Newport Federal Bank is taking early action to build up its loan loss reserves but is poised to end another profitable year.

Newport Federal Bank President Richard Harwood said the bank holding company, United Tennessee Bankshares, is setting aside $186,000 in additional funds as "a proactive approach in reserving money for loan loses."

The recent action will increase the bank's reserve for loan losses by 25 percent in the third quarter of 2009, he said. Management took the action because of the increase in foreclosures and delinquencies.

However, Hardwood said that Newport Federal Bank would end the year, like last fiscal year, reporting more than $1 million profit and a solid financial position.

He credits the bank's strength even during the recession, a time when many banks in the US have failed, with conservative lending practices and focusing on the mortgage market and single-family homes.

"We avoided the commercial loan business entirely and have instead loaned for dwellings. We did not make 100 percent loans or sub-prime loans," he said on Tuesday, after the holding company announcement.

"We are in a lot better shape than many banks. We still have money to loan, though the demand is low," he said. Although the local economy is stabilizing, he said, "We still have a ways to go before improving and rising home prices."

United Tennessee Bankshares has reported record loan charge-offs in 2009, reflecting what has happened to most banks. "We are active in working with our customers to assist them, reduce our losses, and keep delinquencies low."

"Management made the decision to accelerate the increase of the reserves effective in the third quarter instead of the fourth quarter despite the fact that this will negatively impact our previously released earnings for the third quarter of 2009," said Harwood.

The Office of Thrift Supervision has been encouraging banks to take quick action on expected loan losses. In addition, banks will be expected to pay Federal Deposit Insurance (FDIC) premiums in advance.

Harwood said the bank has already paid a special assessment. It must also pre-pay three years insurance premiums and this will cost the bank as much as a half-million dollars. All FDIC-insured banks face the same requirement to pre-pay their insurance premiums, but they can expense these during the three-year period.