-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KH9IBOUIICX58/wt2Wh4shTbzCdUBAAb/IstS9bHJaaDX76HO0QMG51LiJ+yCaHZ znJi3KlO+FKUE3h25CpRUg== 0000904280-99-000188.txt : 19990518 0000904280-99-000188.hdr.sgml : 19990518 ACCESSION NUMBER: 0000904280-99-000188 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED TENNESSEE BANKSHARES INC CENTRAL INDEX KEY: 0001045689 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 621710108 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23551 FILM NUMBER: 99625871 BUSINESS ADDRESS: STREET 1: 344 BROADWAY CITY: NEWPORT STATE: TN ZIP: 37821-0249 BUSINESS PHONE: 4236236088 MAIL ADDRESS: STREET 1: 344 BROADWAY CITY: NEWPORT STATE: TN ZIP: 37821-0249 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB Mark One [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT Commission File Number: 0-23551 UNITED TENNESSEE BANKSHARES, INC. --------------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) TENNESSEE 62-1710108 --------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 344 BROADWAY, NEWPORT, TENNESSEE 37821 -------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number, Including Area Code: (423) 623-6088 -------------- Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days: Yes [X] No [] State the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: 1,382,013 - --------- Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Statements of Financial Condition as of March 31, 1999(Unaudited) and December 31, 1998 3 Consolidated Statement of Income for the Three- Month Periods Ended March 31, 1999 and 1998 (Unaudited) 4 Consolidated Statements of Comprehensive Income for the Three-Month Periods Ended March 31, 1999 and 1998 (Unaudited) 5 Consolidated Statement of Changes in Stockholders' Equity for the Three-Month Period Ended March 31, 1999 (Unaudited) 6 Consolidated Statement of Cash Flows for the Three- Month Periods Ended March 31, 1999 and 1998 (Unaudited) 7-8 Notes to Consolidated Financial Statements for the Three-Month Periods Ended March 31, 1999 and 1998 (Unaudited) 9-12 Item 2. Management's Discussion and Analysis or Plan of Operation 13-18 PART II. OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 20 2 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
March 31, 1999 December 31, (Unaudited) 1998 ------------- ------------- (in thousands) ------------------------------ ASSETS Cash and amounts due from depository institutions $ 3,753 $ 6,131 Investment securities: Available for sale, at fair value 31,038 33,022 Held to maturity, at amortized cost (fair value of $1,928 at 3/31/99 and $2,453 at 12/31/98) 1,898 2,431 Loans receivable, net 55,113 53,346 Premises and equipment, net 501 474 Foreclosed real estate - held for sale -- -- Accrued interest receivable 453 443 Goodwill, net of amortization 1,173 1,193 Other assets 35 30 ------- ------- TOTAL ASSETS $93,964 $97,070 ======= ======= LIABILITIES AND EQUITY LIABILITIES: Deposits $67,641 $69,835 Advances from Federal Home Loan Bank 5,217 5,689 Accrued interest payable 283 290 Accrued income taxes 73 38 Deferred income taxes 737 860 Other liabilities 560 389 ------- ------- TOTAL LIABILITIES 74,511 77,101 ------- ------- Commitments and contingencies -- -- SHAREHOLDERS' EQUITY: Common stock - no par value, authorized 20,000,000 shares; issued and outstanding 1,382,013 shares 13,091 13,091 Unearned compensation - employee stock ownership plan (1,129) (1,129) Shares in MRP plan trust - contra account (451) -- Shares in grantor trust - contra account (137) (137) Retained earnings 7,085 6,950 Accumulated other comprehensive income 994 1,194 ------- ------- TOTAL SHAREHOLDERS' EQUITY 19,453 19,969 ------- ------- TOTAL LIABILITIES AND EQUITY $93,964 $97,070 ======= =======
Accompanying notes are an integral part of these financial statements. 3 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands except per share information) ------------------------- Three months ended March 31, ------------------------- 1999 1998 (Unaudited) (Unaudited) ------------ ------------ Interest income: Loans $ 1,135 $ 1,041 Investment securities 435 273 Other interest-earning assets 78 106 ---------- ---------- TOTAL INTEREST INCOME 1,648 1,420 ---------- ---------- INTEREST EXPENSE: Deposits 732 630 Advances from Federal Home Loan Bank 66 -- ---------- ---------- TOTAL INTEREST EXPENSE 798 630 ---------- ---------- NET INTEREST INCOME 850 790 PROVISION FOR LOAN LOSSES 6 6 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 844 784 ---------- ---------- NONINTEREST INCOME: Deposit account service charges 21 16 Loan service charges and fees 19 20 Net gain (loss) on sales of investment securities available for sale -- -- Other 6 7 ---------- ---------- TOTAL NONINTEREST INCOME 46 43 NONINTEREST EXPENSE: Compensation and benefits 365 162 Occupancy and equipment 62 30 Federal deposit insurance premiums 12 12 Data processing fees 45 36 Advertising and promotion 16 15 Net (gain) loss on foreclosed real estate -- 1 Amortization 20 -- Other 163 100 ---------- ---------- TOTAL NONINTEREST EXPENSE 683 356 ---------- ---------- INCOME BEFORE INCOME TAXES 207 471 INCOME TAXES 72 153 ---------- ---------- NET INCOME $ 135 $ 318 ========== ========== BASIC EARNINGS PER COMMON SHARE $ 0.10 0.22 ========== ==========
The accompanying notes are an integral part of these financial statements. 4 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Three Months Ended March 31, ----------------------------- 1999 1998 (Unaudited- (Unaudited- in Thousands) in Thousands) ----------- ----------- NET INCOME $ 135 $ 318 -------- -------- OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Unrealized gains on investment securities (322) 108 Less reclassification adjustment for gains included in net income - - Less income taxes related to unrealized gains on investment securities 122 (41) -------- -------- OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX (200) 67 -------- -------- COMPREHENSIVE INCOME (LOSS) $ (65) $ 385 ======== ========
The accompanying notes are an integral part of these financial statements. 5 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999
Accumulated Unearned MRP Grantor Unearned Other Total Common Compensation Plan- Trust- Compensation Comprehensive Stockholders' Stock ESOP Contra Contra ESOP Income Equity ----- ------------ ------ ------ ----------- ------------ ------------ (Unaudited - in thousands) BALANCES, BEGINNING OF PERIOD $13,091 $(1,129) $ - $(137) $6,950 $1,194 $19,969 Net income - - - - 135 - 135 Purchase of stock for management recognition plan (451) (451) Other comprehensive income (loss) - - - - - (200) (200) ------- ------- ----- ----- ------ ------- ------- BALANCES, END OF PERIOD $13,091 $(1,129) $(451) $(137) $7,085 $ 994 $19,453 ======= ====== ===== ===== ====== ======= =======
The accompanying notes are an integral part of these financial statements. 6 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Three months ended March 31, ---------------------------- 1999 1998 (Unaudited - (Unaudited - in thousands) in thousands) -------------- -------------- Operating Activities: Net income $ 135 $ 318 ------- ------- Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 6 6 Depreciation 13 12 Amortization of goodwill 20 - Net (gain) loss on sales of foreclosed real estate - (1) Federal home loan bank stock dividends (10) (10) Net (gain) loss on sales of investment securities available for sale - - Accrued income taxes 35 (35) Deferred income taxes (benefit) (1) - (Increase) Decrease in: Accrued interest receivable (10) 5 Other assets (5) 458 Increase (Decrease) in: Accrued interest payable (7) - Other liabilities 171 (176) ------- ------- TOTAL ADJUSTMENTS 212 259 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 347 577 ------- ------- INVESTING ACTIVITIES: Purchases of investment securities available for sale (952) (7,512) Proceeds from sales of investment securities available for sale - - Proceeds from maturities of investment securities available for sale 1,000 500 Principal payments received on investment securities available for sale 1,625 614 Purchases of investment securities held to maturity - (1,042) Proceeds from maturities of investment securities held to maturity 500 - Principal payments received on investment securities held to maturity 32 Net increase in loans (1,773) (396) Purchases of plant and equipment, net (40) (19) Proceeds from sales of foreclosed real estate - 20 ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 392 (7,835) ------- -------
7 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Three months ended March 31, ----------------------------- 1999 1998 (Unaudited - (Unaudited - in thousands) in thousands) -------------- -------------- FINANCING ACTIVITIES: Net proceeds from sale of common stock $ - $ 12,812 Net increase (decrease) in deposits (2,194) (27,982) Purchase of common stock for MRP plan trust (451) - Repayment of advances from Federal Home Loan Bank (472) - -------- -------- NET CASH USED IN FINANCING ACTIVITIES (3,117) (15,170) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,378) (22,428) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,131 25,490 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,753 $ 3,062 ======== ======== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest $ 805 $ 630 Income taxes $ 37 $ 324 SUPPLEMENTARY DISCLOSURES OF NONCASH INVESTING ACTIVITIES: Sale of foreclosed real estate by origination of mortgage loans $ - $ - Acquisition of foreclosed real estate $ - $ - Change in unrealized gain on investment securities available for sale $ (322) $ 108 Change in deferred income taxes associated with unrealized gain on investment securities available for sale $ 122 $ (41) Change in net unrealized gain on investment securities available for sale $ (200) $ 67
The accompanying notes are an integral part of these financial statements. 8 UNITED TENNESSEE BANKSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION United Tennessee Bankshares, Inc. ("Company") was incorporated under the laws of the State of Tennessee for the purpose of becoming the holding company of Newport Federal Savings and Loan Association ("Association"), in connection with the Association's conversion from a federally chartered mutual savings and loan association to a federally chartered capital stock savings bank. The Company had no assets or operations prior to the conversion. On January 1, 1998 the Association converted from a mutual savings association to a capital stock savings bank, changed its name to Newport Federal Bank ("Bank"), and was simultaneously acquired by its holding company, United Tennessee Bankshares, Inc. See Note 3 for additional information concerning the Association's stock conversion. The Bank provides a variety of financial services to individuals and corporate customers through its three offices in Newport, Tennessee. The Bank's primary deposit products are interest- bearing savings accounts and certificates of deposit. The Bank's primary lending products are one-to-four family first mortgage loans. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-QSB and on the same basis as the Company's audited consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations, and cash flows for the interim period presented have been included. The results of operations for such interim period are not necessarily indicative of the results expected for the full year. The consolidated financial statements include the accounts of the Company and the Bank. All intercompany accounts have been eliminated. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is based on the weighted average number of shares outstanding during the period. For the three months ended March 31, 1999 and 1998, the weighted average number of shares outstanding was 1,311,934 and 1,454,750, respectively. The weighted average number of shares outstanding for the three month period ended March 31, 1999 is net of 36,600 shares held in the MRP plan trust and 12,516 shares held in the grantor trust. During the periods ended March 31, 1999 and 1998 the Company did not have any dilutive securities. 9 NOTE 3 - STOCK CONVERSION In May 1997, the board of directors approved a plan of reorganization from a mutual savings association to a capital stock savings bank and the concurrent formation of a holding company. In November 1997 the Office of Thrift Supervision approved the plan of conversion subject to the approval of the members, and in December 1997 the members of the Association also approved the plan of conversion. The conversion was accomplished effective January 1, 1998 through amendment of the Association's charter and the sale of the Company's common stock in an amount equal to the appraised pro forma consolidated market value of the Company and the Association after giving effect to the conversion. A subscription offering of the shares of common stock was offered to depositors, borrowers, directors, officers, employees and employee benefit plans of the Association and to certain other eligible subscribers. The subscription offering opened on November 20, 1997 and closed on December 16, 1997. On January 1, 1998, in accordance with its approved plan of conversion, the Company issued 1,454,750 of its $10 par value stock providing gross receipts of $14,547,500. On January 1, 1998, the Association changed its name to Newport Federal Bank and issued 100,000 shares of its $1 par value stock to the Holding Company in exchange for $7,100,000. In addition, the Company established an ESOP plan which acquired $1,164,000 in stock during conversion. The contra-equity account "Unearned Compensation - ESOP" will be decreased as contributions are made to the ESOP plan and the shares are allocated to the participants. Total conversion costs of $571,822 were repaid to the Bank by the Company in January 1998, and the Company deducted them from the proceeds of the shares sold in the conversion. At the time of the conversion, the Association was required to establish a liquidation account in an amount equal to its capital as of June 30, 1997. The liquidation account will be maintained for the benefit of eligible accountholders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible accountholders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible accountholder's interest in the liquidation account. In the event of a complete liquidation, each eligible accountholder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances for accounts then held. The Bank and the Company will be subject to several restrictions concerning the repurchase of stock and dividend payment restrictions pursuant to the applicable rules and policies of the OTS. NOTE 4 - COMPREHENSIVE INCOME In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting comprehensive income and its components in the financial statements. The object of the statement is to report a measure of all changes in equity of an enterprise that results from transactions and other economic events of the period other than transactions with owners. Items included in comprehensive income include revenues, gains and losses that under generally accepted accounting principles are directly charged to equity. Examples include foreign currency translations, pension liability adjustments and unrealized gains and losses on investment securities available for sale. The Company adopted this statement in the first quarter of 1998 and has included its 10 comprehensive income in a separate financial statement as part of its consolidated financial statements. NOTE 5 - REPURCHASE AND RETIREMENT OF COMMON STOCK In September 1998, in accordance with its approved plan, the Company repurchased and retired 48,165 shares of its common stock for a total cost of $578,944. In October 1998, the Company completed its plan to repurchase and retire a total of 5% of its common stock by repurchasing an additional 24,572 shares for a total cost of $305,615. NOTE 6 - DIRECTORS LONG-TERM INCENTIVE PLAN In June 1997, the Bank established a long-term incentive plan for the board of directors to provide target retirement benefits of 75% of board fees for ten years for directors who retire with twenty or more years of service. Activity in the directors' retirement plan for the years ended December 31, 1998 and 1997 are as follows:
1998 1997 ---- ---- Liability balance at beginning of year $ 125,181 $ 0 Accrued and expensed 10,824 150,991 Transfer of assets to trustee (136,005) 0 Death benefit payment 0 (25,810) Effect of change in accounting principle pursuant to EITF 97-14 164,727 0 --------- -------- Liability balance at end of year $ 164,727 $125,181 ========= ========
In July 1998, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) issued EITF 97-14 Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested. Prior to the issuance of EITF 97-14, the Bank had transferred the assets purchased by the trust (12,516 shares of Holding Company stock) to the trustee of the plan. In accordance with EITF 97-14, the Bank has recognized a liability for the fair value of all shares of Holding Company stock (13,721 shares as of December 31, 1998) and other assets held by the trustee totalling $164,727 and a contra-equity account Shares in Grantor Trust-Contra Account for the cost of the shares totalling $137,210. This change in accounting principle required a reduction in deferred tax liabilities of $10,907 and a net charge to income in 1998 of $16,610. Subsequent increases or decreases in the future in the fair value of the assets held by the Plan's trustee will be charged to expense or credited to income, net of any deferred income tax effect. 11 NOTE 7 - MANAGEMENT RECOGNITION PLAN AND STOCK OPTION PLAN In January 1999, the Company's board of directors approved the Company's 1999 Stock Option Plan (SOP) and a Management Recognition Plan (MRP), subject to the approval of the Company's shareholders at the annual meeting to be held May 18,1999. The board of directors has reserved 145,475 shares of the Company's common stock for issuance pursuant to the options to be granted under the SOP. These shares will be either newly issued shares or shares purchased on the open market. The board of directors has also authorized the issuance of 58,190 shares of common stock as restricted stock pursuant to the MRP. The MRP trust will begin purchasing these shares on the open market in the first quarter of 1999. As of March 31, 1999, the MRP trust had purchased 36,600 shares for a total cost of $450,756. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF ----------------------------------------------- OPERATION --------- GENERAL The principal business of United Tennessee Bankshares, Inc. and our wholly owned subsidiary Newport Federal Bank ("we," "us," etc.) consists of accepting deposits from the general public through our main office and two branch offices and investing those funds in loans secured by one- to four-family residential properties located in our primary market area. We also maintain a portfolio of investment securities and originate a limited amount of commercial real estate loans and consumer loans. Our investment securities portfolio consists of U.S. Treasury notes and U.S. government agency securities, local municipal bonds and mortgage-backed securities which are guaranteed as to principal and interest by the FHLMC, GNMA or FNMA. We also maintain an investment in Federal Home Loan Bank of Cincinnati common stock and FHLMC preferred stock. Our net income primarily depends on our net interest income, which is the difference between interest income earned on loans and investment securities and interest paid on customers' deposits and other borrowings. Our net income is also affected by noninterest income, such as service charges on customers' deposit accounts, loan service charges and other fees, and noninterest expense, primarily consisting of compensation expense, deposit insurance and other expenses incidental to our operations. Based on our review of our internal bookkeeping practices and our conferences with our third party service companies, we do not expect to incur significant additional bookkeeping, data processing or other expenses, and in particular we do not expect to encounter significant difficulties with our data processing service provider, in connection with issues related to the upcoming millennium (that is, "Year 2000" issues). See "Year 2000 Readiness Disclosure." Our operations and those of the thrift industry as a whole are significantly affected by prevailing economic conditions, competition and the monetary and fiscal policies of governmental agencies. Our lending activities are influenced by demand for and supply of housing and competition among lenders and the level of interest rates in our market area. Our deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in our market area. Our stock conversion increased our capital by the amount of the net proceeds, after deduction of conversion-related expenses and the shares to be sold to the ESOP. Funds withdrawn from our deposits decreased our interest-bearing liabilities, and new funds increased our interest-earning assets. While these changes increased our net interest income, we also have experienced increases in our noninterest expenses by increasing our compensation and other operating expenses. 13 Comparison of Financial Condition at March 31, 1999 And December 31, 1998 Total assets decreased from December 31, 1998 to March 31, 1999 by $3.1 million, or 3.2%, from $97.1 million at December 31, 1998 to $94.0 million at March 31, 1999. The decrease in assets was principally the result of a reduction in cash and investment securities available for sale, which were used to fund deposit outflows during the quarter. Investment securities available for sale decreased $2.0 million or 6.0% from December 31, 1998, while investment securities held to maturity also decreased $533,000 from $2.4 million to $1.9 million. Loans receivable increased from December 31, 1998 to March 31, 1999 as originations exceeded repayments for the period by approximately $1.8 million. Our market area has experienced an increase in lending activity during this period. The following table sets forth information about the composition of our loan portfolio by type of loan at the dates indicated. At March 31, 1999 and December 31, 1998, we had no concentrations of loans exceeding 10% of gross loans other than as disclosed below.
March 31, 1999 December 31, 1998 ------------------ ------------------ (Dollars in Thousands) Amount Percent Amount Percent ------ ------- ------ ------- Type of Loan: - ------------ Real estate loans - One- to four-family residential $ 46,201 80.5% $ 41,833 76.1% Commercial 5,034 8.8 7,267 13.2 Construction 3,094 6.8 3,235 5.9 Consumer loans: Automobile 824 1.4 813 1.5 Loans to depositors, secured by deposits 717 1.2 848 1.5 Home equity and second mortgage 213 0.4 162 0.3 Other 520 0.9 838 1.5 ------- ----- ------- ----- 57,413 100.0% 54,996 100.0% ===== ===== Less: Loans in process 1,390 748 Deferred fees and discounts 267 261 Allowance for loan losses 643 641 ------- ------- Total $55,113 $53,346 ======= =======
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 The following table sets forth information about our allowance for loan losses for the period indicated.
Three Three Months Ended Months Ended March 31, March 31, 1999 1998 ------------- ------------ (In Thousands) Balance at beginning of period $ 641 $ 628 Charge-offs: Consumer (4) (3) Recoveries: Consumer - -- ------- ------ Net charge-offs (4) (3) Provision for loan losses 6 6 ------- ------ Balance at end of period $ 643 $ 631 ======= ======
The following table sets forth information about our nonperforming assets at the dates indicated. At these dates, we did not have any assets accounted for on a nonaccrual basis or modified in a troubled debt restructuring.
March 31, December 31, 1999 1998 ------------ ----------- (In Thousands) Accruing loans which are contractually past due 90 days or more: Real estate: One- to four-family residential $ 500 $ 475 Commercial - - Consumer 4 7 ------ ------ Total $ 504 $ 482 ====== ======
At March 31, 1999 and December 31, 1998, we had identified approximately $1,000 and $ 0, respectively, of loans which amounts are not reflected in the preceding table but as to which known information about possible credit problems of borrowers caused us to have doubts as to the ability of the borrowers to comply with present loan repayment terms, all of which was included in our adversely classified or designated asset amounts at that date. At that date, we did not expect to incur any loss in excess of attributable existing reserves on any of our assets. During the quarter ended March 31, 1999, total deposits decreased $2.2 million or 3.1% from $69.8 million at December 31, 1998 to $67.6 million at March 31, 1999. The decrease in deposits was attributable primarily to run-off at the recently acquired Cosby Highway branch. Management attributes the run- off to the change in ownership of the branch and the deposit promotional activities of a bank which opened a new branch in the vicinity. Our shareholders' equity decreased $516 thousand from $20.0 million at December 31, 1998 to $19.5 million at March 31, 1999. The decrease was due to the purchase of 36,600 shares of stock related to the Management Recognition Plan trust for approximately $451,000, $135,000 of net 15 income and a $200,000 decrease in our net unrealized gain on investment securities. The Company has recently received approval from the OTS to repurchase up to 5% of its outstanding shares on the open market. In addition, the Company has filed a request with the Internal Revenue Service for a private letter ruling regarding the tax-free nature of a possible return of capital distribution to its shareholders. The Company is merely considering such a distribution at this time and no firm decision including the amount or timing has been made. Discussion of Results of Operations for the Three Months Ended March 31, 1999 and 1998 Our net income for the three months ended March 31, 1999 was $135 thousand, a $183 thousand, or 57% decrease over the $318 thousand we earned during the three months ended March 31, 1998. Basic earnings per share for the three months ended March 31, 1999 was $0.10 compared to $0.22 for the same period in 1998. Average shares outstanding for the periods were 1,311,934 and 1,454,750, respectively. The decrease in net income is due primarily to the establishment of a management recognition plan during the first quarter of 1999 which increased compensation costs approximately $185 thousand. Interest income increased $228 thousand, or 16.1%, from $1.42 million for the three months ended March 31, 1998 to $1.65 million for the three months ended March 31, 1999. The increase in interest income was primarily due to a $162 thousand, or 59.3%, increase in interest earned on the investment securities portfolio which the Company has significantly expanded in order to increase income and better leverage its capital. Interest on loans increased $94 thousand, or 9.0%, due to an increase in the average balance of the loan portfolio. Interest expense increased $168 thousand primarily due to the purchase of the branch deposit accounts from Union Planters Bank of the Lakeway area in December 1998. In addition, the Company incurred $66 thousand in interest expense on borrowings compared to no such expense in the prior-year period. The Company invested funds from the borrowings in mortgaged-backed securities in order to increase interest income and better leverage its capital. Net interest income increased $60,000, or 7.6%, between the periods as the increase in interest income exceeded the increase in interest expense. The Company's net interest margin, however, narrowed slightly to 3.76% for the three months ended March 31, 1999 compared to 3.80% for the comparable period of 1998. The narrowing of the interest margin reflects the current rate environment and the fact that a significant portion of the Company's asset growth since March 31, 1998 has consisted of investment securities. We conduct regular reviews of our assets and evaluate the need to establish allowances on the basis of this review. Allowances are established on a regular basis based on an assessment of risk in our assets taking into consideration the composition and quality of the portfolio, delinquency trends, current charge-off and loss experience, the state of the real estate market, regulatory reviews conducted in the regulatory examination process, general economic conditions and other factors deemed relevant by us. Allowances are provided for individual assets, or portions of assets, when ultimate collection is considered improbable based on the current payment status of the assets and the fair value or net realizable value of the collateral. Noninterest income increased $3,000 from $43,000 for the three months ended March 31, 1998 to $46,000 for the three months ended March 31, 1999. The increase in other income was mainly from increased deposit account service charges consistent with the higher level of deposit accounts during the 1999 period. 16 Noninterest expenses increased $327,000 from $356,000 for the three months ended March 31, 1998 to $683,000 for the three months ended March 31, 1999. Compensation and benefits for the three months ended March 31, 1999 were $203,000 higher primarily due to compensation expense associated with the implementation of a management recognition plan in 1999. Other noninterest expenses increased $124,000 from $194,000 for the three months ended March 31, 1998 to $318,000 for the three months ended March 31, 1999. The increase in other noninterest expenses is primarily due to increases in costs associated with the Company being a publicly-owned entity, amortization of goodwill associated with the branch purchase, and increased operations costs for the new branch. Our effective tax rates for the three months ended March 31, 1999 and 1998 were 34.8% and 32.5%, respectively. The slightly higher effective tax rate is due to a decrease in our tax-exempt investment securities during the three months ended March 31, 1999. Liquidity and Capital Resources We have historically maintained substantial levels of capital. The assessment of capital adequacy depends on several factors, including asset quality, earnings trends, liquidity and economic conditions. We seek to maintain high levels of regulatory capital to give us maximum flexibility in the changing regulatory environment and to respond to changes in market and economic conditions. These levels of capital have been achieved through consistent earnings enhanced by low levels of noninterest expense and have been maintained at those high levels as a result of our policy of moderate growth generally confined to our market area. At March 31, 1999 and December 31, 1998, we exceeded all current regulatory capital requirements and met the definition of a "well-capitalized" institution, the highest regulatory category. We are required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied at the discretion of the OTS depending on economic conditions and deposit outflows, is based upon a percentage of deposits and, if any, short-term borrowings. We exceeded all of the liquidity requirements of the OTS as of both March 31, 1999 and December 31, 1998. Our most liquid assets are cash and amounts due from depository institutions, which are short-term highly liquid investments with original maturities of less than three months that are readily convertible to known amounts of cash. The levels of these assets are dependent on our operating, financing and investing activities during any given period. Our primary sources of fund are deposits, proceeds from principal and interest payments on loans and investment securities and earnings. While scheduled principal repayments on loans and investment securities are a relatively predictable source of funds, deposit flows and loan and investment securities prepayments are greatly influenced by general interest rates, economic conditions, competition and other factors. We do not solicit deposits outside of our market area through brokers or other financial institutions. We have also designated certain securities as available for sale in order to meet liquidity demands. In addition to internal sources of funding, we as a member of the Federal Home Loan Bank have substantial borrowing authority with the Federal Home Loan Bank. Our use of a particular source of funds is based on need, comparative total costs and availability. 17 Year 2000 Readiness Disclosure Like most financial services companies, the Bank relies heavily on computers and other information technology systems. As the year 2000 approaches, an important business issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. For many years, software applications routinely conserved magnetic storage space by using only two digits to record calendar years; for example, the year 1999 is stored as "99". On January 1, 2000, the calendars in many software applications, in their current form, will produce erroneous results or will fail to run at all since their logic cannot deal with this transaction. The Bank has identified its most mission critical system as its on-line core account processing which is performed by a third party provider. This service provider has advised the Bank that it is Year 2000 compliant and has successfully done testing with a number of its other customers. The service provider tested the Bank's equipment and links during the fourth quarter of 1998 and found them to be Year 2000 compliant. The Bank has developed a contingency plan for back-up manual processing in the event its current data processor is unable to operate because of Year 2000 problems. The Bank also uses personal computers and a variety of other software packages in other facets of its day-to-day operations. All of these systems have been either tested successfully or replaced with systems and software that is millennium compliant. Management believes that it has also identified all the equipment which relies on embedded computer chips to operate and has received correspondence from the vendors indicating that they are Year 2000 compliant. In addition to the risk posed by the Year 2000 readiness of its internal systems, the Bank recognizes that the Bank is exposed to Year 2000 risks from its customers. The Bank has surveyed its larger loan customers regarding their Year 2000 readiness and is working to increase their awareness of the problem. The Bank does not believe that the costs associated with its Year 2000 planning will have a material impact on its results of operations. 18 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K Exhibits: The following exhibits are filed as a part of this report: 3.1 1/ Charter of United Tennessee Bankshares, Inc. 3.2 1/ Bylaws of United Tennessee Bankshares, Inc. 4 1/ Form of Stock Certificate of United Tennessee Bankshares, Inc. 10.1 1/ Form of United Tennessee Bankshares, Inc. Stock Option and Incentive Plan 10.2 1/ Form of United Tennessee Bankshares, Inc. Management Recognition Plan 10.3(a) 1/ Employment Agreements between Newport Federal Savings and Loan Association and Richard G. Harwood, Nancy L. Bryant and Peggy Holston 10.3(b) 1/ Forms of Guarantee Agreements between United Tennessee Bankshares, Inc. and Richard G. Harwood, Nancy L. Bryant and Peggy Holston 10.4 1/ Newport Federal Savings and Loan Association Long-Term Incentive Plan 10.5 1/ Newport Federal Savings and Loan Association Deferred Compensation Plan 27 Financial Data Schedule _______________ 1/ Incorporated by reference to United Tennessee Bankshares, Inc.'s Registration Statement on Form SB-2, File No. 333-36465. Reports on Form 8-K: On January 27, 1999, the Company filed a Current Report on Form 8-K reporting under Item 5. Other Events that it had filed a private letter ruling request with the Internal Revenue Service regarding the tax-free nature of a possible return of capital distribution to its shareholders and to report adoption by the Board of Directors of the 1999 Stock Option Plan and the Management Recognition Plan subject to approval by shareholders at the 1999 Annual Meeting. No financial statements were filed as part of this report. 19 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED TENNESSEE BANKSHARES, INC. Registrant Date: May 14, 1999 /s/ Richard G. Harwood ---------------------- Richard G. Harwood President and Chief Executive Officer (Duly Authorized Representative and Principal Financial and Accounting Officer) EX-27 2 - ARTICLE 9 FIN. DATA SCHEDULE FOR 1ST QTR 10-QSB
9 1 3-MOS DEC-31-1999 MAR-31-1999 1,953,509 1,800,000 0 0 31,038,491 1,897,678 1,928,069 56,022,576 642,519 93,964,420 67,641,562 5,216,811 1,653,464 0 13,091,119 0 0 6,362,465 93,964,420 1,135,139 434,663 78,490 1,648,292 732,202 797,891 850,401 6,000 0 683,495 206,513 134,513 0 0 134,513 0.10 0.10 3.76 0 504,000 0 0 640,982 4,463 0 642,519 642,519 0 0
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