U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 33-94050
VOLUNTEER BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
Tennessee 62-1271025
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
210 East Main Street, Rogersville, Tennessee 37879
(Address of principal executive offices)
(423) 272-2200
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 12, 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 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 539,027 as of June 30, 2001.
Transitional Small Business Disclosure Format (check one); Yes _____ No __X__
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT AUDITOR'S REVIEW REPORT
To the Board of Directors
Volunteer Bancorp, Inc.
Rogersville, Tennessee
We have reviewed the accompanying condensed consolidated balance sheets of
Volunteer Bancorp, Inc. and subsidiary as of June 30, 2001 and 2000, and the
related condensed consolidated statements of earnings and comprehensive income
for the three and six months then ended and the condensed consolidated
statements of cash flows for the six months then ended, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these condensed consolidated financial statements is the representation of the
management of Volunteer Bancorp, Inc.
A review of interim financial statements consists primarily of inquiries of
company personnel and analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with generally accepted
accounting standards, the objective of which is the expression of an opinion
regarding the condensed consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
July 20, 2001
Nashville, Tennessee
2
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 2001 and 2000
(Unaudited- See Accountants' Review Report)
- --------------------------------------------------------------------------------
ASSETS 2001 2000
------ ------------------- -------------------
Cash and due from banks $ 3,322,975 $ 3,434,870
Federal fund sold 5,425,000 975,000
------------------- -------------------
Total cash and cash equivalents 8,747,975 4,409,870
Investment securities available for sale (amortized cost of
$27,298,020 and $26,238,251, respectively) 27,312,892 24,701,248
Investment securities held to maturity (estimated market
$1,755,914 value of and $994,634) 1,749,338 1,071,313
Loans, less allowances for loan losses of $993,915 and
$964,601, respectively 75,792,641 71,476,509
Accrued interest receivable 1,160,623 1,085,257
Premises and equipment, net 3,960,623 4,151,205
Deferred income taxes 144,605 686,735
Other real estate 902,168 492,298
Goodwill 140,201 158,084
Other assets 176,160 113,884
------------------- -------------------
Total assets $ 120,087,226 $ 108,346,403
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Non-interest bearing $ 11,498,556 $ 11,382,147
Interest bearing 98,601,943 88,180,347
------------------- -------------------
Total deposits 110,100,499 99,562,494
Interest payable 1,077,294 941,680
Securities sold under repurchase agreements 862,296 1,050,288
Note payable 2,170,000 2,495,000
Other accrued taxes, expenses and liabilities 59,329 53,988
------------------- -------------------
Total liabilities 114,269,418 104,103,450
------------------- -------------------
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000 shares authorized,
539,027 shares issued and outstanding 5,390 5,390
Additional paid-in capital 1,916,500 1,916,500
Retained earnings 3,905,140 3,296,325
Accumulated other comprehensive income (9,222) (975,262)
------------------- -------------------
Total stockholders' equity 5,817,808 4,242,953
------------------- -------------------
Total liabilities and stockholders' equity $ 120,087,226 $ 108,346,403
=================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Earnings and Comprehensive Income
For The Three and Six Months Ended June 30, 2001 and 2000
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
---------- ----------
2001 2000 2001 2000
---- ---- ---- ----
Interest Income:
Interest and fees on loans $ 1,833,188 $ 1,760,987 $ 3,688,749 $ 3,412,495
Interest on federal funds 56,586 37,490 157,399 62,590
Interest on investment securities:
Taxable 435,800 363,688 842,759 736,093
Exempt from Federal income taxes 28,250 44,999 58,608 93,879
------------------ ---------------- ------------------ ------------------
Total interest income 2,353,824 2,207,164 4,747,515 4,305,057
------------------ ---------------- ------------------ ------------------
Interest Expense:
Interest on deposits 1,243,615 1,149,082 2,556,588 2,208,207
Other borrowed funds 50,300 67,672 109,042 148,375
------------------ ---------------- ------------------ ------------------
Total interest expense 1,293,915 1,216,754 2,665,630 2,356,582
------------------ ---------------- ------------------ ------------------
Net interest income 1,059,909 990,410 2,081,885 1,948,475
Provision for possible loan losses 85,000 60,000 160,000 120,000
------------------ ---------------- ------------------ ------------------
Net interest income after provision for possible
loan losses 974,909 930,410 1,921,885 1,828,475
------------------ ---------------- ------------------ ------------------
Non-interest income:
Service charges on deposits 41,997 60,298 93,933 115,452
Other service charges and fees 38,801 38,910 53,094 57,179
Securities gains 1,677 - 9,604 -
Other non-interest income 487 1,741 18,470 14,606
------------------ ---------------- ------------------ ------------------
Total non-interest income 82,962 100,949 175,101 187,237
------------------ ---------------- ------------------ ------------------
Non-interest expense:
Salaries and employee benefits 428,248 395,216 875,521 814,349
Occupancy expense 78,593 65,381 148,795 122,176
Furniture and equipment expense 84,999 78,276 166,584 158,273
Other non-interest expense 224,038 197,657 427,662 391,712
------------------ ---------------- ------------------ ------------------
Total non-interest expense 815,878 736,530 1,618,562 1,486,510
------------------ ---------------- ------------------ ------------------
Earnings before income taxes 241,993 294,829 478,424 529,202
Income tax expense 86,909 100,056 171,143 176,123
------------------ ---------------- ------------------ ------------------
Net income $ 155,084 $ 194,773 $ 307,281 $ 353,079
================== ================ ================== ==================
Other comprehensive income :
Unrealized gain (loss) on securities available
for sale, before tax $ (76,014) $ (5,476) $ 438,409 $ (218,358)
Reclassification for gains included in net income (1,677) - (9,604) -
Income taxes related to other comprehensive
income 29,522 2,081 (162,947) 82,976
------------------ ---------------- ------------------ ------------------
(48,169) (3,395) 265,858 (135,382)
------------------ ---------------- ------------------ ------------------
Total comprehensive income $ 106,915 $ 191,378 $ 573,139 $ 217,697
================== ================ ================== ==================
Net income per common share $ 0.29 $ 0.36 $ 0.57 $ 0.66
================== ================ ================== ==================
Common shares outstanding 539,027 539,027 539,027 539,027
================== ================ ================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2001 and 2000
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
2001 2000
---------------- ----------
Cash Flows from Operating Activities:
Net income $ 307,281 $ 353,079
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 13,806 4,101
Provision for possible loan losses 160,000 120,000
Provision for depreciation and amortization 121,021 123,625
FHLB stock dividends (12,000) (11,000)
(Gain) on securities (9,604) -
Decrease (increase) in interest receivable 52,696 (56,897)
(Increase) in other assets (315,804) (141,488)
(Decrease) increase in other liabilities (127,436) 51,012
-------------------- -------------------
Net cash provided (used) by operating activities 189,960 442,432
-------------------- -------------------
Cash Flows from Investing Activities:
Purchase of investment securities held to maturity (705,141) -
Proceeds from calls and maturity of held to maturity securities 22,351 26,316
Purchase of investment securities available for sale (14,251,973) -
Proceeds from calls and maturity of securities available for sale 4,606,695 782,535
Proceeds from sale of securities available for sale 8,205,464 -
Net (increase) in loans (2,913,721) (4,864,081)
Capital expenditures (20,659) (191,639)
-------------------- -------------------
Net cash (used) in investing activities (5,056,984) (4,246,869)
-------------------- -------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts, IRA
and savings accounts 2,908,166 3,661,419
Net increase in certificates of deposit 1,184,647 1,077,028
Net (decrease) in securities sold under
repurchase agreements (190,217) (270,802)
Repayment of long-term borrowing (325,000) (295,000)
Repayment of FHLB advances - (4,500,000)
Payment of dividends (75,464) (64,683)
-------------------- -------------------
Net cash (used) provided by financing activities 3,502,132 (392,038)
-------------------- -------------------
(Decrease) in cash and cash equivalents (1,364,892) (4,196,475)
Cash and cash equivalents beginning of period 10,112,867 8,606,345
-------------------- -------------------
Cash and cash equivalents end of period $ 8,747,975 $ 4,409,870
==================== ===================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,782,369 $ 2,266,296
==================== ===================
Income taxes $ 293,754 $ 227,053
==================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
- --------------------------------------------------------------------------------
1. Management Opinion
------------------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Volunteer Bancorp, Inc. contain all
adjustments, consisting of only normal, recurring adjustments, necessary to
fairly present the financial results for the interim periods presented. The
results of operations for any interim period is not necessarily indicative
of the results to be expected for an entire year. These interim financial
statements should be read in conjunction with the annual financial
statements and notes thereto.
2. Adoption of Recently Issued Statements of Financial Accounting Standards
(SFAS)
---------------------------------------------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137, is effective for fiscal quarters
beginning after June 15, 2000 unless adopted earlier. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment,
an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. Adoption by the Company did not have any material
impact upon financial position or results of operations.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities", is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring
after March 31, 2001. This Statement is effective for recognition and
reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. This statement replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguisments of
Liabilities". It revises the standards for accounting for securitizations
and other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's provisions without
reconsideration. This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under the approach,
after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The adoption of the
provisions of this Statement did not have any material impact upon the
financial position or results of operation of the Company.
6
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2001 and 2000
- --------------------------------------------------------------------------------
3. Long-term debt
The Company's long-term debt consists of a single note payable in the
amount of $2,170,000 and $2,495,000 at June 30, 2001 and 2000,
respectively, due an unaffiliated national bank. The interest rate on the
note adjusts quarterly and is equal to the three-months London Interbank
Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the option of
the Company, the rate on the note is equal to the lender's index rate as
such rate changes from time to time. The Company may change interest rate
options at any time with prior notice to the lender. Interest is payable
quarterly. At June 30, 2001 the rate on the note was 5.78% per annum.
Principal is payable annually on January 31, as follows:
January 31, Principal Due
----------- -------------
2002 360,000
2003 395,000
2004 435,000
2005 470,000
2006 (Final Maturity) 510,000
----------------------
$ 2,170,000
======================
The loan is secured by all of the stock of Citizens Bank of East Tennessee
owned by the Company.
4. Contingencies
During the course of business, the Company makes various commitments and
incurs certain contingent liabilities that are not presented in the
accompanying balance sheet. The commitments and contingent liabilities may
include various guarantees, commitments to extend credit, standby letters
of credit, and litigation. In the opinion of management, no material
adverse effect on the financial position, liquidity or operating results of
the Company and its subsidiary is anticipated as a result of these items.
7
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
As of And For The Three And Six Months Ended
June 30, 2001 and 2000
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 155,084 $ 194,773 $ 307,281 $ 353,079
Per common share data:
Net income per weighted average
common share $0.29 $0.37 $0.57 $0.66
Book value $10.79 $7.87 $10.79 $7.87
Ratios:
Return on average assets 0.52% 0.72% 0.52% 0.66%
Return on average common equity 10.76% 18.79% 11.04% 16.95%
Net interest margin (taxable equivalent basis) 3.87% 4.00% 3.81% 4.03%
Expense ratio 2.73% 2.71% 2.74% 2.77%
Allowance for loan losses / loans 1.29% 1.33% 1.29% 1.33%
Non-performing loans / loans 2.11% 1.30% 2.11% 1.30%
Non-performing assets / loans and
foreclosed properties 3.25% 1.96% 3.25% 1.96%
Shareholder's equity / total assets 4.84% 3.92% 4.84% 3.92%
Leverage ratio (tangible capital /
tangible average assets) 4.34% 4.70% 4.38% 4.64%
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As Of and for the Three and Six Months Ended June 30, 2001 and 2000
The following provides a narrative discussion and analysis of significant
changes in Volunteer Bancorp's' results of operations and financial condition.
This discussion should be read in conjunction with the consolidated financial
statements and related financial analysis set forth in Volunteer Bancorp's' 2000
Annual Report, the interim unaudited consolidated financial statements and notes
for the three and six months ended June 30, 2001, included elsewhere herein, and
the supplemental financial data included herein.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This discussion contains certain forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995). Such statements are based on
management's expectations as well as certain assumptions made by, and
information available to, management. Specifically, this discussion contains
forward-looking statements with respect to the following items:
- effects of projected changes in interest rates,
- effects of changes in the securities markets,
- effects of changes in general economic conditions,
- the adequacy of the allowance for losses on loans and the level of
future provisions for losses on loans, and
- business plans for the year 2001 and beyond including underwriting
criteria.
When used in this discussion, the words "anticipate," "project," "expect,"
"believe," "should" and similar expressions are intended to identify
forward-looking statements.
These forward-looking statements involve significant risks and uncertainties
including changes in general economic and financial market conditions, changes
in banking laws and regulations, and Volunteer Bancorp's' ability to execute its
business plans. Although Volunteer Bancorp believes that the expectations
reflected in the forward-looking statements are reasonable, actual results could
differ materially.
8
SUMMARY
The Company reported net income for the second quarter of $155,084, or $0.29 per
common share, compared to income of $194,733, or $0.37 for the same period a
year ago. Our returns on average assets and average common equity were 0.52% and
10.76%, respectively, for the quarter compared to 0.72% and 18.79% for the same
period last year.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the six months ended June 30, 2001
totaled $110,776,000 which represents 92.92% of average total assets. Earning
assets totaled $111,274,000 at June 30, 2001. Average earning assets for the six
months ended June 30, 2000 totaled $99,029,000, which represented 92.21% of
average total assets. Earning assets totaled $99,189,000 at June 30, 2000.
Loan Portfolio. The Company's average loans for the six months ended June 30,
2001 were $74,835,000 and for the six months ended June 30, 2000 were
$70,097,000. The Company's average loans for the quarter ended June 30, 2001
were $75,571,000 and were $71,028,000 for the quarter ended June 30, 2000. The
balance in total loans at June 30, 2001 was $76,787,000 and at June 30, 2000 was
$72,441,000.
Investment portfolio. The Company's investment securities portfolio averaged
$29,521,000 for the six months ended June 30, 2001 and $26,798,000 for the six
months ended June 30, 2000. The Company's investment securities portfolio
averaged $30,104,000 for the quarter ended June 30, 2001 and averaged
$27,727,000 for the quarter ended June 30, 2000. The portfolio totaled
$29,062,000 at June 30, 2001 and $25,773,000 at June 30, 2000.
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: "Available for Sale" and "Held to
Maturity." The Available for Sale securities are carried at fair market value,
whereas the Held to Maturity securities are carried at amortized cost. At June
30, 2001 there was an unrealized loss in the Available for Sale securities of
$15,000 and there was an unrealized loss of $1,573,000 at June 30, 2000.
Deposits. The Company's average deposits were $109,219,000 for the six months
ended June 30, 2001. This included average non-interest bearing deposits of
$11,202,000, average certificates of deposit of $68,076,000, average savings
deposits of $5,186,000 and average interest bearing transaction accounts of
$24,755,000.
The Company's average deposits for the six months ended June 30, 2000 were
$97,893,000. This included average non-interest bearing deposits of $11,009,000,
average certificates of deposit of $63,222,000, average savings deposits of
$4,841,000 and average interest bearing transaction accounts of $18,821,000.
Deposits at June 30, 2001 totaled $110,100,499 and totaled $99,562,494 at June
30, 2000.
Securities sold under repurchase agreements. The Company's average balance of
securities sold under repurchase agreements for the six months ended June 30,
2001 was $976,000 and the average was $1,416,000 for the six months ended June
30, 2000. The total outstanding under these agreements at June 30, 2001 was
$862,000 and the total outstanding at June 30, 2000 was $1,050,000.
Note Payable. The Company's long-term debt consists of a single note payable in
the amount of $2,170,000 due an unaffiliated national bank. The interest rate on
the note adjusts quarterly and is equal to the three-months London Interbank
Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the option of the
Company the
9
rate on the note is equal to the lender's index rate as such rate changes from
time to time. The Company may change interest rate options at any time with
prior notice to the lender. Interest is payable quarterly. At June 30, 2001 the
rate on the note was 5.78% per annum. Principal is payable annually commencing
January 31, 1996 and each January 31 thereafter. Interest expense for the six
months ended June 30, 2001 totaled $85,000. The loan is secured by all of the
stock of Citizens Bank of East Tennessee owned by the Company.
Capital Resources. Shareholder's equity totaled $$5,818,000 as of June 30, 2001.
This included $5,000 of common stock, $1,917,000 of additional paid-in capital,
$3,905,000 of retained earnings and accumulated other comprehensive income
consisting of a unrealized loss on Securities Available for Sale, net of
deferred taxes, of ($9,000.)
BALANCE SHEET MANAGEMENT
Liquidity Management. Liquidity is the ability of a company to convert assets
into cash without significant loss and to raise funds by increasing liabilities.
Liquidity management involves having the ability to meet day-to-day cash flow
requirements of its customers, whether they are depositors wishing to withdraw
funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure
adequate liquidity in order for the Company to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can profitably deploy its
assets. Both assets and liabilities are considered sources of liquidity funding
and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through
investments in federal funds and maturities of investment of investment
securities. Additional sources of liquidity are loan repayments and possible
prepayments from the mortgage backed securities in the investment portfolio. At
June 30, 2001 and 2000, the Company had investments in federal funds of
$5,425,000 and $975,000, respectively.
The liability portion of the balance sheet provides liquidity through various
interest bearing and non-interest bearing deposit accounts. Additional sources
of liquidity are Federal Home Loan Bank Advances, federal funds purchased, and
securities sold under repurchase agreements. The Company has an agreement with
the Federal Home Loan Bank whereby the Company may borrower up to an amount,
$6,000,000 at June 30, 2001, established by the Federal Home Loan Bank. The
Company is required to maintain eligible collateral, consisting of first
mortgages on one-to-four residential properties, representing 150 percent of the
current outstanding balance of all advances. There were no advances outstanding
at June 30, 2001 and 2000. At June 30, 2001, the Company had $2,500,000 of
federal funds purchase lines available at three correspondent banks. There were
no federal funds purchased at June 30, 2001 and 2000. The Company has agreements
with customers, who must meet certain criteria established by the Company,
whereby the Company sells the customer investment securities under agreements to
repurchase the securities. The securities underlying the agreements are
maintained under the Company's control. The outstanding balance under these
agreements was $862,000 and $1,050,000 at June 30, 2001 and 2000, respectively.
Because of the level of capital obtained from stock sales and from the funds
derived from the note payable, no additional capital funds or long-term debt are
anticipated to be deemed necessary during the next twelve months.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net Interest Income. Net interest income is the principal component of a
financial institution's income stream and represents the spread between interest
and fee income generated from earning assets and the interest expense
10
incurred on interest bearing deposits and other borrowed funds. The following
discussion is based on a fully taxable equivalent basis.
Net interest income on a fully tax equivalent basis for the six months ended
June 30, 2001 totaled $2,112,000. This was a result of interest income of
$4,778,000 and interest expense of $2,666,000. Interest and fee income on loans
totaled $3,689,000, interest income on the investment portfolio totaled
$932,000, and interest income on federal funds sold totaled $157,000. Interest
expense included $2,042,000 on certificates of deposit, $443,000 on interest
bearing transaction accounts, $72,000 on savings accounts, $29,000 on securities
sold under repurchase agreements, and $80,000 on the note payable.
Net interest income on a fully tax equivalent basis for the six months ended
June 30, 2000 totaled $1,997,000. This was a result of interest income of
$4,353,000 and interest expense of $2,356,000. Interest and fee income on loans
totaled $3,412,000, interest income on the investment portfolio totaled
$878,000, and interest income on federal funds sold totaled $63,000. Interest
expense included $1,755,000 on certificates of deposit, $381,000 on interest
bearing transaction accounts, $72,000 on savings accounts, $46,000 on securities
sold under repurchase agreements, and $102,000 on the note payable.
Net interest income on a fully tax equivalent basis for the three months ended
June 30, 2001 totaled $1,075,000. This was a result of interest income of
$2,369,000 and interest expense of $1,294,000. Interest and fee income on loans
totaled $1,833,000, interest income on the investment portfolio totaled
$479,000, and interest income on federal funds sold totaled $57,000. Interest
expense included $1,000,000 on certificates of deposit, $208,000 on interest
bearing transaction accounts, $36,000 on savings accounts, $13,000 on securities
sold under repurchase agreements, and $37,000 on the note payable.
Net interest income on a fully tax equivalent basis for the three months ended
June 30, 2000 totaled $1,013,000. This was a result of interest income of
$2,230,000 and interest expense of $1,217,000. Interest and fee income on loans
totaled $1,761,000, interest income on the investment portfolio totaled
$432,000, and interest income on federal funds sold totaled $37,000. Interest
expense included $902,000 on certificates of deposit, $211,000 on interest
bearing transaction accounts, $36,000 on savings accounts, $18,000 on securities
sold under repurchase agreements, and $50,000 on the note payable.
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield on overage earning assets
and the average rate incurred for all funds used to support those earning
assets.
The net interest margin for the six months ended June 30, 2001 was 3.81%. The
net cost of funds, defined as interest expense divided by average earning assets
was 4.82% and the yield on earning assets was 8.63% for the six months ended
June 30, 2001. The net interest margin for the six months ended June 30, 2000
was 4.03%. The net cost of funds for the six months ended June 30, 2000 was
4.76% and the yield on earning assets was 8.79%. The decrease in interest rates
during the first six months of 2001 had a negative impact on the Company's net
interest margin. It is anticipated that the impact will lessen in the second
half of 2001 as rate sensitive liabilities re-price at lower rates.
The net interest margin for the three months ended June 30, 2001 was 3.87%. The
net cost of funds, defined as interest expense divided by average earning assets
was 4.66% and the yield on earning assets was 8.53% for the three months ended
June 30, 2001. The net interest margin for the three months ended June 30, 2000
was 4.00%.
11
The net cost of funds for the three months ended June 30, 2000 was 4.81% and the
yield on earning assets was 8.81%.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate incurred on interest bearing sources of
funds. The interest rate spread eliminates the impact of non-interest bearing
funds and gives a direct perspective on the effect of market interest rate
movements. During recent years, the net interest rate margins and interest rate
spreads have been under intense pressure to maintain historical levels, due in
part to tax laws that discourage investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the six months ended June 30, 2001 was 3.41% and it was 3.69% for the six months
ended June 30, 2000. The interest rate spread for the three months ended June
30, 2001 was 3.44% and it was 3.51% for the three months ended June 30, 2000.
Allowance for Possible Loan Losses. Lending officers are responsible for the
ongoing review and administration of each loan. They make the initial
identification of loans that present some difficulty in collection or where
there is an indication that the probability of loss exists. Lending officers are
responsibility for the collection effort on a delinquent loan. Senior management
is informed of the status of delinquent and problem loans on a weekly basis.
Senior management makes recommendations monthly to the board of directors as to
charge-offs. Senior management reviews the allowance for possible loan losses on
a monthly basis. The Company's policy is to discontinue interest accrual when
payment of principal and interest is 90 days or more in arrears, unless there is
sufficient collateral to justify continued accrual.
The allowance for possible losses represents management's assessment of the
risks associated with extending credit and its evaluation of the quality of the
loan portfolio. Management analyzes the loan portfolio to determine the adequacy
of the allowance for possible loan losses and the appropriate provisions
required to maintain a level considered adequate to absorb anticipated loan
losses. The provision for possible loan losses was $85,000 for the three months
ended June 30, 2001 and it was $60,000 for the three months ended June 30, 2000.
In assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
loan loss experience, the amount of past due and non-performing loans, specific
known risk, the status and amount of non-performing assets, underlying
collateral values securing loans, current and anticipated economic conditions
and other factors which affect the allowance for possible loan losses.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgement as to the adequacy of the allowance is necessarily
approximate and imprecise.
The allowance for loan losses at June 30, 2001 was 1.29% of loans and
approximately 39% of non-performing assets. Management believes that the
$995,000 at June 30, 2001 in the allowance for possible loan losses is adequate
to absorb known risks in the portfolio. No assurance can be given, however, that
adverse economic circumstances will not result in increased losses in the loan
portfolio, and require greater provisions for possible loan losses in the
future.
Non-Performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual and loans past due more than 90 days and still
accruing interest. Non-performing assets at June 30, 2001 were $2,526,000, or
3.25% of loans and foreclosed properties. Non-performing assets at June 30, 2001
consisted of non-accrual loans of $470,000, loans past due 90 days and still
accruing interest of $1,154,000 and foreclosed real estate of $902,000.
Non-performing assets at
12
June 30, 2000 were $1,432,000, or 1.98% of loans and foreclosed assets.
Non-performing assets at June 30, 2000 consisted of non-accrual loans of
$499,000 loans past due 90 days and still accruing interest of $441,000 and
foreclosed real estate of $492,000. The increase in non-performing assets is
primarily attributable to commercial real estate and real estate construction
loans in which management does not anticipate incurring material losses. Senior
management has strengthened the underwriting criteria for real estate
construction and commercial real estate lending in order to decrease the risk
associated with these types of loans.
Non-Interest Income. Non-interest income consists of revenues generated from a
broad range of financial services and activities including fee-based services
and securities gains and losses. Total non-interest income was $175,000 for the
six months ended June 30, 2001. This included $94,000 from service charges on
deposit accounts, $53,000 from other service charges and fees, $10,000 of
securities gains, and $18,000 of other non- interest income.
Total non-interest income for the six months ended June 30, 2000 was $187,000.
This included $115,000 from service charges on deposit accounts, $57,000 from
other service charges and fees, and $15,000 of other non- interest income.
Total non-interest income was $83,000 for the three months ended June 30, 2001.
This included $42,000 from service charges on deposit accounts, $39,000 from
other service charges and fees, $1,000 of securities gains, and $1,000 of other
non-interest income.
Total non-interest income for the three months ended June 30, 2000 was $101,000.
This included $60,000 from service charges on deposit accounts, $39,000 from
other service charges and fees, and $2,000 of other non-interest income.
The decrease in total non-interest income is mainly attributable to a decrease
in service charges on deposit accounts.
Non-Interest Expense. Non-interest expense for the six months ended June 30,
2001 was $1,619,000. This consisted of $876,000 of salaries and employee
benefits, $149,000 of occupancy expenses, $167,000 of furniture and equipment
expense, and $427,000 of other non-interest expenses. Other non-interest
expenses include advertising, supplies and printing, telephone, postage, and
legal and accounting fees.
Non-interest expense for the six months ended June 30, 2000 was $1,486,000. This
consisted of $814,000 of salaries and employee benefits, $122,000 of occupancy
expenses, $158,000 of furniture and equipment expense, and $392,000 of other
non-interest expenses.
Non-interest expense for the three months ended June 30, 2001 was $816,000. This
consisted of $428,000 of salaries and employee benefits, $79,000 of occupancy
expenses, $85,000 of furniture and equipment expense, and $224,000 of other
non-interest expenses.
Non-interest expense for the three months ended June 30, 2000 was $736,000. This
consisted of $395,000 of salaries and employee benefits, $65,000 of occupancy
expenses, $78,000 of furniture and equipment expense, and $198,000 of other
non-interest expenses.
The increase in total non-interest expense is primarily associated with the
overall growth of the Company.
13
Income Taxes. For the six months ended June 30, 2001, the Company incurred
income tax expense of $171,000. For the six months ended June 30, 2000, the
Company incurred income tax expense of $176,000. Approximately $59,000 of income
earned for the six months ended June 30, 2001 is exempt from Federal income
taxes. Approximately $94,000 of the income earned during the six months ended
June 30, 2000 is exempt from Federal income taxes.
For the three months ended June 30, 2001, the Company incurred income tax
expense of $87,000. For the three months ended June 30, 2000, the Company
incurred income tax expense of $100,000. Approximately $28,000 of income earned
for the three months ended June 30, 2001 is exempt from Federal income taxes.
Approximately $45,000 of the income earned during the three months ended June
30, 2000 is exempt from Federal income taxes.
RETURN ON ASSETS AND EQUITY
Return on assets (annualized net income divided by average total assets) for the
six months ended June 30, 2001 was 0.52%. Return on assets for the six months
ended June 30, 2000 was 0.66%. Return on assets for the three months ended June
30, 2001 was 0.52% and it was 0.72% for the three months ended June 30, 2000.
Return on equity (annualized net income divided by average equity) for the six
months ended June 30, 2001 was 11.04% and it was 16.95% for the six months ended
June 30, 2000. Return on equity for the three months ended June 30, 2001 was
10.76% and it was 18.79% for the three months ended June 30,2000.
Equity to assets (average equity divided by average total assets) was 4.72% for
the six months ended June 30, 2001 and it was 3.88% for the six months ended
June 30, 2000. Equity to assets for the three months ended June 30, 2001 was
4.82% and it was 3.81% for the three months ended June 30, 2000.
The dividend payout ratio (dividends declared divided by net income) for the six
months ended June 30, 2001 was 24.55%. The dividend payout ratio for the six
months ended June 30, 2000 was 18.31%. No dividends were declared during the
three months ended June 30, 2001 and 2000 and, accordingly, no dividend payout
ratio is presented for those quarters.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead and to
the extent loans and other assets bear variable rates, the yields on such
assets. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on the performance of a
financial institution than the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services, increases in inflation generally
have resulted in increased interest rates. In addition, inflation affects
financial institutions' cost of goods and services purchased, the cost of
salaries and benefits, occupancy expenses and similar items. Inflation and
related increases in interest rates generally decrease the market value of
investments and loans held and may adversely affect liquidity, earnings and
stockholders' equity. Mortgage originations and refinancing tend to slow as
interest rates increase and can reduce the Company's earnings from such
activities and the income from the sale of residential mortgage loans on the
secondary market.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting on May 23, 2001, the shareholders voted on the following
proposals with the results as indicated:
1. Elected five of its current directors to continue in office until the 2004
meeting of shareholders. Current directors elected to three-year terms were
as follows:
FOR WITHHOLD AUTHORITY
Reed D. Matney 382,719 66
Shirley Price 382,785 0
Carlin Green 382,785 0
Eddie Freeman 382,785 0
Leon Gladson 382,785 0
Directors continuing to serve include:
William E. Phillips H. Lyons Price Douglas Price
Gary Varnell George Brooks Neil Miller
Lawrence Gray Scott Collins
2. Ratified the appointment of Welch & Associates, Ltd. as the Company's
independent accounts and auditors for 2001 as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
--- ------- ------- ----------------
379,974 0 2,811 0
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 23.1 Consent of Welch & Associates
(b) There have been no Current Reports on Form 8-K filed during the
quarter ended June 30, 2001.
15
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.
VOLUNTEER BANCORP, INC.
(Registrant)
Date: August 14, 2001 /s/ Reed D. Matney
---------------------------
Reed D. Matney, President
(principal executive officer)
Date: August 14, 2001 /s/ H. Lyons Price
-----------------------------
H. Lyons Price (principal
financial and accounting
officer)
16
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, dated July 20, 2001, included in this Quarterly Report on Form 10-QSB
for the Quarter Ended June 30, 2001.
Welch & Associates, Ltd.
Nashville, Tennessee
July 20, 2001
17