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 September 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 September 30,
2001.
Transitional Small Business Disclosure Format (check one);
Yes No X
----- -----
VOLUNTEER BANCORP, INC.
INDEX
Page No.
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets September
30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Earnings For The Three
and Nine Months Ended September 30, 2001 and 2000 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 2001 and 2000 (Unaudited) 6
Condensed Consolidated Statements of Comprehensive Income For The
Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited) 7
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2001 and 2000 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Securities Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
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 September 30, 2001 and 2000, and
the related condensed consolidated statements of earnings and condensed
consolidated statements of comprehensive income for the three and nine months
then ended and the condensed consolidated statements of cash flows for the nine
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.
Nashville, Tennessee
October 19, 2001
3
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
September 30, 2001 and 2000
(Unaudited- See Accountants' Review Report)
- --------------------------------------------------------------------------------
ASSETS 2001 2000
------ ----------------- ---------------
Cash and due from banks $ 3,287,812 $ 2,937,507
Federal fund sold 4,600,000 1,875,000
--------------------- ---------------------
Total cash and cash equivalents 7,887,812 4,812,507
Investment securities available for sale (amortized cost of
$24,270,707 and $26,196,204, respectively) 24,468,860 24,984,386
Investment securities held to maturity (estimated market
value of $ 1,752,583 and $1,007,495, respectively) 1,745,291 1,068,584
Loans, less allowances for loan losses of $937,688 and
$971,210, respectively 74,061,454 72,810,569
Accrued interest receivable 1,110,588 1,160,161
Premises and equipment, net 3,907,293 4,118,150
Other real estate 1,041,890 552,332
Deferred income taxes 62,764 549,485
Goodwill 135,730 153,613
Other assets 232,073 120,385
--------------------- ---------------------
Total assets $ 114,653,755 110,330,172
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 11,561,204 $ 11,102,681
Interest bearing 92,585,555 90,017,791
--------------------- ---------------------
Total deposits 104,146,759 101,120,472
Interest payable 1,037,561 1,062,098
Note payable 2,170,000 2,495,000
Securities sold under repurchase agreements 1,023,350 925,434
Other accrued taxes, expenses and liabilities 111,431 66,641
--------------------- ---------------------
Total liabilities 108,489,101 105,669,645
--------------------- ---------------------
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 4,119,909 3,489,964
Accumulated other comprehensive income 122,855 (751,327)
--------------------- ---------------------
Total stockholders' equity 6,164,654 4,660,527
--------------------- ---------------------
Total liabilities and stockholders' equity $ 114,653,755 110,330,172
===================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Earnings
For The Three and Nine Months Ended September 30, 2001 and 2000
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
--------------- ---------------
2001 2000 2001 2000
---- ---- ---- ----
Interest Income:
Interest and fees on loans $ 1,782,589 $ 1,849,017 5,471,338 5,261,512
Interest on federal funds 44,504 27,665 201,903 90,255
Interest on investment securities:
Taxable 361,754 359,299 1,204,513 1,095,392
Exempt from Federal income taxes 29,741 46,983 88,349 140,862
------------------- ----------------- ----------------- ----------------
Total interest income 2,218,588 2,282,964 6,966,103 6,588,021
------------------- ----------------- ----------------- ----------------
Interest Expense:
Interest on deposits 1,110,923 1,225,709 3,667,511 3,433,916
Other borrowed funds 54,056 60,648 163,098 209,023
------------------- ----------------- ----------------- ----------------
Total interest expense 1,164,979 1,286,357 3,830,609 3,642,939
------------------- ----------------- ----------------- ----------------
Net interest income 1,053,609 996,607 3,135,494 2,945,082
Provision for possible loan losses - 60,000 160,000 180,000
------------------- ----------------- ----------------- ----------------
Net interest income after provision for
possible loan losses 1,053,609 936,607 2,975,494 2,765,082
------------------- ----------------- ----------------- ----------------
Non-interest income:
Service charges on deposits 36,152 61,115 130,085 176,567
Other service charges and fees 26,330 24,638 79,424 81,817
Securities (losses) gain 2,158 - 11,762 -
Other non-interest income 22,496 4,156 40,966 18,762
------------------- ----------------- ----------------- ----------------
Total non-interest income 87,136 89,909 262,237 277,146
------------------- ----------------- ----------------- ----------------
Non-interest expense:
Salaries and employee benefits 435,637 400,653 1,311,158 1,215,002
Occupancy expense 64,798 51,285 213,593 173,461
Furniture and equipment expense 104,490 93,009 271,074 251,282
Other non-interest expense 198,296 186,891 625,958 578,603
------------------- ----------------- ----------------- ----------------
Total non-interest expense 803,221 731,838 2,421,783 2,218,348
------------------- ----------------- ----------------- ----------------
Earnings before income taxes 337,524 294,678 815,948 823,880
Income tax expense 122,755 101,039 293,898 277,162
------------------- ----------------- ----------------- ----------------
Net income $ 214,769 193,639 522,050 546,718
=================== ================= ================= ================
Income per common share $ 0.40 0.36 0.97 1.01
=================== ================= ================= ================
Common shares outstanding 539,027 539,027 539,027 539,027
=================== ================= ================= ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 2001 and 2000
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
2001 2000
---------------- ----------
Cash Flows from Operating Activities:
Net income $ 522,050 $ 546,718
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes 14,698 4,101
Provision for possible loan losses 160,000 180,000
Provision for depreciation and amortization 181,156 182,809
(Gain) on securities (11,762) -
Federal Home Loan Bank stock dividends (18,000) (17,000)
Decrease (increase) in interest receivable 102,731 (131,801)
(Increase) in other assets (511,439) (208,023)
(Decrease) increase in other liabilities (115,067) 184,083
-------------------- -------------------
Net cash provided by operating activities 324,367 740,887
-------------------- -------------------
Cash Flows from Investing Activities:
Proceeds from calls and maturity of held to maturity securities 26,398 29,045
Purchase of investment securities held to maturity (705,141) -
==================== ===================
Proceeds from calls and maturity of investments available for
sale 15,701,695 866,582
Proceeds from sale of investments available for sale 9,820,786 -
Purchase of investment securities available for sale (23,897,079) -
Net (increase) in loans (1,182,534) (6,258,141)
Capital expenditures (22,993) (213,297)
-------------------- -------------------
Net cash (used) in investing activities (258,868) (5,575,811)
-------------------- -------------------
Cash Flows from Financing Activities:
Net (decrease) increase in demand deposits, NOW accounts,
savings accounts, and IRA's (2,473,313) 3,938,261
Net increase in certificates of deposit 612,386 2,358,164
Repayment of long-term debt (325,000) (295,000)
Repayment of Federal Home Loan Bank Advances - (4,500,000)
Net change in securities sold under repurchase agreements (29,163) (395,656)
Dividends paid (75,464) (64,683)
-------------------- -------------------
Net cash provided by financing activities (2,290,554) 1,041,086
-------------------- -------------------
(Decrease) in cash and cash equivalents (2,225,055) (3,793,838)
Cash and cash equivalents beginning of period 10,112,867 8,606,345
-------------------- -------------------
Cash and cash equivalents end of period $ 7,887,812 4,812,507
==================== ===================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,933,081 $ 3,402,235
==================== ===================
Income taxes $ 402,254 $ 320,303
==================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income
For The Three and Nine Months Ended September 30, 2001 and 2000
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 214,769 $ 193,639 522,050 546,718
----------------------------------------------------------------------
Other comprehensive income, before tax:
Unrealized (losses) gains on securities
available for sale:
Unrealized holding gains (losses) arising
during the period 215,184 361,385 653,593 142,827
Less: reclassification adjustment for
(gains) losses included in net income (2,158) - (11,762) -
----------------------------------------------------------------------
Other comprehensive income 213,026 361,385 641,831 142,827
Income taxes related to other
comprehensive income (80,949) (137,450) (243,896) (54,274)
----------------------------------------------------------------------
Other comprehensive income,
net of income taxes 132,077 223,935 397,935 88,553
----------------------------------------------------------------------
Total comprehensive income (loss) $ 346,846 417,574 919,985 635,271
======================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2001 and 2000
- --------------------------------------------------------------------------------
1. Management Opinion
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Volunteer Bancorp, Inc. and subsidiary
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 condensed consolidated 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 Extinguishments 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.
8
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Nine Months Ended September 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 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 September 30 , 2001 the rate on the note was 5.61%
per annum. Principal is payable annually commencing January 31, 1996 and
each January 1 thereafter 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.
9
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
As of And For The Three And Nine Months Ended
September 30, 2001 and 2000
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 241,769 $ 193,639 $ 522,050 $ 546,718
Per common share data:
Net income per weighted
average common share $ 0.40 $ 0.36 $ 0.97 $ 1.01
Book value $ 11.44 $ 8.65 $ 11.44 $ 8.65
Ratios:
Return on average assets 0.74% 0.71% 0.59% 0.67%
Return on average common equity 14.34% 17.40% 12.12% 16.66%
Net interest margin (taxable equivalent
basis) 3.97% 4.13% 3.86% 4.02%
Expense ratio 2.76% 2.68% 2.73% 2.73%
Allowance for losses on loans / loans 1.25% 1.32% 1.25% 1.32%
Non-performing loans / loans 2.20% 0.64% 2.20% 0.64%
Non-performing assets / loans and
foreclosed properties 3.54% 1.38% 3.54% 1.38%
Shareholders' equity / total assets 5.38% 4.22% 5.38% 4.22%
Leverage ratio (tangible capital /
tangible average assets) 5.08% 4.88% 4.99% 5.09%
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As Of and for the Three and Nine Months Ended September 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 nine months ended September 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.
SUMMARY
The Company reported net income for the third quarter of $214,769 , or $0.40 per
common share, compared to income of $193,639, or $0.36 for the same period a
year ago. Our returns on average assets and average common equity were 0..74 %
and 14.34%, respectively, for the quarter compared to 0.71% and 17.40% for the
same period last year.
11
FINANCIAL CONDITION
Earning Assets. Average earning assets for the nine months ended September 30,
2001 totaled $109,838,000 which represents 92.73% of average total assets.
Earning assets totaled $104,876,000 at September 30, 2001. Average earning
assets for the nine months ended September 30, 2000 totaled $100,108,000, which
represented 92.52% of average total assets. Earning assets totaled $100,738,000
at September 30, 2000.
Loan Portfolio. The Company's average loans for the nine months ended September
30, 2001 were $75,263,000 and for the nine months ended September 30, 2000 were
$71,161,000. The Company's average loans for the quarter ended September 30,
2001 were $76,100,000 and were $72,776,000 for the quarter ended September 30,
2000. The balance in total loans at September 30, 2001 was $74,999,000 and at
September 30, 2000 was $73,782,000.
Investment portfolio. The Company's investment securities portfolio averaged
$28,548,000 for the nine months ended September 30, 2001 and $26,956,000 for the
nine months ended September 30, 2000. The Company's investment securities
portfolio averaged $26,271,000 for the quarter ended September 30, 2001 and
averaged $27,269,000 for the quarter ended September 30, 2000. The portfolio
totaled $26,214,000 at September 30, 2001 and $26,053,000 at September 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
September 30, 2001 there was a net unrealized gain in the Available for Sale
securities of $198,000 and there was a net unrealized loss of $1,212,000 at
September 30, 2000.
Deposits. The Company's average deposits were $107,981,000 for the nine months
ended September 30, 2001. This included average non-interest bearing deposits of
$11,244,000, average certificates of deposit of $68,877,000, average savings
deposits of $5,136,000 and average interest bearing transaction accounts of
$22,724,000.
The Company's average deposits for the nine months ended September 30, 2000 were
$98,681,000. This included average non-interest bearing deposits of $10,981,000,
average certificates of deposit of $63,570,000, average savings deposits of
$4,814,000 and average interest bearing transaction accounts of $19,316,000.
Deposits at September 30, 2001 totaled $104,147,000 and totaled $101,120,000 at
September 30, 2000.
Securities sold under repurchase agreements. The Company's average balance of
securities sold under repurchase agreements for the nine months ended September
30, 2001 was $982,000 and the average was $1,261,000 for the nine months ended
September 30, 2000. The total outstanding under these agreements at September
30, 2001 was $1,023,000 and the total outstanding at September 30, 2000 was
$925,000.
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 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
September 30, 2001 the rate on the note was 5.61% per annum. Principal is
payable annually commencing January 31, 1996 and each January 31 thereafter.
Interest expense for the nine months ended September 30, 2001 totaled $116,000.
The loan is secured by all of the stock of Citizens Bank of East Tennessee owned
by the Company.
12
Capital Resources. Shareholder's equity totaled $$6,165,000 as of September 30,
2001. This included $5,000 of common stock, $1,917,000 of additional paid-in
capital, $4,120,000 of retained earnings and accumulated other comprehensive
income consisting of an unrealized gain on Securities Available for Sale, net of
deferred taxes, of $123,000.
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
September 30, 2001 and 2000, the Company had investments in federal funds of
$4,600,000 and $1,875,000, 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 September 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 September 30, 2001 and 2000. At September 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 September 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 $1,023,000 and $925,000 at
September 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 NINE MONTHS ENDED SEPTEMBER 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 incurred
on interest bearing deposits and other borrowed funds. The following discussion
is based on a fully taxable equivalent basis.
Net interest income for the nine months ended September 30, 2001 totaled
$3,135,000. This was a result of interest income of $6,966,000 and interest
expense of $3,831,000. Interest and fee income on loans totaled $5,471,000,
interest income on the investment portfolio totaled $1,293,000, and interest
income on federal funds sold totaled $202,000. Interest expense included
$2,994,000 on certificates of
13
deposit, $568,000 on interest bearing transaction accounts, $106,000 on savings
accounts, $41,000 on securities sold under repurchase agreements, $6,000 on
Federal Home Loan Bank advances, and $116,000 on the note payable.
Net interest income for the nine months ended September 30, 2000 totaled
$2,945,000. This was a result of interest income of $6,588,000 and interest
expense of $3,643,000. Interest and fee income on loans totaled $5,262,000,
interest income on the investment portfolio totaled $1,236,000, and interest
income on federal funds sold totaled $90,000. Interest expense included
$2,722,000 on certificates of deposit, $604,000 on interest bearing transaction
accounts, $108,000 on savings accounts, $53,000 on securities sold under
repurchase agreements, $9,000 on Federal Home Loan Bank advances, and $147,000
on the note payable.
Net interest income for the three months ended September 30, 2001 totaled
$1,054,000. This was a result of interest income of $2,219,000 and interest
expense of $1,165,000. Interest and fee income on loans totaled $1,783,000,
interest income on the investment portfolio totaled $391,000, and interest
income on federal funds sold totaled $45,000. Interest expense included $952,000
on certificates of deposit, $125,000 on interest bearing transaction accounts,
$34,000 on savings accounts, $12,000 on securities sold under repurchase
agreements, $6,000 on Federal Home Loan Bank advances, and $36,000 on the note
payable.
Net interest income for the three months ended September 30, 2000 totaled
$997,000. This was a result of interest income of $2,283,000 and interest
expense of $1,286,000. Interest and fee income on loans totaled $1,849,000,
interest income on the investment portfolio totaled $406,000, and interest
income on federal funds sold totaled $28,000. Interest expense included $966,000
on certificates of deposit, $223,000 on interest bearing transaction accounts,
$36,000 on savings accounts, $7,000 on securities sold under repurchase
agreements, $9,000 on Federal Home Loan Bank advances, and $45,000 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 nine months ended September 30, 2001 was 3.86%.
The net cost of funds, defined as interest expense divided by average earning
assets was 4.65% and the yield on earning assets was 8.51% for the nine months
ended September 30, 2001. The net interest margin for the nine months ended
September 30, 2000 was 4.02%. The net cost of funds for the nine months ended
September 30, 2000 was 4.85% and the yield on earning assets was 8.87%. The
decrease in interest rates during the first nine months of 2001 had a negative
impact on the Company's net interest margin. It is anticipated that the impact
will lessen as rate sensitive liabilities re-price at lower rates.
The net interest margin for the three months ended September 30, 2001 was 3.97%.
The net cost of funds, defined as interest expense divided by average earning
assets was 4.32% and the yield on earning assets was 8.30% for the three months
ended September 30, 2001. The net interest margin for the three months ended
September 30, 2000 was 4.13%. The net cost of funds for the three months ended
September 30, 2000 was 5.05% and the yield on earning assets was 9.19%.
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 nine months ended September 30, 2001 was 3.41% and it was 3.63% for the nine
months
14
ended September 30, 2000. The interest rate spread for the three months ended
September 30, 2001 was 3.61% and it was 3.65% for the three months ended
September 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 $60,000 for the three months
ended September 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 September 30, 2001 was 1.25% of loans and
approximately 35% of non-performing assets. Management believes that the
$938,000 at September 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 September 30, 2001 were $2,689,000,
or 3.54% of loans and foreclosed properties. Non-performing assets at September
30, 2001 consisted of non-accrual loans of $476,000, loans past due 90 days and
still accruing interest of $1,171,000 and foreclosed real estate of $1,042,000.
Non-performing assets at September 30, 2000 were $1,576,000, or 1.38% of loans
and foreclosed assets. Non-performing assets at September 30, 2000 consisted of
non-accrual loans of $470,000 loans past due 90 days and still accruing interest
of $554,000 and foreclosed real estate of $552,000. 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 $262,000 for the
nine months ended September 30, 2001. This included $130,000 from service
charges on deposit accounts, $79,000 from other service charges and fees,
$12,000 of securities gains, and $41,000 of other non-interest income.
15
Total non-interest income for the nine months ended September 30, 2000 was
$277,000. This included $177,000 from service charges on deposit accounts,
$82,000 from other service charges and fees, and $18,000 of other non-interest
income.
Total non-interest income was $87,000 for the three months ended September 30,
2001. This included $36,000 from service charges on deposit accounts, $26,000
from other service charges and fees, $2,000 of securities gains, and $23,000 of
other non-interest income.
Total non-interest income for the three months ended September 30, 2000 was
$90,000. This included $61,000 from service charges on deposit accounts, $25,000
from other service charges and fees, and $4,000 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 nine months ended September
30, 2001 was $2,422,000. This consisted of $1,311,000 of salaries and employee
benefits, $214,000 of occupancy expenses, $271,000 of furniture and equipment
expense, and $626,000 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 nine months ended September 30, 2000 was
$2,218,000. This consisted of $1,215,000 of salaries and employee benefits,
$173,000 of occupancy expenses, $251,000 of furniture and equipment expense, and
$579,000 of other non-interest expenses.
Non-interest expense for the three months ended September 30, 2001 was $803,000.
This consisted of $436,000 of salaries and employee benefits, $65,000 of
occupancy expenses, $104,000 of furniture and equipment expense, and $198,000 of
other non-interest expenses.
Non-interest expense for the three months ended September 30, 2000 was $732,000.
This consisted of $401,000 of salaries and employee benefits, $51,000 of
occupancy expenses, $93,000 of furniture and equipment expense, and $187,000 of
other non-interest expenses.
The increase in total non-interest expense is primarily associated with the
overall growth of the Company.
Income Taxes. For the nine months ended September 30, 2001, the Company incurred
income tax expense of $294,000. For the nine months ended September 30, 2000,
the Company incurred income tax expense of $277,000. Approximately $88,000 of
income earned for the nine months ended September 30, 2001 is exempt from
Federal income taxes. Approximately $141,000 of the income earned during the
nine months ended September 30, 2000 is exempt from Federal income taxes.
For the three months ended September 30, 2001, the Company incurred income tax
expense of $123,000. For the three months ended September 30, 2000, the Company
incurred income tax expense of $101,000. Approximately $30,000 of income earned
for the three months ended September 30, 2001 is exempt from Federal income
taxes. Approximately $47,000 of the income earned during the three months ended
September 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
nine months ended September 30, 2001 was 0.59%. Return on assets for the nine
months ended September 30, 2000 was 0.67%. Return on assets for the three months
ended September 30, 2001 was 0.74% and it was 0.71% for the three months ended
September 30, 2000.
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Return on equity (annualized net income divided by average equity) for the nine
months ended September 30, 2001 was 12.12% and it was 16.66% for the nine months
ended September 30, 2000. Return on equity for the three months ended September
30, 2001 was 14.34% and it was 17.40% for the three months ended September
30,2000.
Equity to assets (average equity divided by average total assets) was 5.38% for
the nine months ended September 30, 2001 and it was 4.22% for the nine months
ended September 30, 2000. Equity to assets for the three months ended September
30, 2001 was 5.38% and it was 4.22% for the three months ended September 30,
2000.
The dividend payout ratio (dividends declared divided by net income) for the
nine months ended September 30, 2001 was 14.45%. The dividend payout ratio for
the nine months ended September 30, 2000 was 11.83%. No dividends were declared
during the three months ended September 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.
17
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
None
Item 5. Other Information
None
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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 September 30, 2001.
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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: November 14, 2001 /s/ Reed D. Matney
---------------------------
Reed D. Matney, President
(principal executive officer)
Date: November 14, 2001 /s/ H. Lyons Price
---------------------------
H. Lyons Price (principal
financial and accounting
officer)
20
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, dated October 19, 2001, included in this Quarterly Report on Form 10-QSB
for the Quarter Ended September 30, 2001.
Welch & Associates, Ltd.
Nashville, Tennessee
November 14, 2001
21