $ 98,914 $ 94,120
========= =========
Liabilities and Equity
Liabilities:
Deposits $ 79,478 $ 73,810
Note Payable 0 3,200
Advances from Federal Home Loan Bank 5,298 3,767
Accrued interest payable 285 284
Deferred income taxes 556 457
Accrued benefit plan liabilities 597 619
Other liabilities 36 83
--------- ---------
Total liabilities 86,250 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 MRP plan - contra account (401) (556)
Shares in grantor trust - contra account (202) (202)
Shares in stock option plan trusts - contra account (1,658) (1,658)
Retained earnings 1,963 1,751
Accumulated other comprehensive income 714 479
--------- ---------
Total shareholders' equity 12,664 11,900
--------- ---------
Total liabilities and equity $ 98,914 $ 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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
(In Thousands Except (In Thousands Except
per Share Information) per Share Information)
----------------------------------- --------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 1,382 $ 1,194 $ 4,003 $ 3,501
Investment securities 393 417 1,232 1,304
Other interest-earning assets 33 52 86 170
--------- --------- --------- ---------
Total interest income 1,808 1,663 5,321 4,975
--------- --------- --------- ---------
Interest expense:
Deposits 966 800 2,699 2,282
Advances from Federal Home Loan Bank and Note Payable 81 54 257 180
--------- --------- --------- ---------
Total interest expense 1,047 854 2,956 2,462
--------- --------- --------- ---------
Net interest income 761 809 2,365 2,513
Provision for loan losses 9 6 25 18
--------- --------- --------- ---------
Net interest income after provision for loan losses 752 803 2,340 2,495
--------- --------- --------- ---------
Noninterest income:
Deposit account service charges 46 41 138 85
Loan service charges and fees 27 23 84 68
Other 4 1 9 12
--------- --------- --------- ---------
Total noninterest income 77 65 231 165
--------- --------- --------- ---------
Noninterest expense:
Compensation and benefits 268 264 796 836
Occupancy and equipment 62 43 163 153
Federal deposit insurance premiums 12 12 36 36
Data processing fees 65 55 161 159
Advertising and promotion 18 20 52 59
Amortization 20 20 60 60
Other 112 165 377 508
--------- --------- --------- ---------
Total noninterest expense 557 579 1,645 1,808
--------- --------- --------- ---------
Income before income taxes 272 289 926 852
Income taxes 49 110 300 302
--------- --------- --------- ---------
Net income $ 223 $ 179 $ 626 $ 550
========= ========= ========= =========
Earnings per share:
Basic $ 0.16 $ 0.13 $ 0.45 $ 0.40
========= ========= ========= =========
Diluted $ 0.16 $ 0.13 $ 0.45 ` $ 0.40
========= ========= ========= =========
</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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- --------------
(Unaudited - in Thousands) (Unaudited - in Thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 223 $ 179 $ 626 $ 550
-------- -------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities 584 (135) 389 (187)
Reclassification adjustment for gains\losses
included in net income 0 0 (9) 0
Income taxes related to unrealized
gains\losses on investment securities (215) 53 (145) 73
-------- -------- --------- ---------
Other comprehensive income (loss), net of tax 369 (82) 235 (114)
-------- -------- --------- ---------
Comprehensive income (loss) $ 592 $ 97 $ 861 $ 436
======== ======== ========= =========
</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 NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Shares in
Shares in Grantor Shares in Accumulated
Unearned MRP 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 - - - - - 626 - 626
Issuance of shares of common
stock pursuant to MRP plan - - 155 - - - - 155
Other comprehensive income (loss) - - - - - - 235 235
Payment on ESOP loan principal - 162 - - - - - 162
Dividends paid - - - - - (414) - (414)
-------- ------- ----- ----- ------- ------ ----- -------
Balances, end of period $ 13,091 $ (843) $(401) $(202) $(1,658) $1,963 $ 714 $12,664
======== ======= ===== ===== ======= ====== ===== =======
</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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------------
2000 1999
-------------- ------------
(Unaudited - in Thousands)
<S> <C> <C>
Operating Activities:
Net income $ 626 $ 550
--------- ---------
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 25 18
Depreciation 43 38
Amortization of goodwill 60 60
Net (gain) loss on sales of foreclosed real estate 10 0
Federal home loan bank stock dividends (41) (25)
Net (gain) loss on sales of investment securities
available for sale 9 0
Deferred income taxes (benefit) (47) 3
(Increase) Decrease in:
Accrued interest receivable (105) 4
Other assets 45 (13)
Increase (Decrease) in:
Accrued interest payable 1 (23)
Accrued income taxes 0 (32)
Accrued benefit plan liabilities (22) 0
Other liabilities (46) 297
--------- ---------
Total adjustments (68) 327
--------- ---------
Net cash provided by operating activities 558 877
--------- ---------
Investing Activities:
Purchases of investment securities available for sale (2,474) (5,599)
Proceeds from maturities of investment securities
available for sale 0 2,000
Principal payments received on investment securities
available for sale 4,240 5,085
Proceeds from sales of investment securities
available for sale 1,493 0
Purchases of investment securities held to maturity 0 (464)
Proceeds from maturities of investment securities held
to maturity 0 500
Principal payments received on investment securities
held to maturity 0 1,114
Net increase in loans (5,305) (5,497)
Purchases of plant and equipment, net (14) (72)
--------- ---------
Net cash used in investing activities (2,060) (2,933)
--------- ---------
</TABLE>
7
<PAGE>
UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------------------
2000 1999
-------------- ------------
(Unaudited - in Thousands)
<S> <C> <C>
Financing Activities:
Dividends paid (414) (415)
Net increase in deposits 5,668 3,349
Purchase of common stock for MRP plan trust 0 (2,286)
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 (1,469) (1,433)
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 3,902 (661)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,400 (2,717)
Cash and cash equivalents, beginning of period 2,387 6,131
--------- ---------
Cash and cash equivalents, end of period $ 4,787 $ 3,414
========= =========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,955 $ 2,485
Income taxes $ 344 $ 331
Supplementary disclosures of noncash investing activities:
Sale of foreclosed real estate by origination of loans $ 75 $ 0
Acquisition of foreclosed real estate $ 85 $ 0
Change in unrealized gain\loss on investment securities
available for sale $ 380 $ (187)
Change in deferred income taxes associated with
unrealized gain\loss on investment securities available
for sale $ 145 $ (73)
Change in net unrealized gain\loss on investment
securities available for sale $ 235 $ (114)
</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 NINE MONTH PERIODS ENDED SEPTEMBER 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 nine months ended September 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 nine months ended September 30, 2000 and 1999 were 2,364
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 September 30, 2000, the Stock Option trust had purchased
184,527 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 September 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 nine month periods ended September 30, 1999 and 2000, the Company
issued 12,709 shares of restricted stock each period at a total cost of $311,118
and held 32,772 shares of its common stock in trust for the MRP plan as of
September 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 nine
month period ended September 30, 2000, the Company purchased 58,692 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. In June 2000, the
FASB issued Statement of Financial Accounting Standards No. 138. This statement
amends the accounting and reporting standards of Statement No. 133 for certain
derivative instruments and certain hedging activities, but these amendments will
not significantly affect the Company's operations.
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.
11
<PAGE>
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. The Company has not entered into any transactions of this
nature, 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.
NOTE 8 - ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENT OF LIABILITIES
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. This Statement replaces FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. It revises the standards for accounting for securitization and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of Statement No. 125's provisions. The
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
March 31, 2001. This Statement is also effective for recognition and
reclassification of collateral and for disclosure related to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Since the Company does not currently engage in securitization and other
transfers of financial assets and collateral, this Statement is not expected to
significantly affect the financial condition or results of operations of the
Company.
12
<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.
13
<PAGE>
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Total assets increased from December 31, 1999 to September 30, 2000 by
$4.8 million, or 5.1%, from $94.1 million at December 31, 1999 to $98.9 million
at September 30, 2000. The increase in assets was principally the result of an
increase in loans receivable, which were offset by a decrease in investment
securities available for sale. Investment securities available for sale
decreased $2.8 million or 10.2% from December 31, 1999.
Loans receivable increased from December 31, 1999 to September 30, 2000
as originations exceeded repayments for the period by approximately $5.3
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 September 30, 2000
and December 31, 1999, we had no concentrations of loans exceeding 10% of gross
loans other than as disclosed below.
<TABLE>
<CAPTION>
September 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 $54,502 78.9% $48,550 76.5%
Commercial 7,093 10.3 9,099 14.3
Construction 3,002 4.3 2,615 4.1
Consumer loans:
Automobile 1,290 1.9 980 1.5
Loans to depositors, secured by deposits 1,274 1.8 1,114 1.8
Home equity and second mortgage 206 0.3 208 0.3
Other 1,750 2.5 931 1.5
------- ----- ------- -----
69,117 100.0% 63,497 100.0%
===== =====
Less:
Loans in process 1,355 1,033
Deferred fees and discounts 319 287
Allowance for loan losses 657 661
------- -------
Total $66,786 $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.
14
<PAGE>
The following table sets forth information about our allowance for loan
losses for the period indicated.
<TABLE>
<CAPTION>
Nine Nine
Months Ended Months Ended
September 30, September 30,
2000 1999
-------------------- ------------------
(In Thousands)
<S> <C> <C>
Balance at beginning of period $ 661 $ 641
---------- ----------
Charge-offs:
Consumer (33) (4)
Recoveries:
Consumer 4 0
---------- ----------
Net charge-offs (29) (4)
Provision for loan losses 25 18
---------- ----------
Balance at end of period $ 657 $ 655
========== ==========
</TABLE>
The following table sets forth information about our nonperforming
assets at the dates indicated.
<TABLE>
<CAPTION>
September 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 413 348
Commercial 60 0
Consumer 20 29
---------- ----------
Total $ 493 $ 377
========== ==========
</TABLE>
At September 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 nine months ended September 30, 2000, the Company increased
its liabilities by $4.0 million, or 4.9%, in order to fund asset growth. Total
deposits increased $5.7 million or 7.7% from $73.8 million at December 31, 1999
to $79.5 million at September 30, 2000. Advances from the Federal Home Loan Bank
also increased $1.5 million, or 39.5%, from $3.8 million at December 31, 1999 to
$5.3 million at September 30, 2000. The Company also repaid its short-term note
payable of $3.2 million.
Our shareholders' equity increased $764,000 from $11.9 million at
December 31, 1999 to $12.7 million at September 30, 2000. The increase was due
to $626,000 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
$235,000 increase in our net unrealized gain on investment securities, and
payment of dividends to shareholders totalling $414,000.
Discussion of Results of Operations for the Three Months Ended September 30,
2000 and 1999
Our net income for the three months ended September 30, 2000 was
$223,000, a $44,000, or 24.6% increase from the $179,000 we earned during the
three months ended September 30, 1999. Basic and diluted earnings per share for
the three months ended September 30, 2000 were each $0.16 compared to $0.13 for
the same period in 1999. Basic average shares outstanding for both periods was
1,382,013 shares. Average potential dilutive shares outstanding were 2,364 and
-0-, respectively.
15
<PAGE>
Interest income increased $145 thousand, or 8.7%, from $1.66 million
for the three months ended September 30, 1999 to $1.81 million for the three
months ended September 30, 2000. The increase in interest income was due to
interest on loans which increased $188,000, or 15.7%, 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 $43,000.
Interest expense on deposits increased $166,000 primarily due to the
increase in average balance of deposits and a slight increase in interest rates.
In addition, the Company incurred $81,000 in interest expense on advances from
the Federal Home Loan Bank compared to $54,000 in the prior-year period.
Net interest income decreased $48,000, 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 3.55% for the three months ended
September 30, 2000 compared to 3.73% 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 $12,000 from $65,000 for the three months
ended September 30, 1999 to $77,000 for the three months ended September 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 September 30, 2000.
Noninterest expenses decreased $22,000 from $579,000 for the three
months ended September 30, 1999 to $557,000 for the three months ended September
30, 2000. Other noninterest expenses decreased $53,000 from $165,000 for the
three months ended September 30, 1999 to $112,000 for the three months ended
September 30, 2000. Legal and professional fees and other expenses related to
being a public company have decreased from the prior year when several one-time
costs were incurred.
Our effective tax rates for the three months ended September 30, 2000
and 1999 were 18.0% and 38.1%, respectively. The lower effective tax rate is due
to an increase in our tax-exempt investment securities in 2000 compared to 1999
and an adjustment of our deferred tax liabilities in 2000 in accordance with
FASB Statement No. 109.
Discussion of Results of Operations for the Nine Months Ended September 30, 2000
and 1999
Our net income for the nine months ended September 30, 2000 was
$626,000, a $76,000, or 13.8% increase over the $550,000 we earned during the
nine months ended September 30, 1999. Basic and diluted earnings per share for
the nine months ended September 30, 2000 were each $0.45 compared to $0.40 for
the same period in 1999. Average shares outstanding for both periods was
1,382,013 shares. Average potential dilutive shares outstanding were 2,364 and
-0-, respectively.
Interest income increased $346,000, or 7.0% from $4.98 million for the
nine months ended September 30, 1999 to $5.32 million for the nine months ended
September 30, 2000. The increase in interest income was due to interest on loans
which increased $502,000, or 14.3%, 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 $156,000.
Interest expense on deposits increased $417,000 due to the increase in
average balance of deposits of $4.6 million compared to the same period in the
prior year, and an increase in interest rates. In addition, the Company incurred
$257,000 in interest expense on advances for the Federal Home Loan
16
<PAGE>
Bank compared to $180,000 in the prior period. The Company used the funds from
the additional deposits to fund loan originations.
Net interest income decreased $148,000 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 3.44% for the nine months ended
September 30, 2000 compared to 3.72% 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 $66,000 from $165,000 for the nine months
ended September 30, 1999 to $231,000 for the nine months ended September 30,
2000. The increase in noninterest income was mainly from increased deposit
account service charges due to the higher level of deposit accounts during the
2000 period and the restructure of deposit fees.
Noninterest expenses decreased $163,000 from $1,808,000 for the nine
months ended September 30, 1999 to $1,645,000 for the nine months ended
September 30, 2000. Compensation and benefits for the nine months ended
September 30, 2000 were $40,000 lower primarily due to a one time compensation
expense associated with the implementation of a management recognition plan in
1999. Other noninterest expenses decreased $131,000 from $508,000 for the nine
months ended September 30, 1999 to $377,000 for the nine months ended September
30, 2000. Legal and professional fees and other expenses related to being a
public company have decreased from the prior year when several one-time costs
were incurred.
Our effective tax rates for the nine months ended September 30, 2000
and 1999 were 32.4% and 35.5%, respectively. The lower effective tax rate is due
to an increase in our tax-exempt investment securities in 2000 compared to 1999
and an adjustment of our deferred tax liabilities in 2000 in accordance with
FASB Statement No. 109.
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.
17
<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 September 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 September 30, 2000 and December
31, 1999.
18
<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.
19
<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: November 13, 2000 /s/ Richard G. Harwood
--------------------------------------------
Richard G. Harwood
President and Chief Executive Officer
(Duly Authorized Representative and
Principal Financial and Accounting Officer)
20
